Priority of payment – an extended discussion

Alleviation Med. Servs., P.C. v Allstate Ins. Co., 2017 NY Slip Op 27097

This is a really important issue and I will give an extended discussion in this post about the policy exhaustion issue before discussing the impact of Alleviation on this issue.

The bean counters have told me that the average amount that is paid upon a no-fault claim  is between $11,000-$13,000.  That amount creeps up at the rate of inflation.  The New Jersey game and the necessity of a surgery to occur before an insurance company will authorize an indemnity payment in excess of $25,000, less comparative negligence, has placed upward pressure on aggregate first-party claim payouts.  Some can blame the insurance carriers on the third-party side for creating this first-party monster.  Others will blame opportunistic Plaintiffs for trying to create a 6 figure settlement or jury verdict from a motor vehicle accident involving delta forces equal to the act of mastication.   I really have no opinion (or one I will publicly share); I express this opening to give you some thoughts as to why $50,000 PIP policies exhaust more frequently than they really should.

With policy exhaustion comes the tension between the law stating that an insurance carrier should never have to pay more than the agreed upon policy limits and the priority of payment regulation which, taken at face value, invites policies to offer more coverage than the amount that is contracted.

For those unaware, the priority of payment regulation requires no-fault payments to be made in the order a bill is received.  For billing received on the same date, priority is for earlier dates of service.  Through Court of Appeals case law a decade ago, a bill is deemed received when it is fully verified, i.e., the latter of receipt or when timely and proper verification is received.  Bills must be paid in priority order: first come, first serve.  The case law penalty for the failure to pay bills in the order of receipt is to be forced to pay more than the contracted for policy amount.  The Court of Appeals in  Nyack Hosp. v General Motors Acceptance Corp.,8 NY3d 294 (2007)  compelled GMAC to pay over policy due to the holding up of funds under the basic PIP policy prior to receipt of the OBEL election.   The Appellate Division expressly held in another matter that the failure to follow the priority of regimen mandates insurance carriers to pay more than the policy.  Mount Sinai Hosp. v. Dust Transit Inc. 104 AD3d 823 (2d Dept. 2013).

To explain this another way, if an insurance carrier pays bills “out of line”, the insurance carrier runs the risk of exceeding the applicable coverage limits.  This is because when a policy exhaustion defense is presented, the existence of coverage on a disputed bill is looked at through the vantage point of how much coverage is available on the policy when the bill was received or fully verified.

Now, assuming the disputed bill was not properly handled, i.e., untimely denied, defectively denied, not denied, or denied on a completely and wholly meritless defense, the courts and the insurance department will not engender sympathy to the insurance carrier who dropped the ball.

However, the Appellate Term First Department in Harmonic Physical Therapy, P.C. v Praetorian Ins. Co., 47 Misc 3d 137(A)(App. Term 1st Dept. 2017),  created what I classified as a very limited safe-harbor provision to the priority of payment regulation.  In essence, an insurance carrier that timely denies a bill on the basis of lack of medical necessity will be granted a safe-harbor from the priority of payment regulation.  This makes sense.  An insurance carrier that legitimately disputes a billing should not be placed in an all or nothing position. If anything, a medical provider or injured person who receives this type of disclaimer should quickly challenge the disclaimer, since it is only the insured, putative insured or their assignee who will sustain a policy exhaustion defense should they they sit on their rights.  And quickly challenge does not mean filing a lawsuit in a venue where it will take 3-6 years to have a case fully adjudicated.

Harmonic makes sense as it accomplishes two things.  First, it ensures that an insurance carrier that fails to properly handle a claim will feel the swift consequences of a law that is narrowly construed and inures to the benefits of the injured person and their assignee.  Second, it allows an insurance carrier to properly medically manage billings without having to worry about paying more than the contacted policy coverage amounts.

Harmonic strikes a balance that we all can live with, although begrudgingly.  The insurance carrier who properly trains their claims handlers and properly manages the claims will not feel the knife being plunged into their back should the billings exceed the amount of contracted coverage.  Yet, the insurance carrier  who fails to timely and properly deny bills will be unhappy that they will have to pay an amount in excess of the applicable coverage limits.  This is a compromise that fits within the spirit of no-fault law and basic contract law.

