Court Issues Three Major Insurance Rulings, and Begins to Set the Stage for Next Term

August 19, 2019 | Insurance Coverage

The New York Court of Appeals decided three important insurance cases in its 2018-2019 term. Judge Rowan D. Wilson was the sole dissenter in the first two, with the Court reaching a unanimous decision in the third, and most significant, of the trio. The Court also began to arrange its insurance caseload for next term by accepting a certified question from the U.S. Court of Appeals for the Second Circuit and by granting leave to appeal in another case.

Additional Compensation

In December, the Court decided Matter of Mancini v. Office of Children and Family Services, 32 N.Y.3d 521 (2018), which involved Workers’ Compensation Law (WCL) § 15(3)(v) (Paragraph V), which permits certain permanently partially disabled workers who have exhausted their schedule awards to apply for “additional compensation.”

The case arose in 2008, when Steven Mancini was injured while working as an aide at a facility run by the Office of Children & Family Services (OCFS). A workers’ compensation law judge (WCLJ) found that Mancini had suffered a 50 percent loss of use of his left arm and, therefore, that he was entitled to a 156-week “schedule loss of use” award pursuant to WCL § 15(3)(a)-(u), the statutory schedule providing wage-based compensation for permanent partial disability arising from injury to certain body parts and for serious facial or head disfigurement.

When Mancini’s schedule loss of use award was exhausted, he applied for and was awarded additional compensation under Paragraph V. Paragraph V incorporates by reference WCL § 15(3)(w) (Paragraph W), stating that additional compensation under Paragraph V “shall be determined in accordance with [P]aragraph [W].”

At the hearing on Mancini’s application, an issue arose regarding which portions of Paragraph W’s framework for calculating benefits applied to an additional compensation award under Paragraph V.

The WCLJ determined that Paragraph V incorporated only the Paragraph W formula for determining the sum of each weekly payment and not the portion of Paragraph W stating the number of weeks the benefits were to be awarded.

The workers’ compensation board rejected that interpretation, however, and concluded that Paragraph W’s durational limits applied to additional compensation awards under Paragraph V. After further proceedings, the board ultimately determined that Mancini lost 37.5 percent of his wage-earning capacity and was entitled, based on the Paragraph W calculation, to 275 weeks of additional compensation under Paragraph V due to the injury to his arm.

The Appellate Division, Third Department, affirmed, and the case reached the Court of Appeals. There, Mancini argued that Paragraph V incorporated only Paragraph W’s formula for calculating the weekly payment amount and not Paragraph W’s durational component setting forth the number of weeks that sum was paid. The board countered that Paragraph V incorporated by reference the entirety of Paragraph W’s framework for calculating benefits, including its durational limits.

The Court, in a decision by Chief Judge Janet DiFiore, agreed with the board.

The Court found that the “plain text” of Paragraph V adopted, without qualification, Paragraph W’s process for determining the size and scope of a disability award and incorporated the “entirety” of Paragraph W’s framework for calculating benefits, including both the Paragraph W formula “for determining a weekly benefit payment” and the portion of that provision “setting the maximum number of weeks” the sum was to be paid.

Accordingly, the Court concluded that the board had properly computed the additional compensation benefits payable to Mancini.

Judge Wilson dissented, explaining that in his view the durational provision of Paragraph W did not apply to the calculation of additional compensation under Paragraph V.

Risk Retention Groups

On June 11, the Court decided Nadkos, Inc. v. Preferred Contractors. Ins. Co. Risk Retention Group LLC, No. 37 (N.Y. June 11, 2019), which involved an insurance coverage dispute between Nadkos, Inc., a general contractor sued by an employee of a Nadkos subcontractor, and the subcontractor’s general liability insurer, a risk retention group (RRG) chartered in Montana and doing business in New York. An RRG is an issuer of insurance owned and operated by insureds that work in the same industry and that are exposed to similar liability risks.

Here, Nadkos sought additional insured coverage of the subcontractor’s employee’s lawsuit under the policy that the RRG had issued to the subcontractor.

After the RRG disclaimed coverage based on certain exclusions in the policy, Nadkos sought a declaratory judgment that the policy obligated the RRG to defend and indemnify Nadkos. Nadkos also maintained, without objection from the RRG, that the RRG’s disclaimer was untimely. As a result, Nadkos argued, the disclaimer was void under Insurance Law § 3420(d)(2), which provides that if “an insurer shall disclaim liability or deny coverage . . . it shall give written notice as soon as is reasonably possible.”

The Supreme Court, New York County, granted summary judgment in favor of the RRG, the Appellate Division, First Department, affirmed, and the case reached the Court of Appeals.

The Court, in an opinion by Justice Jenny Rivera, affirmed. It held that foreign RRGs are not subject to Section 3420(d)(2) and its requirement that insurers “disclaim” liability as soon as is reasonably possible.

The Court reasoned that Section 3420(d)(2) does not apply to RRGs because it does not involve a failure to promptly “disclose” coverage within the meaning of Insurance Law § 2601(a)(6), the statutory provision applicable to foreign RRGs.

