So what happened in Carothers?

Understanding Professional Corporation Control in New York No-Fault Insurance Law

The Andrew Carothers, M.D., P.C. v Progressive Ins. Co. case, decided in 2019 (NY Slip Op 04643), represents a crucial turning point in New York’s approach to professional corporation licensing violations and their impact on no-fault insurance reimbursements. This landmark decision clarified when insurance carriers can deny payment based on corporate structure violations, setting important precedents for healthcare providers throughout New York and Long Island.

The Facts: A Textbook Case of Corporate Control Violations

The facts in Carothers were particularly egregious and provide a clear example of what constitutes improper control of a professional corporation. Dr. Carothers established a medical professional corporation, but the evidence revealed that he received no compensation while lay persons Sher and Vayman controlled the corporation’s finances and pocketed the profits. Medtrex appeared to serve as the factoring company in this arrangement.

This type of arrangement would be permissible in Florida, where state law allows lay person ownership with proper medical director oversight. However, New York and New Jersey maintain stricter requirements mandating that professional corporations remain under physician ownership and control.

Legal Framework: Professional Corporation Licensing Requirements

New York’s Professional Corporation Standards

Under New York law, professional corporations must be controlled by licensed professionals in the relevant field. This foundational requirement serves multiple purposes:

• Ensuring professional standards and ethics remain paramount
• Preventing commercial interests from overriding medical judgment
• Maintaining the integrity of the professional-patient relationship
• Protecting against fraudulent billing practices

No-Fault Insurance Reimbursement Eligibility

Under 11 NYCRR 65-3.16(a)(12), providers must maintain proper licensing and incorporation to remain eligible for no-fault insurance reimbursements. The Carothers decision clarified that material violations of these foundational requirements can result in ineligibility without requiring proof of traditional common-law fraud elements.

The Court of Appeals Decision: Key Legal Holdings

Burden of Proof Clarification

The Court of Appeals made several important rulings that affect how similar cases will be litigated:

First, the court declined to address the negative inference issue raised by Judge Solomon’s initial dissent regarding Sher and Vayman’s Fifth Amendment pleadings. While the court appeared inclined to resolve this in favor of insurance carriers, they ultimately chose not to establish precedent on this specific issue.

Second, the court established that insurance carriers do not need to prove common-law fraud when challenging reimbursements based on licensing violations. As stated in the decision: “A corporate practice that shows ‘willful and material failure to abide by’ licensing and incorporation statutes may support a finding that the provider is not an eligible recipient of reimbursement under 11 NYCRR 65-3.16(a)(12) without meeting the traditional elements of common-law fraud.”

Material Breach Standard

The court emphasized the distinction between minor regulatory violations and material breaches of foundational licensing requirements. The decision states: “Insurance carriers do not have good cause to delay or deny payments of reimbursement claims on the basis of a provider’s slight divergence from licensing requirements. Here, the jury’s finding that plaintiff was in material breach of the foundational rule for professional corporation licensure — namely that it be controlled by licensed professionals — was enough to render plaintiff ineligible for reimbursement under 11 NYCRR 65-3.16(a)(2).”

Control vs. Fee-Splitting: A Critical Distinction

Beyond Simple Fee-Sharing Arrangements

The Carothers court made a crucial distinction between improper fee-splitting and actual corporate control. Previous decisions like Matter of Allstate Prop. & Cas. Ins. Co. v New Way Massage Therapy P.C. held that fee-sharing arrangements alone do not constitute a defense to no-fault actions. However, Carothers involved something more substantial.

As the court explained: “The jury in this case determined that plaintiff was controlled by unlicensed persons, rather than merely splitting fees with them. Control of a professional corporation by nonprofessionals violates foundational New York licensing requirements and rendered plaintiff ineligible for insurer reimbursement.”

Implications for Healthcare Providers

This distinction creates important guidance for healthcare providers and their legal counsel:

• Simple profit-sharing arrangements may not trigger reimbursement denials
• Actual control by non-licensed individuals presents serious legal risks
• Documentation of proper corporate governance becomes crucial
• Regular compliance audits can prevent costly litigation

Practical Impact on No-Fault Practice

Insurance Carrier Defense Strategies

The Carothers decision provides insurance carriers with a powerful tool for challenging questionable provider arrangements. Carriers now have clearer guidance on when they can legitimately deny reimbursements based on corporate structure violations without needing to prove fraud.

