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:

• 2017 Issue 1
• 2017 Issue 2
• 2017 Issue 3
• 2017 Issue 4

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.

Form Over Substance Does Matter -- Having Not Asserted Collateral Estoppel as an Affirmative Defense, No-Fault Insurer Is Denied Dismissal of Provider's Recovery Action

NO-FAULT – COLLATERAL ESTOPPEL – MALLELA DEFENSE  
Downtown Acupuncture PC v. State Wide Ins. Co.
(NYC Civ. Ct., Kings Co., decided 10/22/2015)

In 2010, State Farm Mutual Automobile Insurance Company commenced a declaratory judgment action in Nassau County Supreme Court against Downtown Acupuncture PC and other PCs purportedly owned not by licensed professionals but by Valentina Anikeyeva, In 2013, Supreme Court granted State Farm's motion to strike the defendant PCs' answer in that action based on the defendants' non-compliance with a so-ordered discovery stipulation and, based on the defendants' default in pleading, further granted judgment to State Farm, finding that

the overwhelming evidence indicates that the P.C. defendants were not owned and controlled by a licensed acupuncturist, therefore rendering them ineligible to receive reimbursement, and to collect payment on outstanding claims. Additionally, a billing provider which utilizes an independent contractor to provide the services in question, is not a "provider" of the services in question and is not entitled to recover direct payment of assigned no-fault benefits from the defendant insurer. 

In July 2015 the Second Department affirmed that decision, finding that the defendant PCs had failed to demonstrate reasonable excuse for their default in complying with the terms of the conditional order and a meritorious defense to the complaint. 

In this 2004-commenced action, defendant State Wide Insurance Company moved on the eve of trial in late 2014 to dismiss this action based on the doctrine of collateral estoppel, arguing that the Nassau County Supreme Court order and judgment in the State Farm DJ action precluded plaintiff from arguing that it was entitled to receive no-fault benefits.  

Noting that a New York no-fault insurer's Mallela defense is not subject to preclusion "and hence is non-waivable", Kings County Civil Court Judge Katherine Levine nevertheless denied State Wide's dismissal motion, holding:  

This Court cannot even entertain defendant's request for collateral estoppel until it seeks to amend its answer to raise Mallela as a defense and hence create an apparent identity of issues between the DJ action and the instant matter. In the same motion to amend it can also assert collateral estoppel. After defendant formally moves to amend, plaintiff will be afforded the opportunity to argue how it would be prejudiced by such a motion. The Court is quite dubious that plaintiff will be able to show any prejudice or surprise since the Appellate Term noted as early as 2012 that "(t)here exists a rich history of litigation, involving a multitude of cases before the Appellate Term, in which health care facilities allegedly owned by Ms. Anikeyeva have been asked to supply Mallela discovery." Lexington Acupuncture PC, supra, 35 Misc 3d at 49 (Golia, J. concurring). However, sometimes form over substance does matter and plaintiff must be afforded the opportunity to argue prejudice or disclaim the apparent identity of issues.

Justice delayed is justice denied?  Probably not in this case, given Judge Levine's expressed dubiousness. I see a motion to amend and dismiss coming.  

Homeowner Insurer's Failure to Timely Respond to Insured's Proof of Loss or Send 90-Day Delay Letters Does Not Preclude Exclusion-Based Coverage Defenses

PROPERTY – HOMEOWNERS – PROOF OF LOSS – REGULATION 64 – 90-DAY DELAY LETTERS – DEFENSE PRECLUSION
Mallory v. Allstate Ins. Co.
(2nd Dept., decided 12/6/2011) 

Section 216.6 (c) of New York Insurance Regulation 64 (Title 11 NYCRR Part 216) requires an insurer, "[w]ithin 15 business days after receipt by the insurer of a properly executed proof of loss and/or receipt of all items, statements and forms which the insurer requested from the claimant," (30 days if the insurer suspects that the claim involves arson) to advise a claimant, or a claimant's representative, in writing, (1) of its acceptance or rejection of the claim, or (2) that it needs more time to determine whether the claim should be accepted or rejected. Thereafter, if the claim remains unsettled, unless the matter is in litigation or arbitration, the insurer must, 90 days from the date of the initial letter setting forth the need for further time to investigate, and every 90 days thereafter, send to the claimant or the claimant's authorized representative a letter setting forth the reasons additional time is needed for investigation.  These letters are sometimes called "delay letters" by property claims representatives.

What if the insurer fails to comply with this regulatory requirement by not responding to the insured's proof of loss or claim submission or sending the 90-day delay letters within the required time period?  Is the insurer precluded from raising and relying on policy exclusions to deny coverage?  No, says the Appellate Division, Second Department.  Again.