The consumer can live with the fact that an insurance carrier that is negligent and fails to properly handle the claims will  have to pay all disputed billings.   Yet, a consumer will be unhappy that all of their treatments are not being paid because they were under the belief when they received their 6 month EOB that more money was left on the policy than what was there in reality.

This now brings me to Alleviation, which states the following:

In Nyack Hosp. v General Motors Acceptance Corp. (8 NY3d 294 [2007]), the Court of Appeals, noting that no-fault benefits are overdue if not paid within 30 calendar days after receipt of a fully complete claim, held that the word “claims,” as used in 11 NYCRR 65-3.15, the priority-of-payment regulation, does not encompass claims that are not yet complete because they have not been fully verified in accordance with 11 NYCRR 65-3.5 (b). In contrast, in the instant case, by denying the claim on May 10, 2011, defendant implicitly declared that the claim at issue was fully verified. As we read Nyack Hosp. to hold that fully verified claims are payable in the order they are received (see 11 NYCRR 65-3.8 [b] [3]; 65-3.15; Nyack Hosp., 8 NY3d 294), defendant’s argument—that it need not pay the claim at issue because defendant paid other claims after it had denied the instant claim, which subsequent payments exhausted the available coverage—lacks merit (see 11 NYCRR 65-3.15; cf. Nyack Hosp., 8 NY3d 294; but see Harmonic Physical Therapy, P.C. v Praetorian Ins. Co., 47 Misc 3d 137[A], 2015 NY Slip Op 50525[U] [App Term, 1st Dept 2015]). Consequently, defendant has not established its entitlement to summary judgment dismissing the complaint.

The facts here were that the billing was timely denied on the basis that the services lacked medical necessity.  The insurance policy subsequently exhausted.  The Court explicitly did not apply the case-law created safe-harbor provision for billings timely and properly denied on lack of medical necessity.

I think Alleviation is incorrect from a policy standpoint.  I sense that if the Appellate Division, Second Department grants leave, they will be constrained to affirm.  The law from the Second Department, especially the Dust case, suggests that there is no safe-harbor provision to be read into the priority of payment regulation.  With that said, I wonder if leave will even be granted when Allstate makes it motion to the Appellate Term and later to the Appellate Division, Second Department?

At the end of the day, the ball is going to be in the Department of Financial Services’ Court to fix what I think is an unintended reading of the priority of payment regulation,

Exhaustion of benefits – strict priority of payment regimen is somewhat abrogaded

Harmonic Physical Therapy, P.C. v Praetorian Ins. Co., 2015 NY Slip Op 50525(U)(App. Term 1st Dept. 2015)

“The defendant-insurer made a prima facie showing of entitlement to summary judgment dismissing the action for first-party no-fault benefits.  The evidentiary proof submitted by defendant established that, following the timely denial of plaintiff-provider’s claim on the ground of lack of medical necessity, the governing insurance policy’s coverage limits had been exhausted through payment of no-fault benefits in satisfaction of arbitration awards rendered in favor of other health care providers, and that such payments were made in compliance with the priority of payment regulation (see 11 NYCRR 65-3.15; Nyack Hosp. v General Motors Acceptance Corp., 8 NY3d 294 [2007]; New York and Presbyt. Hosp. v Allstate Ins. Co., 28 AD3d 528 [2006]).

In opposition, plaintiff failed to raise a triable issue. Contrary to plaintiff’s contention, defendant was not precluded by 11 NYCRR 65-3.15 from paying other providers’ legitimate claims subsequent to the denial of plaintiff’s claims.  Adopting plaintiff’s position, which would require defendant to delay payment on uncontested claims, or, as here, on binding arbitration awards – pending resolution of plaintiff’s disputed claim – “runs counter to the no-fault regulatory scheme, which is designed to promote prompt payment of legitimate claims” (Nyack Hosp. v General Motors Accept. Corp., 8 NY3d at 300).”

