The Appellate Term, First Department, and the Appellate Term, Second Department, are divided on an issue of law that carries tremendous implications for the automobile insurance industry as well as for policyholders injured in auto accidents and health care providers who treat them. The issue in the cases that has led to the conflict arises under the state's no-fault insurance law and involves the amount that an insurance company can be required to pay after it disputes a health care provider's claim for no-fault benefits so that it can investigate the claim for potential fraud or for other reasons.

Unless resolved by the Appellate Division or by the New York Court of Appeals, or clarified by the legislature or the Department of Financial Services, the Appellate Term split will make it difficult for automobile insurers to accurately calculate premium rates for no-fault coverage or to know which claims of health care providers they should pay. It also is likely to result in forum shopping by health care providers whose claims have been disputed by insurance companies because they are likely to file lawsuits against those insurers in the Second Department, where the law is more favorable to them, than in other courts in the state.

The No-Fault Rules

Under New York's no-fault law, Insurance Law §5101 et seq., and its implementing regulations, 11 N.Y.C.R.R. §65-1 et seq., every liability insurance policy issued in New York on a motor vehicle must provide up to $50,000 of coverage for basic economic loss, otherwise known as no-fault benefits. The no-fault law provides that individuals covered by the law—so-called “Eligible Injured Persons”—can assign their no-fault benefits to health care providers. Health care providers that have been assigned the right to no-fault benefits can file claims with their assignors' no-fault insurers and can receive payments directly from the insurers.

When an insurance company receives a claim for motor vehicle no-fault benefits, it has 10 business days to ask the claimant, including a health care provider, to complete the verification forms it requires before it will have to pay the claim. After an insurance company receives the completed verification forms, it has 15 business days to request any additional verification that it deems necessary to establish the claim. Requests by an insurer for additional verification—including a medical examination—need not be made on any prescribed or particular form.

The no-fault regulations make it clear that an insurer is entitled to receive all items necessary to verify the claim directly from the parties from whom it has requested such verification.

After it has received all the information needed to verify a claim, the insurer then can decide whether to pay the claim or to dispute the claim.

If the insurer pays out no-fault claims totaling $50,000 in benefits, the no-fault insurance policy limits are exhausted and the insurer no longer has any duties under the policy.

In many instances, an auto accident can generate claims by multiple health care providers who have treated the same injured party. To help insurers determine what claims to pay, the no-fault regulations contain a “priority-of-payment” provision at 11 N.Y.C.R.R. §65-3.15 that states that claims for no-fault benefits must be paid “in the order in which each service was rendered or each expense was incurred, provided claims therefor were made to the insurer prior to the exhaustion of the $50,000.”

The regulation also provides that if the insurer pays the $50,000 policy limits before receiving claims for services rendered prior in time to those that were paid, “the insurer will not be liable to pay such late claims.” In addition, the regulation provides that “[i]f the insurer receives claims of a number of providers of services, at the same time, the payments shall be made in the order of rendition of services.”

As noted above, the no-fault law permits insurance companies to request that claims be verified, including by providing additional information related to the claim. However, the priority-of-payment regulation does not explain the priority of payment for claims that have not been “verified” within the meaning of the regulation or for which verification is pending. The Court of Appeals resolved this issue a decade ago, in Nyack Hospital v. General Motors Acceptance Corp., 8 N.Y.3d 294 (2007).

In that case, the court held that the priority-of-payment regulation did not apply to claims that have not been fully verified in accordance with 11 N.Y.C.R.R. §65-3.5(b). Therefore, the court decided, an insurer waiting for information to verify a pending claim was not prohibited by the priority-of-payment regulation from paying already verified claims in the meantime. The court specifically rejected a hospital's contention that an insurer had a duty to keep money “in reserve” for its unverified claim, up to the policy limits of $50,000. The hospital's preferred approach, the court found, ran “counter to the no-fault regulatory scheme” and its goal of “prompt payment of legitimate claims.”

In addition to not explaining the priority of payment for claims that have not been verified, the priority-of-payment regulation has another gap. It also does not explain how insurers should pay claims that have been verified for purposes of the regulation but that they have disputed or denied, and which a court subsequently orders them to pay after the $50,000 policy limits have been exhausted. It is this issue that has divided the Appellate Term.