Plaintiff commenced this action to recover the proceeds of a fire insurance policy. Allstate asserted several affirmative defenses based on policy exclusions. Plaintiff moved to dismiss Allstate's exclusion-based affirmative defenses on the ground that it was precluded from raising those defenses because of its failure to comply with 11 NYCRR § 216.6(c) in processing the plaintiff's claim.  Supreme Court denied plaintiff's motion and, reaffirming its 2004 decision in De Marinis v Tower Ins. Co. of N.Y., the Appellate Division AFFIRMED:

In De Marinis v Tower Ins. Co. of N.Y. (6 AD3d 484, 486-487), this Court held that a failure to comply with 11 NYCRR 216.6(c) does not preclude an insurance company from relying on a policy exclusion to disclaim coverage. We decline the plaintiff's invitation to overrule De Marinis. Accordingly, the plaintiff did not demonstrate that the defenses were without merit as a matter of law (see CPLR 3211[b]; Galasso, Langione & Botter, LLP v Liotti, 81 AD3d 880, 882). 

The potential consequence of not complying with 216.6(c) is administrative sanction, not defense preclusion.

Editor's Note (02.07.14) ~~  The New York Court of Appeals unanimously AFFIRMED this decision on August 28, 2012, holding:

Under the facts of this case, the Appellate Division correctly determined that an insurer's failure to comply with 11 NYCRR 216.6 (c) in processing a claim does not preclude that insurer from relying upon a policy exclusion to disclaim coverage.

Appellate Division, First Department, Holds that Fee Schedule is a Precludable Defense

NO-FAULT – WORKERS' COMPENSATION FEE SCHEDULE – DEFENSE PRECLUSION – UNTIMELY DENIAL – INSURANCE LAW § 5106
Mercury Cas. Co. v. Encare, Inc.
(1st Dept., decided 12/13/2011) 

If a New York no-fault insurer does not issue a timely denial of PIP benefits, is it precluded from limiting payment to the amounts prescribed by the New York workers' compensation fee schedule?  In the opinion of the Appellate Division, First Department, the answer is YES, it is precluded from asserting the fee schedule defense.

Nor do we find it significant, in light of the genesis and purposes of the preclusion rule, that Insurance Law § 5108 prohibits a medical provider from seeking fees in excess of the fee schedule. Virtually every application of the preclusion rule involves the compromise of statute, policy provision, or judge-made rule in service of effectuating the important purposes of the No-Fault Law. The expansion of the lack of coverage exception proposed by Mercury would substantially weaken the long-established rule of preclusion.

Jason Tenenbaum, who represented Mercury in this case, offers his observations of this decision here.

Madness.  Simply madness.

The New York Automobile Fraud Prevention Act of 2010 -- Introduced June 29, 2010

After months and months of meetings and multiple drafts of proposed language that I'm told was the product of negotiation and compromise between interested groups and industries, the New York State Legislature introduced its own "Automobile Fraud Prevention Act of 2010" on June 29, 2010.  This "same as" bill is numbered S8414 Breslin in the Senate and A11596 Titone in the Assembly.

The bill has eight sections:

• § 1 -- Names the bill "the automobile insurance fraud prevention act of 2010"
• § 2 -- Amends and substantially adds to Insurance Law § 5106 regarding defenses preclusion, medical necessity IME- and peer review-based denials, arbitrations, burdens of proof and evidentiary presumptions in lawsuits, and the use of depositions in no-fault litigation
• § 3 -- Amends Insurance Law § 5109 regarding unauthorized health service providers
• § 4 -- Amends Insurance Law § 5103(b)(2) to exempt emergency general hospital and ambulance services from the no-fault intoxication exclusion
• § 5 -- Amends Insurance Law § 5102(d) to add two more categories of "serious injury"
• § 6 -- Adds subparagraph (4) to subsection (j) of Insurance Law § 3420 to define "covered person" as used in Insurance Law § 3420(f)(1)
• § 7 -- Adds subsection (m) to Insurance Law § 5202 adding a definition "covered person" to that section.
• § 8 -- Provides for the effective dates of the various sections of the act.  

The full text of the bill, in a PDF document, is here.  New language is underlined.  Deleted language is bracketed.

I'll post a more detailed review and assessment in a day of two, but for now, here are the bill's highlights or lowlights, depending on your perspective:

