NY PIP: Post-Claim Policy Exhaustion Appears To Be Revived As a Defenset

For nearly four years now, New York auto insurers have awaited with trepidation a decision from New York’s Appellate Division, Second Department, on a question of great urgency: is “policy exhaustion” a complete defense to a PIP lawsuit (or arbitration) if the policy became exhausted after the claim was denied?

The general rule of policy exhaustion in New York, for all types of insurance, is that once the policy is exhausted, the obligations of the insurer end.  However, the New York No-Fault Regulations (Insurance Department Regulation 68) are ambiguous on that issue.  Existing case law is at odds as well, with the courts in several downstate counties (the “Second Department”) holding that, if the policy becomes exhausted after a claim is denied, that defense is not valid. That decision was up on appeal and has now been decided.

In this new decision, Alleviation Medical Services a/a/o Ali Al Rahabi v. Allstate Insurance Co., 2021 NY Slip Opinion 08159, plaintiff commenced a no-fault suit in New York City Civil Court in April 2011 for medical services provided to a claimant who was injured in a motor vehicle accident in October 2010.  In May 2014, Allstate moved for summary judgment, alleging that its policy benefits had been exhausted. Civil Court denied Allstate’s motion, and the Appellate Term (an intermediate appellate court) affirmed that denial. Allstate then appealed to the Appellate Division.

The Appellate Term had held, when it issued its decision in 2017, that because Allstate had not denied the claim on the grounds of policy exhaustion, that defense was lost. Since that time, courts in the Second Department (counties of Kings, Queens, Richmond, Nassau, Suffolk and Westchester) have been refusing the policy exhaustion defense unless it was contained in the claim denial.

Now the Appellate Division ruling is in, and it is not definitive, but it does imply that policy exhaustion is once again a valid defense at any time. What the Appellate Division says, first, is that they affirm the denial of summary judgment on different grounds than did the Civil Court and the Appellate Term. Since those lower courts based their decisions on the ground that policy exhaustion must be cited in the claim denial, we can draw the inference that such rule is not being adopted by the Appellate Division.

The Appellate Division then goes on to cite prior App. Div. cases which hold that an insurer’s duties cease once the policy becomes exhausted (Hospital for Joint Diseases v State Farm Ins. Co., 8 A.D.3d 533; Presbyterian Hosp. v Liberty Mutual Ins. Co., 216 A.D.2d 448).  By citing these cases without disagreeing with them or distinguishing this case from them, the new decision adopts their reasoning, i.e., policy exhaustion is always a defense.

But Allstate does not win this one, because it failed to prove, in its summary judgment motion, that its policy was exhausted. “Although the defendant submitted an affidavit from one of its employees that set forth the defendant’s ordinary business practice of receiving, recording, and denying no-fault claims from medical providers, the affidavit is bereft of any specific information regarding this claim,” held the Court.

Therefore, the case is sent back to Civil Court to resolve the “issues of fact” as to when the claim was denied, and the basis for the denial.

It would appear, at least, that the Appellate Division has rejected the lower courts’ ruling that policy exhaustion is only a valid defense in a PIP case if the policy became exhausted before the claim was denied, but holds that the insurer must prove that the policy was in fact exhausted (which was always the case in any event).

As with many New York appellate court decisions on PIP, this one creates more questions than it provides answers. For example:

1. Does this mean that a claim can be denied on other grounds but still be defended if the policy exhausts later?

I would argue yes.

2. What if the original denial was late or no denial was issued at all? Is a subsequent policy exhaustion still a good defense?  

   This decision provides no specific support for that argument because it does not call policy exhaustion a “non waivable defense.” It does say that policy exhaustion ends the insurer’s obligations, and that the exhaustion must be proven.  Given the fact that this Court rejects the lower courts’ reasoning, there is a good argument to be made that policy exhaustion is always a good defense as long as it can be proven. In other words, the decision implies that the policy exhaustion defense is not waived by a late or missing claim denial.

3. Does a new denial have to be issued if the policy becomes exhausted after the original denial?

There is no legal requirement for a “follow up denial” and in fact all denials are supposed to be issued within 30 days of receiving a bill. However, I think it’s a good idea to issue a new denial (to all known providers on the claim), or in the alternative, a letter advising of the exhaustion, when the policy becomes exhausted because it provides notice of the exhaustion, which judges sometimes look for as a matter of “fairness” by providing notice of the exhaustion to the claimant’s medical providers before they perform more services.

4. What should PIP insurers do now with regard to suits and arbitrations where post-claim policy exhaustion is the defense? 

My opinion: defend them. Insurers are in a much stronger position now that the reasoning used by the lower courts has been tacitly rejected by the Appellate Division.

5. What about self-insureds?

The same rule applies to them as to insurers who issue policies.

6. What about suits and arbitrations in the First Department (New York County, Bronx County)?

In the First Department, policy exhaustion has been a complete defense all along. Nothing has changed.