Monday, January 22, 2018

The AAA Insurance Reporter & The Impact of Fraudulent Procurement of Auto Policies on New York No-Fault Claims

In 2017, after a six-year hiatus, the American Arbitration Association's New York State Insurance Division brought back a "new and improved" quarterly newsletter.  If you work with either New York no-fault or SUM claims, you should have received the four quarterly issues of the AAA Insurance Reporter for 2017.  If you aren't on the email distribution list for that newsletter, don't bother looking on the AAA's website for those quarterly issues.  They're not there.  I don't know why.

The newsletters reside on the Web, however, and their URLs make it easy to find 2017's four issues:
Each issue contains a "Developments in New York No-Fault" section that digests "a cross section of recent, well-reasoned arbitration awards that are consistent with current New York precedent and address commonly raised issues in the No-Fault forum."  According to Issue 1, the reported and digested awards "were objectively selected by an editorial board consisting of No-Fault arbitrators with a view toward promoting discussion and analysis of relevant issues."  Could it be that sitting AAA no-fault arbitrators want participants to pay more attention to these issues?

Issue 1 digested no-fault arbitration awards regarding:
  • the finality of a Worker's Compensation Board's decision; 
  • IME no-shows; 
  • verification requests; 
  • reasonable justification/45-day rule; 
  • medical necessity; and
  • use or operation (including an arbitration decision holding that the birth of a healthy baby following the mother's involvement in a MVA is not a compensable "injury" under New York no-fault law). 
Issue 2 treated:
  • lost earnings; 
  • post-EUO/Mallela verification requests;
  • partial response to verification; 
  • medical necessity--IME awards; and
  • verification requested not under applicant’s control or possession.
Issue 3 addressed:
  • jurisdiction; 
  • intoxication;
  • New Jersey certificate of authority;
  • surgery fee schedule; and
  • EUO no-shows.
Rounding out the year, Issue 4 included abstracts regarding:
  • DME & verification request for wholesale invoice;
  • death benefit claims;
  • fraudulent procurement of the policy;
  • 30-day notice of accident and late receipt of NF-2; and
  • additional verification requested after a denial on a workers’ compensation defense.
Issue 4's abstracts on the impact of fraudulent procurement of the auto insurance policy on the applicant's no-fault claim are copied below (I've added links to the actual awards):

M.G. & State Farm Fire & Cas. Co.,

AAA Case No. 17-15-1021-8978 (4/15/16) (Gary Peters, Arb.)

Arbitrator Peters addressed whether respondent established its defense based upon fraudulent procurement of the policy. Respondent submitted an affidavit from an employee of State Farm Mutual Insurance Company in the Underwriting Department, which referenced that although applicant’s vehicle was insured at a residence in Yonkers, New York, an investigation revealed that applicant was not residing in Yonkers, New York, and that the vehicle was principally garaged in the Bronx. The affidavit further referenced that had State Farm been aware of this, they would not have issued the subject policy. The applicant/injured person provided testimony at the hearing before arbitrator Peters. The applicant/injured person testified that at the time of accident, he resided in Yonkers, New York, and was the operator of a motor vehicle that was registered to his wife at the Yonkers address. The applicant/injured person also testified that he resided in the Bronx “off and on” due to marital difficulties. The applicant/injured person testified that he never misrepresented the location of where the vehicle was garaged in order to obtain cheaper rates. However, due to marital difficulties, his wife moved out of the marital residence in Yonkers, New York, to live with her sister in Mayopac, New York and took the vehicle with her. Arbitrator Peters reviewed the EUO transcript of testimony taken of the applicant/injured person in which he testified that in November, 2014, the policy was changed to the Mayopac, New York address. Despite marital problems, he stayed at the Mayopac address on and off. Arbitrator Peters found that although the applicant/injured person had “multiple residences” wherein he lived in the Bronx, Yonkers and Mayopac for different periods of time, the applicant/injured person believed that the vehicle was garaged primarily in Mayopac, New York, and he was only utilizing the car a few days per week. Arbitrator Peters noted that Insurance Law Sec. 3105 governs material misrepresentation and fraudulent procurement of insurance contracts and that there was no intentional false misrepresentation in this case, since the applicant/injured person did in fact reside at three (3) different locations and his wife principally used the vehicle to care for his children’s needs. 

Isurply, LLC & State Farm Mut. Automobile Ins. Co.,

AAA Case No. 17-16-1026-4904 (12/9/16) (Jeffrey Silber, Arb.)

Arbitrator Silber addressed whether respondent established its defense based upon fraudulent procurement of the policy. Arbitrator Silber noted that although VTL Sec. 313 does not permit an insurer to cancel an automobile insurance policy retroactively on the grounds of fraud or misrepresentation, an insurer is entitled to raise the affirmative defense of fraudulent procurement of the policy in an action to recover benefits thereunder. Arbitrator Silber cited to relevant case law that referenced that misrepresenting residency status for the purpose of rate evasion, if proven, constitutes a material misrepresentation that precludes recovery under the policy. The injured person provided testimony at an examination under oath (EUO), and respondent “outlined” a list of eighteen (18) discrepancies, which the respondent argued established that the injured person actually resided in Brooklyn and not Port Jervis, and thus the injured person made intentional and material misrepresentations in the application for his insurance policy. Arbitrator Silber considered all of the evidence and found that respondent failed to establish its defense based upon fraudulent procurement of the policy. Arbitrator Silber noted that the injured person worked in Brooklyn, where the accident occurred and lived in Port Jervis. Although the injured person testified that she travelled for one and a half hours every day to work, arbitrator Silber found that this did not constitute a misrepresentation, as many people travel that amount of time to work. The injured person testified that her grandmother lives in Brooklyn and that she stayed there the night before the accident. The injured person also testified that her children attend school in Brooklyn and that she was treated at a Brooklyn medical facility. However, the injured person was registered to vote in Port Jervis, and all her mail was delivered to the policy address. Thus, respondent’s defense was not established. 

