Arbitration or Litigation of No-Fault Insurance Disputes: The Second Circuit SpeaksJuly 7, 2014 | |
Insurance companies in New York continue to expend considerable time and effort to fight no-fault automobile insurance fraud. Toward that end, one of the most effective tools is the filing of lawsuits in federal court against health care providers who have received payment for services they contend they have provided to injured policyholders. As has been noted before in this column, carriers claim that the payments were wrongfully paid due to the improper conduct of the health care providers and assert a broad range of causes of action to recover the monies, including under the federal Racketeer Influenced and Corrupt Organizations Act (“RICO”), which authorizes private civil causes of action for fraud to be brought against corrupt organizations, and common law theories of fraud and unjust enrichment, among others.
Recently, defendants in these actions have responded by seeking to compel arbitration. They base their arguments on policy language, state regulations, and the Federal Arbitration Act (“FAA”). Generally speaking, the federal district courts in New York that have been faced with this issue have refused to compel arbitration and have permitted the insurers’ lawsuits to proceed in court.
Now, for the first time, the U.S. Court of Appeals for the Second Circuit has weighed in. In Allstate Ins. Co. v. Mun, an action in which an insurance company sought to recover payments it previously made to two health care providers on the ground that they had engaged in insurance fraud, the Second Circuit, in an opinion by Judge Dennis Jacobs, affirmed the decision by Chief Judge Carol Bagley Amon of the Eastern District of New York rejecting the defendants’ request to arbitrate the insurance company’s claims.
The circuit court’s ruling in Mun did not directly address all of the various contexts in which a health care provider sued in an insurance fraud action might seek arbitration. As such, the issue will continue to percolate among the district courts for the foreseeable future.
New York’s no-fault law provides that an insurer must pay up to $50,000 to cover necessary health expenses for each “covered person” under a “policy of liability insurance issued on a motor vehicle.” A covered person may assign his or her no-fault benefit rights to qualified health care providers, who then are able to seek payment directly from the assignor’s insurer.
In Mun, Allstate Insurance Company alleged that the defendants, Dr. David Mun and Nara Rehab Medical, P.C., had billed it about $500,000 for “electrodiagnostic testing” purportedly performed on covered persons between October 2007 and October 2011. Because Allstate generally is required to process each no-fault claim within 30 days of submission, or be barred from asserting defenses in any subsequent suit or arbitration, Allstate said that it relied on the defendants’ documentation and reimbursed the claims promptly.
Thereafter, Allstate brought a lawsuit against the defendants. In that action, Allstate asserted that, after it had paid the claims submitted by the defendants, it had discovered that the defendants had fraudulently billed it for testing that was fabricated or of no diagnostic value. The insurer sought recovery under theories of common law fraud and unjust enrichment, and under RICO. The defendants moved to compel Allstate to arbitrate.
Chief Judge Amon York denied the defendants’ motion, ruling that they had a right to arbitrate as-yet unpaid claims, but not claims that had been timely paid. The defendants appealed.
Second Circuit’s Decision
In its decision, the circuit court explained that Insurance Law Section 5106(b), like the policies’ arbitration provisions, appears “broad,” providing a right to arbitrate “any dispute involving the insurer’s liability to pay first party benefits.” However, the Second Circuit continued, Section 5106(b) provides an arbitration right only to a “claimant” embroiled in a “dispute involving the insurer’s liability to pay first party benefits.”
It then explained that the defendants were “claimants” (as assignees) for “first party benefits” when they submitted their claims, and that if Allstate had disputed those claims without paying them promptly, disputes contemplated by the statute would have arisen and they could have been arbitrated at the defendants’ insistence. Allstate, however, had paid the defendants’ claims in full. Accordingly, the circuit court reasoned, in Allstate’s lawsuit alleging fraud, the defendants were no longer “claimants” asserting a right to first party benefits, and there was no “dispute involving the insurer’s liability to pay first party benefits.” The Second Circuit ruled that the parties’ dispute involved “the medical provider’s liability to the insurer, under a fraud theory, for what the provider already recovered in the claims process” and not a claimant’s right to first party benefits.