This case stands for the proposition that if you timely and properly handle claims but later have to pay out billing where the denials are vacated causing the policy to exhaust, then you maintain your policy exhaustion defense for the timely and properly denied claims.  It is a proposition of law with which various master arbitrators agree.  It also makes sense since penalizing an insurance carrier for timely and proper claims handling is antithetical to common sense and logic.  And, congratulations to Maureen Knodel (drafter of the brief) and Kevin Glynn (argued it) from Moira Doherty’s office for a great result.

The First Department on Madison Avenue says no dice to Geico

M.N. Dental Diagnostics, P.C. v Government Employees Ins. Co., 2011 NY Slip Op 01333 (1st Dept. 2011)

The Appellate Division, First Department, in an appeal by permission from the Appellate Term, First Department, affirmed the order of the Civil Court, which found that: (a) priority of payment is not a coverage issue; and (b) disputes in this regard must be resolved through intercompany arbitration.  This decision was correctly decided and, actually, benefits the defense bar as much as the plaintiffs bar.  Why you ask?

Well, have you ever been third-partied by Geico?  My clients have.  Exactly – CPLR 3211(a)(7) – see you later.

Finally, I must conclude by congratulating Steven Neuwirth, from Baker, Sanders, Barshay, Fass, Muhlstock & Neuwirth.  Not only did he defeat me in A&A Dental v. State Farm, but he is now the case citation on priority of payment.

A garage policy which insures a temporary substitute is not on the hook for liability coverage (and possibly PIP)

The Fourth Department – yes the same Justices who told us that collateral estoppel does not apply to arbitration decisions (see, In re Falzone, 64 AD3d 1149 [4th Dept. 2009])- released a really interesting opinion today.  Progressive Cas. Ins. Co. v Harco Natl. Ins. Co., 2010 NY Slip Op 01282 (4th Dept. 2010).  The facts are simple.  Tortfeasor receives a loaner vehicle and gets into accident.  Accident victim sues tortfeasor.  Tortfeasor has insurance through Progressive on a family vehicle.  Harco insures the temporary substitute.

Forget the competing excess and primary liability clauses in the insurance contracts for a minute.  That is what the Appellate Division wants us to think this case is about. The question I have is more fundamental and does not rely on contractual interpretation or the admissibility of parol evidence.  Namely, which insurance carrier should be deemed primary as to liability coverage and presumptively no-fault coverage?  Elrac Inc. v. Ward, 96 NY2d 58 (2001) would suggest that Harco should be primary.  Well, you would be wrong so says the Fourth Department.  Not only is Harco not primary but: “[F]inally, because the Harco policy does not provide coverage for the Webb defendants, there is no merit to Progressive’s contention that Harco had a duty to provide a timely disclaimer for the subject accident (see State Farm Mut. Auto. Ins. Co. v John Deere Ins. Co., 288 AD2d 294, 297). Thus, [*3]even assuming, arguendo, that the written disclaimer provided by Harco was insufficient, we conclude that “the failure to disclaim coverage does not create coverage which the policy was not written to provide” (Zappone v Home Ins. Co., 55 NY2d 131, 134).

We thus conclude that the Progressive policy provides primary coverage for the subject accident and that Harco is not obligated to defend or indemnify the Webb defendants in the underlying action.”

Perhaps the no-fault endorsement of the garage policy should be read differently from the remainder of the garage policy since it is separate and distinct from the underlying liability policy.  Utica Mut. Ins. Co. v Timms , 293 AD2d 669, 670 (2d Dept. 2002).  Also, since this is a garage policy and not a standard liability policy, maybe we can avoid the ultimate PIP primacy issue that I see here.  But, I cannot help but think that priority of payment litigation involving rental cars is going to arise again.  This time, however, the rental car company is going to say that their contract supersedes 65-3.12.  But see, M.N. Dental Diagnostics, P.C. v. Government Employees Ins. Co., 24 Misc.3d 43 (App. Term 1st Dept. 2009); SZ Medical, P.C. v. Lancer Ins. Co., 7 Misc.3d 86 (App. Term 2d Dept. 2005).  Could this decision somehow be related to the “Graves Amendment”.  See, 49 USC sec 30106.

Needless to say, I am confused right now.