Jacobson Chiropractic, PC & National Liability & Fire Ins. Co.,

AAA Case No. 17-16-1026-5243 (2/9/17) (Lucille S. DiGirolomo, Arb.)

Arbitrator DiGirolomo addressed whether respondent established its defense based upon fraudulent procurement of the policy. Respondent argued that the assignor used a Saranac Lake, New York, address to procure the policy of insurance when he never lived there. Respondent submitted an SIU report wherein the investigator advised that he went to the Saranac Lake address and spoke to various occupants who had no knowledge of applicant residing at the premises. Moreover, the SIU investigator was advised that the apartment allegedly rented by the assignor was occupied by a different individual, who was a pilot at the local airport and had resided there since February, 2015. Respondent submitted an EUO transcript of testimony in which the assignor testified that although he planned on moving to Saranac Lake for school and would start in September, he never lived in Saranac Lake. Arbitrator DiGirolomo cited to relevant case law that referenced that the standard for determining residency for purposes of insurance coverage requires something more than temporary or physical presence and requires at least some degree of permanence and intention to remain. Arbitrator DiGirolomo found that the mere intention to reside at certain premises is not sufficient. Accordingly, arbitrator DiGirolomo found that respondent’s defense was established. 

New York Community Hospital & Utica National Ins. Co.,

AAA Case No. 17-15-1016-6707 (4/21/16) (Rhonda Barry, Arb.)

Arbitrator Barry addressed whether respondent established its defense based upon fraudulent procurement of the policy. Arbitrator Barry noted that although pursuant to VTL Sec. 313, a policy may not be canceled retroactively, the insurance carrier may assert the fraudulent procurement of the policy by the assignor in an action by a health care provider assignee for no-fault benefits. To sustain its defense, the insurer must provide that the subject insurance policy was procured through material misrepresentation. See, Insurance Law Sec. 3105. Arbitrator Barry cited to relevant case law noting that a misrepresentation is material only if the insurer would not have issued the policy had it known the facts misrepresented. Arbitrator Barry reviewed the available record, which included the EUO transcript of testimony taken of the injured person. The injured person testified that he lived in Rochester from January, 2014 through the date of accident in November, 2014. However, the injured person had no bills, receipts or cancelled checks documenting that he resided at that location. The injured person testified that he paid rent to his friend in Rochester for the last six months of 2013 in cash and traveled back and forth between Rochester and Brooklyn. The injured person was unable to testify regarding the amount of time spent at either location and could not adequately describe his residence in Rochester. Arbitrator Barry noted that the no-fault application provided a Brooklyn address and the injured person had a New York State commercial driver’s license that provided a Brooklyn address. Respondent also submitted an investigative report that referenced that the investigator spoke with the landlord of the premises in Rochester where the injured person purportedly resided and the landlord did not know the injured person. Respondent provided the affidavit of its underwriter who averred that the injured person listed a Rochester, New York, address as his place of residence and the location where the insured vehicle would be garaged when in fact he resided in Brooklyn. This was done to save on policy premiums, as the cost of the policy premiums for a vehicle to be listed as principally garaged in Rochester, New York, as opposed to Brooklyn, New York, is significantly less. Respondent maintained that it would not have issued the policy to the injured person at the same rate had the insured provided truthful information. Based on the foregoing, arbitrator Barry found that respondent’s defense based upon fraudulent procurement was established.

For those keeping score, the applicant prevailed on two of these four arbitrations; the insurers prevailed on the other two.

Proven rate evasion supports the denial of no-fault benefits (and other first-party coverages) to or on behalf of any EIP who was complicit in the fraudulent procurement of the auto policy.  The operative question is NOT whether the insurer would have insured the risk at all had it known the true facts, but whether it would have issued the SAME policy on the same terms and premium.  If the answer to that question is no, the misrepresentation is material.  Although New York personal auto policies may not be rescinded (retroactively canceled) because of New York's financial responsibility laws, first-party benefits may be denied to those complicit in the fraudulent procurement of the policy.

Additionally, remember that the rate evasion/fraudulent policy procurement defense is not subject to the 30-day preclusion rule.  In A.B. Medical Services, PLLC a/a/o Yevgenya Ioffe v. Commercial Mut. Ins. Co., 12 Misc.3d 8 (App. Term, 2nd Dept., 2006), the Appellate Term , Second Department, stated:
Contrary to plaintiffs' contention, the defense of fraudulent procurement of an insurance policy, which is nonwaivable and hence exempt from the 30-day preclusion rule, may be asserted as against plaintiffs providers in this action seeking to recover assigned no-fault benefits (cf. Matter of Metro Med. Diagnostics v Eagle Ins. Co., 293 AD2d 751, 751-752 [2002]). 
For more discussion, cases and awards on this issue, click the rate evasion label below.

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