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.

Court Weighs Impact of Fair Price Medical Decision on No-Fault Fraud-Related Defenses

NO-FAULT – IMPACT OF FAIR PRICE MEDICAL ON NO-FAULT FRAUD-RELATED DEFENSES – MALLELA DEFENSE – STAGED ACCIDENT DEFENSE
Manhattan Med. Imaging, P.C. a/a/o Jessica Rodriguez v. State Farm Mut. Auto. Ins. Co.
(NYC Civil, Richmond Co., decided 9/4/2008)

I spoke about this case at yesterday's NYSSIU quarterly meeting in Cicero. Kudos to all who made it there in spite of the snow, and welcome new NYSSIU officers and directors.

The decision dates back to September of last year, but its rulings are noteworthy and important to no-fault practitioners. I've had some of this post in draft for some time, and yesterday's discussion motivated me to finish it.

When the New York Court of Appeals issued its decision in Fair Price Medical in June of last year, the New York no-fault community wondered what fraud-related defenses could and would survive beyond 30 days from an insurer's receipt of a bill (even for services or devices that may not actually have been administered or delivered to patients) or requested verification of a claim. If billing fraud for services or devices not actually administered or delivered to patients would be subject to the 30-day pay or deny preclusion rule, what other types of no-fault claimant and provider fraud wouldn't be? The incline on the "coverage defense" slipperly slope had just gotten radically steeper.

Enter Judge Katherine Levine of Richmond County New York City Civil Court, whose prodigious vocabulary and prolific writing on no-fault issues provide ample grist for this blawger's mill. In this case, Judge Levine addressed “the murky issue of what precise evidence a defendant insurer must present in support of its late denial based upon fraud to withstand the granting of summary judgment to a plaintiff medical services provider in a No-Fault case.” Also at issue was whether the Court of Appeals’ Fair Price Medical decision requires an insurer to proffer the defense that a provider is fraudulently incorporated within 30 days or whether that defense remains non-waivable.

On the first issue, Judge Levine reiterated that a staged accident defense is not subject to the 30-day preclusion rule and held that State Farm’s proffer of the assignors’ transcribed recorded statements, although unsworn and unsigned but certified by the transcriber, together with a signed and sworn affidavit of State Farm’s special investigator was sufficient to create a question of fact on whether the claim was fraudulent, precluding summary judgment. State Farm’s special investigator memorialized inconsistencies in the various assignors' statements, including the color and make of the car they were in that was supposedly involved in the accident, different reasons as to why they were all together with the same driver, who was seated in the front of the car at the time of the accident and whether the car was stopped at the point of the accident. Judge Levine commented:

While this court does not believe that defendant presents a strong case of a staged accident, it presents enough inconsistencies to rise above the base level of "unsubstantiated hypothesis and suppositions" so as to permit this defense to go to trial. The court is not troubled that the statements of the assignors were not verified or signed since their transcribed statements were certified by the transcriber. See R.M. Newell Co. v. Rice, 236 AD2d 843, 844 (4th Dept. 1997), (deposition transcripts certified as accurate by transcriber admissible on summary judgment motion even though unsigned). Nor is the court concerned that Fink was not present during the taking of the statements. See, e.g., PDG Psychological, supra, Northern Medical, P.C., supra (trial held despite late denial based upon SIU investigator's finding that there was a staged accident based upon his review of the file for the first time a few weeks before the trial and his running a prior claim history on the assignor).

