What Is New York's No-Fault Scheme Ill-Equipped to Handle? (The right answer is not "claims".)

NO-FAULT – RICO AFFIRMATIVE ACTION – PRELIMINARY INJUNCTION STAYING COLLATERAL ARBITRATIONS & LITIGATION – MOTION TO DISMISS

GEICO v. Mikhail Strut, MD, RES Physical Medicine & Rehabilitation Services, PC, and Cheryle Hart, MD
(WDNY, 4/10/2020)

Those of you dealing with Mikhail Strut, MD (f/k/a Mikhail Strutsovskiy) and his medical practice,  RES Physical Medicine & Rehabilitation Services, PC, may want to read this decision (click the case name) and follow this case.  

In this decision and order, WDNY Judge Sinatra adopted Magistrate Judge Scott's recommendations to:

• DENY defendants' motion to dismiss GEICO's complaint, which alleges causes of action based on RICO, fraud and unjust enrichment; and

• GRANT GEICO's motion for a preliminary injunction and a stay of all collateral no-fault suits and arbitrations, upon GEICO posting $500,000 security. 

In rejecting Dr. Stut's argument that GEICO was trying "improperly to circumvent New York's no-fault scheme" by litigating Strut's claims in federal court, Judge Sinatra remarked:  "Well, isn't that the pot calling the kettle black?  But the law is clear that Plaintiffs may maintain RICO and fraud claims in federal court, notwithstanding New York's no-fault scheme, because the no-fault scheme is ill-equipped to handle claims involving systemic fraud." 

Okay, Judge Sinatra didn't write the pot/kettle thing.  But he did deny Dr. Strut's motion to dismiss and grant GEICO's preliminary injunction application.  If you're a New York no-fault insurer and are facing growing numbers of suits and arbs while you race to complete a global DJ action to confirm your non-coverage position, consider moving for preliminary injunctive relief.  

Yes, that Mikhail Strut.

NYSSIU Legal Update 2019-2020 Edition

 LEGAL UPDATE

I have been privileged since incorporating the New York State Chapter of Special Investigation Units (NYSSIU) in 1997 to serve as its Counsel.  Many times I have prepared and presented the NYSSIU Legal Update to members and guests at NYSSIU meetings.  Some of those updates even made it to NYSSIU's website.  

On May 6, 2020, my son Ryan Mura prepared and virtually presented the 2019-2020 edition of the NYSSIU Legal Update.  That edition digests eight no-fault, six property and two criminal law case decisions, as well as providing updates on New York legislative and regulatory developments affecting New York property and casualty insurers. 

You can read that Legal Update here.  Case decisions are hyperlinked within.  Questions can/should be directed to Ryan.

Claim Professionals Cannot be Held Personally Liable

HOMEOWNERS – BREACH OF CONTRACT – PUNITIVE DAMAGES – FRAUD – ATTORNEYS' FEES – PERSONAL LIABILITY
O'Keefe v. Allstate Ins. Co.
(2nd Dept., decided 12/13/2011) 

There's nothing new in this decision, but it sets forth a number of important and useful principles relating to the defense of first-party property coverage disputes:

Personal Liability of Claims Professionals 

Agents of a disclosed principal cannot be held personally liable for the principal's breach of contract.  Supreme Court properly dismissed this action against the Allstate claims professionals who were named as individual defendants in the complaint.  

The Supreme Court properly granted that branch of the defendants' motion which was pursuant to CPLR 3211(a)(7) to dismiss the complaint insofar as asserted against the individual defendants, Mark Malenczak, David Mateer, and Freida Hicks (hereinafter collectively the individual defendants), all employees of the defendant Allstate Insurance Company (hereinafter the insurer), as they cannot, under the circumstances of this case, be held personally liable to the plaintiffs (see Bardi v Farmers Fire Ins. Co., 260 AD2d 783, 787; Schunk v New York Cent. Mut. Fire Ins. Co., 237 AD2d 913, 915; Benatovich v Propis Agency, 224 AD2d 998, 998-999). 

Fraud Cause of Action

If a complaint's fraud cause of action relates directly to its breach of contract cause of action, it must be dismissed.  

With respect to the complaint insofar as asserted against the insurer, the third cause of action sounds in fraud but relates directly to the breach of contract claims, in that it alleges that the insurer's actions were undertaken to avoid paying the plaintiffs the amounts specified in their insurance policy. Accordingly, the third cause of action cannot be sustained (see Pepper v Hezghia, 307 AD2d 959, 960; Schunk v New York Cent. Mut. Fire Ins. Co., 237 AD2d at 913-915; F. Nathanson & Co. v Marinello, 192 AD2d 575; Manshul Constr. Corp. v City of New York, 143 AD2d 333, 336). 

Attorneys' Fees

As a general rule, attorneys' fees are not recoverable in a breach of contract action.  An insured may not recover the expenses incurred in bringing an affirmative action against an insurer to settle the insured's rights under the policy.

Moreover, the Supreme Court properly granted that branch of the motion which was to dismiss so much of the complaint as sought an award of an attorney's fee against the insurer. An "insured may not recover the expenses incurred in bringing an affirmative action against an insurer to settle its rights under the policy" (New York Univ. v Continental Ins. Co., 87 NY2d 308, 324; see Mighty Midgets v Centennial Ins. Co., 47 NY2d 12, 21).

Punitive Damages

Punitive damages are not recoverable unless the complaint alleges facts supporting the contention that the insurer's conduct was egregious or fraudulent, or that it evidenced wanton dishonesty so as to imply a criminal indifference to civil obligations directed at the public generally.  Private breach of contract disputes generally do not warrant punitive damages.

Further, punitive damages are not warranted, as "[t]he insureds failed to set forth any facts or allegations to support their contention that the defendant insurer'[s] conduct was egregious or fraudulent, or that it evidenced wanton dishonesty so as to imply a criminal indifference to civil obligations directed at the public generally. This case is, in effect, simply a private breach of contract dispute between the insurer[ ] and [its] insureds with no greater implications" (Flores-King v Encompass Ins. Co., 29 AD3d 627, 627; see Rocanova v Equitable Life Assur. Socy. of U.S., 83 NY2d 603, 615).

"Because We Don't Have the Money" -- Andrew Carothers and Former Counsel Fight Over Fees

NO-FAULT – MALLELA DEFENSE – ATTORNEYS' FEES – OVERBILLING – FRAUD
Collier, Halpern, Newberg, Nolletti & Bock, LLP v. Andrew Carothers, M.D., P.C.
(Sup. Ct., Westchester Co., decided 7/2/2010)

Someone should submit this case to Wikipedia as a footnote for its irony entry.

New York no-faulters will recall that in August 2008, a Richmond County (Staten Island) civil court jury rejected Andrew Carothers MD, PC's $23 million in consolidated claims for MRI services against 50 insurance companies, finding that the corporation rather than being owned by Dr. Carothers had been "fraudulently incorporated", i.e., the Mallela defense.

In Matter of Andrew Carothers, M.D., P.C. v Insurance Cos. Represented by Bruno Gerbino & Soriano, LLP, 26 Misc 3d 448 (NYC Civ. Ct., Richmond Co., decided 10/14/2009), Richmond County Civil Court Judge Peter Sweeney denied the plaintiff PC's post-trial motion to set aside the jury's verdict.  Those wishing to understand what a fraudulent incorporation or Mallela defense looks like should read Judge Sweeney's summary of the trial evidence in that case.  It is my understanding that the verdict has been appealed. 

