Court Declines to Declare Six Informal Opinion Letters of New York State Insurance Department's Office of General Counsel Regarding Services Provided by Independent Contractors to be Irrational

NO-FAULT – FRAUDULENT INCORPORATION – BILLED SERVICES PROVIDED BY INDEPENDENT CONTRACTORS – JUSTICIABLE CONTROVERSY – DECLARATORY RELIEF
State Farm Mutual Automobile Ins. Co. v. Manuel Farescal, M.D., et al.
(Sup. Ct., Queens Co., decided 5/13/2009)

State Farm brought this action against to recover damages for common-law fraud and unjust enrichment, and for a judgment declaring that State Farm had no obligation to pay no-fault claims submitted by the professional corporation defendants as assignees of policyholders. State Farm alleged that defendant professional services corporations were fraudulently incorporated in the name of defendant Manuel Farescal, M.D., a physician, while, in fact, the professional corporations were owned, operated, and controlled by defendants Adnan Munawar and P. Clifford LoBrutto, unlicensed persons, in violation of applicable statutes and regulations. State Farm also alleged that the defendant professional corporations were not entitled to receive such payments because they were not owned and controlled solely by a licensed medical physician and the services provided were not rendered by employees but, rather, by independent contractors in violation of state law.

Defendants moved pursuant to CPLR 3212(e) for partial summary judgment declaring that six “informal opinions” of the office of General Counsel of the State of New York Insurance Department are irrational and not entitled to deference, and to dismiss State Farm's causes of action regarding services provided by independent contractors.

In denying defendants' motion, Queens County Supreme Court Justice Allan Weiss ruled that defendants had failed to assert any counterclaim for such affirmative declaratory relief, and any ruling, in the context of this case, that the opinion letters were irrational and not entitled to deference would constitute an impermissible advisory opinion.

A state court lacks subject matter jurisdiction in cases when no justiciable controversy is presented (see Matter of New York State Inspection, Security & Law Enforcement Employees, Dist. Council 82, AFSCME, AFL-CIO v Cuomo, 64 NY2d 233, 241, n 3 [1984]; Morrison v Budget Rent A Car Systems, Inc., 230 AD2d 253, 258-259 [1997]). It is well settled law that “[t]he courts of New York do not issue advisory opinions for the fundamental reason that in this State ‘[t]he giving of such opinions is not the exercise of the judicial function’ (Matter of State Indus. Commn., 224 NY 13, 16 [1918]) . . .,” (Cuomo v Long Island Light Co., 71 NY2d 349, 354 [1988]).

Any ruling by the court regarding the opinion letters would not be dispositive of a cause of action asserted by plaintiff (citations omitted). * * * Nothing about the opinion letters themselves constitutes a final determination by the State regarding the propriety of plaintiff’s actions, and the Farescal defendants are not aggrieved by their issuance. Rather, the question of whether plaintiff properly may withhold payments of no-fault benefits to defendants All Family, Universal and Painpro in instances where professional health services were rendered by independent contractors, as opposed to their employees, is one of law, which must be decided based upon interpretation of statute and regulation, and case law.

With respect to defendants' motion to dismiss State Farm's causes of action seeking a declaration that defendants were not entitled to recover for services provided by independent contraction, Justice Weiss held:

The Farescal defendants assert an insurer may not deny payment for no-fault benefits on the ground that the professional health services billed to plaintiff were performed by independent contractors. The Farescal defendants, therefore, argue plaintiff cannot obtain a judgment declaring that defendants All Family, Universal and Painpro are not entitled to collect no-fault benefits for charges submitted to it when such professional health services were rendered by independent contractors. The court notes that the Farescal defendants make no factual argument that the professional health services billed to plaintiff were performed by their employees, or that they exercised a particular level of control over the independent contractors. Their motion raises purely legal arguments regarding the propriety of plaintiff’s withholding of payments to the professional corporations based upon the rendering of services by independent contractors.

CPLR 3001, in relevant part, provides: “The supreme court may render a declaratory judgment having the effect of a final judgment as to the rights and other legal relations of the parties to a justiciable controversy whether or not further relief is or could be claimed.” “An action is justiciable when the controversy presented touches the legal relations of the parties having adverse interests from which harm is presently flowing or could flow in the future in the absence of a court determination of the parties’ rights” (Initiative For Competitive Energy v Long Is. Power Auth.,178 Misc 2d 979, 989 [1998]). “The controversy must be capable of disposition and be presented in an adversarial context with a set of concrete facts” (Goodwill Adv. Co. v State Liq. Auth.,14 AD2d 658 [1961]). The complaint herein demonstrates the existence of a controversy between the parties regarding plaintiff’s withholding of payments to defendant professional corporations to the extent the services were rendered by independent contractors, and the practical need for its resolution. The No-Fault Law, which supplants common-law tort actions for most victims of automobile accidents with a system of no-fault Insurance, has as its primary aims 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 (see Medical Society of State v Serio, 100 NY2d 854, 860 [2003]). The Superintendent has promulgated regulations implementing the No-Fault Law, currently contained in 11 NYCRR Part 65. Section 65-3.11(a) of that part (formerly section 65.15[j][1]), in relevant part, provides, “An insurer shall pay benefits for any element of loss, . . ., directly to the applicant or . . . upon assignment by the applicant . . ., shall pay benefits directly to providers of health care services . . . .”