On Fair Price Medical's impact on the Mallela (fraudulent incorporation) defense, Judge Levine also ruled that the Court of Appeals’ decision does not preclude a no-fault insurer from raising a fraudulent incorporation defense beyond 30 days from receipt of billings or verification, provided the insurer presents a "founded belief" that the corporation is ineligible to obtain no-fault benefits by reason of a fraudulent corporate filing:

Defendant herein alleges that Dr. Brownstein is not the sole owner of Manhattan Medical but rather shares his ownership responsibilities with Sam Stern, a non physician. The attorney's affirmation cites a number of certificates of incorporation which allegedly show a labyrinth of interconnections between plaintiff Manhattan Medical and Universal Diagnostic Imaging, the latter of which is purportedly owned by Stern. Defendant also alleges that Brownstein owns at least five other imaging companies and is allegedly facing civil fraud lawsuits stemming from his ownership of other entities. Also attached is an EBT of the assistant office manager of plaintiff who indicates that Stern is one of the other owners of plaintiff and the testimony of plaintiff's business manager in another where she testified that Stern is a general partner of plaintiff.

The court finds that defendant has articulated a "founded belief" that plaintiff is fraudulently incorporated as it is actually controlled by a non-licensed professional. Defendant has therefore made allegations sufficient to raise an issue of fact as to whether plaintiff is fraudulently incorporated.

Through this morning, Judge Levine's decision in this case has been cited only once -- again by Judge Levine in her New Year's Eve ruling in Yklik, Inc. a/a/o Tammy Agosto v. Allstate Ins. Co. concerning a no-fault insurer's fee schedule defense, a decision with which, by the way, I take a most respectful exception for reasons given in my post on that case.

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.

New Poll

The 57.1% of you who predicted that the Court of Appeals would affirm the Second Department's decision in Fair Price Medical were right.

Take our new poll (to the right): given that affirmance, will insurers be permitted to counterclaim or sue and recover 5106(a)-required payments of no-fault services or DMEs they can prove were not actually rendered or delivered?

Fair Price Medical -- Affirmed

NO-FAULT – FRAUDULENT BILLING – 30-DAY RULE
Fair Price Med. Supply Corp. v. Travelers Indem. Co.
(Ct. Apps., decided 6/5/2008)

In a 5-2 decision, the Court of Appeals has AFFIRMED the Second Department's decision.

Judge Read wrote the majority opinion, in which Chief Judge Kaye and Judges Ciparick, Graffeo and Jones concurred. Judge Smith wrote the dissent, in which Judge Piggott concurred.

The majority answered "yes" to the certified question before it of whether the Second Department's decision and order were properly made. With apparent approval of its sentiment, Judge Read quoted from the Appellate Term's decision:

The two-Justice majority opined that the "clear implication" of Presbyterian Hosp. in City of N.Y. v Maryland Cas. Co. (90 NY2d 274 [1997]) was that "a defense based on a provider's alleged fraudulent claim for no-fault benefits is precluded by an insurer's failure effectively to invoke its remedies in the 'contestable period,' one of the 'tradeoff[s] of the no-fault reform' which the Legislature recognized as the cost of providing 'prompt uncontested, first-party insurance benefits'" (Fair Price Med. Supply Corp. v Travelers Indem. Co., 9 Misc 3d 76, 79 [App Term, 2d and 11th Jud Dists 2005], quoting Presbyterian, 90 NY2d at 285 [alteration in Appellate Term opinion]).

As some commentators had predicted, the majority cited the Court's own decision from November 2007 in Hospital for Joint Diseases v. Travelers Prop. Cas. Ins. Co. (9 NY3d 312 [2007]), in which the court reviewed "the basic no-faul regime" and verification process in the context of Insurance Law § 5102(a)'s 30-day pay or deny rule. Turning next to the question of what no-fault defenses fall within and without that preclusion rule, the majority held:

Thus, the key issue here — as was also the case in Hospital for Joint Diseases — is whether the facts fit within the narrow no-coverage exception to the preclusion rule. Travelers argues that they do, and so it is "irrelevant" that Fair Price's claims were pending for nearly two years before Travelers finally denied them. Specifically, Travelers argues "where . . . the medical supplies and equipment for which the plaintiff provider is suing to recover payments were never provided to the insured-assignor, there is no coverage in the first instance, and a defense of fraud based upon the plaintiff provider's failure to provide the supplies and equipment cannot be waived, even if its denial of claim was untimely."