The plaintiff law firm Collier, Halpern, Newberg, Nolletti & Bock, LLP did not represent Andrew Carothers, MD, PC (ACMDPC) in that case; the once über confident Mark W. Smith of Smith Valliere, PLLC, did (and is defending ACMDPC and Dr. Carothers in this action). Collier Halpern brought this action against ACMDPC, Dr. Carothers personally, and other defendants to recover $402,626.44 in legal fees and disbursements ACMDPC and Dr. Carothers allegedly failed to pay.  Collier Halpern had billed the PC and Dr. Carothers a total of $892,190.99 for defending them in 13 actions brought by various no-fault insurance companies.  The total amount of billings at issue in 11 of those 13 actions was $47,937.60. 

On defendants' motions to dismiss, the court dismissed the complaint against the Medtrex defendants and the quantum meruit and fraud causes of action against defendants ACMDPC and Carothers.  The Carothers defendants then answered and asserted nine affirmative defenses.  After discovery and the filing of a note of issue, plaintiff moved for summary judgment on the grounds of breach of the retainer agreement and account stated.  In support of their motion, plaintiff argued that there were no issues fact to preclude summary judgment because at his deposition when asked by plaintiff why its invoices were not paid Dr. Carothers replied "Because we don't have the money." Further, when asked if there was any other reason why plaintiff was not being paid, Dr. Carothers answered "No."

In addition to opposing plaintiff's motion on various grounds,the Carothers defendants cross-moved for leave to amend their answer to assert four counterclaims against the plaintiff for its alleged "gross overbilling" based on breach of contract, unjust enrichment, breach of fiduciary duty, and fraud.  In support of their cross motion, the Carothers defendants contended that in view of the fact that they allege plaintiff misstated the number of hours expended on various matters and marked up out-of-pocket expenses when only the actual cost of the expenses were to be charged, there was a valid claim for fraud.

In denying plaintiff's motion for summary judgment, Westchester County Supreme Court Justice William Giacomo ruled:

Here, there are significant questions of fact regarding the reasonableness of the legal fees billed in this case. There is no dispute that plaintiff charged approximately $900,000 in legal fees for cases worth about $48,000. Notably, the legal fees are about 20 times the value of the no-fault cases! While the Court is mindful of the fact that the avoidance of particular outcome in first party benefit no fault cases can be worth more than the medical reimbursement at stake, to wit, a finding that the health care provider was unlicensed or fraudulently licensed providers (see State Farm Mut. Auto. Ins. Co. v. Robert Mallela, 4 NY3d 313 320-22 [2005][Such a determination renders these entities "not eligible" for reimbursement .], it still seems to this Court that legal bills in excess of 20 times value of the no-fault cases warrants denial of summary judgment as the reasonableness of attorney's fees is always subject to court scrutiny. (See Matter of First Natl. Bank v Brower, 42 NY2d 471 [1977]; D'Antoni v. Ansell, 184 AD2d 678 [2nd 1992]; Reisch & Klar v Sadofsky, 78 AD2d 517 [2nd Dept 1980]).

As the First Department noted in Collier, Cohen, Crystal & Bock v. MacNamara, 237 AD2d 152 [1st 1997]), a similar case in which a law firm [a predecessor firm to the plaintiff?] was trying to collect fees which seemed on their face to be unreasonable, "[f]urther militating against summary disposition of this matter is the question of the reasonableness of the fees the firm is attempting to collect, to wit, $155,000 for less than six months work for defendant's interest in a partnership valued at less than $30,000. It is recognized that the courts possess the traditional authority "to supervise the charging of fees for legal services under the courts' inherent and statutory power to regulate the practice of law" (id at 152; see also Gair v Peck, 6 NY2d 97 [1959], cert denied 361 US 374 [1960]; Finkelstein v Kins, 124 AD2d 92, 100 [1st Dept 1987], appeal dismissed 69 NY2d 1023 [1987]).

Based on the foregoing, summary judgment is DENIED because "[t]he reasonableness of plaintiff's fees can be determined only after consideration of the difficulty of the issues and the skill required to resolve them; the lawyers' experience, ability and reputation; the time and labor required; the amount involved and benefit resulting to the client from the services; the customary fee charged for similar services; the contingency or certainty of compensation; the results obtained and the responsibility involved." (Morgan & Finnegan v. Howe Chemical Co., Inc., 210 AD2d 62 [1st Dept 1994]; see also Matter of Freeman, 34 NY2d 1, 9 [1974]; Marshall v New York City Health & Hosps. Corp., 186 AD2d 542, 543 [2nd 1992]; Gutin v Gutin, 155 AD2d 586, 587 [2nd 1989]; cf., Kramer, Levin, Nessen, Kamin & Frankel v Aronoff, 638 F Supp 714 SDNY 1986]).

The court also granted the Carothers defendants' cross motion to amend their answer to assert four counterclaims against plaintiff, holding:

Here, although the note of issue has been filed there can be no doubt that the allegations raised in the Carothers defendant's counterclaims are not a surprise to plaintiff. The amount and propriety of legal fees billed by plaintiff is the heart of the dispute between the parties. Therefore, the four proposed counterclaims arguable have merit. 

A fraudulent billings counterclaim being asserted by the Carothers defendants against the attorneys who defended them in actions alleging that Carothers fraudulently incorporated and billed under ACMDPC.  See the irony?

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

South Brooklyn No-Fault DME Fraud Indictments Announced

SEVENTEEN INDIVIDUALS CHARGED AND TWELVE LOCATIONS SEARCHED IN MAJOR HEALTH CARE FRAUD AND MONEY LAUNDERING PROSECUTION

On June 15, 2010, United States Attorney Loretta E. Lynch announced four separate indictments charging 17 individuals for their participation in health care fraud and money laundering schemes in the Eastern District of New York.  In addition, agents of Immigration and Customs Enforcement (ICE), the Federal Bureau of Investigation, and Internal Revenue Service searched offices of 12 durable medical equipment retail companies located in South Brooklyn that were operated by the defendants and seized assets from bank accounts maintained by the defendants’ retail companies.

According to the indictments, the defendants filed fraudulent claims with private insurance companies with no-fault insurance plans.  Specifically, the defendants – through their retail companies – allegedly submitted false invoices to the insurance companies for reimbursable expenses for durable medical equipment at prices well in excess of the price paid by the defendants, as well as for durable medical equipment that was never obtained.   The indictments allege that it was also part of the defendants’ schemes to engage in financial transactions to conceal the identity, source, and destination of the fraudulent proceeds by “laundering” them through checks they issued to the same wholesale companies.   The checks were then negotiated at check cashing stores and the resulting cash was delivered back to the defendants.