The First Department Cases

The Appellate Term, First Department, has issued two decisions reaching the same result.

The first case, Harmonic Physical Therapy, P.C. v. Praetorian Ins. Co., 47 Misc. 3d 137(A) (App. Term, 1st Dep't 2015), arose after Harmonic Physical Therapy treated a patient who assigned Harmonic the right to receive no-fault payments for its services from the patient's no-fault insurer, Praetorian Insurance Company.

Harmonic filed a claim with Praetorian, but the insurer denied the claim on the ground of lack of medical necessity.

Harmonic sued and Praetorian moved for summary judgment, arguing that it was not obligated to pay Harmonic's claim because the patient's no-fault benefits had been exhausted. The trial court denied Praetorian's motion, and Praetorian appealed to the Appellate Term, First Department.

The appellate court reversed. It explained that after Praetorian denied Harmonic's claim, it paid claims of other health care providers, which exhausted the insurance policy's coverage limits. Those payments to other health care providers, the Appellate Term ruled, “were made in compliance” with the priority-of-payment regulation under the no-fault insurance law.

The Appellate Term specifically rejected Harmonic's argument that 11 NYCRR 65-3.15 precluded Praetorian from paying other providers' legitimate claims after it had denied Harmonic's claim. The Appellate Term reasoned that adopting Harmonic's position would require Praetorian to delay payment on uncontested claims or on binding arbitration awards pending resolution of Harmonic's disputed claim, which would run counter to the goal of the no-fault insurance system of prompt payment of legitimate no-fault claims.

The next year, the Appellate Term, First Department, reached the same conclusion in a second case, Allstate Property and Casualty Ins. Co. v. Northeast Anesthesia and Pain Management, 51 Misc. 3d 149(A) (App. Term, 1st Dep't 2016).

The 'Allstate' Case

The Appellate Term, Second Department, reached the opposite result in Alleviation Medical Services, P.C. v. Allstate Ins. Co., 55 Misc. 3d 44 (App. Term, 2d Dep't 2017).

That case arose when a patient treated by Alleviation Medical Services, P.C., assigned it the right to receive no-fault payments for its services from the patient's insurer, Allstate Insurance Company. Alleviation submitted a claim to Allstate, but the insurer denied the claim on the ground of lack of medical necessity.

Alleviation sued Allstate, which moved for summary judgment. The trial court denied Allstate's motion, and Allstate appealed to the Appellate Term.

The appellate court affirmed.

In its decision, the appellate court reasoned that claims that had been “fully verified,” as Alleviation's claim had been, were payable in the order received under the no-fault insurance regulations. Moreover, the Appellate Term ruled, Allstate's argument that it did not have to pay Alleviation's claim because it had paid other claims after it had denied Alleviation's claim, which exhausted the available coverage, “lack[ed] merit.”

Accordingly, the Appellate Term concluded, Allstate had not established that it was entitled to summary judgment dismissing Alleviation's complaint.

Conclusion

Under the decisions by the Appellate Term, First Department, no-fault insurers cannot be held responsible for paying more than $50,000 in no-fault benefits—the statutory limit. If a health care provider has filed a claim that has been verified but denied, and the provider then sues the no-fault insurance company, the insurer is entitled to summary judgment dismissing the complaint involving the disputed claim by showing that the policy's coverage limits had been exhausted through payment of no-fault benefits that it made in compliance with the priority-of-payment regulation.

By contrast, the decision by the Appellate Term, Second Department, can result in an insurer being required to pay in excess of $50,000 in no-fault benefits—and conceivably a great deal over that limit—if it paid $50,000 in no-fault benefits to verified claims, exhausting the policy limits, and then is ordered by a court to pay some or all of the claims it had disputed.

All parties involved with a no-fault claim, as well as the New York court system, would benefit from a uniform resolution of this issue.

Evan H. Krinick, managing partner of Rivkin Radler, can be reached at [email protected]. The author and his firm represent two insurance trade associations, as amici, in support of Allstate Insurance Company's motion for permission to appeal the decision by the Appellate Term, Second Department, discussed in this column.