Provider Compliance Considerations

Healthcare providers must ensure their corporate structures comply with New York’s professional corporation requirements. Key compliance areas include:

• Maintaining licensed professional ownership and control
• Documenting decision-making processes
• Ensuring compensation structures reflect professional oversight
• Regular legal review of corporate arrangements

Unresolved Questions and Future Implications

The Raia Case Complication

The Carothers decision raises questions about the viability of cases like Liberty Mut. Ins. Co. v Raia Med. Health, P.C., where the Second Department held that Education Law violations could justify withholding compensation even when the clinic owner was a physician in good standing who simply couldn’t read diagnostic films.

This creates potential inconsistency in how courts apply 11 NYCRR 65-3.16(a) – whether it’s purely about the Mallela standard of material licensing violations or encompasses broader regulatory compliance issues.

Need for Additional Guidance

Legal practitioners in the no-fault insurance arena need clearer guidance on how courts will apply the Carothers standard to various fact patterns. The decision’s emphasis on “material breach of foundational rules” suggests a case-by-case analysis that may create uncertainty in marginal cases.

Best Practices for Healthcare Providers

Corporate Structure Review

Healthcare providers should regularly review their corporate structures with qualified legal counsel to ensure compliance with New York’s professional corporation requirements. This review should include:

• Ownership structure documentation
• Decision-making authority verification
• Financial control mechanisms
• Professional oversight procedures

Documentation and Record Keeping

Proper documentation becomes crucial for defending against reimbursement challenges. Providers should maintain clear records showing:

• Professional oversight of business operations
• Appropriate compensation structures
• Compliance with licensing requirements
• Regular board resolutions and corporate actions

Frequently Asked Questions About Professional Corporation Control

What constitutes “control” of a professional corporation under New York law?

Control involves more than simple profit-sharing or fee arrangements. It includes decision-making authority over business operations, financial control, and the ability to direct the corporation’s activities. The Carothers case established that when unlicensed individuals exercise actual control over a professional corporation’s operations and finances, this violates foundational licensing requirements.

Can insurance carriers deny all claims from a practice with corporate control violations?

Yes, under the Carothers standard, material violations of foundational licensing requirements can render a provider ineligible for no-fault insurance reimbursements. However, the violation must be material and involve foundational requirements rather than minor regulatory deviations.

How does this affect existing provider arrangements with factoring companies or management companies?

Providers must carefully structure relationships with third parties to ensure licensed professionals maintain ultimate control over the professional corporation. While administrative and financial services can be outsourced, decision-making authority and corporate control must remain with licensed professionals.

What should providers do if they receive a reimbursement denial based on corporate structure issues?

Immediate legal consultation is essential. The provider should gather all corporate documentation, review decision-making processes, and assess whether the arrangement truly involves improper control by unlicensed individuals. If the structure is legally compliant, vigorous defense may be warranted.

Are there safe harbors or best practices to avoid these issues?

Yes, providers should ensure licensed professionals maintain ownership, document proper corporate governance, maintain decision-making authority over professional matters, and regularly review arrangements with qualified legal counsel familiar with New York professional corporation law and no-fault insurance requirements.

Contact a New York No-Fault Insurance Attorney

The Carothers decision significantly impacts how no-fault insurance claims are evaluated and defended in New York. Healthcare providers facing reimbursement challenges based on corporate structure issues need experienced legal representation to protect their interests and ensure compliance with evolving legal standards.

If you’re a healthcare provider dealing with no-fault insurance reimbursement disputes or need guidance on professional corporation compliance, our experienced legal team can help. We understand the complex interplay between professional licensing requirements and no-fault insurance law, and we’re here to protect your practice’s financial interests.

Call 516-750-0595 for a free consultation with our New York no-fault insurance attorneys.

Legal Update (February 2026): Since this 2019 analysis of professional corporation control requirements under 11 NYCRR 65-3.16, the Department of Financial Services has issued multiple regulatory amendments and guidance updates affecting corporate structure compliance standards. Additionally, subsequent court decisions may have refined the precedential impact of the Carothers ruling on no-fault reimbursement denial criteria. Practitioners should verify current provisions of 11 NYCRR 65-3 and review recent case law developments when advising on professional corporation compliance issues.