• Defense preclusion:  If the New York no-fault insurance industry was hoping for a complete eradication of the Presbyterian Hospital decision, this isn't it.  Fair Price (services or supplies not provided) would be gone, but the preclusion of the fee schedule defense up to 10% would remain.  A weak and inartful attempt has been made to codify the courts' non-preclusion for for staged/caused event defense. 
• IME- and Peer Review-Based Medical Necessity Denials:  Extends to 60 days the time period within which a no-fault insurer may deny a claim based on lack of medical necessity.  Requires that lack of medical necessity denials be based on an IME or peer review and, even if not requested, copies of the IME or peer review report supporting any such denial would be required to be sent to the claimant, the claimant's attorney, and "the claimant's treating health care provider" within 30 days of the IME or peer review.
• Arbitrations:  Mandatory arbitrations of no-fault disputes?  Not in here.  Instead, a claimant's option to arbitrate some bills or benefits and sue others from the same accident would be codified.  A claimant would not be able to submit the same dispute to multiple forums, however.  Arbitrators would be required to "follow and apply substantive law", master arbitration would include the opportunity for parties to submit "written briefs", the master arbitrator's scope of review would include "factual, legal and procedural errors", and an arbitration or master arbitration award, except as to the issue of "the existence of insurance coverage" would not be given collateral estoppel effect in any personal injury litigation. 
• Burdens of Proof & Evidential Presumptions in Arbitrations & Lawsuits:  The claimant's prima facie showing would be satisfied by the claimant's filing of a "verification" with the arbitration demand or complaint setting forth that: (1) the claimant was licensed to render the services or the items provided at the time they were provided; (2) the services were rendered or items supplied by the claimant; (3) the services or items were medically necessary, or, for services or supplies provided pursuant to prescription, that such were properly supported by a prescription; (4) the claimant received an assignment of benefits from the injured party or the guardian or parent of the injured party; and (5) the claimant authorized the particular attorney or law firm to commence the suit.  In litigation, certain rebuttable evidentiary presumptions would attach to various billing and claim documents upon the submission of an affidavits sponsoring such documents as business records.
• Use of Depositions:  Depositions of any person could be used by any party without the necessity of showing unavailability or special circumstances, subject to the right of any party to move pursuant to CPLR 3103 to prevent abuse, "provided that the party against whom the evidence is offered had been afforded an opportunity to participate and question the witness at the deposition."
• Unauthorized Health Service Providers:  Authorizes the superintendent of insurance to fine up to $50,000 and prohibit a provider of health services from demanding or requesting payment for health services rendered under the no-fault article, for a period not exceeding three years, if the superintendent makes certain determinations after notice and a hearing.
• "Serious Injury" Threshold:  Would add "a complete tear or rupture of a nerve, tendon, ligament, cartilage or muscle" and "a tear, rupture or impingement of a nerve, tendon, ligament, cartilage or muscle which results in a significant impairment of a body organ, member, function or system" to the "serious injury" categories under Insurance Law § 5102(d).  
• "Covered Person":  Would define a "covered person" for purposes of Insurance Law §§ 3420(f)(1) and 5202 to include pedestrians and anyone injured in a staged/caused event who "is not a perpetrator of or a knowing participant in the staging or planning of the accident."

My sources tell  me that there is a chance this bill will make it out of committee and onto the floors of the Senate and Assembly for a vote this legislative session.  If you oppose the passage of this packaged bill, you should contact your legislative liaison or contact the sponsors themselves.  Or you could post your comments here or email them to me and I'll make sure they get to people who can get them to the legislators.  I'll post the sponsors' contact information here later tonight or tomorrow. anyone

`Twas Brillig, and the Slithy Toves Did Gyre and Gimble in the Wabe

NO-FAULT – FRAUDULENT BILLING – INSURER RECOVERY ACTION – FAIR PRICE
Lincoln Gen. Ins. Co. v. Alev Med. Supply Inc
(Nassau Co. Dist. Ct., 1st Dist., decided 9/28/2009)

Lewis Carroll wrote  Jabberwocky for his brothers and sisters in 1857 when he was 23 years old.  Fair Price Medical was decided by the New York Court of Appeals in 2008 when New York's no-fault law was 31 years old.  For over 150 years, the academic debate has continued over what the text of Jabberwocky means.  In just over a year, Fair Price continues to spawn unusual decisions such as this one.  In the words of young Alice from the Wonderland fame, "It seems very pretty, but it's rather hard to understand."

Andrey Armstrong was injured in an automobile accident on September 5, 2008.  On October 4, 2008 and October 9, 2008, defendant Alev Medical Supply, Inc. purportedly provided medical supplies to Armstrong. Armstrong assigned his right to no-fault benefits for these items to Alev, which submitted bills for the medical supplies to the plaintiff, Lincoln General Insurance Company.

Lincoln received the bills from Alev on November 10, 2008 and paid the bills in part and denied the bills in part 24 days later on December 4, 2008.  Lincoln issued checks to Alev for the portions of the bills it paid and issued denials for the balance of the bills.  Lincoln denied a portion of the bills on the ground the charges for the medical supplies and equipment were not in accordance with the no-fault payment schedule, 11 NYCRR Part 68.  Alev received and deposited the checks issued in payment of the claims.

On December 18, 2008, Armstrong testified at an examination under oath that he never received any of the equipment Alev claims it provided to him.  Based on that testimony, Lincoln commenced this action seeking to recover the money it paid to Alev on the claim.  Alev defaulted in the action, and Lincoln moved for a default judgment against Alev.

