Medicare expands resolution options to include a new Medicare repayment program for small settlements or judgments. This program will be available starting in February 2012 and applies to cases settling for $25,000 or less.  Under this program, Medicare will provide final conditional payment amounts before settlement under certain circumstances.  This program has the potential to revolutionize the settlement process for many Medicare beneficiaries, their counsel, and settling parties.  The foundation of that process is to start the verification process early.  

Recently, the Centers for Medicare and Medicaid Services (“Medicare”) released guidance (the “Alert”) relevant to conditional payment reimbursement under the Medicare Secondary Payer (“MSP”) Act (42 U.S.C. §1395y(b)(2)).  This guidance permits certain Medicare beneficiaries to receive a final conditional payment amount from Medicare prior to date of settlement.  Historically, Medicare’s conditional payment reimbursement process has not allowed a Medicare beneficiary or settling parties from obtaining such information from Medicare or its recovery contractors.
 
Under this small settlement option, for a Medicare beneficiary to obtain a final conditional payment amount prior to settlement, the fact pattern must meet all of the following criteria:

1. The liability insurance (including self-insurance) settlement will be for a physical trauma based injury (the settlement does not relate to ingestion, exposure, or medical implant);
2. The total liability settlement, judgment, award, or other payment will be $25,000 or less;
3. The Date of Incident occurred at least six months before the beneficiary or representative submits the proposed conditional payment amount to Medicare; and
4. The beneficiary demonstrates that treatment has been completed and no further treatment is expected either through a written physician attestation or by certifying in writing that no medical treatment related to the case has occurred for at least 90 days prior to submitting the proposed conditional payment amount to Medicare.

If the case meets all of these qualifying criteria, then Medicare, through its recovery contractor, the Medicare Secondary Payer Recovery Contractor (“MSPRC”), will provide a final conditional payment amount prior to settlement.  This final conditional payment amount provided by the MSPRC will only be valid if the Medicare beneficiary settles a claim within sixty (60) days of the date of Medicare’s response.  According to MSPRC, this option will be available to Medicare beneficiaries starting in February 2012, and will effectively allow Medicare’s related claims to be identified pre-settlement.  While the process has not been fully defined, it is likely that once settlement is finalized, the process of requesting a final demand amount from Medicare (by providing gross settlement amount, fees, costs and expenses) will remain the same, regardless of whether this small settlement resolution program has been utilized.

Starting the Medicare repayment process early provides the best opportunity to comply with all Medicare Secondary Payer obligations while expediting the case.  Medicare’s 2012 small settlement resolution program reinforces the need to START EARLY!  To take advantage of this program in a $25,000 or less case means needing to know if an individual is Medicare enrolled, and if so, how much in medical expenses has Medicare paid conditionally.  Having a formalized settlement process that integrates these core concepts will achieve efficiencies and enhance the effectiveness in settlement proceedings.  Such a formalized settlement process should include an analysis of the applicability of this small settlement resolution program.  Thus, screening a case/claim up front to verify entitlement, establishing a tort recovery record with Medicare early in the process and obtaining the first conditional payment letter from Medicare (all as part of a formalized settlement process) and resolution path is the proper path to take advantage of this small settlement resolution program.  Although Medicare currently does not intend to include exposure, ingestion or implantation cases in this program, the Alert identifies that this will be a work in progress.  As a result, if this program creates the intended results that benefit the settling parties, taxpayers and the Medicare program, an extension of this program in 2013 may not be out of the question. 

Medicare intends to issue additional guidance on how to participate in this program in January 2012.  The DRI MSP Task Force will provide further program details once they have been released.  Until then, we continue to stress the importance of verifying Medicare enrollment as early in the settlement process as possible, as that information will better define the scope of the settlement continuum; from reimbursement to reporting to potential future cost of care issues.

CMS Announcements on Fixed Percentage Option for Settlements of $5,000 or less, $300 Threshold Limit for Reimbursement, and Identification of Contractor for Medicare Secondary Payer Recovery

Insurance fraud has been estimated to take between $80 billion and $300 billion a year from the insurance industry in the United States. Every state has a statute making insurance fraud a crime including the federal crimes of mail and wire fraud and the Racketeer Influenced and Corrupt Organization Act (RICO). RICO can also be a civil action which allows for treble damages or punitive damages.

Some insurer victims of insurance fraud have become proactive. In State Farm Mutual Automobile Insurance Company; State Farm Fire and v. Arnold Lincow, D.O.; Richard Mintz, D.O.; Steven Hirsh; 7622 Medical, No. 10-3087 (3d Cir. 09/16/2011) the Third Circuit dealt with an appeal from State Farm’s successful trial against some doctors and clinics who defrauded it and those it insured.

