No-fault insurance fraud continues to plague New York, with estimates of its cost to consumers and insurance carriers reaching hundreds of millions of dollars.1 The growing wave of fraud persists notwithstanding efforts by federal and state prosecutors to bring criminal actions seeking to punish alleged fraud2—and despite guilty pleas in some of these actions.3 State regulators have recognized the problem, as well, and new no-fault regulations are about to take effect in an effort to crack down on no-fault insurance fraud.4

The final, and perhaps most important element needed to successfully attack no-fault insurance fraud in New York is action by the Legislature and the governor. Although bills have been introduced over a number of years5 that, if enacted, would have helped, no major piece of no-fault reform legislation has been passed by both the New York State Assembly and the New York State Senate in recent memory. It is time for a different result now.

At least five bills, including three sponsored by New York State Senator James L. Seward, the chairman of the Senate’s Insurance Committee, have been introduced in the New York Legislature in recent weeks. If enacted, this legislation—together with the new no-fault regulations and continuing prosecutorial pressure—could very well begin to dent the amount of no-fault insurance fraud that takes place in the state.

Background

New York’s no-fault law6 requires every vehicle registered in the state to have no-fault automobile insurance, which enables the driver and passengers of a registered and insured vehicle to obtain benefits of up to $50,000 per person for injuries sustained in an automobile accident, regardless of fault. The no-fault law requires prompt payment for medical treatment, thereby obviating the need for claimants to file personal injury lawsuits to be reimbursed.

Under the no-fault law, patients can assign their right to reimbursement from an insurance company to others, including to medical clinics that provide treatment for their injuries. In these cases, insurance carriers typically compensate medical practitioners at a rate pursuant to a fee schedule established by the Workers’ Compensation Board for various medical services performed on accident victims.

The various bills that have been proposed and are now pending seek to address many of the opportunities presented for fraud in these circumstances.

Staged Accidents

On Feb. 5, Seward introduced S. 3547 to combat what New York State Attorney General Eric Schneiderman has referred to as the "all-too-common staged accident scheme."7

S. 3547 would add three new sections to the penal law.8 The first would create the crime of staging a motor vehicle accident in the third degree, a Class D felony. Under the bill, a person would be guilty of the crime when, with intent to commit a fraudulent insurance act, he or she:

(1) Operates a motor vehicle and intentionally causes or attempts to cause a collision involving a motor vehicle; or

(2) Solicits, requests, commands, importunes, or otherwise attempts to cause another person to intentionally cause a collision involving a motor vehicle.

Staging a motor vehicle accident in the second degree, a Class C felony, would occur when a person commits the offense of staging a motor vehicle accident in the third degree and has been previously convicted within the preceding five years of insurance fraud.9

A person who stages a motor vehicle accident in the third degree that causes serious personal injury or death to another person, other than a participant in the fraud, would be guilty of a Class B felony.

Enhanced criminal penalties as provided in this proposed legislation that are directed at staged accidents should help get the message out to people seeking to defraud the no-fault system that they risk suffering severe criminal penalties, including prison time.

Rescinding a Policy

Vehicle and Traffic Law Section 313 overrides the common law right of insurance carriers to rescind an automobile policy ab initio due to fraud in procuring the policy. Aetna v. O’Connor, 8 NY2d 359 (1960); In the Matter of Insurance Co. of North America v. Kaplun, 274 A.D.2d 293 (2d Dept. 2000). On Jan. 9, New York State Senator Martin Golden introduced S. 1959, which would authorize automobile insurance companies to retroactively rescind or cancel newly issued insurance policies when obtained by fraud, under the theory that the acquisition of these policies often is intended to be used to immediately obtain coverage for staged accidents or other insurance fraud.10

In particular, S. 1959 provides that an insurance carrier, within 60 days of issuing a new automobile insurance policy, can rescind or retroactively cancel the policy (subject to certain exceptions) if the initial premium payment is not honored by a financial institution due to the nonexistence or the unauthorized use of a bank account or is denied by a credit card company due to the unauthorized use of a credit card account.

The bill would not penalize innocent victims of staged accidents. Thus, it provides that a person who is injured during this period and who ordinarily would be covered under the insured’s policy, had it not been canceled or rescinded, is entitled to seek to recover under his or her own policy or, if uninsured, from the Motor Vehicle Accident Indemnification Corporation—provided that the person had not engaged in fraud such as staging an accident.

Assignment of Benefits

Seward has also introduced S. 3540. This bill, if enacted, would help eliminate insurance fraud involving claims for durable medical equipment (DME) that a provider has not delivered to an insured individual.11 DME often represents a large proportion of the expenses involved in treating an insured who was injured in an automobile accident—or who fraudulently claims to have been injured.

