Jason A. Moroff and Michael C. Rosenberger’s article, Restoring ‘Exceptional Exemption’: Effect of ‘Fair Price’? was published earlier this week in the New York Law Journal. In their article, the authors argue that the Fair Price decision indicates that the only defenses that survive a late denial are “pure coverage” defenses, as opposed to a condition precedent or a policy exclusion. And, that neither Mallela nor Independent Contractor defenses are “pure coverage” defenses, making them subject to the 30 day rule.
Here are some excerpts:
Whether it is the criminal act of driving while intoxicated1, allegations of fraudulent and excessive billing by a medical provider2, or a litany of other affirmative defenses, the recent New York Court of Appeals decision in Fair Price v. Travelers reaffirms in no uncertain terms the seminal decision of Presbyterian, which requires an insurer or self-insurer to issue a timely denial of claim form or verification request.
If it fails to do so, it will be precluded from raising any defense except the narrow “exceptional exception” set forth in Chubb.3
This decision represents a major turning point in no-fault litigation, as it demonstrates the intent of the New York Court of Appeals to restore the original intent of the preclusion rule; that is, only defenses based upon “pure coverage” may survive preclusion.4
Since the “exceptional exemption” was first set forth by the New York Court of Appeals insurers have tried to carve out additional exemptions to various affirmative defenses, including allegations that: 1) the services at issue were rendered by an independent contractor; and 2) the services at issue were rendered by a fraudulently incorporated medical facility, the so-called Mallela defense.5 Curiously, all of these defenses have been held to fall within the “exceptional exemption.” However, based upon the history of the exemption and the recent decision in Fair Price, it is no longer reasonable to argue such defenses fall within the “exceptional exemption.
…Expansion and Restoration
Notwithstanding the clear intent of the New York Court of Appeals in 1997, insurers have successfully argued to expand the independent contractor defense and Mallela defense into the “exceptional exemption.” However, a review of the relevant case law reveals such a result is in direct contravention with a strict interpretation of Presbyterian and Chubb.
This is made more apparent when coupled with the rationale of the New York Court of Appeals in Fair Price, which demonstrates the intent of New York’s highest Court to impliedly abrogate all decisions holding that defenses not based upon “pure coverage” fall within the “exceptional exemption.” In Fair Price, the Court presents a test to determine whether a defense fits within the narrow “exceptional exemption.” Specifically, the Court held: “More fundamentally, determining whether a specific defense is precluded under Presbyterian or available under Chubb entails a judgment: Is the defense more like a ‘normal’ exception from coverage (e.g., a policy exclusion), or a lack of coverage in the first instance (i.e., a defense ‘implicat[ing] a coverage matter’)?”11
In essence a Chubb defense is a moment frozen at the time of the accident. If there is a policy of insurance in effect and a real motor vehicle accident occurs, coverage attaches. Once coverage attaches, inquiry into a Chubb defense ends. Anything that occurs after the moment deals with exclusions to coverage and falls under Presbyterian. This test is consistent with Presbyterian and Fair Price, where the Court precluded defenses based upon allegations of wrong doing against the claimants that, if true, would be felonies under the penal law. Under these circumstances it is hard to rationalize that defenses based upon less nefarious circumstances will avoid preclusion.
…The ‘Mallela‘ Defense
In 2005, the New York Court of Appeals held that insurance carriers are entitled to withhold payment of no-fault medical expenses provided by fraudulently incorporated enterprises to which patients have assigned their claims.17 However, the Court was silent as to whether such defense is the type that fits into the “narrow exception” set forth in Chubb. Thereafter, the Appellate Term for the 2nd and 11th judicial districts addressed the issue by holding that a defense based upon the fraudulent incorporation of a medical provider is not precluded even if it was not interposed in a timely denial.18
Although the Appellate Term did not set forth a rationale for its decision, it only cites to two cases immediately after its holding – Mallela and Chubb. Since Mallela does not address the issue, the Appellate Term is principally relying upon Chubb. However, the Appellate Term’s reliance upon Chubb in support of its holding that fraudulent incorporation survives preclusion is inconsistent with Fair Price and so the Court of Appeals arguably abrogates such holding by implication.
In a case where an insurer alleges fraud in the incorporation there is no question that coverage exists; that is, “there was an actual accident and actual injuries.”19 It is the accident and the injuries that trigger coverage. It is not the “egregiousness of the fraud” that excuses the insurer’s compliance, but rather, the absence of something that is not an “accident.”20 Indeed, “the pertinent inquiry is whether the asserted defense is based on a lack of coverage. The kind of fraud scheme involved – and whether there is any fraud scheme at all – is irrelevant.”21
To date, only one lower court has addressed this new issue, ruling that even in light of Fair Price, the Mallela defense need not be raised in a timely denial for the following reasons: 1) “it assumes the Court of Appeals was ignorant of its own precedent in Presbyterian and [Chubb] when it decided Mallela, and that the Fair Price court chose to somehow abrogate Mallela in its decision”; 2)”the appellate courts in Presbyterian, [Chubb] and Fair Price were dealing in large measure with contract interpretation, the extent to which policies of insurance covered certain situations, and the extent to which the insurers’ obligations under those policies were subject to applicable laws and regulations”; and 3) the Mallela court quoted a relevant passage from its earlier decision in Matter of Medical Society of State of N.Y. v. Serio, 100 NY2d 854, 866, 768 NYS2d 423, 800 NE2d728 [2003], which provided that the challenged regulations “create not a new category of exclusion, but rather merely a condition precedent with which all claimants must comply in order to receive benefits under the statute.”22 However, such contentions are inconsistent with the Court of Appeals holding.23
First, the idea that preclusion assumes the Court of Appeals was “ignorant” of its own precedent when it decided Mallela is immaterial. The sole reason the Court did not address the issue of preclusion is that it was not part of the question certified to the Court.24 Generally, the Court will not address ancillary issues outside the certified question.25
Second, the contention that the Court of Appeals’ decisions in Presbyterian, Chubb and Fair Price dealt with “contract interpretation” and are somehow distinguishable is debatable. True, both Presbyterian and Chubb dealt with contract interpretation, but only to the extent that a contract must be in effect in order to have coverage. Also, the Court in Fair Price was not dealing with “contract interpretation” but merely relied upon its prior holding in Presbyterian and Chubb to demonstrate the bright line demarcation between “pure coverage” defenses and all others.
…In light of the recent decision in Fair Price, the “exceptional exemption” to the preclusion rule set forth in Chubb has effectively been restored to its original form. The resulting implications for insurers is potentially devastating, as defenses not based upon “pure coverage” that were once ruled to be nonwaivable may now be precluded if Fair Price is determined to impliedly abrogate lower court decisions. Despite insurers’ successful efforts to expand the number of allowable exceptions – this may have been in vain – the New York Court of Appeals has demonstrated an implied intent to quash any decisions which do not comport with its ruling in Fair Price. In doing so, the Court of Appeals has underscored the purpose of no-fault reform, which is to provide “prompt compensation for losses incurred by accident victims without regard to fault or negligence and to reduce the burden on the courts.”26
I’ll try to edit this down later today.