Facts

After a four-week jury trial plaintiff State Farm successfully convinced the jury that defendants, a number of health care providers (“Defendants”), engaged in various schemes to defraud State Farm by billing it for medical services that were either not provided or provided unnecessarily, and were illegal under RICO, fraud statutes, and common law fraud. Following trial, Defendants filed motions for judgment as a matter of law or, in the alternative, for a new trial or, in the alternative, to alter or amend the judgment. The District Court denied Defendants’ motions in their entirety.

Plaintiff alleged that Defendants were members of a conspiracy that sharply inflated the costs of medical care for car accident victims by prescribing tests and treatments, as well as prescriptions and medical equipment – whether medically necessary or not – and then routinely billed State Farm for additional treatments that were never provided. At trial, State Farm’s proof of Defendants’ fraud consisted of State Farm’s claim files and testimony of patients, physicians at Defendants’ medical facilities, Defendant physicians, and experts.
After a four-week trial, the jury awarded Plaintiff over $4 million against all Defendants jointly and severally, and individual Defendants were found liable for punitive damages totaling $11.4 million

Analysis

The Third Circuit’s reviews a district court’s order granting or denying a motion for a new trial for abuse of discretion unless the court’s denial of the motion is based on the application of a legal precept, in which case the review is plenary. A new trial may be granted on the basis that a verdict was against the weight of the evidence only if a miscarriage of justice would occur if the verdict were to stand.

State Farm noted that RICO is distinct because the members of the association-in-fact enterprise include all the defendants, there is a complete identity between the enterprise and the defendants and, therefore, no distinctiveness among the defendants.  As the District Court noted and State Farm urged, the intracorporate conspiracy doctrine is not universally accepted, and it is questionable whether the Defendant’s version is completely accurate.

The defendants argued that State Farm failed to prove: (1) the elements of an association-in-fact enterprise; (2) that defendant Mintz conspired with the other Defendants to defraud, as § 1962(d) requires; (3) that Mintz’s actions proximately caused State Farm’s injuries; (4) that Mintz’s conduct fulfilled the elements of common law fraud; and (5) that Mintz’s conduct fulfilled the elements of statutory fraud under Pennsylvania law. The Third Circuit rejected all of Mintz’s claims to the contrary and held that the weight of the evidence supports the jury’s finding against Mintz and the other defendants. Therefore, the Third Circuit concluded that to let the verdict stand would not result in a miscarriage of justice.

The Third Circuit agreed with State Farm’s assertion that a violation of the Insurance Fraud statute is a civil tort and that, as the jury found and the District Court upheld, the Defendants together contributed to State Farm’s injuries and are thus jointly and severally liable. Moreover, as the District Court correctly noted, there is no requirement for district courts to instruct juries to award damages against each defendant separately and individually. Because State Farm elected to receive treble damages the Third Circuit had no reason to address the contention that the punitive damages award should be reduced.

Lesson

Insurers who are the victims of fraud cannot rely on police agencies to investigate and prosecute perpetrators of insurance fraud. Prosecutions are few and far between. As readers of Zalma’s Insurance Fraud Letter, available FREE at http://www.zalma.com/ZIFL-CURRENT.htm, know prosecutions are increasing but are still anemic and those who are prosecuted and convicted usually receive minor punishments. By being proactive insurers can recover from the fraud perpetrators, like the doctors involved in this case, the insurer can recover what it lost, a bonus of three times the compensatory damages, and actually deter insurance fraud by hitting the perpetrators where it hurts them most, in their wallet.

It is time that insurers emulate the actions of State Farm and the few other insurers who are using civil suits to defeat insurance fraud by taking the profit out of the crime.

The Centers for Medicare and Medicaid Services (“CMS”) posted an alert (the “Alert”) that confirms that there has been an extension, in certain cases, of the reporting trigger date for Mandatory Insurer Reporting (“MIR”) under Section 111 of the MMSEA.  The Alert provides the new trigger dates based on gross settlement/judgment/other payment (“TPOC”)  values for claims as follows:

On September 23, 2011 the MSPRC announced that it would be adding a Self Service Information Feature to its current Customer Service Line that will provide automated conditional payment information over the telephone. It is scheduled to go live on September 30, 2011. The announcement suggests the advantages of the new telephone feature would be:

We find that it raises more questions than it answers. For example:

More information was promised although none has been received to date. We will keep you up to date as we receive the information.