In denying Lincoln General's unopposed motion for a default judgment, Nassau County District Court Judge Fred Hirsh relied principally on the Court of Appeals' decision in Fair Price Medical and held that since Lincoln General had not denied Alev's bills within 30 days for fraud, it could not seek to recover its payment of those bills based on fraud:

An insurer's time to pay or deny a claim is tolled or extended if the insurer timely requests verification and/or upon receipt of the verification, timely requests additional verification of the claim. St. Barnabas Hospital v. American Transit Ins. Co., 57 AD3d 517 (2nd Dept. 2008); and Central Suffolk Hosp. v. New York Central Mut. Fire Ins. Co., 24 AD3d 492 (2nd Dept. 2005); lv. dnd. 7NY3d 704 (2006)^[FN1]When a insurer timely requests additional verification, the 30 day period in which to pay or deny the claim is tolled pending receipt of the additional verification. Kingsbrook Jewish Medical Center v. Allstate Ins. Co., supra ; and Montefiore Medical Center v. Government Employees Ins. Co., 34 AD3d 771 (2nd Dept. 2006).

Lincoln did not request verification of the claim submitted by Alev.

With limited exception, none of which are relevant to this case, an insurer is precluded from raising defenses including fraud not asserted in a timely denial. Fair Price Medical Supply Corp. v. Travelers Indemnity Co., 10 NY3d 556 (2008); Hospital for Joint Disease v. Travelers Property Casualty Ins. Co., supra ; and Careplus Medical Supply, Inc. v. Selective Ins. Co of America, -Misc.3d-, 2009 WL 679251 (App.Term 9th & 10th Jud. Distrs. 2009).  

Lincoln could have denied the claim on the grounds it was fraudulent. Fair Price Medical Supply Corp. v. Travelers Indemnity Co., supra . Lincoln did not. It paid the claim in part and denied the claim in part. The denial of the claim was based not upon fraud but upon the charges not being in accordance with the no-fault payment schedule.

The purpose of the no-fault law is "...to ensure prompt compensation for losses incurred by accident victims without regard to fault or negligence, to reduce the burden on the courts and to provide substantial premium savings to New York motorists." Medical Society of the State of New York v. Serio, 100 NY2d 854, 860 (2003). See, Fair Price Medical Supply Corp. v. Travelers Indemnity Co., supra ; and Hospital for Joint Disease v. Travelers Property Casualty Ins. Co., supra . An insurer can contest an illegitimate or fraudulent claim, but it must do so within the strict time periods and processes established by the no-fault law and regulations. Presbyterian Hosp. in the City of New York v. Maryland Cas. Co., 90 NY2d 274(1997).

The core objective of the no fault law and regulations is "...to provide a tightly timed process of claim, disputation and payment." Id. at 281. See, LMK Psychological Services, P.C. v. State Farm Mutual Auto Ins. Co., 12 NY3d 217 (2009).

Permitting Lincoln to recover in this action would allow an insurer to avoid or evade the time restrictions of the no fault law and regulations by paying and then investigating a claim and suing to recover the previously paid benefits if the investigation reveals the claim was fraudulent. To permit this would subvert the entire no-fault system which establishes strict time limits by which an insurer must process, dispute and pay a claim.

The no-fault law and regulations require insurers to promptly investigate and pay claims. The regulations provide insurers with the verification process in order to obtain additional information designed to ferret out illegitimate or fraudulent claims.

While the 30 day period plus any applicable tolls for paying or denying a claim may be "...too short of a time frame in which to detect billing fraud, any change is up to the Legislature." Fair Price Medical Supply Corp. v. Travelers Indemnity Co., supra at 565.

All bases that an in insurer has for denying a no fault claim, except for specific and limited exceptions, must be raised in a timely denial.^[FN2] The only way an insurer can avoid paying a fraudulent no fault claim is to deny the claim as fraudulent in a timely denial and to assert and prove the defense at trial. Id.; and Lenox Hill Radiology and MIA, P.C. v. Global Liberty Ins. Co. of New York, 24 Misc 3d 1225(A) (NY Civil Ct. 2009).

With due respect to Judge Hirsh and an appreciation of the case law context in which he was required to consider Lincoln General's motion, there is no indication that as of December 4, 2008, only three months after the accident, Lincoln General "could have denied [Alev's bills] on the grounds [sic] that [the claim] was fraudulent" or even had reason to request verification of those billings from Alev.  Fair Price Medical addresses the legal consequence of a no-fault insurer doing nothing within 30 days of receiving what may be fraudulent billings.  It does not, in this blogger's opinion, support or require the holding that a no-fault insurer which, in good faith, makes timely payment of a bill later discovered to be fraudulent cannot sue the provider on a fraud theory to recover that payment.  Fair Price Medical and its ilk address only the preclusion of defenses to payment under Insurance Law § 5106(a) and Regulation 68.