According to the U.S. Attorney's press release, the indicted defendants are:

ALEKSANDR AFANASEV
Age: 44
EDUARD BODRUNOV
Age: 49
GRIGORY BRANFENBRENER
Age: 57
GENNADIY BRONSHTEYN
Age: 51
LYUBOV GROYSMAN
Age: 56
VLADIMIR KHMELNITSKI
Age: 45
ILIYA MUGERMAN
Age: 46
BELA RUD
Age: 38
VIKTOR SEMERIK
Age: 44
ARKADI SHAPIRO
Age: 59
DENIS ZAGLADKO
Age: 29
IGOR SHTURMAN
Age: 48
MARIYA GOMELSKAYA\
Age: 27
IGOR VETUKH
Age: 50
ANDREI KOZLOVSKI
Age: 42
IGOR LADANOV
Age: 28
ARTEM YURYEV
Age: 31

The press release notes that the charges announced are merely allegations, and the defendants are presumed innocent unless and until proven guilty.

NICB/NYIA New York Insurance Fraud Summit

I attended the NICB/NYIA New York Insurance Fraud Summit at the LaGuardia Airport Marriott in East Elmhurst, New York, yesterday.  A capacity crowd heard industry and law enforcement representatives speak about the tremendous and again growing impact organized no-fault insurance fraud and abuse has on New York automobile insurance consumers.  New York Insurance Superintendent James Wrynn and Queens County District Attorney Richard Brown led off the program with remarks about what their respective offices are doing to combat and prosecute no-fault fraud in New York.   Their and the other speakers' remarks made it clear that:

1. In spite of the regulatory changes that went into effect in 2002, New York no-fault fraud has increased so much over the past several years that, unless checked, may necessitate the Insurance Department's approval of substantial auto premium increases, especially for consumers living in the five boroughs of New York City.
   
   
2. Certain New York court decisions have crippled auto insurers' ability to detect, deny and defend fraudulent no-fault insurance claims.
   
   
3. Despite the industry's best efforts to manage an exponential increase in no-fault litigation over the past 15 or so years, the unimpeded inundation of the New York City civil courts with small no-fault suits, most being for far less than what an average New York state resident sues for in a typical small claims court matter, substantially increases no-fault claim costs and indirectly incentivizes fraud.
   
   
4. There can and will be no stopping the alarming upward trend of no-fault insurance fraud in New York unless comprehensive and coordinated regulatory and legislative changes addressing the underwriting, claims, and law enforcements functions are made now.  All agree that the goal of these changes should be to ensure that legitimately injured parties and legitimately organized and operating  health care providers receive prompt payment of no-fault benefits. 
   
   
5. More money and resources would enable law enforcement to prosecute more insurance fraud in New York.  Such prosecutions have been very successful in the past, but are complex and expensive. 

With Dr. Robert Hartwig's return trip from Europe having been delayed by a volcanic ash cloud over that continent, Dr. Steven Weisbart, chief economist at the Insurance Information Institute (I.I.I.), delivered Dr. Hartwig's presentation entitled "Fraud & The P/C Insurance Industry -- Focus on No-Fault Auto Insurance".  According to the I.I.I.'s analysis, fraud and abuse in New York's no-fault auto insurance system equate to about 20 percent of every no-fault claim paid.  The presentation's slides can be viewed here:

There has been much debate over whether the New York auto insurance industry has created or claimed a crisis that doesn't exist for the purpose of achieving regulatory and legislative changes favorable to the industry.  The I.I.I.'s numbers and statistics, however, are compelling and appear to validate the industry's concerns.  Legislative changes aimed only at law enforcement will not solve the problem that no one can deny exists, since prosecutors currently lack sufficient monetary resources to prosecute any sustained volume of insurance fraud cases, and state and local governments themselves are experiencing severe budgetary constraints and reportedly have no more money to commit to the prosecution of insurance fraud.

Band-aids will not stop the bleeding.  Something more and more comprehensive is needed.  Right now.

The Fraud Detection Threshold

In today's über competitive insurance marketplace, property and casualty insurers must sometimes sacrifice accuracy at the altar of customer service.   Claims handling becomes a process to be streamlined, automated and maximized, especially for large companies.  Such companies make attractive targets for petit fraud, however, because their expedited underwriting and claims processes can allow fraudulent claims of the smaller variety to go undetected.  Smaller particles through a larger sieve, so to speak.  

Perhaps that's what Sidney Edwards of Buffalo, New York, was counting on.   He reportedly:

• took out a homeowners policy on a Kenmore, New York home that he didn't own,
• provided Allstate with a fictitious bank account number for payment of the policy premiums,
• submitted a claim for damage to the home's undamaged garage door,
• received a check -- most likely not to the insured location's address -- from Allstate for $1,600,
• called Allstate to complain that he had not received Allstate's claim payment check,
• received a second check for $1,600 from Allstate, again probably not sent to the insured address, and
• cashed both checks at a local store.

Investigation by the New York State Insurance Department's Insurance Frauds Bureau revealed that the home's actual owner did not know Edwards and was unaware that he had used the address to obtain a homeowners policy.  But consider the opportunity for fraud that presented itself to Edwards:  an underwriting process that did not initially verify ownership; an accounting system that perhaps did not quickly enough flag the policy and submitted claims; and a claims process that did not include an actual inspection of the loss and permitted the issuance of not one but two claim payment checks, presumably sent to other than the insured address, that could be cashed at other than a bank. 

Maybe it was Edwards' greed in requesting a second check that caused Allstate to take a closer look at the claim.  In insurance fraud work, the maxim "pigs get fat, hogs get slaughtered" is often apropos.  Something Edwards did tripped the fraud detection threshold, leading to his eventual arrest.  What I wonder, though, is whether Edwards came up with this idea all on his own, or had he learned of a similar hit and run from someone else? 

Fast, cheap, good.  Can have two but not all three.  In project work, and in insurance fraud detection.

Leave to Amend Answer to Assert Fraudulent Proof of Loss Defense Granted

HOMEOWNERS – PROPERTY – LEAVE TO AMEND ANSWER – FRAUDULENT CLAIM EXAGGERATION
Forsythe v. Otsego Mut. Fire Ins. Co.
(1st Dept., decided 3/23/2010)

Two years after answering plaintiffs' complaint, defendant Otsego Mutual Fire Insurance Company moved for leave to amend its answer to assert a fraud affirmative defense and for summary judgment based on that defense.  Otsego Mutual contended that plaintiffs' proof of loss was fraudulently overstated.  New York Supreme (Jane S. Solomon, JSC) denied Otsego's motion in all respects and Otsego Mutual appealed.

In MODIFYING the lower court's order to grant leave to Otsego Mutual to amend its answer but sustaining the lower court's denial of summary judgment, the Appellate Division, First Department held:

Although defendant did not move for leave to amend until approximately two years after it answered the complaint, plaintiffs do not show, or even allege, prejudice or surprise as a result of the delay (see CPLR 3025[b]; Arellano v HSBC Bank USA, 67 AD3d 554 [2009]).

However, defendant failed to demonstrate as a matter of law that plaintiffs' proof of loss was fraudulent (see Saks & Co. v Continental Ins. Co., 23 NY2d 161, 164-165 [1968]). Plaintiffs' explanation for their overvaluation of the loss, that the house was uninhabitable and all their furniture destroyed, raises an issue of fact whether they intended to defraud defendant (see Latha Rest. Corp. v Tower Ins. Co., 38 AD3d 321 [2007], lv denied 9 NY3d 803 [2007], cert denied 552 US 1010 [2007]; Kyong Nam Chang v General Acc. Ins. Co. of Am., 193 AD2d 521 [1993]). 

