Visions of the Presbyterian Dissent Encouraging Fraud by Shouting “Gotcha”

The old adage that “today’s dissent is tomorrow’s majority” is a powerful concept – one that sometimes comes to fruition. However, very often a dissent, while not becoming tomorrow’s majority, makes bold predictions of what may become of a majority’s holding. One not too distant dissent – a dissent whose predictions were dismissed by the majority – casts an eerie shadow on the arena of first-party no-fault insurance claims.

Karen DeGuisto was hurt in a one-car accident on December 26, 1993, when she drove her car into a utility pole. Maryland Casualty Company (“Maryland”) was her no-fault insurer. She was admitted to Presbyterian Hospital (“Presbyterian”) on two separate occasions for treatment of her injuries, including the period June 7 – 10, 1994. On August 5, Presbyterian, as assignee, sent Maryland a no-fault claim form, received by the insurer on August 9. On September 15, 1994, a mere 37 days after the insurer received the form, the $26,000 in no-fault medical payments had not yet been paid and Presbyterian sued Maryland to recover the benefits. Maryland raised a defense that its insured was intoxicated and that the “intoxication exclusion” in the no-fault policy precluded coverage.

Under the no-fault regulations, Maryland had been required to pay or deny benefits within 30 days. The insurer argued that the claim was not overdue because it had not yet received all of the available information relating to the incident, such as a police report on the insured’s blood-alcohol test results.

Maryland had applied to the police department for public access to the insured’s blood-alcohol test results on April 19, 1994, after receiving a police accident report noting alcohol on DeGuisto’s breath and that a blood specimen had been taken. On October 13, 1994, Maryland requested verification of the insured’s alleged intoxication from Presbyterian in the form of interrogatories. Subsequently, on November 3, 1994, the insurer requested the blood-alcohol test results from the local District Attorney’s office.

On November 7, 1994, Presbyterian moved for summary judgment, asserting that Maryland’s failure to timely deny the claim barred interposition of the intoxication defense in the action. Thereafter, on December 5, 1994, Maryland received the test results, which indicated a blood-alcohol level of 0.13% at the time of the insured’s accident. Maryland issued a denial of the claim that same day.

The Appellate Division held that “preclusion of the insurance company’s ability to deny the claim is the appropriate remedy” where, as here, “the insurance company neither denies a claim within 30 days after receiving it nor seeks to extend that time by requesting verification in the prescribed forms” (226 A.D.2d 260, 261).

Leave was granted to the Court of Appeals.

In Presbyterian Hospital v. Maryland Casualty Company, 90 N.Y.2d 274 (N.Y. 1997) the Court first noted that the nofault statute and regulations include various penalties for late payment of claims. An insurer is required to either pay or deny a claim for no-fault automobile insurance benefits within 30 days from the date an applicant supplies proof of claim (see, Insurance Law § 5106(a); 11 NYCRR 65.15(g)(3)). Failure to pay benefits within the 30-day requirement renders benefits “overdue,” and all overdue payments bear interest at a rate of 2% per month (Insurance Law § 5106(a); 11 NYCRR 65.15(h)). Additionally, a claimant is entitled to recover attorney’s fees where a “valid claim or portion” was denied or overdue (Insurance Law § 5106(a); 11 NYCRR 65.15(i)).

The Court of Appeals held that since Maryland neither denied the claim within 30 days after receiving it nor properly sought to extend that time frame by requesting verification, using the prescribed forms, within 10 days after receipt of the hospital’s completed application, it failed to comply with its obligation to timely deny or disclaim Presbyterian’s no-fault claim.

The Appellate Division had held that the penalty for the late denial was preclusion of the insurer’s ability to raise the intoxication exclusion. Maryland argued that preclusion is an “unavailable remedy” under the statute and regulations because (a) the common law does not preclude defenses, (2) neither the Insurance Law nor the Superintendent’s regulations expressly provide for such preclusion, and (3) the Legislature’s prescribed penalties for overdue payments (statutory interest and attorney’s fees) are exclusive remedies and impliedly exclude the more effective incentive and sanction of ultimate preclusion.