Lincoln General was not seeking to "avoid or evade the time restrictions of the no fault law and regulations" in this case; it paid Alev's bills in a timely fashion.  That fact alone should render the preclusion rule of § 5106(a) inapplicable.  Permitting no-fault no-fault insurers that have timely paid bills later discovered to be fraudulent to sue the providers to recover those payments would not "subvert the entire no-fault system which establishes strict time limits by which an insurer must process, dispute and pay a claim."  The system's objectives are met if, in the first instance, bills are timely paid.  Certainly New York courts would not have no-fault insurers delay payment of bills by requesting verification of them when there is no apparent reason to do so.  The 30-day preclusion rule is not a period of incontestability; it is a defense to payment rule.  Once timely payment is made, the rule should be irrelevant.  No further extension of that rule, from its genesis in Presbyterian Hospital through its unusual manifestation and application in Fair Price Medical is needed or warranted as respects an insurer's right to recover payments that it was fraudulently induced into making.

All mimsy were the borogoves, and the mome raths outgrabe.

Galumph.

Heading to Albany

Set three alarms for 3:30 this morning and made it with 11 minutes to spare for my 4:45 a.m. departure at Amtrak's Buffalo-Depew station. I'm rumbling east in business class (very nice) with a cup of hot coffee and the Verizon broadband AirCard-slotted laptop, heading to Albany to meet with one of my no-fault clients and a state assemblyman or two to discuss proposed legislation to amend New York's 30-day no-fault preclusion rule.

Beats steering with my knee any day.

Whether Plaintiff's Assignor Was an "Eligible Injured Person" Is a Coverage Defense Not Subject to Preclusion -- Default Judgment Vacated

NO-FAULT – VACATING DEFAULT JUDGMENT – MERITORIOUS DEFENSE – ELIGIBLE INJURED PERSON
Westchester Med. Ctr. a/a/o Jamel Harris v. Allstate Ins. Co.
(Sup.Ct., Nassau Co., decided 3/25/2009)

Allstate moved to vacate a default judgment entered 15 days after its answer in this medical provider no-fault recovery suit was due.  Allstate contended that the summons and complaint had been "misindexed" by an employee who "did not realize the time sensitive nature of the documents".

Plaintiff opposed the motion on the basis that Allstate had established neither a reasonable excuse for its default nor a meritorious defense to the hospital's claim.  According to Allstate, plaintiff's assignor was not an "eligible injured person" entitled to no-fault coverage benefits because he was not driving either of the two covered autos listed on his grandmother's policy and did not reside with her.  Plaintiff counterargued that Allstate was precluded from raising that defense because it had not issued a denial of claim (NF-10).

In granting Allstate's motion and vacating the default, Nassau County Supreme Court Justice Randy Sue Marber ruled:

The Plaintiff's attorney argues that the defense to the action that the Defendant raises is precluded due to Allstate's failure to have issued a Denial of Claim. In response to this argument, the Defendant's attorney asserts that the insurer's failure to timely disclaim coverage does not preclude it from later denying liability on the ground that the insurance agreement itself does not cover the particular automobile or person. In support of this proposition, the Defendant's counsel cites Zappone v. Home Ins. Co., 55 NY2d 131, 138 (1982). Additionally, the Defendant's counsel points out that at no time did the Defendant ever admit that it provided coverage for the subject vehicle. The affirmation submitted by the Defendant's counsel, dated January 26, 2009, in support of the Order to Show Cause specifically states in paragraphs 14 and 15 that the Plaintiff's assignor drove a 2005 Ford and that the policy insured a 1999 Nissan Maxima and a 1997 Acura. The Defendant's counsel argues that the Plaintiff has failed to put forth any evidence to show that the Plaintiff's assignor was an eligible injured person covered under the subject policy. 

This Court, in its discretion, accepts the Defendant's explanation for the delay incurred in answering the Summons and Complaint in this matter as an excusable delay. Additionally, the Defendant has provided a meritorious defense and sufficient evidence that the default was not willful. The delay was short and the Plaintiff will not be prejudiced by allowing the Defendant to interpose an answer. 

Whether someone qualifies as an "eligible injured person" under the prescribed PIP endorsement is a coverage defense not subject to the 30-day pay or deny preclusion rule.

Court Rules that DME Provider's Illegal Billing Is Excused by No-Fault Insurer's Untimely Denial

NO-FAULT – DME BILLING – DEFENSE PRECLUSION – FEE SCHEDULE DEFENSE – INSURANCE LAW § 5108
Yklik, Inc. a/a/o Tammy Agosto v. Allstate Ins. Co.
(NYC Civil Ct., Richmond Co., decided 12/31/2008)

New York Insurance Law § 5108 provides:

§ 5108. Limit on charges by providers of health services.