I've posted before that obtaining summary judgment on a fraudulent claim exaggeration defense is difficult.   Intent to defraud and materiality are issues that often involve questions of fact, requiring a trial.  The Saks & Co. v. Continental Ins. Co. case, cited by the First Department, involved an appeal and reversal of a bench trial verdict, not a pre-trial motion for summary judgment.  Still, the opening section of the New York Court of Appeals' 1968 decision in the Saks case is worth repeating: 

There is an old saying that "clothes make the man". This aphorism must have been coined (to jumble a metaphor) with the plaintiff, here, one Khaibar Khan Goodarzian, in mind.*fn1 Mr. Goodarzian's life-style can only be characterized as extravagant and flamboyant. His manner of living is typified by his wardrobe. The different types of clothing and the numbers of each type which Mr. Goodarzian claimed to have possessed is simply staggering. 

To accommodate his inventory of clothing, Goodarzian converted a bedroom of his Fifth Avenue apartment into a wardrobe room in which closets lined all four walls; a bathroom was made into a shoe closet.  Goodarzian's extravagance for clothing is amply documented in the record and supports his self-proclaimed title of the "World's Best Dressed Man".  He even went so far as to monogram his clothing with the initials WBDM, an acrostic made up of the first letters of his title. 

Mr. Goodarzian sued the defendant insurance companies for $411,952, the full coverage of the policies issued by the companies, alleging that he had sustained a loss of $985,000 as a result of a fire which occurred in his apartment in the early morning hours of November 4, 1961 while he was entertaining a group of friends at a plush nightclub. Earlier in the evening, he had been a host to an even larger group at his apartment.  Goodarzian claimed that various items of clothing, furniture, fixtures, betterments and improvements, valuable jewelry and Persian rugs were damaged, destroyed, or lost and missing as a consequence of the fire and that the loss to his property amounted to approximately $985,000. The defendants did not dispute the value placed on the property allegedly lost by the plaintiff, but resisted his claim on the ground that items included in the proof of loss, submitted as the basis for recovery under the policies, included many which were not in the apartment on the night of the fire. 

The policies issued to Goodarzian insured him against fire for the contents of his apartment to the extent of $341,000 and $57,000 for theft and mysterious disappearance.*fn2 The insured claimed that there was destruction to "in-sight" property amounting to $92,625, improvements and betterments amounting to $9,437, in debris $750, lost and missing $132,518, jewelry $745,300 and additional living expense $4,500. Goodarzian accordingly claimed the full amount of his insurance coverage to partially compensate him for his loss.

The case was tried without a jury, and the Trial Judge awarded judgment to the plaintiff for $104,316. (The sum embraced $35,645 for clothing, $17,702 for carpeting, $37,482 for damage to furnishings, and $13,487 for destruction of betterments and improvements.) The Trial Judge stated that "Claims for the other items as lost and missing are not allowed because of failure of proof by the plaintiffs." 

The Appellate Division (First Department) unanimously reversed and dismissed the plaintiff's complaint, finding as a matter of law that the proof of loss was fraudulent. We affirm.

Insurer's Proof of Fraud on Default Judgment Application Found Insufficient

AUTO – NO-FAULT – FRAUDULENT MISREPRESENTATIONS – DECLARATORY JUDGMENT – PROOF REQUIRED FOR DEFAULT JUDGMENT IN FAVOR OF PLAINTIFF INSURER
New South Ins. Co. v. Dobbins
(2nd Dept., decided 3/2/2010)

It's not easy for plaintiff insurers to obtain default judgments in declaratory judgment actions.  In addition to establishing the defendants' defaults, the plaintiff insurers must establish, prima facie, that they are entitled to the relief sought.  That usually entails demonstrating, in evidentiary form, the merits of the coverage defenses which form the basis of the DJ action.  A verified complaint, by itself, won't suffice if the insurer's coverage defenses are based on facts outside the personal knowledge of the person who verified the complaint.

New South insured Adrienne Dorns, who allowed James Dobbins, Sr., to drive her vehicle.  On July 31, 2006, Dobbins Sr. was involved in a collision with a vehicle owned by Quadrozzi Concrete Corp. and operated by Emanuel Paradiso.  Dobbins Sr., James Dobbins, Jr., Felita Dobbins, and Jamie Dobbins all claimed to be within the Dorns vehicle at the time of the accident, and all made no-fault claims to New South.  In his MV-104 and subsequent interview, Paradiso indicated that there was only one occupant of the Dorns vehicle at the time of the accident.  New South conducted examinations under oath of the Dobbins claimants and then commenced this DJ action against Dorns and the four Dobbins, seeking a declaration that its policy with Dorns afforded no liability, no-fault or uninsured motorists coverage in relation to the July 31, 2006 accident by reason of: (1) Dorns's policy application misrepresentations; and (2) the Dobbins' fraudulent misrepresentations of the identities and numbers of the occupants of the Dorns vehicle.  All defendants failed to appear, and New South moved for a default judgment against all.

Nassau County Supreme Court Justice F. Dana Winslow denied New South's initial motion, based primarily on New South's failure to submit a complete copy of Dorns's insurance policy with New South in support of its motion.  Justice Winslow also found that New South could only cancel the policy prospectively for application fraud and noted:

[A]lthough the DOBBINS defendants' [EUO] testimony seems evasive and inconsistent , and is contradicted, in some respects, by the accident report, the record to date does not unequivocally demonstrate that any individual defendant was not in the vehicle at the time of the accident.  Plaintiff has not sufficiently established that it is entitled to wholesale relief from its obligations under the policy with respect to any individual defendant. To the extent that plaintiff assert that a particular claim is fraudulent, its remedy is to issue a disclaimer pursuant to the Insurance Law and applicable regulations, or to defend against such claim in any
proceeding in which coverage is sought.

New South moved to renew and reargue, this time submitting a complete copy of the insurance policy at issue. On that motion to renew and reargue, Justice Winslow granted New South a default judgment as to no-fault claimant Jaime Dobbins, but denied the motion as to no-fault claimants James Dobbins, Jr. and Felita Dobbins.  The court found that New South had not established via evidentiary material that James Jr. and Felita were not in the Dorns vehicle at the time of the accident:

Plaintiff relies on the Form MV-104 filed by the driver of the adverse vehicle, Manny E. Paradiso, which indicates only one occupant in the vehicle driven by DOBBINS. The Affidavit of Brinton Max Esty, plaintiff's investigator, sworn to on July 17, 2007, refers to Mr. Paradiso's statement, in the MV-104 and in a subsequent interview, that DOBBINS was the sole occupant.  These statements, however, are inadmissible hearsay, and cannot be relied upon to support plaintiff's prima facie showing of entitlement to the relief sought. Although, as plaintiff contends, defaulters may be deemed to have admitted the facts alleged in the complaint, that rule can only apply where the allegations were made or verified by someone with first-hand knowledge. See Woodson v. Mendon Leasing Corp., 100 NY2d 62; State v. Wiliams, 44 AD3d 1149.  In the case at bar, plaintiff's attorney verified the Complaint, and plaintiff's investigator lacked first-hand knowledge of who was in the DOBBINS vehicle at the time of the Incident.

