New York Law Journal: 9/2008

Restoring the “Exceptional Exemption”: The Potentially Sweeping Effect of Fair Price v. Travelers 

By: Jason A. Moroff, Michael C. Rosenberger and Edward A. Shapiro

Introduction

Whether it is the criminal act of driving while intoxicated[1], allegations of fraudulent and excessive billing by a medical provider[2], or a litany of other affirmative defenses, the recent New York Court of Appeals decision in Fair Price reaffirms in no uncertain terms the seminal decision of Presbyterian, which requires an insurer or self-insurer to issue a timely denial of claim form or verification request. If it fails to do so, it will be precluded from raising any defense except the narrow “exceptional exception” set forth in Chubb.[3]  This decision represents a major turning point in no-fault litigation, as it demonstrates the intent of the New York Court of Appeals to restore the original intent of the preclusion rule; that is, only defenses based upon “pure coverage” may survive preclusion.[4]

Since the “exceptional exemption” was first set forth by the New York Court of Appeals insurers have tried to carve out additional exemptions to various affirmative defenses, including allegations that: 1) the services at issue were rendered by an independent contractor; and 2) the services at issue were rendered by a fraudulently incorporated medical facility, the so-called Mallela defense.[5] Curiously, all of these defenses have been held to fall within the “exceptional exemption.” However, based upon the history of the exemption and the recent decision in Fair Price, it is no longer reasonable to argue such defenses fall within the “exceptional exemption.”

The General Rule    

On June 10, 1997, the New York Court of Appeals determined the criminal act of driving while intoxicated may not be raised as an exclusion defense in an action to recover outstanding no-fault benefits unless such defense is raised in a timely denial of claim form.[6] Indeed, even an egregious offense that carries with it severe civil and criminal liabilities will be precluded to effectuate the goals of “no-fault reform [which] was enacted to provide prompt uncontested, first party benefits.”[7] As the Court of Appeals reasoned, such a result is the “price to be paid to eliminate common law contested lawsuits.”[8] The holding in Presbyterian – standing alone – seemingly stood for the proposition that an insurer or self-insured would be barred from raising any defense not raised in a timely denial of claim form absent a proper verification request. However, such would not be the case.

The “Exceptional Exemption”

On the same day, the New York Court of Appeals carved out an “exceptional exemption” to the general rule set forth in Presbyterian by holding “that the preclusion remedy does not apply to a defense of no coverage at all.”[9] Therefore, the only defenses that survive preclusion are those “narrow” defenses based upon “pure matters of coverage” where an insurer has “no contractual relationship with respect to the subject vehicle and incident.”[10] The only defenses that could logically be a part of such an exemption would be those related to a staged loss or instances where a policy of insurance was never procured or not in effect at the time of the accident at issue.

Expansion and Restoration

Notwithstanding the clear intent of the New York Court of Appeals in 1997, insurers have successfully argued to expand the independent contractor defense and Mallela defense into the “exceptional exemption.”  However, a review of the relevant case law reveals such a result is in direct contravention with a strict interpretation of Presbyterian and Chubb.  

This is made more apparent when coupled with the rationale of the New York Court of Appeals in Fair Price, which demonstrates the intent of New York’s highest Court to impliedly abrogate all decisions holding that defenses not based upon “pure coverage” fall within the “exceptional exemption.” In Fair Price, the Court presents a test to determine whether a defense fits within the narrow “exceptional exemption.”  Specifically, the Court held: “More fundamentally, determining whether a specific defense is precluded under Presbyterian or available under Chubb entails a judgment: Is the defense more like a “normal” exception from coverage (e.g., a policy exclusion), or a lack of coverage in the first instance (i.e., a defense “implicat[ing] a coverage matter”)?”[11]

In essence a Chubb defense is a moment frozen at the time of the accident.  If there is a policy of insurance in effect and a real motor vehicle accident occurs, coverage attaches.  Once coverage attaches, inquiry into a Chubb defense ends. Anything that occurs after the moment deals with exclusions to coverage and falls under Presbyterian.  This test is consistent with Presbyterian and Fair Price, where the Court precluded defenses based upon allegations of wrong doing against the claimants that, if true, would be felonies under the penal law.  Under these circumstances it is hard to rationalize that defenses based upon less nefarious circumstances will avoid preclusion.