The Wisconsin Supreme Court recently held in Casper v. American International South Insurance Co., 2011 WI 81 (July 19, 2011), that an insurer may be sued directly by the claimant when the claimant is involved in an incident that takes place in Wisconsin, even if the policy was not issued and delivered in Wisconsin.  Wisconsin, as one of a handful of states that permit a claimant to file an action directly against the defendant’s insurer, now may see a greater number of direct actions against insurers. 

As background, a truck driven by an employee of Transport Leasing/Contract Inc. (“TLC”) collided with a minivan, seriously injuring the passengers in the minivan.  The passengers filed suit against TLC’s excess insurer, National Union Fire Insurance Company of Pittsburgh, PA (“National Union”).  The Wisconsin Supreme Court considered, in pertinent part, whether the passengers could maintain a direct action against National Union, even though the liability policy was neither delivered nor issued for delivery in Wisconsin.  The Court of Appeals had granted summary judgment in favor of National Union on the basis that the passengers could not maintain such action under Wis. Stat. §§ 631.01(1) and 632.24.  The Court of Appeals relied on Kenison v. Wellington Insurance Co., 218 Wis. 2d 700, 582 N.W.2d 69 (Ct. App. 1998).

The Wisconsin Supreme Court reversed and found that Wis. Stat. § 632.24 allowed for direct actions based on insurance policies delivered or issued for delivery outside Wisconsin.  Notably, this statute provides, “Any . . . policy of insurance covering liability to others for negligence makes the insurer liable . . . to the persons entitled to recover against the insured for the death of any person or for injury to persons or property, irrespective of whether the liability is presently established or is contingent and to become fixed or certain by final judgment against the insured.”  The Supreme Court characterized this language as “exceptionally inclusive.”

National Union argued that Wis. Stat. § 631.01(1) requires a narrower view.  That statutory provision states “… This chapter and ch. 632 apply to all insurance policies . . . delivered or issued for delivery in this state, on property ordinarily located in this state, on persons residing in this state when the policy . . . is issued, or on business operations in this state.”  National Union maintained that this provision required that the policy be delivered or issued for delivery in Wisconsin as a threshold prerequisite, relying on Kension.  However, the Supreme Court adopted the claimant’s disjunctive reading of the provision, i.e., that any of the four conditions may be met in order for a direct action to be maintained.  Thus, the Supreme Court announced the new rule (thereby overruling Kension) that Wis. Stat. § 632.24 “applies to any policy of insurance coverage liability, irrespective of whether that policy was delivered or issued for delivery in Wisconsin, so long as the accident or injury occurs in this state.”

Going forward, even though an insurer may be able to price a policy based on where it is issued and delivered, the fortuitous occurrence of an incident in a state, such as Wisconsin, may force the insurer into the unenviable position of having to litigate directly against the non-judgment creditor claimant.  Does this decision cause insurers to increase premium rates if insureds do significant business in Wisconsin, even though the insured’s principal place of business is not in Wisconsin, and the policy is not issued or delivered in Wisconsin?

In the case of Nationwide Insurance Co. of Florida v. Demmo, No. 2D10-4104, 2011 WL 1197538 (Fla. Dist. Ct. App. Apr. 1, 2011), a Florida state circuit judge ordered Nationwide to produce “Nationwide’s claims notes, activity logs, property loss notice information, and property loss notice forms in Demmo’s first-party breach of contract action against Nationwide.”  Id. at *1.  On certiorari review, the Florida appellate court quashed the trial court’s order.

The reason for reversal in this case was a simple one.  According to the appellate court, the trial court erred by focusing on the date that Nationwide denied coverage under the homeowner’s policy it issued to Ms. Demmo.  The trial court then ordered production of everything prepared before Nationwide denied coverage, on the ground that none of it could have been work product prepared in anticipation of litigation, in the eyes of the trial judge.

Instead, the appellate court concentrated on the nature of the action which Ms. Demmo filed against Nationwide.  “Rather, the issue turns on what type of action Demmo has brought.  Here she is not pursuing a bad faith claim, but rather seeks relief for breach of contract.”  Id.  In this particular case, the materials requested by Ms. Demmo were simply not discoverable where coverage was disputed and not yet resolved, and where, in addition, the homeowner’s insurance company faced prejudice if it were compelled to produce its claim file materials during the insurance coverage litigation.

In an appropriate case, the appellate court indicated that it might be inclined to hold that certain documents contained in a first-party claims file might be discoverable, see id. at *2 n.2, but in effect, the appellate court held that this was not an appropriate case.