Plaintiff also cites inconsistencies in the testimony of JAMES JR., FELITA and JAMIE in their No-Fault examinations under oath, with respect to the circumstances of the Incident and the description of the adverse vehicle. The Court finds these to be inconclusive and insufficient to demonstrate that the purported passengers were not in the DOBBINS vehicle at the time of the Incident.

In granting New South a default judgment as to Jaime Dobbins, however, the court found that Dobbins Sr.'s admissions in his MV-104 and telephone report to New South supported the inference that there were only two adult passengers -- James Jr. and Felita -- in the vehicle at the time of the accident.

New South appealed the second order to the Appellate Division, and the Second Department AFFIRMED, holding:

The Supreme Court properly, upon renewal and reargument, adhered to so much of its original determination as denied the plaintiff leave to enter judgment against the defendants James Dobbins, Jr., and Felita Dobbins, upon their default in answering the complaint.  In support of its motion, the plaintiff offered the complaint, which was verified by plaintiff's counsel, and an affidavit of the plaintiff's investigator, neither of whom possessed personal knowledge of the facts constituting the claim (see CPLR 3215; Woodson v Mendon Leasing Corp., 100 NY2d 62, 70-71; Hosten v Oladapo, 44 AD3d 1006; Finnegan v Sheahan, 269 AD2d 491). The statements from the driver of the other vehicle that the plaintiff's investigator relied upon in his affidavit constituted inadmissible hearsay (see CPLR 4518[a]; Hochhauser v Electric Ins. Co., 46 AD3d 174, 179-183; Metropolitan Cas. Ins. Co. v Shaid, 23 Misc 3d 1140[A]). Accordingly, entry of a default judgment against these defendants was properly denied on the papers before the Supreme Court. 

If New South had obtained an affidavit from the adverse driver that there was only one occupant of the Dorns vehicle at the time of the accident, would that have been enough?  Perhaps.   But relying on hearsay statements and affidavits from those lacking first-hand knowledge in moving for a default judgment in a insurer-commenced declaratory judgment action will probably never be enough.

US Senator Charles Schumer to Introduce Federal Legislation to Crack Down on Auto Insurance Fraud

FOR IMMEDIATE RELEASE: February 5, 2010

SCHUMER TO INTRODUCE LEGISLATION TO CRACK DOWN ON AUTO INSURANCE FRAUD AND BRING DOWN PREMIUM HIKES AS NEW REPORT FINDS FRAUD COSTS NY DRIVERS MILLIONS

Cheaper Car Insurance Act of 2010 Would Set Up New Federal Penalties To Prevent Auto Insurance Fraud and Punish the Criminals Behind It

Legislation Comes on Heels of New Report that NY Fraud Cases Have Jumped 33% Since 2006, Leaving Drivers Paying the Bill

Schumer: Auto Fraud Is Causing Serious Damage to New Yorkers and It's Time to Strike Back

Today, U.S. Senator Charles E. Schumer announced that he is introducing the Cheaper Car Insurance Act of 2010 that would set up new federal penalties for auto insurance fraud. The legislation was originally introduced in 2004. This legislation comes on the heels of a new report which reveals that auto insurance fraud is on the rise in New York, along with drivers’ insurance rates. Suspected fraud cases in New York have jumped 33% since 2006. The rise in fraud cases has lead to auto insurance rate hikes averaging 6.3% last year alone. Schumer’s legislation will go after criminals who perpetrate the fraud, requiring them to foot the bill. It will also impose harsh penalties on criminals involved with auto insurance fraud.

“This Cheaper Car Insurance Act of 2010  sends a very simple, very strong and very clear message to anyone even thinking of committing auto insurance fraud: expect to be arrested, expected to be tried in federal court by federal prosecutors, and don’t make any plans for the next five to fifteen years,” Schumer said. "Auto insurance fraud is a serious business that causes substantial damage to drivers and business, and until we tackle this problem head on insurance rates will continue to rise. I will fight to see that this legislation becomes law and so that New Yorkers can see their insurance rates stop rising.”

Auto insurance fraud is rising rapidly in New York State. Companies have flooded the state Insurance Department with 13,433 complaints of suspected no-fault auto-insurance fraud last year, which is up from the 10,117 incidents just three years prior.  Auto-insurance scams are being reported across the state, but are most prevalent in the Bronx and Brooklyn. As cases of auto insurance fraud have increased, payouts per auto industry injury claim have as well. They’ve risen 55% since 2004 and are now more than double the national average. Last year's cost per claim averaged $8,690 - up from $5,615 in late 2004 and more than twice the current $4,152 U.S. average. Some estimate say that scams cost insurers and drivers a whopping $229 million last year alone.

The Cheaper Car Insurance Act of 2010 will set up new federal penalties to combat auto insurance fraud. Specifically, Schumer’s legislation would impose fines, decided by a judge, of up to $100,000. If the cost of the fraud exceeds $100,000, the fines can cover the fraud’s total cost. It would also lock up perpetrators for insurance fraud rings and allow auto insurance companies to require inspections for cars they suspect could be used for fraud before insuring them under certain circumstances to prevent insurance fraud by criminals who buy cars in bad condition and falsely claim that they were damaged in a car accident. Schumer’s proposal would create a three tiered system of harsh penalties including jail time for the insurance fraud ring masterminds, organizers, and participants:

·         Participants: The proposal makes it a separate crime to serve as a “runner,” “capper” or “steerer” – such as a person who gets paid to simply set up an auto accident by cutting off another driver, a person who directs the victim of an accident to a particular health clinic or doctor knowing that they are involved in the insurance fraud or a person who promises someone money in exchange for lying about the circumstances of a car accident or car theft in order to fraudulently obtain insurance money. These participants would face up to 5 years in jail for each offense.

·         Organizers: The proposal makes it a separate crime to employ or solicit a “runner,” “capper” or “steerer” to help set up fake auto accidents or make false auto insurance claims for the ringleader of an auto insurance scam. These fraud ring organizers would face up to10 years in jail for each offense.

·         Masterminds: The proposal makes it a separate crime to conceive of and mastermind an auto insurance scam. Under Schumer’s proposal, the leader of an auto insurance scam would face up to 15 years in jail for each offense.

Schumer added,” Auto fraud hurts everyone whose car insurance bill goes up even though their car goes down in value. It hurts every small business that can afford to buy more delivery vans but can’t afford to insure them. Fraud hurts vacationers and business travelers to New York who don't understand why car rental insurance rates are so much higher here than in other cities and states. Fraud hurts us all, and it’s time to strike back." 

Source:  schumer.senate.gov/record.cfm?id=322134&

Defamation Claim Against No-Fault Insurer Dismissed -- Conclusory Allegations of Malice Found Insufficient

NO-FAULT – DEFAMATION – QUALIFIED PRIVILEGE – MALICE – INSURANCE FRAUD
Hame v. Lawson
(2nd Dept., decided 2/2/2010)

Can an insurer be sued for defamation in relation to statements it makes about the insured or claimant while it is investigating whether or after it has concluded that the claim is fraudulent?  Of course it can.  Whether such a claim or cause of action will survive a dispositive motion, however, is another thing. 