The bill would limit the ability of an insured under a no-fault insurance policy to assign his or her claim for benefits to DME providers unless they have been approved by the National Supplier Clearinghouse (NSC) as an authorized Medicare supplier of durable medical equipment, prosthetics, orthotics, and supplies.

To do so, the bill would add a definition of "Health Service Provider" to mean any medical provider or DME supplier that submits a bill for payment of no-fault benefits for any of the following:

(1) Medical, hospital, surgical, nursing, dental, ambulance, X-ray, prescription drug, and prosthetic services or equipment;

(2) Psychiatric, physical therapy (where treatment is rendered pursuant to a referral), and occupational therapy and rehabilitation;

(3) Any nonmedical remedial care and treatment rendered in accordance with a religious method of healing recognized by New York law; and

(4) Any other professional health services.

It then would add a new section to the Insurance Law that would provide that an insured under a no-fault policy "shall not assign" claims for medical expenses to a health service provider (as defined above) for DME unless the health service provider has been approved by the NSC as an authorized Medicare supplier of DME, prosthetics, orthotics, and supplies. Moreover, the bill provides that no health service provider shall be eligible to demand or request payment from an insurer for DME unless the make and model number of the equipment is set forth on the invoice for the equipment.

Burden of Proof

Seward also introduced S. 3545, which would limit the ability to recover from no-fault insurers for health care expenses that are not medically necessary.12 It would do that by providing that the claimant (i.e., an insured or a health care provider to which an assured has assigned his or her rights under the no-fault insurance policy) has the burden of proof to show that the health care expenses were "medically necessary" and in accordance with the no-fault fee schedule. Moreover, the bill provides that evidence of mailing a claim is not sufficient to meet this burden.

Whistleblowers

Finally, A. 4265 is a comprehensive bill (the "New York automobile insurance fraud and premium reduction act") with a variety of provisions designed to reduce no-fault insurance fraud. A particularly interesting idea would add a new Section 405-a to the Insurance Law and would authorize payment of compensation to whistleblowers who report insurance fraud to law enforcement authorities of at least 15 percent, but not more than 25 percent, of the proceeds of a lawsuit or settlement of a fraudulent claim up to a maximum of $25,000.

Conclusion

Certainly there are other legislative changes that could decrease no-fault insurance fraud, and other bills have been introduced in the Legislature in the past targeting other issues.13 Now, however, it is finally time for the Legislature and the governor to act. Adoption of the new bills undoubtedly would help in the fight against no-fault insurance fraud, to the benefit of policyholders, insurance carriers and the general public alike.

Evan H. Krinick is a partner with Uniondale’s Rivkin Radler and can be reached at evan.krinick@rivkin.com.

Endnotes:

1. See N.Y. Superintendent of Financial Services Benjamin M. Lawsky, "Statement of the Reasons for Emergency Measure," available at http://www.dfs.ny.gov/insurance/r_emergy/re68er.pdf.

2. See, e.g., Press Release, "A.G. Schneiderman Announces 16 Arrests in Staged Automobile Accident Scheme," Jan. 24, 2013, available at http://www.ag.ny.gov/press-release/ag-schneiderman-announces-16-arrests-staged-automobile-accident-scheme-0.

3. See, e.g., Press Release, "Two Clinic Owners Plead Guilty for Their Roles in Massive No-Fault Insurance Fraud Scheme," Feb. 15, 2013, available at http://www.justice.gov/usao/nys/pressreleases/February13/AnikeyevSlobodyanskyPleas.php.

4. See http://www.dfs.ny.gov/insurance/r_finala/2013/rf68ca4t.pdf; David M. Barshay, "New No-Fault Regulations to Take Effect April 1," NYLJ (Feb. 14, 2013), available at http://www.newyorklawjournal.com/PubArticleNY.jsp?id=1202588032932.

5. See, e.g., Evan H. Krinick, "Are Statutory Changes to No-Fault Law on the Horizon?, NYLJ (Nov. 11, 2011).

6. N.Y. Ins. Law §5101 et seq.; 11 N.Y.C.R.R. §65 et seq.

7. See Press Release, supra n. 2.

8. A similar bill has been introduced before. See S1685 (Jan. 11, 2011).

9. N.Y. Penal Law Art. 176 (Insurance Fraud).

10. A similar bill has been introduced before. See S. 04507 (April 8, 2011).

11. A similar bill has been introduced before. See S. 05064 (March 12, 2012).

12. A similar bill has been introduced before. See S. 6707 (March 12, 2012).

13. See, e.g., Krinick, supra n. 5.