(a) The charges for services specified in paragraph one of subsection (a) of section five thousand one hundred two of this article and any further health service charges which are incurred as a result of the injury and which are in excess of basic economic loss, shall not exceed the charges permissible under the schedules prepared and established by the chairman of the workers' compensation board for industrial accidents, except where the insurer or arbitrator determines that unusual procedures or unique circumstances justify the excess charge.

(b) The superintendent, after consulting with the chairman of the workers' compensation board and the commissioner of health, shall promulgate rules and regulations implementing and coordinating the provisions of this article and the workers' compensation law with respect to charges for the professional health services specified in paragraph one of subsection (a) of section five thousand one hundred two of this article, including the establishment of schedules for all such services for which schedules have not been prepared and established by the chairman of the workers' compensation board.

(c) No provider of health services specified in paragraph one of subsection (a) of section five thousand one hundred two of this article may demand or request any payment in addition to the charges authorized pursuant to this section. Every insurer shall report to the commissioner of health any patterns of overcharging, excessive treatment or other improper actions by a health provider within thirty days after such insurer has knowledge of such pattern. (Emphasis added.)

Plaintiff DME provider sued to recover $317 in unpaid bills and moved for summary judgment. Allstate opposed the motion on two grounds: (1) that plaintiff had failed to establish a prima facie case because the affidavit of its billing manager was not based on personal knowledge of the plaintiff's office practices and billing procedures; and (2) that because plaintiff's claims were in excess of the fee schedule contained in the Workers' Compensation Law, and because defendant made a partial payment to plaintiff, a triable issue of fact existed as to whether Allstate paid the appropriate amount for medical services. Plaintiff argued that Allstate's late denial precluded it from raising and relying on the fee schedule defense.

Richmond County NYC Civil Court Judge Katherine Levine agreed with plaintiff and found that Allstate's late denial (57 days after receipt of plaintiff's billings) precluded it from asserting the statutory fee schedule defense. After discussing the preclusion rule in general, Judge Levine held:

A medical provider must limit its charges to those permitted by approved fee schedules. Ins. Law §5108(a), 11 NYCRR 68.0(f) "which protects a patient from erosion of available benefits by inflated charges" Complete Orthopedic Supplies, Inc. v. State Farm Ins. Co., 16 Misc 3d 996, 1005 (Civil Ct., Queens Co. 2007)) citing from Ops. Gen Counsel NY Ins. Dept. No. 04-06-11 ( 6/16, 2004). The fees for services and procedures are governed by the workers compensation fee schedule ( 11 NYCRR 68.1) and durable medical goods fees are governed by the NY Medicaid fee schedule (11 NYCRR part 68). An insurer who raises this defense will prevail if it demonstrates that it was correct in its reading of the fee schedules unless the plaintiff shows that "an unusual procedure or unique circumstance justifies the necessity" for a charge above the schedules fee ( 11 NYCRR 68.4) Complete Orthopedic Supplies , Inc, supra 16 Misc 3d at 1005. However, before this defense can be invoked an insurer must prove a timely denial.

In Fair Price, supra , the Court distinguished the defense that the assignor never received the medical supplies from the plaintiff from the defense raised by the insurance company in Chubb, supra - that the claimant's injuries arose out of a prior related accident rather than a car accident. Only the latter - "a lack of coverage defense" - fell outside the preclusion rule since if in fact the injuries were unrelated to the accident, the treatment would not have been covered by the automobile liability policy in the first instance. 10 NY3d at 564 citing Chubb, supra at 199. The defense that the billed for services were never rendered, on the other hand, was more akin to a normal exception from coverage, like the defense of billing for unnecessary procedures found by the Chubb court to fall within the preclusion rule. 10 NY3d at 564 citing Chubb, 90 NY2d at 199 (over billing does not ordinarily implicate a coverage matter). This is so because in both situations, there was an actual accident and an actual injury, where "coverage legitimately came into existence". Id. at 565 citing Fair Price, supra , 42 AD3d at 285.

The same reasoning applies to the defense that the claims were in excess of a fee schedule. The parties do not dispute that the assignor is entitled to no-fault insurance benefits. There was an actual accident where the assignor sustained real injuries; the assignor was covered by defendant under an actual insurance policy; and the assignor was prescribed medical equipment which Yklik provided and for which the insurer was billed. Thus, an insurer can only preserve a fee schedule defense by first complying with the 30 day rule and issuing a timely denial. Complete Orthopedic Supplies, supra at 1005; Jamil M. Abraham v. Park Health Center Rockaway Blvd., 3 Misc 3d 130A, 787 NYS2d 678 (App. Term, 2d Dept. 2004)("by virtue of a timely claims denial an insurer is entitled to raise a fee schedule defense and establish that charges exceeded those permitted by law"). See Forrest Chen Acupuncture v. GEICO, 54 AD3d 996 (2d Dept. 2008).