Independent Contractor

The Appellate Term has held that, “where a billing provider seeks to recover no-fault benefits for services which were not rendered by it or its employees, but rather by a treating provider who is an independent contractor, it is not a provider” within the meaning of the regulations and may not recover assigned no-fault benefits.[12] Moreover, such defense is not subject to the preclusion rule.[13] It is beyond dispute that an independent contractor is not entitled to recover assigned no-fault benefits.  However, the prior rulings of the Appellate Term wherein the independent contractor defense survives preclusion are inconsistent with Fair Price. The fact that the no-fault regulations specifically prohibit an independent contractor from directly recovering assigned no-fault benefits is irrelevant.[14]  The no-fault regulations and Insurance Law also specifically indicate a provider is only entitled to “all necessary expenses incurred for services” and yet the New York Court of Appeals still requires a defense based uponunnecessary services to be raised in a timely denial of claim form.[15]

In Fair Price, a defense based upon “a complete failure to provide medical supplies” is precluded if not raised in a timely denial of claim form, as such defense does not fall within the “narrow sweep” of the exception set forth in Chubb “premised on a lack of coverage.”[16] Based upon the same reasoning a defense premised on the ground that the services were rendered by an independent contractor – which is far less egregious – is also precluded if not raised in a timely denial of claim form. Logic dictates that if a defense based upon services that were never rendered does not fall within the “exceptional exemption,” then services that were actually rendered, albeit by a different provider, must also be raised in a timely denial. To allege the contrary would merely be presenting a distinction without a difference. The independent contractor defense fits squarely within the expansive set of defenses contemplated by Court of Appeals in Presbyterian and Fair Price and fails the Chubb“moment in time” test.

The Mallela Defense

In 2005, the New York Court of Appeals held that insurance carriers are entitled to withhold payment of no-fault medical expenses provided by fraudulently incorporated enterprises to which patients have assigned their claims.[17] However, the Court was silent as to whether such defense is the type that fits into the “narrow exception” set forth in Chubb. Thereafter, the Appellate Term for the 2nd and 11th Judicial Districts addressed the issue by holding that a defense based upon the fraudulent incorporation of a medical provider is not precluded even if it was not interposed in a timely denial.[18] Although the Appellate Term did not set forth a rationale for its decision, it only cites to two cases immediately after its holding – Mallela andChubb. Since Mallela does not address the issue, the Appellate Term is principally relying upon Chubb.  However, the Appellate Term’s reliance upon Chubb in support of its holding that fraudulent incorporation survives preclusion is inconsistent with Fair Price and so the Court of Appeals arguably abrogates such holding by implication.

In a case where an insurer alleges fraud in the incorporation there is no question that coverage exists; that is, “there was an actual accident and actual injuries.”[19]  It is the accident and the injuries that trigger coverage. It is not the “egregiousness of the fraud” that excuses the insurer’s compliance, but rather, the absence of something that is not an “accident.”[20] Indeed, “the pertinent inquiry is whether the asserted defense is based on a lack of coverage. The kind of fraud scheme involved–and whether there is any fraud scheme at all–is irrelevant.”[21]

To date, only one lower court has addressed this new issue, ruling that even in light of Fair Price, theMallela defense need not be raised in a timely denial for the followings reasons: 1) “it assumes the Court of Appeals was ignorant of its own precedent in Presbyterian and [Chubb] when it decidedMallela, and that the Fair Price court chose to somehow abrogate Mallela in its decision;” 2)“the appellate courts in Presbyterian, [Chubb] and Fair Price were dealing in large measure with contract interpretation, the extent to which policies of insurance covered certain situations, and the extent to which the insurers’ obligations under those policies were subject to applicable laws and regulations;” and 3) the Mallela court quoted a relevant passage from its earlier decision in Matter of Medical Society of State of N.Y. v. Serio, 100 N.Y.2d 854, 866, 768 N.Y.S.2d 423, 800 N.E.2d728 [2003], which provided that the challenged regulations “create not a new category of exclusion, but rather merely a condition precedent with which all claimants must comply in order to receive benefits under the statute.”[22]  However, such contentions are inconsistent with the Court of Appeals holding.[23]

First, the idea that preclusion assumes the Court of Appeals was “ignorant” of its own precedent when it decided Mallela is immaterial.  The sole reason the Court did not address the issue of preclusion is that it was not part of the question certified to the Court.[24]  Generally, the Court will not address ancillary issues outside the certified question.[25]  Second, the contention that the Court of Appeals’ decisions in Presbyterian, Chubb and Fair Price dealt with “contract interpretation” and are somehow distinguishable is debatable.  True, both Presbyterian and Chubb dealt with contract interpretation, but only to the extent that a contract must be in effect in order to have coverage. Also, the Court in Fair Price was not dealing with “contract interpretation” but merely relied upon its prior holding inPresbyterian and Chubb to demonstrate the bright line demarcation between “pure coverage” defenses and all others.  Finally, the Mallela court’s reference to Serio is immaterial.  The court inSerio merely held that the Superintendent of Insurance had broad powers in amending the regulations.  Moreover, the quoted passage from Serio actually supports the contention herein that the Mallela defense must be raised in a timely denial.  Undoubtedly, as the Court indicates, the defense does not create “a new category of exclusion,” but rather “a condition precedent.”  The “condition precedent” the court in Serio was confronted with was the reduction of an applicant’s time to submit its bill to an insurance carrier – a defense which must be raised in a timely denial.  Therefore, the fact that proper incorporation may be a “condition precedent” and not an “exclusion” is semantic and has no bearing on whether or not it should be raised in a timely denial.