Therefore, the Court concluded, the RRG was not barred from asserting coverage defenses as applied to Nadkos.

Justice Wilson once again dissented, declaring that Section 3420(d)(2) by its terms applied “to all liability insurers operating in this state,” including foreign RRGs and the policy the RRG had issued to Nadkos’ subcontractor.

Non-Physician-Owned Medical Providers

Also on June 11, the Court issued its decision in Andrew Carothers, M.D., P.C. v. Progressive Ins. Co., No. 39 (N.Y. June 11, 2019), the insurance decision with the most significant practical implications from this past term because it strengthened the ability of insurers to refuse to pay claims submitted by medical providers secretly owned by non-physicians in violation of New York’s prohibition of the corporate practice of medicine.

The case involved Andrew Carothers, M.D., P.C., a professional service corporation formed in 2004 by Andrew Carothers, M.D., a radiologist. The PC provided magnetic resonance imaging services to patients, including those allegedly injured in motor vehicle accidents. The patients assigned their rights to receive first-party no-fault insurance benefits to the PC, which billed insurance companies to recover payment on the assigned claims.

Insurance companies stopped paying the PC’s no-fault claims in 2006 and the PC sued.

The insurers asserted that, under State Farm Mutual Automobile Ins. Co. v. Mallela, 4 N.Y.3d 313 (2005) (a case in which my firm and I were co-counsel for State Farm), and 11 N.Y.C.R.R § 65-3.16(a)(12), the PC was not eligible to seek reimbursement of the insurance benefits because Carothers was merely a nominal owner of the PC and the PC actually was owned and controlled by individuals who were not physicians.

The PC asserted that Mallela allowed insurers to withhold payments under 11 NYCRR 65-3.16(a)(12) only where the professional corporation’s ostensible or real managers had engaged in conduct “tantamount to fraud,” which it claimed the insurers had not demonstrated.

A jury found that the insurers had proved that the PC was “fraudulently incorporated,” and, accordingly, not entitled to recover the payment it sought from the insurers. The case reached the Court of Appeals.

The Court, in a unanimous decision by Judge Eugene M. Fahey, upheld the decision in favor of the insurance companies. It ruled that Mallela does not require a finding of fraud for an insurer to withhold payments to a medical service corporation improperly controlled by non-physicians.

In particular, the Court ruled that, under Mallela and 11 NYCRR 65-3.16(a)(12), an insurance carrier need not demonstrate that a professional service corporation or its managers engaged in common law fraud in order to deny payment of no-fault benefits. Rather, the Court stated, 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 the no-fault rules.

The Court concluded that the jury’s finding that the PC was in material breach of the “foundational rule” for professional corporation licensure – that it violated the principle of control by licensed professionals – was enough to render the PC ineligible for reimbursement.

And for Next Term…

As noted above, the Court already has agreed to decide two insurance-related cases next term.

In March, in Haar v. Nationwide Mutual Fire Ins. Co., No. 48 (N.Y. March 21, 2019), the Court accepted a certified question from the Second Circuit in a case that began when an orthopedic surgeon sued an insurance company, alleging that the insurer had submitted a report about him in bad faith to the New York State Office of Professional Medical Conduct (OPMC). The surgeon asserted a cause of action for damages pursuant to Public Health Law § 230(11)(b).

The U.S. District Court for the Southern District of New York dismissed the cause of action asserted by the surgeon under Section 230(11)(b), holding that the New York Court of Appeals, were it faced with the question, would find that the statute did not create a private right of action. Section 230(11)(b) states that “[a]ny person, organization, institution, insurance company, osteopathic or medical society who reports or provides information to the [state board for professional misconduct] in good faith, and without malice shall not be subject to an action for civil damages or other relief as the result of such report.”

The surgeon appealed, arguing that there was an implied cause of action under the statute for complaints made in bad faith to the OPMC. The Appellate Division, Second Department, has determined that there is no private right of action, while the Appellate Division, First Department, has reached the opposite result.

The Second Circuit asked the Court of Appeals to decide whether Section 230(11)(b) creates a private right of action for bad faith and malicious reporting to the OPMC.

Excess Insurance

Finally, in June, the Court granted the plaintiff leave to appeal in Chen v. Insurance Company of Pennsylvania, No. 2019-337 (N.Y. June 11, 2019).

In this case, the Court will consider questions related to the obligations of an excess carrier for interest on a judgment based on an excess policy that “follows form” to the underlying policy.

Conclusion

The Court’s decisions this past term on issues relating to workers’ compensation payments, risk retention groups, and no-fault insurance claims reflects the Court’s continuing interest in a wide range of insurance-related questions. That will continue next term, with the Court already having agreed to decide two cases involving other important insurance subjects.

Reprinted with permission from the August 19, 2019 issue of the New York Law Journal. © ALM Media Properties, LLC.  Further duplication without permission is prohibited.  All rights reserved.

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