In light of these opinions, it is clear that the defenses of fee schedule non-compliance and partial payment made in accordance with the fee schedule are precluded if defendant fails to disclaim coverage in timely manner pursuant to the no-fault regulations. Here, the denial annexed to plaintiff's papers as Exhibit "3" reveals that defendant received the claims on July 10, 2007 and mailed the denial on 9/04/07, waiting approximately 56 days to send out its denial. By failing to timely submit its denial, defendant is precluded from raising the defense of non-compliance with the fee schedule and summary judgment is granted to plaintiff.

Unfortunately, the cases cited by Judge Levine -- Complete Orthopedic Supplies, Abraham, and Forrest Chen Acupuncture -- do not actually hold that "an insurer can only preserve a fee schedule defense by first complying with the 30 day rule and issuing a timely denial", and it is arguable whether they implicitly support that conclusion.

In 1989, the Second Department held that Insurance Law § 5108 was not unconstitutional, finding that "a person of average intelligence would understand this [statute] to constitute a prohibition against accepting any payments in excess of the fee schedule[.]" Goldberg v. Corcoran, 153 AD2d 113, 119 (2d Dept. 1989). Fair Price can be distinguished because it involved a fraud defense and did not involve any statutory prohibition against billing for DMEs that were not actually delivered. It is doubtful that, in enacting Insurance Law § 5108, the New York State Legislature intended the first sentence of subsection (c) to become "[n]o provider of health services . . . may demand or request any payment in addition to the charges authorized pursuant to this section [unless the no-fault insurer does not issue a timely denial of payment, in which case the provider may demand or request payment of whatever excessive charges it wishes]." For this stautory prohibition to have any real meaning, it cannot be dependent on a no-fault insurer's response to illegally excessive charges. Illegal conduct does not become legal simply because someone does not object to it.

This defense is not a coverage defense at all; it's a statutory defense. That's why it cannot be analyzed under the Fair Price and Central General Hospital, Presbyterian Hospital and Hospital for Joint Diseases defense preclusion rubric. Thou shall not, means thou shall not. Period.

Survey of Recent Appellate Term, 2nd Department No-Fault Decisions

NO-FAULT – MEDICAL PROVIDER SUIT – 3-YEAR SOL UNDER CPLR § 214(2)
Boulevard Multispec Med., P.C. v MVAIC
(App. Term, 2nd Dept., decided 4/14/2008)

In Boulevard Multispec Med., P.C. v. MVAIC, the court granted MVAIC's motion for summary judgment, dismissing the provider's suit, based on its finding that the provider had not commenced suit within 3 years of when payment of the bills in question became due. The 3-year SOL of CPLR § 214(2) applied because the provder's action against MVAIC was one "to recover upon a liability, penalty or forfeiture created or imposed by statute" and not based on contract. The court rejected the provider's argument that MVAIC should be equitably estopped from asserting the SOL defense because it had previously taken the position that its verification requests were not untimely. The submission of an untimely verification request did not toll the payment due date and, therefore, the accrual date of the provider's statutory claim against MVAIC. "We disagree with plaintiff's position that its gratuitous compliance with a verification request issued beyond the payment due date, or its apparent willingness now to unilaterally waive the time limit for the sending of a verification request, can render a belated verification request timely and, ultimately, postpone the accrual date of its cause of action. Neither the relevant statute nor the applicable regulations provide for such a waiver." See, also, Kings Highway Diagnostic Imaging, P.C. v. MVAIC (App. Term, 2nd Dept., decided 4/14/2008).

NO-FAULT – MEDICAL PROVIDER SUIT – INDEPENDENT CONTRACTOR – DEFENSE NOT PRECLUDED
Health & Endurance Med., P.C. v. Liberty Mut. Ins. Co.
(App. Term, 2nd Dept., decided 4/14/2008)

In Health & Endurance Med., P.C. v. Liberty Mut. Ins. Co., the court AFFIRMED the lower court's denial of plaintiff's motion and granting of defendant's cross motion for summary judgment. Where a billing provider seeks to recover no-fault benefits for services which were not rendered by it or its employees, but rather by a treating provider who is an independent contractor, it is not a "provider" of the medical services rendered within the meaning of Insurance Department Regulations (11 NYCRR) § 65-3.11 (a) and is therefore not entitled to recover "direct payment" of assigned no-fault benefits from the defendant insurer.

In this case, the claim forms submitted by plaintiff in support of its motion for summary judgment stated that the treating professional was an independent contractor and, in opposition to defendant's cross motion, plaintiff conceded that the services were rendered by an independent contractor. Contrary to plaintiff's contention, that defense is nonwaivable and not subject to the preclusion rule. As a result, the court properly denied plaintiff's motion for summary judgment and granted defendant's cross motion for summary judgment dismissing the complaint.

