Agent Owes No More Duties Than Principal

Zalma on Insurance in top 50

The New Jersey Supreme Court was faced with an appeal that presented a discrete, narrow legal question: “is a health care provider who has received an assignment of personal injury protection (PIP) benefits from an insured obligated upon request to furnish to the insurer broad information with respect to the provider’s ownership structure, billing practices, and regulatory compliance?” In Selective Insurance Company of America, Selective Way Insurance v. Hudson East Pain Management Osteopathic Medicine and Physical Therapy, No. A-105 September Term 2010 (N.J. 07/18/2012) the Supreme Court was called upon to interpret the language in an insurance policy issued by plaintiff.

Since an insurance policy is a form of contract and the interpretation of contract language is a question of law the Supreme Court reviewed the decision of the appellate court as if it was newly presented to the Supreme Court.

The Supreme Court found it is fundamental that the rights of an assignee can rise no higher than the rights of the assignor. If an assignee can have no greater rights than his assignor, it must follow that an assignee can have no greater duties than his assignor. Selective argued that the medical assignee was required to  fulfill the insured’s duty to cooperate with Selective and its duty to cooperate with the “investigation, settlement or defenses” of the insured’s underlying claim.

The Fraud Legislation

The Legislature set down clear directives with respect to discovery in connection with PIP benefits. The material sought by Selective in this matter far exceeds the statutory limitations of a patient’s “history, condition, treatment, dates and cost of such treatment.”

In an effort to protect the public from insurance fraud, the Legislature passed the Insurance Fraud Prevention Act, which created the Insurance Fraud Prosecutor, and the Bureau of Fraud Deterrence. Defendants contend that the statute places responsibility for the detection and prevention of insurance on the Attorney General and the Department of Banking and Insurance, not on private entities such as Selective. The statute, however, does impose affirmative duties on insurers with respect to insurance fraud. Selective contends that these statutory provisions justify its request for the detailed information it sought from defendants. When Selective filed its complaint, it articulated the legal theories under which it was proceeding: that defendants were obligated to respond to Selective’s discovery demands under both the cooperation clause and the PIP discovery statute.

In reviewing the claims submitted, Selective detected what it considered to be suspicious patterns in both the treatments defendants had provided and the corporate links among the treating entities. Wanting to pursue the questions generated by those perceived patterns, Selective requested that defendants supply to it a variety of data with respect to their ownership structure, billing practices, and compliance with certain regulations. In support of its request, Selective cited the provision within the insureds’ insurance policies requiring the insureds to cooperate with Selective in the investigation of any claim under the policy.  Selective sought a declaratory judgment that defendants were obligated to provide the information and documents it sought and that if they failed to do so, they would be ineligible to receive PIP reimbursement.

Amici stressed that the insurance industry has, for many years, relied on a policy’s cooperation clause to obtain data from medical providers as a check on improper practices. Amici asserted that if insurers are not able to require providers to supply that information, they will be unable to seek relief under the Insurance Fraud Prevention Act.

Appellate Division Decision

The Appellate Division panel relied on the general principle that there is a legally significant distinction between an assignment, which conveys benefits or the potential to receive benefits, and a delegation, which conveys duties or obligations. The principle that an assignment of benefits does not carry with it the corresponding duties of the assignor is not universal in its application.  The record that was before the Supreme Court did not contain the executed assignments upon which Selective relies and is barren with respect to the circumstances under which a particular assignment was executed.

However, the Supreme Court noted that it is fundamental that the rights of an assignee can rise no higher than the rights of the assignor. If an assignee can have no greater rights than his assignor, it must follow that an assignee can have no greater duties than his assignor. Here, an insured’s duty to cooperate with Selective referred to the duty to cooperate with the “investigation, settlement or defenses” of the insured’s underlying claim.

An insured had no duty to provide information to Selective with respect to the ownership structure, billing practices, or referral methods of the medical providers from whom he or she sought treatment for his or her injuries. Because an insured had no obligation to supply that information to Selective, the assignment of benefits executed by an insured could not serve to impose that duty on the providers.