However, the Court disagreed. It compared the no-fault statute to Insurance Law § 3420(d), a provision that requires liability insurers to deny coverage in certain circumstances as soon as reasonably possible. A body of common law has developed around that statute which has precluded insurers from relying on policy exclusions and breaches if a disclaimer/denial governed by that section is untimely.

The Court announced that it was: … persuaded that, until and unless the Legislature clearly declares otherwise, the preclusion analysis that we have employed in this other branch of the Insurance Law should also be discretely applicable with respect to the 30-day requirement in the no-fault context of the instant case. In fact, in addition to consistency and a fair, reasonable and logical policy fit, the no-fault situations also benefit from the availability of preclusion against insurers in situations such as the instant one.

An articulate dissent by Judge Wesley, writing for a three judge minority, joined in the majority’s request for the Legislature and the Insurance Superintendent to study this issue and craft a solution.

Judge Wesley looked into the future and saw the injustice and mischief that the majority’s opinion would likely cause. The decision “could result in insurers’ having to pay claims that would otherwise not be covered.” Presbyterian, 90 N.Y.2d at 289. The majority’s holding in Presbyterian created a system in which, for the most part, an insurer who fails to pay or deny a nofault claim within 30 days of receipt of same is precluded from asserting any defense against the claim in arbitration or litigation.2 The preclusive effects of Presbyterian are far reaching, and Judge Wesley’s dire prediction of an insurer paying claims that they would otherwise not be paying has come true.3 As stated by Judge Wesley, the preclusion rule is not even contemplated by the Regulation:

Had the Legislature chosen to include preclusion within the available enforcement mechanism it provided for claimants (be they injured persons or care providers) it would have done so. Presbyterian, 90 N.Y.2d at 288. For those not familiar with nofault, it is an area of the law that has become a burgeoning business for the medical providers, no-fault mills, and those seeking to game the system. Long ago, the State of New York implemented a no-fault system for covered automobile accidents that paid for an injured party’s medical treatment, regardless of fault. In exchange, limitations were placed on the ability of an injured party to commence an action for personal injuries except in those circumstances where the injured person sustained a serious injury as defined by Insurance Law §5102(d).

Up until the decision in Presbyterian, the no-fault system operated, for the most part, as intended. However, after Presbyterian, the no-fault system was changed into a money-making system with the interests of the claimants coming second. The No-Fault Regulation as enacted in the 1970s was fundamentally flawed because it assumed that those involved in the process had the welfare of the claimants in mind. As a result, there has been – and continues to be – a dramatic increase in the submission of fraudulent and suspect claims. The drastic increase in fraudulent and suspect no-fault claims ultimately led to the Insurance Department implementing a “new” No- Fault Regulation.4 The validity of the “new” No-Fault Regulation was sustained by the Court of Appeals in Matter of Medical Society of New York v. Serio, 100 N.Y.2d 854 (N.Y. 2003). In sustaining the need for reform in the no-fault system, the Court in Serio took notice of the growing epidemic of fraud in no-fault claims:

Between 1992 and 2001, reports of suspected automobile insurance fraud increased by 275%, the bulk of the increase occurring in no-fault insurance fraud. Reports of no-fault fraud rose from 489 cases in 1992 to 9,191 in 2000, a rise of more than 1700%. No-fault fraud accounted for three quarters of the 16,902 reports of automobile- related fraud received by the Insurance Department’s Frauds Bureau in 2000, and more than 55% of the 22,247 reports involving all types of insurance fraud. In 1999, the Superintendent established a No-Fault Unit within the Frauds Bureau to focus specifically on no-fault fraud and abuse. By one estimate, the combined effect of no-fault insurance fraud has been an increase of over $100 per year in annual insurance premium costs for the average New York motorist. Serio, 100 N.Y.2d at 860.