NO-FAULT – MEDICAL PROVIDER SUIT – BUSINESS RECORDS – DOCUMENT RETENTION POLICY
First Aid Occupational Therapy, PLLC v. New York Cent. Mut. Fire Ins. Co.
(App. Term, 2nd Dept., decided 4/8/2008)

In First Aid Occupational Therapy, PLLC v. New York Cent. Mut. Fire Ins. Co., the court REVERSED the lower court's granting of plaintiff's motion for summary judgment, agreeing with defendant insurer that plaintiff provider had not made a prima facie showing because plaintiff failed to establish the admissibility of the claim forms annexed to its moving papers. " Inasmuch as the affirmation submitted by plaintiff's billing manager was insufficient to establish that she possessed personal knowledge of plaintiff's office practices and procedures so as to lay a foundation for the admission, as business records, of the documents annexed to plaintiff's moving papers, plaintiff failed to make a prima facie showing of its entitlement to summary judgment. The fact that copies of documents were stored in compliance with a document retention policy is not sufficient to establish that the documents were business records in the absence of a showing as to how and when the documents were generated (see CPLR 4518). "

NO-FAULT – MEDICAL PROVIDER SUIT – PRIOR INJUNCTION
A.T. Med., P.C. v. State Farm Ins. Co.
(App. Term, 2nd Dept., decided 4/24/2008)

In A.T. Med., P.C. v. State Farm Ins. Co., the court REVERSED and vacated the lower court's order granting plaintiff's motion for summary judgment. State Farm demonstrated on appeal that in a separate action brought by State Farm against various health care providers including the plaintiff, Nassau County Supreme Court had enjoined the providers from commencing suit against State Farm to recover no-fault benefits during the pendency of that action. State Farm successfully argued that plaintiff's summary judgment motion in this action, therefore, was improperly made, the Appellate Term agreeing that the injunction barred the motion.

NO-FAULT – MEDICAL PROVIDER SUIT – ILLEGIBLE PEER REVIEW REPORTS
Boris Kleyman, P.C. v. Kemper Ins. Co.
(App. Term, 2nd Dept., decided 4/24/2008)

In Boris Kleyman, P.C. v. Kemper Ins. Co., the court REVERSED the lower court's order denying plaintiff provider's motion for summary judgment. The peer review reports submitted by Kemper in support of its defense that the services rendered were not medically necessary were illegible. Thus, the Appellate Term held that Kemper failed to demonstrate the existence of a triable issue of fact as to medical necessity.

Fair Number of Questions on Fair Price Medical Oral Argument

If you've ever attended an oral argument of an appeal, you know that an assessment of "how it went" is sometimes gauged by the questions posed to respective counsel. With grateful appreciation to Coverage Counsel's two in-court observers and correspondents, Cheryl from AIG and Andre from Progressive, here's what they saw and heard this afternoon at the Court of Appeals in Albany:

Questions for Traveler's counsel (Appellant):

• Did Travelers obtain an affidavit from the EIP? [No.]


• Isn't it true that the EIP didn't speak English? [Yes, but an interpreter was used.]


• What was with Travelers' use of a 200-question questionaire?


• If the DMEs had been received, would Travelers have paid for them? [Yes.]


• Where does it state that fraud is not subject to the 30-day preclusion rule? [BEL not incurred, therefore not "covered"; Insurance Law § 5109 and public policy require insurers to investigate fraud.]


• Why didn't Travelers deny for 22 months? [It doesn't matter whether the denial is one day or 2 years late where the services or supplies have not been rendered.]

Questions for Fair Price Medical's counsel (Respondent):

• Did Fair Price obtain an affidavit from the EIP? [No. Med providers are required only to prove the bill was mailed and not paid in order to make their prima facie case.]


• Why shouldn't a defense of fraudulent billing be available to the insurer at any time? [If not discovered within 30 days, too bad.]


• What recourse does a no-fault insurer have if it cannot deny a claim for fraud? [Insurer can commence a DJ action or sue for recovery.]
• Wait, so if the provider sues for payment of the billings, the insurer can counterclaim for payment back? [Yes.]

Cheryl: "It is difficult to tell which way the judges will go on this." Andre: "It went better than I thought given the facts."

To one of the two observers, Judges Smith and Pigott seemed to be more skeptical of Fair Price's position, while Chief Judge Kaye seemed to be more bothered with Travelers' 22-month delay in denying coverage.

The Court of Appeals usually issues decisions in 4-6 weeks. Look for a decision on this case in that time frame. Any predictions?

June 5th -- Court of Appeals AFFIRMED. See Fair Price Medical -- Affirmed.