(Tomasz Papuga)

A physician and his medical practice accused of insurance fraud in post-accident testing cannot compel arbitration, the U.S. Court of Appeals for the Second Circuit held Friday.

The circuit rejected an argument that New York Insurance Law, regulations and a contract arbitration provision all gave Dr. David Mun and Nara Rehab Medical, P.C. the right to arbitrate any dispute over billing. The court noted that the right to arbitrate is not so broad as to mandate it in an action to recover monies procured by fraud.

With the motion to compel arbitration denied, the civil suit will continue in the Eastern District, where Mun and his medical practice could potentially face higher damages.

Mun and Nara Rehab billed Allstate Insurance Company for about $500,000 for “Electrodiagnostic Testing,” allegedly performed between 2007 and 2011 on people who had been in auto accidents.

Allstate sued in the Eastern District in 2012 under the Racketeer Influenced and Corrupt Organizations Act, (RICO), 18 U.S.C. §1964, claiming some of the tests had no diagnostic value while others were never performed.

Attorneys for Mun and his practice moved to compel arbitration but were denied by Judge Carol Amon (See Profile), who said the case law in the Eastern District holds that medical providers can’t compel arbitration for claims that were paid on time.

They appealed to the Second Circuit, where oral argument was heard in Allstate Insurance Co. v. M.D. David Mun, 13-1424-cv, on Feb. 10 by Judges Dennis Jacobs (See Profile), Debra Ann Livingston (See Profile) and Gerard Lynch (See Profile).

On Tuesday, Jacobs explained that New York Insurance Law §§5101-5109 requires an insurance company to pay up to $50,000 to cover necessary health expenses for any “covered person” who can then assign their no-fault benefit rights to providers like Dr. Mun.

Allstate, Jacobs said, is generally required to process motor vehicle claims within 30 days of submission or it is barred from asserting any defenses in a lawsuit or arbitration.

Jacobs quoted the state regulation on arbitration, which states, “In the event any person making a claim for first-party benefits and the company do not agree regarding any matter relating to the claim,” they can submit the matter to arbitration. N.Y.Comp.Codes R. & Regs. tit. 11,§65-1.1(a)(d).

Jacobs noted the arbitration provision in Allstate’s policies implementing this regulation “appears quite broad” but “it is not as broad as it may seem.”

“Defendants are no longer ‘making a claim,’” he said. “They made a claim; They made many claims. And those claims were promptly paid by Allstate.”

“Allstate’s fraud suit therefore does not raise a dispute between it and a person ‘making a claim for first-party benefits,” he said. “The arbitration provision does not apply.”

The court then turned to whether arbitration was required by statute and concluded that §5106(b)’s arbitration right “applies only to disputes arising from the insurer’s non-payment during the initial 30-day claims process, not to insurer fraud suits brought later.”

“The linkage between the 30-day reimbursement process in subsection (a) and the arbitration right in subsection (b) is a feature, not a bug” and the two sections work together, Jacobs said.

“New York’s arbitration process for no-fault coverage is an expedited, simplified affair meant to work as quickly and efficiently as possible,” he said. “Discovery is limited or non-existent. Complex fraud and RICO claims, maturing years after the initial claimants were fully reimbursed, cannot be shoehorned into this system.”

Allowing providers to compel arbitration, he said, “would also undercut anti-fraud measures that the New York legislature encouraged.”

Edward Blodnick of Blodnick Fazio & Associates in Garden City argued for the defendants.

Blodnick said the U.S. Supreme Court has held that “agreements to arbitrate should be enforced and I think the court [the Second Circuit)] ignored that rule because they were concerned about the practicalities of no-fault fraud.”

Robert Alan Stern of Stern & Montana wrote the brief for Allstate, while William Natbony of Cadwalader, Wickersham & Taft argued before the Second Circuit. They declined to comment.