Nassau District Court Rules that a No-Fault Insurer May Not Obtain Documentary Material Relating to a Mallela Defense in an EUO Request

NO-FAULT – VERIFICATION – PROVIDER EUO – DOCUMENT REQUESTS – MALLELA DEFENSE
Dynamic Med. Imaging, P.C. a/a/o Staffa Pasqualino v State Farm Mut. Auto. Ins. Co.
(Nassau Dist, 1st Dist., decided 7/15/2010)

From the judge who last inspired me to quote Lewis Carroll's Jabberwocky comes this decision, another head scratcher.

New York no-fault mavens know that the Mallela defense is not subject to the 30-day pay-or-deny preclusion rule of Insurance Law § 5106(a) and 11 NYCRR § 65-3.8(a)(1).  They may also know that under New York procedural law, a litigant must have a good faith basis for alleging something that's in a complaint or an answer.  Having a good faith basis to allege something usually depends on having already obtained some factual information about the allegation or defense.  

In State Farm Mut. Auto. Ins. Co. v Mallela (4 NY3d 313 [2005]), the New York Court of Appeals held that a health care provider which is fraudulently incorporated or organized in violation of New York Business Corporation Law §§ 1507, 1508, and New York Education Law § 6507(4)(c) is not entitled to reimbursement from no-fault insurers for medical services rendered by licensed medical practitioners.  New York state licensing requirements prohibit nonphysicians from owning or controlling medical service corporations. Only an appropriately licensed professional licensed may be the owner of a profession corporation [Business Corporation Law §1507], a professional limited liability company [Limited Liability Company Law §1207]or a professional limited liability partnership [Partnership Law §121-1500(q)], and only licensed professionals can obtain payment of no-fault benefits. 11 NYCRR § 65-3.16(a)(12).

Plaintiff submitted bills to State Farm for lumber and cervical MRIs and 3D renderings ordered by the assignor's treating chiropractor.  State Farm sought to determine whether the plaintiff, Dynamic Medical Imaging, P.C., was properly incorporated and operating, so it requested that the PC's purported owner, Steven Brownstein, M.D., appear for an examination under oath (EUO) and produce the following documents and records:

(i) documents evidencing ownership of the P.C., at the time of the treatment for which you seek payment, by one or more licensed professionals, including but not limited to a copy of the certificate of incorporation for the P.C., receipts for filing, stock certificates, and the stock ledger for the P.C.;

(ii) documents relating to the income and expenses of the P.C., including but not limited to tax returns and general ledgers of the P.C. for the past twelve months;

(iii) a list of the individuals who provided and/or supervised the health care services for which you seek payment, identification of the type of professional license each individual holds, and documents (i.e, W-2, 1099, etc.) identifying the relationship between the individual and the P.C. (e.g. whether the individual is an employee or independent contractor and how that individual is compensated);

(iv) a list of days of the week and hours that any owner of the P.C. provides or supervises services for the P.C. during the period for which payment is sought for services rendered;

(v) all documents, including all schedules, attachments or addenda, relating to the relationship between the P.C., and/or any entity of individual that leases equipment or space to or from the P.C., or provides management, consulting, administrative or billing services to the P.C. and any payments made to any person or entity that rendered such services to the P.C.; and

(vi) complete, sign and return the enclosed NF-3 form.

Dr. Brownstein twice did not appear for the EUO, scheduled for October 30, 2007 and November 19, 2007, and none of the requested documents was provided to State Farm.  By letter dated December 12, 2007, State Farm denied payment of the plaintiff's bills, based on Dr. Brownstein's failure to appear for an EUO and the provider's failure to comply with 11 NYCRR 65-3.16(a)(12).  Plaintiff commenced this action on January 24, 2008 to recover payment of its bills, and State Farm moved for summary judgment.