The fact that a medical provider may have violated a section of the Business Corporation Law before or during treatment for real injuries is irrelevant if the insurer or self-insured failed to raise it in a timely denial of claim, so long as there was coverage at the time of the accident.  Similarly, a provider that violates a section of the Penal Law is also entitled to recover no-fault benefits if the defense is not properly preserved. Clearly, acts by a medical provider, whether providing phantom services or being improperly incorporated, do not implicate a coverage matter and therefore do not fall within the “exceptional exemption.”

Conclusion

In light of the recent decision in Fair Price, the “exceptional exemption” to the preclusion rule set forth in Chubb has effectively been restored to its original form.  The resulting implications for insurers is potentially devastating, as defenses not based upon “pure coverage” that were once ruled to be non-waivable may now be precluded if Fair Price is determined to impliedly abrogate lower court decisions.  Despite insurers’ successful efforts to expand the number of allowable exceptions – this may have been in vain – the New York Court of Appeals has demonstrated an implied intent to quash any decisions which do not comport with its ruling in Fair Price.  In doing so, the Court of Appeals has underscored the purpose of no-fault reform, which is to provide “prompt compensation for losses incurred by accident victims without regard to fault or negligence and to reduce the burden on the courts.”[26]


[1] Presbyterian Hospital in the City of New York v. Maryland Casualty Company, 90 N.Y.2d 274 (1997).

[2] Fair Price Medical Supply Corp. v. Travelers Insurance Co., 10 N.Y.3d 556 (2008)

[3] Central General Hospital v. Chubb Group of Insurance Companies, 90 N.Y.2d 195 (1997).

[4] Id.; See also, Jaffe, Michael D. and Tucker, Daniel J. “Meeting No Fault’s Prima Facie Burden.”New York Law Journal. (December 29, 2000).

[5] State Farm Mut. Auto Ins. Co. v. Mallela, 4 N.Y.3d 313 (2005).

[6] Presbyterian Hospital in the City of New York v. Maryland Casualty Company, 90 N.Y.2d 274 (1997).

[7] Id. at 285

[8] Id.

[9] Central General Hospital v. CHUBB Group of Insurance Companies, 90 N.Y.2d 195 (1997).

[10] Id. at 200.

[11] Fair Price, supra at 565.

[12] See generally, 11 NYCRR 65-3.11[a]; See also, Rockaway Blvd. Medical P.C. v. Progressive Ins., 9 Misc.3d 52 (App Term 2nd and 11th Jud. Dists. 2005); Craig Antell, DO v. New York Central Mut. Fire Inc. Co., 11 Misc.3d 137(A) (App. Term 1stDept. 2006);

[13] Rockaway Blvd., supra at 54.

[14] 11 NYCRR 65-3.11[a]

[15] See generally, N.Y. Ins. Law §5102 (Emphasis added.)

[16] Fair Price, supra at 564.

[17] State Farm Mut. Auto Ins. Co. v. Mallela, 4 N.Y.3d 313 (2005).

[18] See generally, A.B. Medical Servs. PLLC v. Utica Mut. Ins. Co., 11 Misc.3d 71 (App. Term 2nd and 11th Jud. Dists. 2006).

[19] Id.

[20] Fair Price Medical Supply Corp. v. Travelers Insurance Co., 42 A.D.3d 277 at 284 (2nd Dept. 2007), aff’d 10 N.Y.3d 556 (2008).

[21] Id.

[22] Eastern Medical, P.C. v. Allstate Ins. Co., 19 Misc.3d 775 (N.Y. Dist. Ct. 2008)

[23] It is important to note that the Eastern Medical was decided based upon the Appellate DivisionFair Price decision and not the recent Court of Appeals affirmance.

[24]State Farm Mut. Auto Ins. Co. v. Mallela, 4 N.Y.3d 313 (2005) (“On this certified question from the United States Court of Appeals for the Second Circuit, we are asked whether, under our “no-fault” insurance laws ( see Insurance Law § 5101 et seq. and implementing regulations), insurance carriers may withhold payment for medical services provided by fraudulently incorporated enterprises to which patients have assigned their claims.”).

[25] Marsh v. Prudential Securities, Inc., 1N.Y.3d 146 (2003).

[26] Matter of Medical Society of State of N.Y. v. Serio, 100 N.Y.2d 854 (2003).

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