It’s Time to End the 30-Day Preclusion Rule

September 3, 2010 | Appeals | Insurance Coverage

Several weeks ago, New York County Civil Court Judge Arthur F. Engoron issued a decision in Quality Psychological Services PC v. GEICO Ins. Co.,[1] a case involving multiple actions filed by a medical provider seeking payment of bills it had sent to an insurance carrier for psychological services allegedly rendered to the plaintiff’s assignors, who were covered by “no-fault” insurance issued by the insurer. The carrier sought to amend its answers to assert counterclaims for fraud and unjust enrichment. In opposition, the plaintiff asserted that the insurer’s failure to allege fraudulent billing in a timely claim denial acted to preclude that as a defense or as counterclaims in the litigation.

The court acknowledged the existence of the 30-day preclusion rule referenced by the plaintiff, but it nevertheless granted the insurance carrier’s motions. The court declared that, based solely on its “very limited review of its billing practices,” the plaintiff “may be a criminal enterprise, whose primary purpose is to generate fraudulent no-fault billing.” In the court’s view, the law “does not provide the same privileges and immunities to fraudulent and criminal activity as to lawful and legitimate activity.” It concluded that, “[i]n the final analysis, assuming (without deciding) a persistent pattern of fraud, the following ancient legal doctrine applies here: ‘We are not going to let them get away with this.'”

Undoubtedly, most people who read the opinion or the summary above would find the court’s decision and rationale to be reasonable, fair, equitable, and correct. Yet, it was rejected only weeks later in a virtually identical case between the same parties by a judge in Kings County Civil Court – even though the court in that case stated that it was “persuaded that the instant matters smack of fraud and unjust enrichment considering the compilation of plaintiff’s bills.”[2] The Kings County decision, unfortunately, is not surprising. That’s because traditional interpretation of a provision in the no-fault insurance law[3] and its corresponding regulations[4] by court decisions (including by the New York Court of Appeals) over more than a decade,[5] coupled with the legislature’s continuing failure to pass legislation overruling – or even just modifying – the 30-day preclusion rule supports this result.

Judge Engoron, however, has it right. It is now time to examine the preclusion rule and to change it for the simple reason that whatever benefits are gained by imposing preclusion as a remedy for a violation of the 30-day rule are substantially outweighed by the burdens it imposes on the no-fault system.

The 30-Day Rule

In the no-fault context, a healthcare provider is entitled to receive payment for services rendered to patients whose injuries arise from covered motor vehicle accidents. Under New York insurance law, insurance carriers have 30 days (plus any applicable tolling) from the date of receipt of a claim to pay or deny it in whole or in part.[6] Fraudulent billing, including billing for services never rendered, is precluded as a defense, unless the insurer raises it in a timely denial.[7]

How did this come to be? Insurance Law § 5106(a) states that benefits “shall be made as the loss is incurred,” and that they are “overdue if not paid within thirty days after the claimant supplies  proof  of  the  fact  and  amount  of  loss sustained.” The statute also states that “[a]ll overdue payments shall bear interest at the rate of two percent per month,” and that 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.” Nowhere does the statute refer to an insurance carrier’s defenses being “precluded” for violation of the 30-day rule.

Preclusion was a remedy that was judicially created by a severely divided New York Court of Appeals (4-3) in 1997, in the Presbyterian Hospital case.[8] There, the Court interpreted the no-fault law and the Insurance Department’s corresponding regulations to preclude insurers’ statutory exclusion defenses, such as intoxication, to no-fault claims in the event that claims were not paid or denied within 30 days. In so doing,  the Court  analogized no-fault  claims to claims in the “parallel universe” of  liability insurance in  general,  and to Insurance Law § 3420(d)  in particular – even though there is no specific preclusion rule set forth in Section 3420, either.

Courts – including the Court of Appeals – have crafted a number of exceptions to the preclusion rule. For one thing, where there is no coverage, an insurer’s failure to deny a claim within 30 days does not preclude it from later asserting lack of coverage.[9]

Courts also have rejected application of the 30-day preclusion penalty to claims submitted by improperly licensed providers or for services provided by independent contractors.[10]  There is no evidence that carriers act less expeditiously when handling claims involving these exceptions, to which the 30-day preclusion rule does not apply, than when handling claims to which the rule does apply. The reason for this is simple:  any delay in wrongfully denying a claim carries a punitive amount of interest.

There also are procedures in place that “toll” the 30-day rule. For example, the period is tolled when an insurer asks a claimant for additional verification during the 30-day period; the toll is lifted when the claimant appropriately responds. However, the toll can be reinstated in the event of additional verification requests from a carrier, including a request for an examination under oath, only to be lifted upon an appropriate response from the claimant.

Gamesmanship

As has often been stated, no-fault insurance was enacted by the

Legislature nearly 40 years ago in an effort to obtain prompt payment of claims for the benefit of injured persons without regard to fault, at a cost lower than traditional litigation, for the benefit of policyholders.

Unfortunately, however, in practice, that goal has been lost.  No-fault has been turned into a game, of sorts, where carriers have to pay or deny a claim within 30 days, and medical providers receive assignments from patients and are incentivized to argue that they are entitled to payment where their claims were not denied within 30 days – notwithstanding the medical validity of their claims or whether they deserve payment. The 30-day preclusion rule incentivizes providers to seek payment of claims by searching for defects in a carrier’s claim handling processes; all the while, the merits of individual claims are rendered essentially irrelevant.

One must ask whether the 30-day preclusion rule actually serves any purpose of the no-fault law that is not already fostered by the punitive interest awarded to wrongfully denied claims or whether it actually immunizes and encourages fraudulent activities. Do the benefits, to the extent any exist, truly outweigh the litigation tactics that are encouraged?