In DENYING State Farm's motion, Justice Fred Hirsh concluded that by requesting Mallela materials, State Farm's EUO request was "palpably improper" and that a no-fault insurer should not be allowed to obtain what in essence Justice Hirsh believes constituted pre-action discovery in conjunction with a duly requested EUO:

No-fault is a statutory/regulatory system. See, Medical Society of the State v. Serio, 100 NY2d 854 (2003). No fault is in derogation of the common law. East Acupuncture, P.C. v. Allstate Ins. Co., 61 AD3d 202 (2nd Dept. 2009).  The rights of an insurer are limited to those expressly provided for by the statute and regulations. Presbyterian Hosp. in City of NY v. Maryland Cas. Co., 90 NY2d 274, rearg. denied 90 NY2d 937 (1997)The regulation provide for an examination under oath. The term "examination under oath" is not defined by the no-fault regulations. Word used in regulations that are not specifically defined in the regulations are to be given their ordinary meaning. Oefelein v. Town of Thomson Planning Board, 9 AD3d 556 (3rd Dept. 2004); Parker v. Kelly, 140 AD2d 993 (4th Dept. 1988); McCarter v. Beckwith, 247 App.Div 289 (2nd Dept. 1936: and McKinney's Statutes §76. Examination is defined as the questioning of a witness by an attorney. See, Law.Com Law Dictionary. Examination can also be defined as a formal interrogation. Webster's Unabridged Dictionary 2nd Ed. (1998) p.673. Therefore, the term "examination under oath" as used in the no-fault regulations means the insurer can request the injured party or the assignee of the injured party appear and give oral testimony after having been sworn or under affirmation.

The regulations do not provide an insurer with the right to obtain written documentation other than such documentation as may be demanded as verification. In addition to appearing for an examination under oath, the assignee can be compelled to execute a written proof of claim under oath and provide other pertinent information as may assist the insurer in determining the amount due and payable. 11 NYCRR 65-1.1. The regulation do not give the insurer to right to ask an assignee to produce documents relating to the corporate structure or finances of a medical provider. 11 NYCRR 65.3.5(a). Upon receipt of the completed verification form, the insurer can request additional verification. 11 NYCRR 65-3.5(b). The regulations only permit the insurer to obtain written information to verify the claim. 11 NYCRR 65-3.5(c). See generally, V.M.V. Management Co, Inc. v. Peerless Ins., 15 AD3d 647 (2nd Dept,. 2005). Nothing in the No-Fault regulations permits an insurer to request an assignee to produce corporate organizational and financial documents a week in advance of an EUO.

An examination under oath permits the insurer to question the injured party or the its assignee regarding the claim. While an examination under oath has been treated by the courts as condition precedent to coverage, the no fault regulations treat the examination under oath as a form of verification. Thus, where a carrier properly demands an examination under oath, "...the verification is deemed to have been received by the insurer on the day the examination was performed." 11 NYCRR 65-3.8(a)(1). The insurer has 30 days from the day the EUO is conducted to is conducted to pay or deny the claim. Id. 

The purpose for demanding verification is to extend or toll the carriers time to pay or deny the claim so the carrier can obtain information regarding the claim. Hospital for Joint Disease v. New York Central Mutual Fire Ins. Co., 44 AD3d 903 (2nd Dept. 2007); and 11 NYCRR 65-3.5(c); and 11 NYCRR 65-3.8(a)(1). The extension of time in which to pay or deny the claim is extremely important in circumstances in which the insurer is seeking information regarding a defense the insurer would be precluded from raising if the defense is not stated in a timely served denial. Fair Price Medical Supply Corp. v. Travelers Indemnity Co., 10 NY3d 556 (2008); and Lincoln General Ins. Co. v. Alev Medical Supply Inc., 25 Misc 3d 1019 (Dist. Ct. Nassau Co. 2009).

However, this rationale does not apply to a Malella [sic] defense since a Malella [sic] defense is non-precludable. State Farm Mutual Ins. Co. v. Malella [sic], 4 NY3d 313 (2005).