But there are important differences between this case and Chubb. As already noted, the majority in Chubb emphasized the "narrow[] . . . sweep" of the exception for "denial[s] of claims [] premised on lack of coverage" (90 NY2d at 199). Moreover, the relevant statutory language reveals "neces[sity]" and "incur[sion]" to be of a kind in Insurance Law § 5102 et seq. (see id. at § 5102[a][1] [providing coverage for "[a]ll necessary expenses incurred for services"]), which is important because we explicitly stated in Chubb that billing for unnecessary procedures — i.e., overbilling — was subject to preclusion, not the no-coverage exception (see e.g. Chubb, 90 NY2d at 199 ["We would not, for example, extend this exceptional exemption to excuse Chubb's
untimely defense in relation to treatment being deemed excessive by the insurer. That would not ordinarily implicate a coverage matter and, therefore, failure to comply with the Insurance Law time restriction might properly preclude the insurer from a belated rejection of the billing claim on that basis"] [emphasis added]).

More fundamentally, determining whether a specific defense is precluded under Presbyterian or available under Chubb entails a judgment: Is the defense more like a "normal" exception from coverage (e.g., a policy exclusion), or a lack of coverage in the first instance (i.e., a defense "implicat[ing] a coverage matter")? In our view, a defense that the billed-for services were never rendered is more akin to the former. In this case, there was an actual accident and actual injuries. As the Appellate Division put it, "coverage legitimately came into existence" (42 AD3d at 285), thus removing this fact pattern from the realm of cases where preclusion would "create coverage where it never existed" (Matter of Worcester Ins. Co. v Bettenhauser, 95 NY2d 185, 188 [2000]).

While preclusion requires Travelers to pay a no-fault claim it might not have been obligated to honor if timely disclaimed, the same can be said of any policy defense subject to preclusion. Moreover, although there may be some merit to Travelers' protest that a 30-day (plus potential tolling) window is generally too short a time frame in which to detect billing fraud, any change is up to the Legislature [FN2]. As we observed in Presbyterian and repeated in Hospital for Joint Diseases:

"No-fault reform was enacted to provide prompt uncontested, first-party insurance benefits. That is part of the price paid to eliminate common-law contested lawsuits. . . . The tradeoff of the no-fault reform still allows carriers to contest ill-founded, illegitimate and fraudulent claims, but within a strict, short-leashed contestable period and process designed to avoid prejudice and red-tape dilatory practices" (Presbyterian, 90 NY2d at 285 [citations omitted]; see also Hospital for Joint Diseases, 9 NY3d at 320, quoting Presbyterian, 90 NY2d at 285).

Finally, Travelers and amici curiae argue that, unless we adopt the approach they advocate, insurers in the future will be forced to blanket insureds and their assignees with demands for additional verification in order to combat fraud. A flurry of verification requests, however, is unlikely to burden the no-fault system more than the uncertainty and delay apt to result from judicial expansion of the no-coverage exception. And in this case, of course, Travelers discovered potential billing fraud well within the 30-day time period. Rather than acting on Fair Price's claims in a timely fashion, however, Travelers waited for almost two full years.

And there you have it. We learned in law school that bad facts make bad law. If you are inclined to view this decision as bad law, that last sentence is telling. Nonetheless, at this point, it won't matter whether the lateness is two years, two months, or two days. Unless the New York State Legislature "overrules" this decision, like it or not, New York no-fault insurers must regard and treat a defense that billed-for services were never rendered as falling within the 30-day preclusion rule.

Judge Smith's dissent offers some valid points:

The rule of Central Gen. Hosp. and Zappone is difficult to apply. Despite our use of the word "strict" in Central Gen. Hosp., there is no theoretically perfect way to distinguish lack of coverage defenses from others. It can plausibly be said that any claim not payable under the terms of the policy is a claim the policy does not cover (see Zappone, 55 NY2d at 140-143 [Gabrielli, J., dissenting]). In Zappone, we said that to preclude a defense based on lack of coverage "would be to impose liability upon the carrier for which no premium had ever been received" (55 NY2d at 135-136), but every loss for which a carrier did not agree in its policy to pay is one for which it never received a premium. Nevertheless, it is clear under Presbyterian that insurers must pay most such claims if they do not assert their defenses in a timely way.