The No-Fault arena remains replete with fraud and the Insurance Department is again exploring the need for another “new” No-Fault Regulation to better serve the citizens of New York. The growth in fraud can be attributed, in part, to Presbyterian, which ultimately led to a decrease in the ability of insurers to combat fraudulent and suspect claims.

It should be every New Yorker’s goal – insureds, insurers, medical providers, and certainly the Legislature and the regulatory agency – to reduce no-fault fraud, to lower the cost of insurance premiums, to deny coverage to those who simply do not deserve it. Instead, the Court of Appeals has unwittingly encouraged no-fault fraud under a “gotcha” rule.

A few recent examples underscore the clarity of Judge Wesley’s predictions.

In Nyack Hosp. v. Allstate Ins. Co., 84 A.D.3d 1331 (N.Y. App. Div. 2d Dep’t 2011), the insurer untimely denied a claim for benefits, asserting that the insured, Ferguson, intentionally caused her injuries in an attempt to commit suicide. Intentionally caused injuries are excluded. The court acknowledged the vitality of the defense, however, the failure to establish timely denial of the claim results in the preclusion of the defense that Ferguson’s allegedly intentional act was the cause of the accident and subject to exclusion under the insurance contract.

Of course, the insurer would be required to pay attorneys’ fees and twopercent per month interest for late denials. Is the public served by allowing a person who intentionally caused her own injuries to recover no-fault benefits?

In two recent cases, the insurer, as in Presbyterian, raised an intoxication defense in response to a claim for benefits. Again, the proof was to show that a driver would be ineligible for no-fault benefits because the driver, in violation of statutory, regulatory and policy provisions, was intoxicated and the intoxication caused the accident and injuries. In both cases, the court held that failure to establish timely denial of the claim results in preclusion of the defense that the intoxication of the insured was a contributing cause of the accident and subject to exclusion under the policy. See, NYU-Hospital for Joint Diseases v. American Intl. Group, Inc., 84 A.D.3d 1192 (N.Y. App. Div. 2nd Dep’t 2011); Westchester Med. Ctr. v. New York Cent. Mut. Fire Ins. Co., 81 A.D.3d 929 (N.Y. App. Div. 2nd Dep’t 2011)

Should the “gotcha because you missed the deadline” approach to no-fault claims be used to overlook and sanction fraud? Yes, said the Third Department in Valley Psychological, P.C. v. Liberty Mut. Ins. Co., 30 A.D.3d 718 (N.Y. App. Div. 3rd Dep’t 2006):

Because the defense raised here was analogous to an argument that the treatment was excessive or unnecessary, it does not implicate coverage and therefore required a timely denial. Since defendant’s fraud defense was precluded, substantial justice was not meted out according to the substantive law, requiring reversal and remittal for City Court to determine the amount of judgment to be entered in plaintiff ’s favor. Defendant successfully argued in City Court and County Court that its fraud defense asserted a lack of coverage thereby rendering its untimely denials irrelevant. We disagree. In contrast to fraudulent conduct such as staging an automobile accident, which results in no coverage at all — thus not requiring a timely denial — coverage is not extinguished by allegations, or even proof, that a medical services provider unilaterally schemed to defraud the insurer by providing unnecessary or excessive treatment — thus requiring a timely denial to avoid preclusion of the defense [citations omitted]. In fact, the Court of Appeals expressly noted that the fraud exception from preclusion for untimely denials does not apply to a defense that the provider’s treatment was excessive, as that defense does “not ordinarily implicate a coverage matter.” Cent. Gen. Hosp. v. Chubb Group of Ins. Cos., 90 N.Y.2d 195 (1997).