11 NYCRR 65-3.11(a) and its precursor, 11 NYCRR 65-3.15(j)(1), have been interpreted to mean that a medical provider cannot recover assigned no-fault benefits if services were provided by an independent contractor rather than by it or its employees (see Health & Endurance Medical, P.C. v Liberty Mut. Ins. Co., 19 Misc 3d 137[A], 2008 NY Slip Op 50864(U) [NY Sup App Term, 2d and 11th Jud Dists (2008)]). In Health & Endurance, a provider sought to recover assigned first-party no-fault benefits for services which were not rendered by it or its employees, but rather by a treating provider who was an independent contractor. The Appellate Term held that the plaintiff was not a “provider” of the medical services rendered within the meaning of Insurance Department Regulations (11 NYCRR) § 65-3.11[a]), and, therefore, was not entitled to recover “direct payment” of assigned no-fault benefits from the defendant insurer. Such holding is consistent with the holdings in A.M. Medical Services, P.C. v Progressive Cas. Ins. Co., (22 Misc 3d 70, 2008 NY Slip Op 28528, [App Term, 2d, 11th and 13th Jud Dists (2008)]); Health & Endurance Med. P.C. v State Farm Mut. Auto. Ins. Co., (12 Misc 3d 134[A], 2006 NY Slip Op 51191[U] [App Term, 2d and 11th Jud Dists 2006]);Craig Antell, D.O., P.C. v New York Cent. Mut. Fire Ins. Co., (11 Misc 3d 137[A], 2006 NY Slip Op 50521[U] [App Term, 1st Dept 2006]); Rockaway Blvd. Medical P.C. v Progressive Ins., (9 Misc 3d 52, 2005 NY Slip Op 25278 [App Term, 2d Dept 2005]); A.B. Med. Servs. PLLC v Liberty Mut. Ins. Co., (9 Misc 3d 36 [App Term, 2d and 11th Jud Dists 2005]); A.B. Med. Servs. PLLC v New York Cent. Mut. Fire Ins. Co., (8 Misc 3d 132[A], 2005 NY Slip Op 51111[U] [App Term, 2d and 11th Jud Dists 2005]). These opinions of the Appellate Term are persuasive authority, and the court is convinced of their reasoning. Under such circumstances, the third and fourth causes of action asserted by plaintiff state viable claims for declaratory relief.

Claim First, Sue Second -- No Justiciable Controversy Where No Breach

COMMERCIAL PROPERTY – JUSTICIABLE CONTROVERSY – PREMATURE ACTION – FILING CLAIM BEFORE SUING
King's Gym Complex, Inc. v. Philadelphia Indem. Ins. Co.
(2nd Cir. US Ct. Apps., decided 9/15/2008)

When running up against a policy's two-year suit limitations period, may an insured sue its insurer before making a claim? The Second Circuit, United States Court of Appeals, says no.

King's Gym Complex sued its commercial property insurer in federal court for business income loss coverage before actually filing a claim with the company. The complaint asserted a breach of contract cause of action. Philadelphia Indemnity moved to dismiss the complaint based on the court's lack of subject matter jurisdiction, contending that there was no justiciable controversy for the court to adjudicate.

In AFFIRMING the District Court's granting of Philadelphia's motion, the Second Circuit Court of Appeals agreed with the lower court's reasoning that since King's Gym had not submitted a business loss claim to Philadelphia prior to suing, Philadelphia could not have breached its duty under the policy to honor such a claim, and King's Gym could not assert a claim in federal court based upon such an alleged breach. The Second Circuit also rejected King's Gym's argument that it should be allowed to maintain a suit, even though no justiciable controversy yet existed because otherwise it would be time-barred.

King's Gym argued that the policy did not require it to file a claim before suing, and Philadelphia had not requested that it file a proof of loss on its business income loss claim. The Second Circuit also rejected this argument, holding:

As to the question of its filing a business loss claim with Philadelphia, King's Gym argues that the policy does not explicitly require it to "file a claim" before filing suit against Philadelphia unless Philadelphia had previously requested King's Gym to submit a proof of loss, which Philadelphia did not do. Although the language of the policy between King's Gym and Philadelphia is unclear regarding precisely what conduct by the insured constitutes a filing of a business loss claim, we need not address the question of whether King's Gym did so in this case. King's Gym conceded -- both before the District Court and in its brief to this Court -- that it had not suffered any business loss prior to its filing suit against Philadelphia. The policy obligates Philadelphia to pay for the 'actual loss of Business Income' the insured sustains as a result of a covered loss, and there is no evidence in the record that Philadelphia ever denied or declined to follow up on an actual loss of business income claim by King's Gym. Indeed, the record demonstrates that Philadelphia repeatedly tried to contact King's Gym and, prior to King's Gym's complaint, notified it that it considered the claim inactive." The District Court correctly concluded that there existed before it no dispute ripe for adjudication, and the District Court properly granted Philadelphia's motion to dismiss King's Gym's claims for lack of subject matter jurisdiction.

The same argument of lack of a justiciable controversy and subject matter jurisdiction can be made in a situation where an insured does not submit its replacement cost holdback claim prior to the two-year loss anniversary but nonetheless commences suit to "protect the statute", i.e., to sue within the policy's two-year suit limitations period. My office has successfully moved to dismiss a number of such suits on this basis. See No Replacement of Property Within 2 Years Results in Dismissal of RC Holdback Suit.

This decision is unpublished. Pursuant to Federal Rules of Appellate Procedure Rule 32.1, parties may cite to this opinion, but must provide a copy of it with their papers.