The Zappone/Central Gen. Hosp. rule is best understood as requiring different treatment for defenses of such fundamental importance that, unlike most defenses, they should not be subject to waiver by insurance company inaction. These defenses are treated as "lack of coverage" defenses. The defense we upheld in Zappone was that the liability sued on was "incurred neither by the person insured nor in the vehicle insured" (id. at 135). The defense in Central Gen. Hosp. was that the injuries for which the insured was treated did not arise out of an automobile accident. That no medical supplies were provided to the insured is an equally fundamental objection to a claim, and should be treated as a defense based on lack of coverage. That is consistent with the plain meaning of the words "lack of coverage." Neither the insurance policy at issue here nor any other covers wholly fabricated claims.

If indeed Travelers' insured never received the supplies for which Travelers was billed, to uphold these claims would be to countenance a particularly gross form of fraud. I acknowledge that, under Presbyterian, some "illegitimate and fraudulent claims" must be paid if a defense to them is not asserted promptly (90 NY2d at 285); no doubt padded medical bills, overpriced merchandise and other relatively petty abuses will sometimes slip through. But I agree with Justice Golia, dissenting from the Appellate Term's ruling in the present case, that the line should be drawn at what he called "pure fraud" or "classic fraud" (Fair Price Med. Supply Corp. v Travelers Indem. Co., 9 Misc 3d 76, 81 [App Term 2d Dept 2005] [Golia, J., dissenting]). An attempt to distinguish this kind of fraud from the lesser kinds would not succeed perfectly, and would no doubt be the cause of some delay and administrative inconvenience, but I think it would be worth the cost.

The impact of fraud on this State's no-fault system is notorious, as the Appellate Term majority and the Appellate Division acknowledged, even while rejecting Travelers' defense. The Appellate Term referred to "the steep increase in fraudulent no-fault benefits claims arising . . . from provider claims where the services or supplies were . . . never rendered" (9 Misc 3d at 78); the Appellate Division said that "the fraud and abuse that plagues the no-fault insurance system is a serious problem with widespread consequences" (42 AD3d 277, 285-286 [2d Dept 2007]). Today's decision, I believe, unjustifiably hinders insurers' efforts to keep that problem within bounds.

Notice that neither the majority nor the dissent mentions what recourse a no-fault insurer might have if, precluded by the 30-day rule from denying payment for services or supplies that were never rendered or delivered, it must such payment. Will the New York courts permit insurers to counterclaim in provider recovery suits for such repayment? Or bring separate, affirmative actions for recovery? Technically speaking, what occurs when the 30-day rule is not adhered to is neither a waiver (intentional relinquishment of a known right or defense) nor an estoppel (words or conduct by the insurer upon which the insured or assignee reasonably relies to her/its detriment). Consequently, there arguably should be no legal or equitable impediment to seeking recovery under theories of either fraud or unjust enrichment.

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.

Fair Price Medical -- Oral Argument Scheduled at Court of Appeals

The long awaited oral argument at the Court of Appeals of the 2nd Department's decision in Fair Price Medical Supply Corp. v. Travelers Indem. Co. is scheduled for Wednesday, April 30, 2008. In Fair Price, the 2nd Department upheld the lower court's ruling that fraudulent no-fault billings (DMEs never delivered or supplied) is not a lack of coverage defense and, thus, must be included in a timely NF-10. At stake in this appeal are millions of dollars in bills for no-fault services or supplieds that either were not rendered or were rendered to people who were not really injured in either real accidents or staged events. Coverage Counsel expects to have an observer in court to report how oral argument went.

