Courts Weigh Arbitration of No-Fault Claims

March 2, 2012 | Appeals | Insurance Coverage

More and more automobile insurance companies seek to combat no-fault insurance fraud by suing health care providers and others for fraudulently obtaining or seeking to obtain benefits[1] under New York’s no-fault law.[2] These lawsuits often combine claims to recover monies paid to the providers with a declaratory judgment action as to claims denied and/or not yet decided.  For the most part, all the various causes of action arise out of the same nucleus of facts. One of the newest areas of contention in these cases:  efforts by medical providers to require that these affirmative insurance company lawsuits be arbitrated rather than litigated.

The issue arises under two provisions of New York’s no-fault law. First, Insurance Law § 5106(b) requires that:

Every insurer shall provide a claimant with the option of submitting any dispute involving the insurer’s liability to pay first party benefits, or additional first party benefits, the amount thereof or any other matter which may arise pursuant to subsection (a) of this section to arbitration pursuant to simplified procedures to be promulgated or approved by the superintendent.[3]

The reference to “subsection (a)” in Insurance Law § 5106(b) is to Insurance Law § 5106(a), which provides that:

Payments of first party benefits and additional first party benefits shall be made as the loss is incurred. Such benefits are overdue if not paid within thirty days after the claimant supplies proof of the fact and amount of loss sustained. If proof is not supplied as to the entire claim, the amount which is supported by proof is overdue if not paid within thirty days after such proof is supplied. All overdue payments shall bear interest at the rate of two percent per month. If a valid claim or portion was overdue, the claimant shall also be entitled to recover his attorney’s reasonable fee, for services necessarily performed in connection with securing payment of the overdue claim, subject to limitations promulgated by the superintendent in regulations.[4]

In mid-February, U.S. District Judge John Gleeson of the Eastern District of New York issued a decision on this arbitration question in Allstate Ins. Co. v. Lyons,[5] a civil action brought by a number of insurance companies, which alleged that the defendants, who were health care providers, had engaged in sophisticated and related schemes to fraudulently obtain insurance proceeds that were supposed to pay for medical services for people injured in automobile accidents. The court’s decision, which included extensive analysis of whether the arbitration clause in § 5106(b) reaches an affirmative suit by insurance companies to claw back money already paid to claimants, resoundingly ruled that it does not, and it rejected the defendants’ efforts to arbitrate those claims.

In a less well-reasoned and significantly briefer portion of the opinion, however, the court compelled arbitration of insurance claims that had not been paid by the insurers. In other words, the court directed the parties to arbitrate the insurers’ claim for a declaratory judgment seeking to avoid liability on the defendants’ pending and unpaid claims.

Whether insurance carrier claims of no-fault fraud must be arbitrated or can be litigated in court where they belong has significant practical ramifications for insurance companies’ efforts to fight insurance fraud. It thus is likely that we will see significant further litigation on this question. Indeed, it very well may take some time for the law on arbitration of these matters to be finally resolved – including, perhaps, a decision by the New York Court of Appeals.


In Lyons, insurance companies asserted claims against a variety of health care providers for violations of the Racketeer Influenced and Corrupt Organizations Act,[6] common law fraud, violations of § 349 of the New York General Business Law, and unjust enrichment.[7] In addition to demands for damages and injunctive relief, the carriers requested a declaration that the defendants had no right to receive payment for any previously denied, pending, or future no-fault claims.  Certain of the defendants moved, among other things, to compel arbitration, arguing that Insurance Law § 5106(b) and the individual insurance contracts governing the allegedly fraudulent billing at issue gave them the unilateral option to resolve the dispute through arbitration.

The court acknowledged that the text of § 5106(b) appeared “broad at first blush,” mandating that insurance companies provide claimants with the opportunity to arbitrate “any dispute” that “involv[es] the insurer’s liability to pay first party benefits.” Read in isolation, the court stated, the language the defendants relied on supported their argument. The court found, however, that the defendants had ignored “crucial additional statutory language.” In particular, the court pointed out that § 5106(b)’s arbitration clause extended to disputes “involving the insurer’s liability to pay first party benefits, or additional first party benefits, the amount thereof or any other matter which may arise pursuant to subsection (a) of [§ 5106].”

