POLICY EXHAUSTION – UNDISPUTED CLAIMS

POLICY EXHAUSTION – UNDISPUTED CLAIMS

Today’s New York Law Journal had a good policy exhaustion case.

NYU Hospitals Center-Hospital v. State Farm Mutual Automobile Ins. Co., 000091/16, NYLJ 1202771102250, at *1 (Sup., NA, Decided October 26, 2016).

State Farm denied the hospital bill based on a fee schedule defense and policy exhaustion.  It then dropped the fee schedule defense and just stuck to the policy exhaustion.  The Court found in favor of the hospital in part saying that the fee schedule defense was a bogus and was just used to delay paying the claim.  The relevant dicta is as follows:

11 NYCRR 65-3.15 provides that when claims aggregate more than the policy limit, payments are to be made in the order in which each service was rendered or expense incurred, provided the claims were made before the exhaustion of the policy. This priority of payment regulation comes into play when an insurer has received the provider’s claim together with all properly requested verification. Nyack Hospital v. General Motors Acceptance Corp., 8 N.Y.3d 294, 301 (2007). Here, that date was October 26, 2016, since State Farm requested no further verification or information from NYU after it received NYU’s claim on that date.

The policy was not exhausted when State Farm received NYU’s claim and there were sufficient policy proceeds remaining to pay NYU’s bill in full. State Farm does not contend that it received and paid claims for services rendered by other medical providers prior to NYU’s services thus causing the exhaustion of the policy. Therefore, State Farm did not make policy payments pursuant to 11 NYCRR 65-3.15 and, as a result, cannot rely upon an after-the-fact exhaustion defense. It simply breached the terms of the policy by failing to timely pay NYU the amount properly due. That State Farm thereafter exhausted the policy limits by making payments inconsistent with its obligations under 11 NYCRR 65-3.15 is immaterial and cannot affect NYU’s right to payment.

The Court of Appeals decision in Nyack Hospital is also instructive. In that action, the no-fault insurer paid out other claims after its receipt of the plaintiff hospital’s claim — substantially exhausting its policy — while it awaited additional verification from the hospital and an election form from the insured. The Appellate Division granted summary judgment to the insurer based on the exhaustion defense. The Court of Appeals modified the decision, finding that the insurer was entitled to pay subsequent verified claims while awaiting information from the hospital, but that the insurer’s obligation to pay the hospital arose when the insurer received the requested information (and not when the insurer later received the election form from the insured). Nyack Hospital v. General Motors Acceptance Corp., 8 N.Y.3d at 301, 302. The Court denied the insurer’s summary judgment motion and remitted the action back to the trial court, holding, that pursuant to 11 NYCRR 65-3.15 “the insurer should have paid the hospital ahead of any unpaid verified claims for services rendered or expenses incurred later than the services billed by the hospital, up to the policy’s limits.” Id. at 301. Of course, if 11 NYCRR 65-3.15 had no teeth and the exhaustion of the policy in and of itself was a complete defense for the insurer, there would have been no reason for the Court to reverse the grant of summary judgment and remand the matter to the trial court.

But this court need not decide whether insurers may pay undisputed claims without fear of paying in excess of policy limits notwithstanding pending good-faith disputed claims.1 This is because there is no evidence in the record that State Farm acted in good faith. State Farm has never attempted to explain its initial determination that the amount billed by NYU was incorrect. Instead, State Farm first failed to timely accept or reject NYU’s claim and then relied upon an unsupported, bogus and now withdrawn fee schedule defense to justify its actions.

Policy considerations militate against State Farm’s position. State Farm breached its policy by failing to timely pay NYU’s bill, as it now concedes it should have done. If NYU were now to seek the payment to which it is entitled directly against its assignee, the insured patient, what recourse would he have? If the insured would then be able to successfully bring a breach of contract action against State Farm, why require this circuitous, inefficient route? The loss here should fairly fall upon the insurer, which breached its obligations under the policy and violated the regulatory payment scheme, not the insured or NYU.

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