One would have thought the logic as being straightforward and self-evident: the no-fault endorsement provides reimbursement "for basic economic loss sustained by an eligible injured person on account of personal injuries caused by an accident", BEL which by definition includes health service benefits, lost earnings and other necessary expenses. Even the greenest coverage attorney knows that something not covered by reason of lack of inclusion cannot implicate waiver, estoppel or statutory preclusion. If there has been no BEL "sustained", such as the non-delivery of DMEs, there can be no coverage obligation -- not because of the appplicability of an exclusion or breach of condition subsequent to coverage, but because the facts (and non-existence of covered services or expenses) do not trigger coverage in the first place. Similarly, if there has been no "accident", PIP coverage does not lie, again not because of the appplicability of an exclusion or breach of condition subsequent to coverage, but because the insuring agreement of the PIP endorsement has not been triggered. The New York courts have repeatedly and correctly noted this tenet of insurance coverage in 3rd-party liability coverage cases, and yet seem to have overlooked it in the no-fault claim context, instead focusing slavishly on the 30-day pay or deny rule of Insurance Law § 5106(a) and the ever-expanding legacy of the Court of Appeals' decisions in Presbyterian Hosp. in City of N.Y. v. Maryland Cas. Co., 90 NY2d 274 (1997) and Central Gen. Hosp. v. Chubb Group of Ins. Cos., 90 NY2d 195 (1997).

Fair Price continues to cause consternation in the courts. Recently, Judge William A. Viscovich of Queens Civil in Northern Medical P.C., a/a/o Jose Rodriguez, v. State Farm Mut. Auto. Ins. Co., 2008 NY Slip Op 50753U, 2008 N.Y. Misc. LEXIS 2030 (NY City Civ. Ct., Queens Co., 3/19/08), in "regretfully" awarding judgment to the plaintiff, wistfully observed:

Unfortunately, the only issue which this court may address under Fair Price is whether there was a lack of coverage as contended by defendant on the basis that the alleged July 31, 2002 accident was "staged". Any testimony by Rodriguez regarding his treatment or lack thereof is being used by the court solely as evidence as to whether the loss in question resulted from an actual "covered" accident or arose from a staged collision. Any evidence that Mr. Rodriguez was not treated as claimed by the plaintiff provider or was treated to a lesser extent than claimed, has relevance only to the extent that common sense dictates that it is less likely that the participants in such a "staged" collision would actually receive treatment than in a true accident. It also follows that the alleged victim of a "staged" accident would be less likely to actually accept the risk of real injury arising from an unnecessary course of treatment (Keep in mind that this court does concede that a real injury may arise from a staged accident, but does not believe this to be the case herein).

What distresses the court is that while the defendant was not able to meet its burden of proof as to a "staged accident", there was credible evidence of provider fraud. While a full trial on that issue may reveal that there was no fraud and that services were in fact rendered, the holding in Fair Price assures that neither the court nor the defendant are able to delve further into that issue. The end result is that this court is put in the potential position of having to make an award to a possibly unethical provider.

This is exactly the concern expressed by Justice Joseph Golia in his dissent in the Appellate Term rendering of Fair Price Medical Supply Corp. a/a/o Nivelo v. Travelers Indemnity Company, 9 Misc 3rd 76 [ App. Term, 2nd & 11th Jud. Dists. 2005], in which the majority decision was upheld by the Appellate Division in the Fair Price decision that controls herein. Like Justice Golia, this court is "under the firm and unshakable belief that neither the Legislature nor the Insurance Department ever intended for an insurance carrier, or anyone else for that matter, to be forced to pay for medical equipment [or in this case, medical treatment] that was never provided "(Fair Price, supra, dissent at 82). But, alas, that is the potential outcome all but acknowledged by both the Appellate Term and Appellate Division Fair Price holdings.

It's time for the Court of Appeals to re-read its seminal decision in Zappone v. Home Ins. Co., 55 NY2d 131 (1982) and apply its principle to fraudulent no-fault billings. Not rendered. Not covered.