While Malella [sic] has been called a fraudulent incorporation defense, the rationale underlying Malella [sic] is that only an appropriately licensed professional licensed may be the owner of a profession corporation [Business Corporation Law §1507], a professional limited liability company [Limited Liability Company Law §1207]or a professional limited liability partnership [Partnership Law §121-1500(q)] and only licensed professionals can obtain payment of no-fault benefits. 11 NYCRR 65-3.16(a)(12). The Malella [sic] defense permits an insurer to look behind a facially proper business structure to determine if persons not duly licensed to practice the profession are the actual owners of the medical provider. Andrew Carothers, M.D., P.C. v. Insurance Companies Represented by Bruno, Gerbino & Soriano, LLP, 26 Misc 3d 448 (Civil Ct. Richmond Co. 2009). If the provider is not owned by a licensed professional or if the provider is controlled by a non-professional, then the provider may not obtain payment of no-fault benefits. State Farm Mutual Ins. Co. v. Malella [sic], supra.

If a carrier believes the provider/assignee is subject to a Malella  [sic] defense, the proper way to assert it as an affirmative defense it in its answer. New York First Acupuncture P.C. v. State Farm Mut. Auto. Ins. Co., 25 Misc 3d 134(A) (App Term2nd, 11th & 13th Jud. Dists. 2009). 

The document demand contained in State Farm's EUO letters to Dynamic and Dr. Brownstein are essentially a demand for pre-action discovery regarding a Malella  [sic] defense. CPLR 3102(c) permits pre-action discovery only by court order and only to aid in bringing an action. Some of the documentation requested in the EUO letters State Farm might not be able to obtain even if it had been requested in a duly served notice for discovery and inspection.^[FN3]

The oft stated purpose of the No-fault Law is to insure prompt payment for medical services rendered to persons injured in motor vehicle accidents. Fair Price Medical Supply Corp. v. Travelers Indemnity Co., supra; and Hospital for Joint Diseases v. Travelers Property Casualty Ins. Co., 9 NY3d 312 (2007); and Presbyterian Hosp. in City of NY v. Maryland Cas. Co., supra. Permitting an insurer to obtain what would be tantamount to full discovery regarding a Malella  [sic] defense as part of an EUO would defeat that purpose and is beyond the scope of the No-fault Law and regulations relating to EUO.

Permitting an insurer to demand what has been demanded by State Farm in this action for an EUO is fraught with the potential for abuse. See, Unitrim Advantage Ins. Co. v. Carothers, 17 Misc 3d 1121(A) (Sup. Ct. NY Co. 2007); and Gegerson v. State Farm Ins. Co., 27 Misc 3d 1207(A) (District Ct. Nassau Co. 2010). An insurer should not be able to defeat no fault claims by making an onerous and improper document demand relating to an EUO.

If an insurer has a reasonable basis for believing a medical provider cannot obtain payment of no-fault benefits because the provider is "fraudulently incorporated", then it should assert the defense in its answer and litigate the issue on the merits in the action brought by the provider for no-fault benefits. The insurer should move to consolidate all of the actions brought by the provider and have the issue of whether the provider is subject to a Malella  [sic] defense determined in one action. See, Andrew Carothers, M.D., P.C. v. Insurance Companies Represented by Bruno, Gerbino & Soriano, LLP, supra. Alternatively, an insurer can commence a declaratory judgment action seeking a judgment declaring the provider ineligible to receive no-fault payments. See, State Farm Mutual Ins. Co. v. Malella  [sic] , supra.

While State Farm may have reason to believe Dynamic is not eligible to receive no-fault benefits for Malella  [sic] reasons, State Farm cannot use a palpably improper EUO demand not subject to court review as a basis for obtaining summary judgment. See, Westchester Medical Center v. Progressive Casualty Ins. Co., 51 AD3d 1012 (2nd Dept. 2008). 

Since the EUO demand was improper, defendant's motion for summary judgment is denied.

Expect an appeal.  And a reversal, in my opinion.   In my respectful view, Justice Hirsh's misunderstanding of the Mallela decision and its defense is not confined to its spelling.  Denying no-fault insurers an opportunity to obtain verification of a provider's proper licensing and ownership in conjunction with the verification of their bills would force insurers to do something the New York courts have repeatedly said litigants should not do, i.e., allege something in a complaint or answer without a good faith, factual basis for doing so. And as to Footnote # 2, an NF-3 is the prescribed Verification of Treatment by Attending Physician or Other Provider of Service form, not the Verification of Hospital Treatment form, which is an NF-4.  Here's a bookmark of the current forms.