A declaratory judgment to nowhere

In New York no-fault insurance litigation, insurers have increasingly turned to declaratory judgment actions as a strategy to resolve coverage disputes in Supreme Court rather than defending individual claims in Civil Court. The typical approach is straightforward: the insurer commences a declaratory judgment action naming the injured party (the assignor) and sometimes the medical providers (the assignees), seeking a judicial declaration that the insurer has no obligation to pay benefits arising from a particular accident. When executed properly, a favorable declaratory judgment can have preclusive effect on related no-fault actions.

But the strategy has a critical vulnerability. A declaratory judgment action must actually declare the rights of the parties it seeks to bind. When an insurer obtains a default judgment against only the assignor — the injured patient — while the medical provider has separately appeared and defended, the resulting order does not adjudicate the provider’s rights. And a judgment that does not determine a party’s rights cannot preclude that party from litigating those rights in a subsequent action. The Appellate Term’s decision in Jamaica Wellness Med., P.C. v Mercury Cas. Co. illustrates this principle in stark terms.

Case Background

Jamaica Wellness Medical, P.C. commenced a no-fault action in Civil Court, Kings County, to recover assigned first-party benefits for treatment provided to its assignor, Shantall Smith. Meanwhile, Mercury Casualty Co. had brought a declaratory judgment action in Supreme Court, Nassau County, against Jamaica and its assignor, among others, seeking a declaration that Mercury had no duty to provide coverage for claims arising from the accident at issue.

Jamaica served an answer in the Supreme Court declaratory judgment action, but its assignor — Smith — did not appear. Mercury then moved under CPLR 3215 for a default judgment against the non-appearing assignor. The Supreme Court granted the unopposed motion, entering a default judgment against Smith alone. Armed with this order, Mercury moved in Civil Court to dismiss Jamaica’s no-fault action, arguing that the Supreme Court’s order barred Jamaica’s claims under the doctrine of res judicata.

The Civil Court agreed with Mercury and dismissed Jamaica’s complaint. Jamaica appealed.

Jason Tenenbaum’s Analysis:

Jamaica Wellness Med., P.C. v Mercury Cas. Co., 2018 NY Slip Op 51128(U)(App. Term 2d Dept. 2018)

Upon a review of the record, we find that, as the March 23, 2016 Supreme Court order in the declaratory judgment action merely awarded a default judgment to Mercury against Jamaica’s assignor, but did not declare the rights of Mercury as against Jamaica (see Hirsch v Lindor Realty Corp., 63 NY2d 878 ; Suburban Bindery Equip. Corp. v Boston Old Colony Ins. Co., 150 AD2d 767 ; Metro Health Prods., Inc. v Nationwide Ins., 48 Misc 3d 85), the Supreme Court order cannot be considered a conclusive final determination of Jamaica’s rights and, thus, can have no preclusive effect on the no-fault action at bar (see Promed Orthocare Supply, Inc. v AIG Advantage Ins. Co., 50 Misc 3d 128, 2015 NY Slip Op 51886 ; cf. Vital Meridian Acupuncture, P.C. v Republic W. Ins. Co., 46 Misc 3d 147, 2015 NY Slip Op 50222 ; EBM Med. Health Care, P.C. v Republic W. Ins., 38 Misc 3d 1 ). Consequently, the Civil Court should not have dismissed the complaint based on the Supreme Court order. In light of the foregoing, we reach no other issue.

This embarrassment speaks for itself.

The Court’s Reasoning

The Appellate Term’s reversal rests on a bedrock principle of New York preclusion law: a judgment can only bind the parties whose rights were actually adjudicated. The court relied on the Court of Appeals decision in Hirsch v Lindor Realty Corp. (63 NY2d 878), which holds that for a judgment to have preclusive effect, it must constitute a “conclusive final determination” of the rights of the party sought to be bound. A default judgment against the assignor — who never appeared and whose rights were never litigated on the merits — says nothing about the rights of the provider, which are derived from but legally distinct from the assignor’s rights through the assignment of benefits.

The distinction matters because medical providers who accept no-fault assignments step into the shoes of the assignor only with respect to the right to receive payment for services rendered. The provider is a separate legal entity with its own standing to litigate. Mercury named Jamaica in the declaratory judgment action, Jamaica answered, and yet the Supreme Court order addressed only the defaulting assignor. This left Jamaica’s rights entirely undetermined — and an undetermined right cannot be precluded.

Practical Implications

For insurers pursuing declaratory judgment strategies, this case is a cautionary tale. Obtaining a default judgment against a non-appearing assignor is not sufficient to preclude the medical provider’s separate no-fault action. To achieve preclusive effect against the provider, the insurer must either obtain a judgment on the merits against the provider in the declaratory judgment action or, at minimum, secure a default judgment that specifically addresses the provider’s rights.

For medical providers and their attorneys, Jamaica Wellness reinforces the importance of appearing and answering in any declaratory judgment action — but also demonstrates that even when the insurer obtains a default against the assignor, the provider’s independent claims survive. Counsel should be prepared to oppose any motion to dismiss based on a declaratory judgment by examining whether the judgment actually determined the provider’s rights, as opposed to merely adjudicating the assignor’s default.

Key Takeaway

A default judgment in a declaratory judgment action against the assignor alone does not determine the medical provider’s rights and cannot preclude the provider’s separate no-fault action. Insurers who rely on such judgments to dismiss provider claims will find, as Mercury did, that the declaratory judgment leads nowhere.

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