The Second Circuit further observed that because Section 5106(b) referred to Section 5106(a), which requires that payments of first party benefits “be made as the loss is incurred” and that those payments become “overdue if not paid within thirty days after the claimant supplies proof of the fact and amount of loss sustained,” Section 5106(b)’s arbitration right applied “only to disputes arising from the insurer’s non-payment during the initial 30-day claims process, not to insurer fraud suits brought later.”
In broad language, which may be interpreted to signal a stronger message as to the inapplicability of arbitration to no-fault fraud disputes in general, the Second Circuit stated, “[c]omplex fraud and RICO claims, maturing years after the initial claimants were fully reimbursed, cannot be shoehorned into this system,” and “[a]llowing the providers to elect arbitration in these actions would also undercut anti-fraud measures that the New York legislature encouraged.”
Arbitration of Other Claims
A variety of other aspects of this type of insurance fraud litigation brought by insurance carriers against providers have been extensively considered in the district courts, all of which would seem to fall within the Second Circuit’s “shoehorned” comment. For instance, they frequently include an insurer’s efforts to recoup money from past no-fault bills that it paid in full (as Allstate sought in Mun); efforts to recoup money from past no-fault bills that an insurer partially paid; and a declaration that unpaid no-fault bills that are the subject of pending state court litigation initiated by the provider need not be paid.
When providers seek to compel arbitration of these types of claims, district courts have rejected them for a variety of reasons. The district courts have found no distinction between an insurer’s efforts to recoup money from bills paid in full or in part, and have ruled that providers have waived their right to arbitrate by electing to litigate disputes over unpaid bills in court or that judicial economy warranted a stay of state court litigations during the pendency of the federal suit.
Another issue often arises because of the mandatory counterclaim provisions of Federal Rule of Civil Procedure 13. Providers who are sued for insurance fraud may file counterclaims seeking payment of unpaid bills, and then will seek to compel arbitration of those counterclaims. One district court, in Allstate Ins. Co. v. Elzanaty, has ruled that arbitration of those counterclaims was appropriate – but it then enjoined arbitration, finding that any judgment it would issue would be “severely threaten[ed]” if there were pending arbitrations or future arbitrations that could result in inconsistent rulings with respect to the provider’s eligibility for reimbursement of no-fault insurance payments.
The court in Elzanaty stated that under the “complicated procedural facts” presented to it, it could not find that Section 5106(b) intended, or that the notions underlying the FAA permitted, “the haphazard and contradictory concurrent flow of litigation and arbitration that appears here.” Therefore, it granted the insurers’ motion to temporarily stay the pending arbitrations and to temporarily enjoin the defendants from filing any additional arbitrations pending resolution of the federal lawsuit.
Insurance companies that assert that health care providers have engaged in sophisticated schemes to fraudulently obtain insurance proceeds that were supposed to pay for medical services for people injured in automobile accidents are making a strong effort to limit the harm that insurance fraud causes. Permitting whole actions to be litigated in federal court certainly helps to expedite resolution of these disputes, without impinging on the arbitration rights provided by the no-fault law itself. Given its decision in Mun, one can hope, and perhaps even expect, that the Second Circuit, if it ultimately is faced with the arbitrability of other portions of insurance company fraud litigation against providers, would agree.
 18 U.S.C. § 1964(c).
 See, e.g., Evan H. Krinick, “Court Validates Another Tool for Insurers in Fight against No-Fault Fraud,” NYLJ, May 3, 2013; Evan H. Krinick, “Anatomy of Massive No-Fault Insurance Fraud Alleged by Government,” NYLJ, May 4, 2012; Evan H. Krinick, “Courts Weigh Arbitration of No-Fault Claims,” NYLJ, March 2, 2012; Evan H. Krinick, “Are Statutory Changes To No-Fault Law on the Horizon?,” NYLJ, Nov. 4, 2011; Evan H. Krinick, “Wave of Civil Claims Being Asserted by Insurers Against Alleged Fraud,” NYLJ, Jul. 1, 2011.