Certainly, the preclusion remedy for violation of the 30-day rule has its critics, both inside and outside of the judiciary. In a dissent at Appellate Term in the Fair Price case, Judge James J.  Golia declared that “[it] is my firm and unshakable belief that neither the Legislature nor the Insurance Department ever intended for an insurance carrier, or anyone else for that matter, to be forced to pay for medical equipment that was never provided.” Then, in dissenting in Fair Price, Court of Appeals Judges Robert S. Smith and Eugene F. Pigott, Jr., declared that “any claim not payable under the terms of the policy is a claim the policy does not cover [i.e., should be subject to a lack of coverage defense].”  

Consider, as well, Judge Engoron’s conclusions in Quality Psychological Services. Judge Engoron explained that, according to the insurer’s computer compilation, certain of the plaintiff’s employees billed for more than 10 hours a day for days on end. Indeed, he found, there were “numerous instances of employees billing for 20, 25, 30, 35 and, in at least one instance, 40 hours in a day (at roughly $185 per hour).” He noted that in January 2008 alone, “a Dr. Seidman billed 11 days of 10 or more hours per day, including 20 hours on January 15 and 21, 25 hours on January 8 and 10, and 30 hours on January 14.” Thus, in one three day period (the 14th through 16th), this Dr. Seidman billed 60 hours (some $11,000).

That same month, Judge Engoron pointed out, a Dr. Fischer billed eight days of 10 or more hours per day, “reaching 15 hours on January 28, 25 hours on January 9, followed immediately by 30 hours on January 10, and 40 hours (!) on January 23.” As Judge Engoron pointed out, as “astounding, and brazen,” as these numbers were in isolation, “what turns the merely impossible into the flatly incredible is that these bills were all directed to a single insurance company.”  He stated that, “[f]or all we know, plaintiff may have been billing other insurance companies additional hours for the same employees on the same day.”

Is justice served by allowing payments in this case without the merits being considered? Judge Engoron did not believe so. This is only one case, but over the past five years, it has been estimated that no-fault fraud and abuse has cost New York’s consumers and insurers more than $600 million.[11] The preclusion remedy contributes to the escalating fraud that is abundant in the no-fault system.

Legislation

Recently, State Senator Breslin and Assembly Member Titone introduced identical bills titled “Automobile Insurance Fraud Prevention Act of 2010” in the State Senate (S8414) and Assembly (A11596).[12] A portion of the bills would solve some of the problems discussed in this column that are caused by the existing 30-day preclusion rule. Admittedly, the Legislature has had opportunities over the years to address the harmful effects of the preclusion rule; one can hope that it will see the wisdom in not just modifying the rule but in relegating it to the history books.

The Court of Appeals has put the onus on the Legislature, stating in Fair Price that “there may be some merit to” the argument “that a 30-day (plus potential tolling) window is generally too short a time frame in which to detect billing fraud, any change is up to the Legislature.” The existing statutory provision requiring the payment of interest – at two percent per month – on overdue payments, plus attorney’s fees and costs, is a strong incentive to insurers to pay valid claims timely; the 30-day rule as currently in effect is not.


[1] No. 47851/08 (Civ. Ct. N.Y. Co. July 22, 2010).

[2] Quality Psychological Servs., P.C. v. GEICO Ins. Co., 2010 N.Y. Slip Op. 51423(U) (Civ. Ct. N.Y. Co. Aug. 16, 2010).

[3] Insurance Law § 5106.

[4] 11 N.Y.C.R.R.  §65-3.8.

[5] See, e.g., Fair Price Supply Corp. v. Travelers Indem. Co., 10 N.Y.3d 556 (2008) (the author and his firm filed an amicus brief in this case on behalf of the New York Insurance Association, Inc.); Presbyterian Hosp.  v. Maryland Cas. Co., 90 N.Y.2d 274 (1997); and Central Gen. Hosp. v. Chubb Group of Ins. Cos., 90 N.Y.2d 195 (1997).  

[6] See 11 NYCRR 65-3.8.

[7] See Fair Price Med. Supply Corp., supra.

[8] Supra, n. 5.

[9] See, e.g., Family Care Acupuncture v. Motor Vehicle Accident Indemnification Corp., No. 50732/09 (Civ. Ct. N.Y. Co. Aug. 6, 2010) (insurer’s motion to dismiss granted for lack of coverage where its moving papers made a prima facie showing that plaintiff’s assignor was not a “qualified person” (Insurance Law §5202[b]) and, thus, that he was not a “covered person” (Insurance Law §5221[b][2]), rejecting plaintiff’s argument that insurer may not raise this “issue” to “obviate the 30-day requirement which would frustrate the purpose and objective of the No-Fault Law”).

[10] See, e.g., Lexington Acupuncture, P.C., v. State Farm Ins Co., 12 Misc. 3d 90 (App. Term 2d Dep’t June 7, 2006); A.M Medical Services, P.C. v. Progressive Cas. Co., 22 Misc.3d 70 (App. Term 2d Dep’t 2008) (independent contractor defense is non-precludible).

 [11] See Steve Acunto, “Determined: New York’s insurance, regulatory and legislative leaders target insurance fraud as stats climb,” Insurance Advocate, May 10, 2010.

[12] See Norman H. Dachs and Jonathan A. Dachs, Proposed Amendments to the No-Fault Law, Take 2, NYLJ, July 13, 2010, p 3, col 1.

This article is reprinted with permission from the September 3, 2010 issue of the New York Law Journal. Copyright ALM Properties, Inc. Further duplication without permission is prohibited. All rights reserved.

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