The goal of PIP is to provide prompt medical treatment for those who have been injured in automobile accidents without having that treatment delayed because of payment disputes. The Supreme Court noted that Selective asserts that it has paid all the statements submitted to it and has not sought to deny treatment to any patients. That, however, does not mean they would not do so in the future.

Selective’s final argument rests on New Jersey’s strong public policy against insurance fraud. We have noted that insurance fraud in this State is a problem of massive proportions. The Federal Bureau of Investigation estimates that insurance fraud costs the average American family approximately $400 to $700 per year in increased premiums.

In an effort to protect the public from insurance fraud, New Jersey has adopted both statutory and regulatory structures. The Legislature passed the Insurance Fraud Prevention Act. That statute, however, does impose affirmative duties on insurers with respect to insurance fraud. It requires, for instance, that all automobile insurers such as Selective prepare and file with the Commissioner of Banking and Insurance a plan to detect and prevent fraudulent claims. Further, each insurer must annually file with the Director of the Division of Insurance Fraud Prevention a report on its “experience in implementing its fraud prevention plan.”

An insurer that does not comply with the filing requirements is subject to a penalty of up to $25,000 per violation. Additionally, by regulation, every automobile insurer that insures more than 2,500 vehicles in New Jersey must include as part of its plan to prevent and detect insurance fraud a Special Investigations Unit. Among the duties of the Special Investigations Unit is identifying persons and organizations that are involved in suspicious claim activity.

Selective contended that those provisions obligated the defendants to respond to Selective’s discovery demands under both the cooperation clause and the PIP discovery statute. The Court stressed that its decision is not to be understood as sanctioning attempts to hamper legitimate efforts to root out instances of fraudulent conduct. Nor did it intend to restrict insurers’ reasonable attempts to comply with their statutory obligations.

The Supreme Court concluded that an insured had no duty to provide information to Selective with respect to the ownership structure, billing practices, or referral methods of the medical providers from whom he or she sought treatment for his or her injuries.

ZALMA OPINION

This case is really an attempt to compel a medical provider to give an insurer evidence about the provider that will help it prove that the billings it received from the providers that it believes might be fraudulent. Since there is no way an insured — the assignor of the benefits — could obtain or provide that information the effort failed.

Since the New Jersey statutes required the insurer to maintain an SIU it might have been better if Selective had used the expertise of the SIU investigators. The information it sought are available by investigation since ownership records are public and can be obtained with some effort as can the structure of the medical providers. The billing practices can be obtained by review of medical records of those insureds and claimants who seek benefits. Finally, if the insurer has evidence that the billing by the providers is fraudulent — by taking statements from its insureds who can establish whether the services claimed were provided — it can then sue the providers for fraud and obtain the information by legitimate discovery.

Insurance fraud is much worse than the court and the FBI report. It is essential that insurers do what they can to stop it. They should not, however, waste time and money in an effort like that tried by Selective in this case.

© 2012 – Barry Zalma

Barry Zalma, Esq., CFE, has practiced law in California for more than 40 years as an insurance coverage and claims handling lawyer. He also serves as an insurance consultant and expert witness specializing in insurance coverage, insurance claims handling, insurance bad faith and insurance fraud. Mr. Zalma serves as a consultant and expert, almost equally, for insurers and policyholders.

He founded Zalma Insurance Consultants in 2001 and serves as its senior consultant.

Mr. Zalma recently published the e-books, “Zalma on Insurance Fraud – 2012″; “Zalma on Diminution in Value Damages – 2012,”“Zalma on Insurance,” “Heads I Win, Tails You Lose — 2011,” “Zalma on Rescission in California,” “Arson for Profit”  and others that are available at www.zalma.com/zalmabooks.htm.

Mr. Zalma can also be seen on World Risk and Insurance News’ web based television program “Who Got Caught” with copies available at his website at http://www.zalma.com.