In the case of Malaker v. Cincinnati Insurance Co., 2011 WL 1337095 (N.D. Ill. April 7, 2011), a federal judge decided the entire case on a motion to dismiss one count of the complaint. 

Mr. John Helfrich was an insured under a CGL (or Commercial or Comprehensive General Liability Insurance) policy issued by Cincinnati Insurance Company.  An incident took place in which Mr. Helfrich’s hand came into contact with a shirt and jacket worn at the time by Mr. Eric Malaker.  Mr. Helfrich admitted that, and Mr. Helfrich also admitted that he pushed Mr. Malaker.

Mr. Helfrich informed Cincinnati of this incident.   (It is not clear from the opinion how he informed Cincinnati, i.e., whether verbally or in writing, but it did not seem to matter to the judge in reaching her decision).  Cincinnati denied coverage in response to this pre-suit notice and in its “denial-of-coverage letter” asked Mr. Helfrich, should he be sued, to provide Cincinnati with notice “of the suit immediately” so that Cincinnati “may review the wording of the suit” for possible coverage.  Malaker, 2011 WL 1337095 at *1.

Thereafter, Malaker sued Helfrich.  Some two years later, Mr. Helfrich’s attorneys may have notified Cincinnati of the underlying lawsuit by Malaker against Helfrich, a fact which was in dispute.  Six years after the underlying lawsuit was filed, Mr. Malaker and Mr. Helfrich reached a settlement for $5.1 million.  The Circuit Court of Illinois entered what appears to be a consent judgment in the underlying case accordingly.  Mr. Helfrich paid $100,000.00 to Mr. Malaker and assigned all of his rights against Cincinnati to Malaker.

Malaker then filed a complaint against Cincinnati in which he alleged three claims in three counts:  Count One for alleged breach of contract, Count Two for alleged breach of fiduciary duty owed by Cincinnati to Helfrich, and Count Three for alleged bad faith under Section 115 of the Illinois Insurance Code.  In the decision in question, the federal court expressly considered Cincinnati’s motion to dismiss the claim for its alleged breach of fiduciary duty.  However, the Court also noted that the parties had filed motions for summary judgment by the time of this decision.  Id. at *2, *2 n.1.  The federal court’s disposition of the motion to dismiss also disposed of the motions for summary judgment in this case.

As the federal judge threaded her way through to a determination in considering a motion to dismiss that no fiduciary relationship existed on the face of the complaint, the Court made a series of interesting and potentially instructive rulings for duty-to-defend cases.

First, the Federal District Court held that a “breach-of-fiduciary-duty claim” is subject to the notice-pleading standards of Federal Rule of Civil Procedure 8, and not the requirements of pleading with particularity which are required for fraud claims under Rule 9(b).  Id. at *3.

Second, the Court agreed with Cincinnati that the mere existence of an “insurer-insured relationship does not in itself give rise to a fiduciary relationship under Illinois law.”  Id.  Under Illinois law there could be a fiduciary relationship triggered by a duty to defend, but in this particular case whether a duty to defend were triggered involved fact questions of timely vs. late notice which could not be determined at the pleading state, the federal judge wrote.  Id. at *5, *6-*7.  Therefore, the federal court determined, in effect, that it would not determine that factual issue but would instead determine the legal issue of whether, even assuming timely notice, there was a duty to defend Mr. Helfrich against the underlying complaint under Cincinnati's CGL policy.  See id. at *6.

The federal court held that there was never a legally enforceable fiduciary duty between Helfrich and Cincinnati in this matter, because under Illinois law Cincinnati never had a duty to defend him against Malaker’s underlying complaint.  In order to reach this legal conclusion, the federal court had to look behind the complaint at bar, which did not contain allegations which revealed what were the claims and allegations made by Mr. Malaker against Mr. Helfrich in the underlying lawsuit.  Therefore the federal court employed Federal Rule of Evidence 201(b) to examine the underlying state court complaint for the fact of those underlying claims and allegations and not to determine whether they were true or false.  Id. at *6-*7.  It is not clear from the federal court’s opinion in this case whether the underlying complaint was attached as an exhibit to the complaint at bar, or whether there was a request for judicial notice of the underlying complaint under Evidence Rule 201(b) in this case.  It would be a good practice to do both in an appropriate case, and to invite the court in any future case to determine the duty to defend based upon documents which are easily referenced in the record at bar.