In Horbul v. Mercury Ins. Group, 64 AD3d 682 (2d Dept. 2009), the Appellate Division, Second Department, dismissed plaintiff's complaint because it did not set forth the the particular words complained of, as required by CPLR Rule 3016.  Horbul had generally alleged in his complaint that Mercury Insurance committed slander per se when it reported to the police that the plaintiff had filed a fraudulent claim with it for no-fault medical benefits for his son.

Months earlier, in LeBaron v Erie Ins. Co., 59 AD3d 939 (4th Dept. 2009), the Fourth Department affirmed the dismissal of the plaintiff's slander claim against Erie Insurance Company's special investigator, which was based on discussions the special investigator allegedly had with police.  The lower court had concluded that the special investigator's qualified privilege was not overcome by the vague and conclusory allegations set forth in plaintiff's amended complaint that the statements to the police were made with ill will or with a high degree of awareness of their probable falsity.  See, also, East Point Collision Works, Inc. v. Liberty Mut. Ins. Co., 271 AD2d 471 (2d Dept. 2000)(statements Liberty Mutual's special investigator allegedly made to the insured suggesting the possibility that plaintiff collision shop had enhanced the collision damage to the insured vehicle were found to be qualifiedly privileged because they related to something -- the extent of the damage actually caused by the accident -- in which both Liberty's investigator and the insured had a common interest; there was nothing in the record to support a finding that the special investigator acted with malice in making the alleged statements). 

This decision marks the second time in less than eight months that a defamation claim against a no-fault insurer has reached the Second Department.  In AFFIRMING Kings Supreme's granting of Response Insurance Company's CPLR Rule 3211(a)(7) motion to dismiss plaintiff's complaint for failure to state a cause of action, the Second Department held that the plaintiff was required to allege that Response's statements were made solely with malice, but failed to allege any facts from which malice could be inferred and her conclusory allegations of malice were insufficient to overcome the qualified privilege that otherwise attached to the statements Response made in its no-fault denial of claim forms.

The plaintiff in this case allegedly was struck by an automobile driven by Igal Shaul.  Plaintiff filed a claim for no-fault benefits with Shaul's insurer, Response.  After conducting an investigation, including examinations under oath of the plaintiff and Shaul, Response denied plaintiff's no-fault claim, concluding that she had made "material misrepresentations and false statements" and that the incident was a "deliberate[ly] staged event." The denial of claim form was sent to three medical providers who had treated the plaintiff. After a referee determined that Shaul had been involved in the accident, the plaintiff brought this action alleging that she had been defamed when Response sent the denial to her medical providers.

In granting Response's CPLR Rule 3211(a)(7) motion to dismiss, the Second Department found that Response's statements made in the no-fault denial of claim forms were subject to a qualified privilege as both Response and the medical providers treating the plaintiff had an interest in that communication.  The appellate court also held that plaintiff had failed to allege any facts from which malice could be inferred and her complaint's conclusory allegations of malice were insufficient to overcome the privilege:

Contrary to the plaintiff's contention, the Supreme Court properly granted the defendants' motion pursuant to CPLR 3211(a)(7) to dismiss the complaint for failure to state a cause of action. The statements made in the denial of claim form were subject to a qualified privilege as both RIC and the medical providers treating the plaintiff had an interest in that communication (see Golden v Stiso, 279 AD2d 607, 608). In order to overcome the privilege, the plaintiff was required to allege that RIC's statements were made solely with malice, either under the constitutional or common-law standard (see Liberman v Geldstein, 80 NY2d 429, 438; Rohrlich v Consolidated Bus Tr., Inc., 15 AD3d 561, 562). "The plaintiff failed to allege any facts from which malice could be inferred and [her] conclusory allegations of malice were insufficient to overcome the privilege" (Red Cap Valet v Hotel Nikko [USA], 273 AD2d 289, 290; see Rohrlich v Consolidated Bus Tr., Inc., 15 AD3d at 562; Serratore v American Port Servs., 293 AD2d 464; Freidman v Ergin, 110 AD2d 620, affd 66 NY2d 645; see also Breytman v Olinville Realty, LLC, 54 AD3d 703, 704; Baker v City of New York, 44 AD3d 977, 981).

In the seminal case of Liberman v. Gelstein,  the New York Court of Appeals noted:

Under the [New York] Times [Co. v Sullivan (376 US 254)] malice standard, the plaintiff must demonstrate that the “statements [were] made with [a] high degree of awareness of their probable falsity” (Garrison v Louisiana, 379 US 64, 74). In other words, there “must be sufficient evidence to permit the conclusion that the defendant in fact entertained serious doubts as to the truth of [the] publication” (St. Amant v Thompson, 390 US 727, 731; see also, Restatement § 600, comment b).

* * * [T]here is a critical difference between not knowing whether something is true and being highly aware that it is probably false. Only the latter establishes reckless disregard in a defamation action.

Although these decisions reflect New York's high standard for pleading defamation claims, insurers denying coverage based on fraud grounds may wish to choose carefully both the wording of their denials as well as the distribution list of the fraud-based declination letters or forms.  In no-fault claim matters, New York case law requires that denial of claim forms (NF-10s) be specific, creating a inherent tension in a fraud-based denial situation between stating enough and avoiding an allegation of defamation.   Claimant attorneys will no doubt study these decisions and attempt to fashion complaints that meet the New York courts' allegational threshold for pleading a defamation cause of action against insurers.  Something more than merely alleging that the insurer was highly aware its statements were probably false or that it acted with "ill will" or malice, however, is needed to  overcome the qualified privilege that ordinarily attaches to communications made during and as the result of the investigation of suspected insurance fraud.

H/t to David Gottlieb and his No-Fault Paradise for bringing this case to my attention.   Without "insurance" or "mutual" or "casualty" in the case name, I may have missed this one.

Denial of Summary Judgment to Property Insurer on its Material Misrepresentation Defense Affirmed

COMMERCIAL PROPERTY – MATERIAL MISREPRESENTATION – SUMMARY JUDGMENT
Classon Realty Corp. v. Tower Ins. Co. of N.Y.
(2nd Dept., decided 12/8/2009)

It's tough winning summary judgment on a fraud/material misrepresentation defense during a first-party action.  Intent to defraud and materiality are issues that often involve questions of fact, requiring a trial.  Such was the case in this matter. 

Tower denied first-party property coverage to the plaintiff based , at least in part, on what Tower contended were the insured's material misrepresentations during Tower's investigation of the insured's claim.  The insured commenced this breach of contract action against Tower, and Tower moved for summary judgment on its material misrepresentation defense.

In AFFIRMING Kings Supreme's denial of Tower's motion, the Second Department held:

The proponent of a motion for summary judgment must establish its entitlement to judgment as a matter of law by demonstrating that there are no triable issues of fact (see Winegrad v New York Univ. Med. Ctr., 64 NY2d 851, 853). The defendant failed to demonstrate that there are no triable issues of fact regarding whether the plaintiff insured made material misrepresentations during the defendant's investigation of the plaintiff's claim (see Christophersen v Allstate Ins. Co., 34 AD3d 515; Fine v Bellefonte Underwriters Ins. Co., 725 F2d 179, 183, cert denied 469 US 874). Accordingly, the Supreme Court properly denied the defendant's motion for summary judgment dismissing the complaint.