Does it serve a public purpose to allow medical providers to be paid more than the law permits? “Yes,” held the Second Department in Westchester Med. Ctr. v. Am. Transit Ins. Co., 17 A.D.3d 581, 582 (N.Y. App. Div. 2nd Dep’t 2005):

The Supreme Court erred in denying that branch of the plaintiffs’ motion which was for summary judgment on the second cause of action, which arises from the treatment rendered by St. Vincent’s Hospital & Medical Center (hereinafter St. Vincent’s) to Brian Cardimone, on the ground that “an issue of fact exists as to whether there was payment by the defendant in accordance with the DRG schedule.” It is undisputed that the defendant failed to pay or deny the claim for Cardimone’s treatment within 30 days after proof of such claim was submitted, nor did the defendant seek any further verification of this claim. Instead, the defendant merely tendered a belated partial payment of the claim. The defendant alleges that St. Vincent’s billed under the wrong “DRG” code, and that it paid in accordance with the correct code. However, since the defendant never sought any verification of the claim, it is precluded from raising this statutory exclusion defense based upon its failure to issue a denial of claim form within 30 days of its receipt of the claim as required by 11 NYCRR 65.15 (g) (3).

The courts have, as well, sanctioned payments to medical providers for unnecessary treatment because of a late denial. See, A & S Med. P.C. v. Allstate Ins. Co., 15 A.D.3d 170, 171 (N.Y. App. Div. 1st Dep’t 2005).

The Presbyterian preclusion rule has since been expanded as a result of the Court of Appeals’ decision in Fair Price Med. Supply Corp. v. Travelers Indem. Co., 10 N.Y.3d 556 (N.Y. 2008). A divided Court in Fair Price held that the insurer was precluded from defending against a claim submitted by a medical equipment provider even though the insurer established that the equipment at issue was never provided to the alleged injured person. The basis of the insurer’s preclusion – the insurer failed to deny the submitted charge within 30 days of receipt of same notwithstanding the fact that the submitted charge was clearly fraudulent.

The Court’s decision in Fair Price was monumental in that it firmly established that an insurer who fails to pay or deny a claim within 30 days, even a fraudulent claim, is generally precluded from asserting any defense against the claim. Judge Smith, writing for the dissent in Fair Price, opined, as did Judge Wesley, that a strict adherence to the 30-day pay or deny rule will result in insurers paying claims that they should not otherwise be paying. The majority in Fair Price seems to ignore the far reaching implications of the further expansion of the Presbyterian preclusion rule; however, Judge Smith’s dissent is educational in that he clearly states that the growth of fraudulent no-fault claims was explicitly noted by the underlying appellate courts. Fair Price, 10 N.Y.3d at 568; see also, Fair Price Med. Supply Corp. v. Travelers Indem. Co., 803 N.Y.S.2d 337 (N.Y. App. Term 2nd Dept. 2005) affirmed 42 A.D.3d 277 (N.Y. App. Div. 2nd Dept. 2007).

Judge Wesley’s dissent ends with what appears to be an ominous warning:

It is hard for us to understand how preclusion serves the goals of speedy payment when the statutory and regulatory framework on which it is now engrafted by this Court is fraught with ambiguities and inconsistencies. Presbyterian, 90 N.Y.2d at 291.

The “ambiguities and inconsistencies” contemplated by Judge Wesley have culminated in the Court’s decision in Fair Price and many other decisions which, by their holding – although perhaps not by their intent – encourage unnecessary medical treatment, sanction no-fault fraud and give comfort and support to those who seek benefits for excluded activities and conduct.

Even though Judge Wesley’s dissent is not today’s law, his realization and vision that precluding an insurer from defending a claim that it would not otherwise cover has resulted in a dramatic increase in the submission of fraudulent and suspect claims – so much so that Court of Appeals itself has held that an insurer is precluded from defending itself from a claim that is knowingly fraudulent.

The time has come for the Legislature and the regulatory authority to accept the kind invitation by both the majority and dissenting judges in Presbyterian and discourage no-fault fraud. With the prime rate of interest hovering at 3.5% per year, an insurer’s assessment of 2% per month (24% annually) together with attorney fees and filing costs is penalty enough for missing a 30-day deadline. That was clearly the intention of the Legislature and the Superintendent and that intention should be underscored and clarified. Presbyterian preclusion is draconian indeed, and encourages and supports increased no-fault fraud which adversely impacts all of us.