 9 U.S.C. § 1 et seq.
 See, e.g., Gov’t Emps. Ins. Co. v. Five Boro Psychological Servs., P.C., 939 F. Supp. 2d 208 (E.D.N.Y. 2013) (Gleeson, J.) (the author’s firm represented the insurance company plaintiffs in this case); Allstate Ins. Co. v. Elzanaty, 929 F. Supp. 2d 199 (E.D.N.Y. 2013) (Spatt, J.); Gov’t Emps. Ins. Co. v. Grand Med. Supply, Inc., No. 11 Civ. 5339 (BMC) (E.D.N.Y. July 4, 2012) (Cogan, J.); Liberty Mut. Ins. Co. v. Excel Imaging, P.C., 879 F. Supp. 2d 243 (E.D.N.Y. 2012) (Weinstein, J.); Allstate Ins. Co. v. Khaimov, No. 11 Civ. 2391 (JG)(JMA) (E.D.N.Y. Feb. 29, 2012) (Gleeson, J.); Allstate Ins. Co. v. Lyons, 843 F. Supp. 2d 358 (E.D.N.Y. 2012) (Gleeson, J.); see also Minute Entry, Allstate Ins. Co. v. Yadgarov, No. 11 Civ. 6187 (PKC)(VMS) (E.D.N.Y. Sept. 10, 2013) (Chen, J.); Minute Entry, State Farm Mut. Auto. Ins. Co. v. Giovanelli, No. 12 Civ. 3398 (NGG)(VMS) (E.D.N.Y. Sept. 21, 2012) (Garaufis, J.).
 No. 13-1424-cv (2d Cir. May 6, 2014).
 N.Y. Ins. Law §§ 5101-5109.
 See N.Y. Comp. Codes R. & Regs. tit. 11, § 65-3.11(a).
 See N.Y. Ins. Law § 5106(a).
 N.Y. Ins. Law § 5106(b) (emphasis added).
 First party benefits are benefits payable to an insured for his or her own injuries or property loss. They can be compared to third party benefits, which are benefits sought by third parties claiming that they were harmed by an insured.
 See, e.g., Government Employees Ins. Co. v. Five Boro Psychological Services, P.C., supra n. 3.
 See, Allstate Ins Co. v. Elzanaty, supra n. 3. See, also, Government Employees Insurance Co. v. Damien, No. 10 Civ. 5409 (E.D.N.Y. Jan. 4, 2011) (granting an order pursuant to Fed. R. Civ. P. 65 enjoining the defendant medical facilities from commencing or prosecuting any future claims against GEICO for no-fault benefits, either through state court proceedings or through arbitration, except as counterclaims to the action, and for an injunction staying any claims then pending in arbitration proceedings between Geico and the defendants, pending resolution of the action).
 New York state courts that have stayed arbitrations under the same facts include Autoone Ins. Co. v. Manhattan Heights Med., P.C., 24 Misc.3d 1228[A], 899 N.Y.S.2d 57 (Table) (N.Y. Sup. Ct. 2009) (“The plaintiffs have shown that the issuance of a preliminary injunction is necessary to prevent the repetitive litigation and arbitration of numerous No Fault claims for reimbursement by medical providers where the insurers raise the same defense of fraudulent incorporation.”); St. Paul Travelers Ins. Co. v. Nandi, 15 Misc.3d 1145[A], 841 N.Y.S.2d 823 (Table) (N.Y. Sup. Ct. 2007) (“in view of the multiplicity of lawsuits and the possible inconsistent outcomes in the absence of an injunction, plaintiff has established the elements of irreparable injury and the balancing of the equities in its favor…. That branch of plaintiff’s motion which seeks a preliminary injunction enjoining the defendants from commencing future lawsuits against Travelers seeking reimbursement of no-fault benefits for acupuncture services pursuant to Insurance Law § 5101 et. seq. and the regulations promulgated thereunder, pending the determination of this action, is granted”).
Reprinted with permission from the July 7, 2014 issue of the New York Law Journal. All rights reserved.