There was a possibility that Illinois State Courts considering the question of whether there was a duty to defend the underlying case, would look to other pleadings in the underlying case in addition to looking at the underlying complaint.  The federal judge wrote that she also considered the complaint and other pleadings in the underlying case, although the opinion does not provide a list of all the other pleadings that she considered.  In any event, the result would be the same: the court held that there still would have been no duty by Cincinnati to defend Mr. Helfrich in the underlying Malaker lawsuit.  Id. at *8.  Defense practitioners may thus wish also to consider attaching all relevant underlying pleadings to the complaint, or to consider attaching them to a notice of filing with a request for judicial notice of them, in any appropriate duty-to-defend insurance coverage case.

The federal court was not done in this case, however.  The federal judge went on to consider the legal sufficiency of the counts for alleged breach of contract and for alleged bad faith under the Illinois Insurance Code.  There could be no breach of contract since Cincinnati did not have a duty to defend the underlying Malaker case, and there could not be any bad faith or “vexatious and unreasonable” conduct under the Illinois Insurance Code by Cincinnati denying a duty to defend where, the Court ruled, it did not have a duty to defend.

Since amendment of any count would be futile, dismissal of all claims in all counts in the federal court complaint was warranted.  Accordingly, all counts were held dismissed with prejudice, and the pending motions for summary judgment were held moot as a result.  Id. at *10.

The holdings of the Federal Court in this case came down to this concise summary:

In the present case, the operative Complaint fails to state a claim because its constituent allegations, coupled with relevant pleadings of which the Court takes judicial notice, reveal that Defendant properly denied coverage.

Did you know that AFLAC generates 75% of its revenue from Japan? Gilbert Gottfried must know that now. The voice of the AFLAC duck in its U.S. commercials was fired this week after insensitive comments he made about Japan's tragedy on Twitter. This article in the DRI Voice discusses some of the pitfalls of social media like Twitter.
 
The total cost of the earthquake damage could be between $100 billion and $190 billion (estimates from Eqecat, the catastrophe modeling firm and Barclay's Capital respectively). However, because most earthquake risk in Japan is covered by the government, insurance losses are likely to be in the range of $12-25 billion. For comparison, Hurricane Katrina caused total losses of $125 billion, of which $62.2 billion was insured. The 1995 earthquake in Kobe caused economic losses of more than $100 billion, but only $3 billion was insured loss. That area was not considered earthquake-prone, so earthquake coverage was less prevalent than in other areas. But that catastrophe did increase the rate of coverage.
 
The Wall Street Journal reports that insurance claims related to the disaster in Japan will be generated far from the island-nation. They quote Rod Fox of reinsurance broker TigerRisk that the disaster will "have far-reaching effects, and the business interruption claims can mount very quickly." Already ON Semiconductor has reported that they are "working with [their] insurance carriers to assess and recover incurred losses from business interruption, supply chain disruption and property damage..."
 
Our hearts go out to everyone affected by this catastrophe in Japan and we'll be seeing these issues for some time to come.

Must a beneficiary have his/her hands or feet at least partially "cut off" to qualify for Accidental Death and Dismemberment benefits?  What does the term "dismemberment by severance" in an ERISA plan mean?   Isn't paralysis enough?  No.
 
Here's the case of Fier v. UNUM Life Insurance Co., F.3d (9th Cir. January 4, 2011) (paralysis resulting from "severance of spine" insufficient to qualify for AD&D benefit).
 
FACTS: Fier was a beneficiary under the employer's Long Term Disability (LTD) and Accidental Death and Dismemberment (AD&D) benefits. An accident in 1992 severed his spinal cord and he became a quadriplegic; the company tailored a new position for him, paying him the same salary. His salary was reduced $20,000 in 1997.  UNUM paid benefits from 1997-2004.
 
In 2004 UNUM informed Fier he had not been eligible for disability payments (since 1998) because he earned greater than 80% of his pre-disability earnings. 
 
Fier sued, seeking benefits from 1993-1997 and a continuation of benefits. Fier contended, among other things: although his hands and feet remain physically attached to his body, he has lost them from a functional standpoint due to "severance" of his spinal cord.
 
TRIAL COURT: Applied de novo review and affirmed UNUM's decision to end benefits.
 
NINTH CIRCUIT:  AFFIRMS with the following rationale.
 
"'Dismemberment by severance' has to mean some actual, physical separation."  This is "unambiguous draftsmanship by an abundantly cautious lawyer." The court relied on the holding involving nearly identical facts in Cunninghame v. Equitable Life Assurance Society of the United States, 652 F.2d 306, 307 (2nd. Cir. 1981).