Christophersen involved a fraudulent claim exaggeration defense.  Allstate contended that the insured had attempted to defraud Allstate by including inaccurate information in his sworn proofs of loss.  In affirming the motion court's denial of Allstate's request that it search the record and award it summary judgment, the Second Department reiterated several principles applicable to first-party property insurers' fraud and material misrepresentation defenses:

A policy of insurance is vitiated where the insured has " 'willfully and fraudulently placed in the proofs of loss a statement of property lost which he did not possess, or has placed a false and fraudulent value upon the articles which he did own' " (Saks & Co. v Continental Ins. Co., 23 NY2d 161, 165 [1968], quoting Domagalski v Springfield Fire & Mar. Ins. Co., 218 App Div 187, 190 [1926]). However, "unintentional fraud or false swearing or the statement of any opinion mistakenly held are not grounds for vitiating a policy" (Sunbright Fashions v Greater N.Y. Mut. Ins. Co., 34 AD2d 235, 237 [1970], affd 28 NY2d 563 [1971]). While there is no question that the plaintiff gave the defendant Allstate Insurance Company (hereinafter Allstate) inaccurate information in his original proof of loss statements, a triable issue of fact exists as to whether the plaintiff thereby intended to defraud Allstate (see e.g. St. Irene Chrisovalantou Greek Orthodox Monastery v Cigna Ins. Co., 226 AD2d 624 [1996]; cf. Pipo Bar & Rest., Inc. v Certain Underwriters at Lloyd's at London, 15 AD3d 556, 557 [2005]; Rickert v Travelers Ins. Co., 159 AD2d 758, 760 [1990]).

Further, a triable issue of fact exists regarding whether the plaintiff's other alleged misrepresentations were sufficiently material to warrant the denial of coverage under the policy. Indeed, "[t]he issue of materiality is generally a question of fact for the jury [and] . . . [c]onclusory statements by insurance company employees . . . are insufficient to establish materiality as a matter of law" (Parmar v Hermitage Ins. Co., 21 AD3d 538, 540-541 [2005]; see Lenhard v Genesee Patrons Co-op. Ins. Co., 31 AD3d 831 [2006]).

Lying About Who Else Was in the Car Doesn't Void No-Fault Coverage in the Opinion of the Appellate Term, Second Department

NO-FAULT – FRAUD – ASSIGNOR'S MISREPRESENTATION ABOUT DAUGHTER'S PRESENCE IN VEHICLE – SUMMARY JUDGMENT
Excel Radiology Servs., P.C. a/a/o Candida Vinas Perez v. Clarendon Natl. Ins. Co.
(App. Term, 2nd Dept., decided 12/1/2009)

This is an another example of how the no-fault train has derailed off the fraud track.

In Nationwide Mut. Ins. Co. v. Graham, 275 AD2d 1012 (4th Dept. 2000), the Appellate Division, Fourth Department, held that the insured's "failure to make fair and truthful disclosures in reporting the incident constitute[d] a breach of the cooperation clause of the insurance policy as a matter of law", disqualifying him from liability coverage under the policy.  The Fourth Department reiterated that principle in Nationwide Mut. Ins. Co. v Posa, 56 AD3d 1143 (4th Dept. 2008), holding that the insured's Posa's "failure to make fair and truthful disclosures in reporting the [accident] constitute[d] a breach of the cooperation clause [and the fraud and misrepresentation clause] of the insurance policy as a matter of law[.]"  More recently, in AA Acupuncture Service, P.C., a/a/o Dupont-Desir Ivrose v. Safeco Ins. Co. of Amer., 25 Misc3d 30 (App. Term, 1st Dept., 2009), the Appellate Term, First Department, noted that "an insurer may assert misrepresentation or fraud as an affirmative defense in an action by an insured to recover benefits under the policy".

But not in no-fault?  Lying about how an accident occurred or whether another no-fault claimant was actually in the vehicle at the time of the reported accident is not coverage-disqualifying conduct in breach of an auto policy's cooperation and fraud/misrepresentation conditions?  Apparently not in the opinion of the Appellate Term, Second Department, it isn't.

Clarendon National apparently denied $1,791.73 in billings from the plaintiff provider based, at least in part, on its belief that plaintiff's assignor had lied about her daughter being in the insured vehicle at the time of the reported accident.  Although the decision does not indicate whether the daughter also made a no-fault claim to Clarendon, presumably she did, otherwise the mother's misrepresentation would be irrelevant.  Queens Civil granted judgment in favor of the plaintiff provider, and Clarendon appealed.

In affirming the Civil Court's order granting summary judgment to plaintiff, the Appellate Term, Second Department, ruled that since Clarendon was not contending that no accident occurred at all, or that the accident was staged, the assignor's alleged misrepresentation regarding her daughter's presence in the vehicle was irrelevant to the assignor's no-fault claim:

On appeal, defendant characterizes its defense as one based upon fraud and relies solely on A.B. Med. Servs. v State Farm Mut. Auto. Ins. Co. (3 Misc 3d 130[A], 2004 NY Slip Op 50575[U] [App Term, 9th & 10th Jud Dists 2004]), in which the Appellate Term for the Ninth and Tenth Judicial Districts held that the insurer "establish[ed] the existence of a triable issue of fact as to whether there was a lack of coverage because the alleged injuries did not arise from an insured incident (see Central Gen. Hosp. v Chubb Group of Ins. Cos., 90 NY2d 195, 199 [1997])." In the case at bar, defendant has not alleged that no motor vehicle accident occurred or that the accident was staged. Rather, defendant contends that it raised a triable issue as to whether the assignor's daughter was in the car at the time of the accident. However, contrary to defendant's contention, the assignor's alleged misrepresentation of the presence of her daughter in the car is irrelevant to the question of whether the assignor's injuries arose from an insured incident. Accordingly, as defendant failed to demonstrate the existence of a triable issue of fact in opposition to plaintiff's motion for summary judgment, the judgment is affirmed.

While I agree with the Appellate Term that lying about another no-fault claimant being in the vehicle is irrelevant to the narrow question of whether the liar's injuries were caused by the accident, such a lie is relevant to the insurer's investigation of who may be entitled to no-fault benefits for that accident and should bear some negative consequence on the liar's no-fault claim.  Otherwise, what incentive is there to each claimant to tell the truth?  Shouldn't there be one?  Why should the fraud in part, fraud in whole rule not apply to no-fault?  Someone please don't tell me it's because there's no fraud/misrepresentation condition in the PIP endorsement.

Let's say the assignor was driving, and it was a single vehicle accident.  The mother puts the daughter in the vehicle, giving the daughter a potential personal injury claim against the mother.  It would be an aberrant result indeed if the mother's lie about her daughter being in car -- and we're assuming for the sake of this point that it can be proven that the daughter was not in the car -- had no consequence on the mother's no-fault claim under the mother's personal auto policy, but negated liability coverage to the mother under that same policy with respect to her daughter's fraudulent personal injury claim in accordance with the Fourth Department's decisions in Nationwide v. Graham and Nationwide v. Posa.  Does that trouble anyone other than me?

Is New York’s No-Fault Auto Insurance Crisis Returning?