As the court explained, the use of the word “other” in defining the residual category of disputes covered by the arbitration clause suggested that each of the preceding categories of disputes also were “matter[s] which may arise pursuant to subsection (a)” of § 5106. Otherwise, the court stated, the word “other” would be superfluous. Thus, the court found, the scope of § 5106(b)’s arbitration clause was “significantly narrower” than the defendants suggested because it was limited to disputes that arose from the requirements of subsection (a).

The court reasoned, therefore, that if subsection (a) had nothing to say about a particular matter, disputes stemming from that matter would fall outside the scope of subsection (b). It then observed that the parallelism of subsections (a) and (b) was both “rational and intuitive.” As the court said, Section 5106 created the “[f]air claims settlement” procedures under New York’s no-fault law: subsection (a) has the rules governing when insurance companies must pay claims for benefits and the potential monetary penalties for nonpayment or untimely payment, and subsection (b), in turn, makes arbitration available for disputes stemming from claims for benefits.

By incentivizing the prompt payment of claims and extending to claimants (or their assignees) the option to arbitrate their disputes, subsections (a) and (b) work in tandem to quickly and efficiently direct no-fault benefits to people injured in automobile accidents, the court observed.[8] Because the speedy resolution of benefits claims depended on both subsections, it was logical that the subsections were congruent, the court reasoned.

The court then pointed out that although there was little case law on the proper scope of subsection (b), the case law on subsection (a) was “uniform and clear,” and the requirements of subsection (a) were not implicated by an affirmative action by an insurer to recover monies previously paid based on allegations of fraud. In particular, the court noted that other courts uniformly have held that subsection (a)’s 30-day rule was inapplicable to affirmative suits to recover monies previously paid, concluding that the 30-day rule did not bar an insurer who had timely paid a claim from later (i.e., outside of the 30-day window) suing the claimant to recoup that payment.[9]

Judge Gleeson therefore held that the rules set forth in subsection (a) were not implicated when an insurer brought a suit to recover payment previously made. Accordingly, any such suit did not involve a dispute that arose under subsection (a), and thus subsection (b)’s arbitration provision was inapplicable to that portion of the complaint in Lyons.[10] The court added that the alternative – interpreting the 30-day rule of subsection (a) to apply to and effectively bar affirmative actions – would “sacrifice too much in the name of efficiency.” Slow-to-detect misconduct “would be irremediable,” a result that the court said was “difficult to reconcile” with Insurance Law § 409, which, it recognized, reflected the goal of combating insurance fraud.[11]

The court also rejected the defendants’ argument that the broad policy favoring arbitration under the Federal Arbitration Act[12] required the court to read any ambiguities in the arbitration clause, insofar as they existed, in favor of arbitration. As the court explained, inasmuch as the contract did no more than incorporate the requisite statutory provision, the intention of the parties was simply to adopt and comply with New York law, and the best construction of subsection (b) excluded from its scope affirmative suits to recover monies previously paid. The court therefore denied the defendants’ motion to compel arbitration of these claims.

Pending or Unpaid Claims

The court reached a different result with respect to the defendants’ motion to compel arbitration with respect to claims that the insurance companies had not paid. Without extended discussion, it simply found that, for those claims, “the obligations set forth in subsection (a) squarely apply. By extension, disputes regarding first-party benefits that arise with respect to those claims are subject to the arbitration clause of subsection (b).” The court then granted the defendants’ motion to compel arbitration “of this limited class of claims.”

The court did not reach the most optimal result in this portion of its ruling. Considerations of judicial economy and the risk of inconsistent results suggest that arbitration of those matters – especially given the court’s refusal to require arbitration of the affirmative claims asserted by the insurers – should not take place. Requiring insurers to defend potentially hundreds of individual collections arbitrations[13] – arising out of the same core facts as the RICO, fraud,  GBL § 349, and unjust enrichment claims they asserted – that could be disposed of with far greater efficiency in the context of the insurers’ lawsuit would waste the time and resources of the parties, the courts, and the arbitrators.

