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,