I.I.I. Analysis Finds Average Cost of No-Fault Claim Has Soared 56 Percent Since 2004

LATHAM, NEW YORK, November 5, 2009 — New York’s auto insurers saw their typical no-fault payment for the medical care of accident victims rise by 56 percent to $8,748 per claim in the second quarter of 2009. This represents a dramatic increase from late 2004, when the average no-fault payment stood at $5,615 per claim, according to an Insurance Information Institute (I.I.I.) analysis.

The insurance industry, the New York State Insurance Department’s (NYSID) Frauds Bureau, the National Insurance Crime Bureau and law enforcement agencies continue to investigate suspicious claims vigorously, according to Dr. Robert Hartwig, the I.I.I. president and an economist. Yet loopholes in the no-fault system make it particularly vulnerable to fraud and abuse by a “no-fault industry” of corrupt medical professionals, attorneys, and street-level criminals who work on their behalf.

“In less than five years, New York’s auto insurers have seen an extraordinary 56 percent increase in the average cost of no-fault claims, to a great extent the result of abuse and, sometimes, outright fraud in the system,” stated Dr. Hartwig, in remarks scheduled for delivery today to the New York Insurance Association’s (NYIA) annual meeting in Latham, NY. “The costs of fraud and abuse of the state’s no-fault system ultimately are borne by New York’s honest policyholders. New York’s no-fault claim costs are now the second highest in the country and are 111 percent higher than the U.S. average of $4,152.”

“State lawmakers need to make no-fault auto insurance reform a high priority when they reconvene in Albany for their 2010 session,” said Ellen Melchionni, president of the NYIA. “There are external forces which drive up the cost of auto insurance in this state which can and must be contained.”

The state Insurance Department’s Frauds Bureau, in its 2008 annual report, said that no-fault fraud reports to the NYSID had increased 22 percent since 2006, after the number of these same reports fell 35 percent between 2003 and 2006, Dr. Hartwig observed. Moreover, the Frauds Bureau has significantly expanded its number of no-fault investigations, its 2008 annual report stated.

The term "no-fault" auto insurance is often used to denote any auto insurance program that allows policyholders to recover financial losses, such as medical costs and lost wages, from their own insurance company, regardless of fault. The policyholder’s no-fault benefit coverage is listed under the personal injury protection (PIP) provision of their policy.

Dr. Hartwig said that several proposals have been advanced to combat New York’s growing no-fault crisis, including:

Institute Medical Protocols/Utilization Reviews: Implement medical treatment guidelines for specific auto accident-related injuries so as to reduce instances of over-treatment and/or unnecessary treatments. New York’s no-fault system is one of the few in the U.S. that allows for insurer payment of medical treatment providers while requiring neither mandatory protocols nor utilization reviews. This virtual blank check drives up system costs dramatically because the PIP payment ceiling is a very generous $50,000.

Require Disputes Be Resolved via Arbitration: Implement an arbitration system to eliminate trial costs for all parties while also expediting claims resolution. No-fault systems were created to avert courtroom battles. Yet, in New York, no-fault cases are clogging the judicial system’s calendar, especially in New York City. The city courts are so inundated with no-fault cases today that they are currently setting trial dates for 2011.

Streamline the Process for Adjudicating No-Fault Claims: Permit parties with no-fault disputes involving less than $5,000 to submit proof based on a sworn affidavit from doctors. Under today’s system, doctors must appear personally in court, time which could be better spent treating their patients.

Implement Fair Burden of Proof Requirements: Require that, in order to establish the plaintiff’s right to no-fault benefits, the plaintiff must produce a witness with personal knowledge of the facts alleged in the plaintiff’s complaint. Furthermore, there should be no presumption of medical necessity based on documents submitted by non-medical plaintiffs and/or witnesses who do not have personal knowledge of the facts of the case. New York’s medical treatment providers are required only to submit proof that a bill was received by the auto insurer to establish entitlement to receive amounts billed—irrespective of suspicions of fraud or abuse. The burden of the auto insurers is much higher. They are required to produce in court both a witness to testify under oath that the claim was handled in accordance with regulations and a medical expert to testify on the “lack of medical necessity.”

Strengthen anti-runner laws: “Runners” are those who receive a monetary benefit for facilitating a fraudulent insurance transaction, usually by acting as a go-between for dishonest policyholders and unscrupulous medical treatment providers and/or attorneys. The crime is currently a misdemeanor but, if upgraded to a felony, could provide an added deterrent.

For more information, see Dr. Hartwig’s PowerPoint presentation to the NYIA’s annual meeting:  New York PIP Insurance Update: Is New York’s No-Fault Crisis Returning?

Declaratory Judgment and Order of Restitution of No-Fault Payments Granted Based on Annulment of PC's Certificate of Incorporation

NO-FAULT – FRAUDULENT INCORPORATION – MALLELA – ANNULMENT OF MEDICAL PC'S CERTIFICATE OF INCORPORATION
Allstate Ins. Co. v. Plainview Professional Med., P.C.
(Sup Ct., Nassau Co., decided 9/24/2009)

Three Allstate companies brought this action against Plainview Professional Medical, P.C., Bruce Bromberg, D.C., Rafael Garcia, M.D., PPP Healthcare Management, Inc., and Handon Management, Ltd.: (1) for a declaration that the Allstate plaintiffs were under no obligation to pay pending, previously denied or future no-fault claims submitted to them by defendants since Plainview Professional Medical PC's certificate of incorporation was annulled by order of the New York State Department of Health, State Board for Professional Medical Conduct on or about October 6, 2008; and (2) to recoup payments made to defendants pursuant to New York State s no-fault law from April 4, 2002 through and including July 18, 2006, predicated on causes of action sounding in fraud and unjust enrichment/restitution.

Plaintiffs moved for summary judgment, contending that, as a consequence of their failure to comply with the state licensing requirements of § 1503(a) of the Business Corporation Law, defendants were not eligible to receive in excess of $600,000 in no-fault payments paid to them by the Allstate plaintiffs.  Specifically, Allstate argued that Plainview was formed in violation of Business Corporation Law § 1503 in that Rafael Garcia was not, in fact, Plainview's true owner and Plainview's certificate of incorporation was annulled by the New York State Department of Health, State Board for Professional Medical Conduct on or about October 6, 2008 after an evidentiary hearing at which neither Rafael Garcia nor Plainview appeared to contest the charges. The Hearing Committee found that unqualified individuals were instrumental in operating, controlling and/or handling Plainview's financial and operational affairs, to wit: according to the Findings of Fact contained in the Determination and Order of the Hearing Committee, Plainview "evaded the legal restrictions on incorporation, ownership and/or control of (Professional Corporations) by concealing * * * that legally unqualified individuals incorporated, owned, operated and controlled medical service corporations . While Rafael Garcia, M.D. was listed on Plainview's certificate of incorporation, filed with the Secretary of State on March 8 , 2000 as Plainview's sole shareholder, director and officer, he did not operate or control Plainview from its inception through the present. Although he apparently did not practice medicine at Plainview since in or about the summer of2000, he was compensated for the use of his name.

Allstate also asserted that once he surrendered his medical license, effective February 6, 2008, pursuant to Public Health Law § 230.12, defendant Rafael Garcia was no longer authorized to practice medicine, a further violation of §§ 1503(a) and (b) and 1504(a) of the Business Corporation Law.