Moreover, the Lyons decision, to the extent that it compels arbitration of pending or unpaid no-fault claims, leads to an anomalous result. For claims where medical providers successfully conceal their fraudulent conduct and carriers pay benefits, the carriers have the right to seek to recover the monies previously paid in court. However, where carriers are not deceived by providers’ misconduct, recognize the fraud, and deny the claims, they open the door for providers to submit the claims to arbitration, where the claims are unlikely to receive the scrutiny that they would in court when considered as part of a larger suit given that arbitrators permit little or no discovery and hearings generally are concluded in 15 minutes. It makes little sense for insurers to discover misconduct promptly if they are afforded less protection from a fraudulent scheme. In essence, courts have incentivized carriers not to find fraud but to pay claims and then go to court.

In analogous situations, where arbitrations have been commenced by medical providers prior to the initiation of an affirmative suit, courts routinely have stayed no-fault arbitrations pending the disposition of affirmative lawsuits and declaratory judgment actions or have consolidated them with declaratory judgment actions.[14] The Lyons court’s decision to deny the defendants’ request to arbitrate the insurers’ affirmative claims suggests that the better result with respect to claims not paid would be to resolve them in court as well or, at a minimum, to stay the arbitrations pending the determination in the court action.



[1] See, e.g., Evan H. Krinick, “Wave of Civil Claims Being Asserted by Insurers Against Alleged Fraud,” NYLJ, Jul. 1, 2011.

[2] N.Y. Ins. Law §§ 5101 et seq.; 11 N.Y.C.R.R. §§ 65 et seq.

[3] N.Y. Ins. Law § 5106(b) (emphasis supplied).

[4] N.Y. Ins. Law § 5106(a).

[5] No. 11-CV-2190 (E.D.N.Y. Feb. 16, 2012).

[6] 18 U.S.C. § 1962(c)-(d).

[7] The decision in Lyons addressed a number of issues relating to the plaintiff insurance carriers’ pleading of violations of the federal RICO, common law fraud, violations of General Business Law § 349, and unjust enrichment.  The district court found that the complaint sufficiently pled all such claims.

[8] See State Farm Mut. Auto. Ins. Co. v. Mallela, 372 F.3d 500 (2d Cir. 2004); certified question answered by State Farm Mut. Auto. Ins. Co. v. Mallela, 4 N.Y.3d 313 (2005).

[9] See, e.g., State Farm Mut. Auto. Ins. Co. v. Liguori, 589 F. Supp. 2d 221 (E.D.N.Y. 2008); State Farm Mut. Auto. Ins. Co. v. CPT Med. Servs., P.C., No. 04 Civ. 5045, 2008 U.S. Dist. Lexis 71156 (E.D.N.Y. Sept. 5, 2008); Allstate Ins. Co. v. Valley Physical Med. & Rehab., P.C., 555 F. Supp. 2d 335 (E.D.N.Y. 2008).

[10] See, also, Progressive Ne. Ins. Co. v. Advanced Diagnostic & Treatment Med., P.C., No. 601112/00 (N.Y. Sup. Ct. July 25, 2001) (finding § 5106(b)’s arbitration clause inapplicable to civil actions for fraud to recover payments for claims under the no-fault law), appeal dismissed 303 A.D.2d 1057 (2003).

[11] See N.Y. Ins. Law § 409 (requiring insurance companies to adopt plans “for the detection, investigation and prevention of fraudulent insurance activities,” including plans for the “initiation of civil actions” based on such investigations).

[12] 9 U.S.C. §§ 1 et seq.

[13] See, e.g., 11 N.Y.C.R.R. § 65-4.2(b) (providing that a claimant shall initiate arbitration by submitting the insurer’s denial of claim form with respect to a discrete claim, together with the claimant’s reasons for contesting the denial of the discrete claim).

[14] See, e.g., GEICO Ins. Co. v. Williams, 2011 N.Y. Slip Op. 30326U (Sup. Ct. Nassau Co. 2011) (in action seeking a declaration that defendants were not entitled to recover no-fault benefits, court stayed pending no-fault arbitrations until declaratory judgment action concludes “in the interests of judicial economy” and because of the chance of “significantly varying outcomes” if  the insurance company was required to “litigat[e] each alleged fraudulent claim separately”).

This article is reprinted with permission from the March 2, 2012 issue of the New York Law Journal. Copyright ALM Properties, Inc. Further duplication without permission is prohibited. All rights reserved.

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