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.

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).

It seems that the duties of a premises owner may be expanding rapidly.  The Michigan Supreme Court recently held that a restaurant may have a duty to inspect things such as the toilet paper dispenser in a bathroom stall when employees do restroom checks, to make sure the dispenser is not in an unreasonably dangerous condition. Both the Wall Street Journal Law Blog and Above the Law have a field day with the facts in this case in which a woman injured her hand (and claims it is not yet healed so she cannot work, but can still bowl three years later) when the toilet paper dispenser landed on her hand in the bathroom stall.  Given that the Court held that the dispenser might be considered unreasonably dangerous, it seems the manufacturers of toilet paper dispensers might also now be on notice of this potential hazard.

Many defense attorneys have asked how their personal injury cases might be affected by last week's CMS announcement that Medicare is postponing some aspects of the Mandatory Insurer Reporting requirements under § 111 of the MMSEA.  The reporting extension announced by CMS is a big deal to settling insurance companies and self-insureds who have the burdensome reporting obligations under § 111 of the MMSEA.  Lawyers who defend personal injury claims are less affected by the § 111 implementation delay, because although they are called upon to help identify Medicare beneficiaries and gather some of the data which CMS requires insurers/self-insured to report, the defense lawyers themselves do not do the reporting under § 111 of the MMSEA.
 
That said there has been a good deal of misinformation and generalizing about the § 111 reporting extensions.  Here are a few of the most troublesome bits of misinformation we've heard recently:

1. Some have suggested (incorrectly) that the reporting extensions mean parties do not have to notify Medicare of settlements which occur, and we've heard some suggest that  Medicare will suspend its collection efforts until the § 111 reporting is in full swing.  The § 111 reporting deferral does not affect or change the need for all parties to ensure Medicare's interests are being protected and Medicare is reimbursed from the settlement proceeds in accordance with the MSP statutes and regulations.
 
2. Some believe (incorrectly) that the recent CMS announcement had the effect of postponing ALL of the mandatory insurer reporting required under § 111 of the MMSEA.   Not so.   The recent extensions apply to only one aspect of the § 111 reporting:  reporting of TPOC settlements.  TPOC is Medicare-speak for "Total Payment Obligation to Claimant" and most liability settlements are considered TPOCs.   Under the extended § 111 deadlines, TPOC settlements which occur on or after October 1, 2011 will be "reportable" and must be reported no later than the first quarter of 2012.  Before the recent extension all TPOCS after October 1, 2010 were reportable, and had to be reported no later than the first quarter of 2011.  But while the reporting timeline for TPOCS has been extended, the reporting timeline for ORMs HAS NOT BEEN EXTENDED.  ORM is Medicare-speak for "Ongoing Responsibility for Medicals" and most med pay, no-fault and PIP claims are ORMs.  As such, the recent reporting extension does NOT change existing § 111 reporting requirements for workers' compensation or liability cases that include ORM—all ORMs since January 1, 2010 have been "reportable" and STILL must be reported by insurers/self-insureds during the first quarter of 2011.
 
3. Many insurers have already completed the required testing period and have gone "live" with their § 111 reporting obligations.  As such, some insurers/self-insureds with which you work may continue to report all TPOCs and ORMs under the § 111 of the MMSEA even though the implementation deadline for TPOCs has been postponed.    The recent CMS Alert states that if the reporting entity wishes to report TPOC settlements prior to the first quarter of 2012 they are allowed to do so.
 
4. Extension of Current Dollar Thresholds: The CMS Alert also extended, by one year, the interim reporting thresholds set out in Section 11.4 of Version 3.1 of the User Guide.  These low-dollar § 111 reporting thresholds are designed to eliminate the burden of § 111 reporting for smaller settlements while everyone is learning the new system.  The thresholds are temporary and staged to expire altogether after 2014.  The new timeline on the temporary thresholds is:

• Settlements prior to January 1, 2013: those $5,000 or less need not be reported
• Settlements during 2013:  those $2,000 or less need not be reported
• Settlements during 2014: those $600 or less need not be reported

Remember that the duty to report under § 111 is separate and distinct from the duty to reimburse the MSPRC under the MSP statutes and regulations.  As such, even if a settlement is small enough that it need not be reported under § 111, the obligation STILL EXISTS to fully reimburse Medicare from the settlement proceeds.   While there is a low-dollar threshold for § 111 reporting, there is NO low-dollar threshold for reimbursing Medicare.

So, bottom line is the § 111 reporting delays provide an additional twelve months for CMS and the insures/self-insureds to gear up for the mandatory reporting of TPOC settlements.  This § 111 implementation delay does not, however, change the present need for all parties in personal injury cases involving Medicare beneficiaries to ensure that Medicare's interests are being protected (and Medicare's past conditional payments are being reimbursed from all settlements).  The penalties under the MSP statutes for failing to reimburse Medicare are steep for settling insurers, and this aspect of Medicare compliance is completely unaffected by the § 111 reporting postponement. 

I am a lawyer at Picadio Sneath Miller & Norton in Pittsburgh, Pennsylvania, and I have been a member of DRI for approximately three years.  I recently joined DRI’s group on Linked in, and I received my first discussion group email last week.  One discussion was started by Dennis Bailey who asked if anyone had success subpoenaing Facebook to obtain information about a plaintiff in a personal injury case.  I just happened to be facing a similar question in a personal injury case we are defending, and the responses were very informative and helpful.  Also, there was a discussion group started by Matthew Marrone regarding a recent Pennsylvania Supreme Court ruling which may have a big impact on the attorney-client privilege in Pennsylvania—also a very important and relevant topic to my practice.   I strongly recommend that all members of DRI join the DRI group on Linked in.  It is a great way to share valuable information with lawyers from across the country and improve your practice.

Virginia is in the minority of states that generally permit parties to be contractually indemnified for their own negligence, as long as the provision is clear and explicit.   In 2007, the Virginia Supreme Court upheld contractual indemnification clauses which shift the burden of liability to the indemnitor, even though the injury was the fault of the indemnitee.  Estes Exp. Lines, Inc. v. Chopper Exp., Inc., 273 Va. 358, 641 S.E.2d 476 (2007); W.R. Hall, Inc. v. Hampton Roads Sanitation Dist., 273 Va. 350, 641 S.E.2d 472 (2007).

In Estes Exp. Lines, Inc. v. Chopper Exp., Inc., a Chopper employee was injured while operating a truck leased from Estes.  The employee filed a personal injury action against Estes and a repair company on the basis that their negligence was the proximate cause of his injuries.  The parties settled their claims and, Estes then requested that Chopper reimburse it for the settlement amount and attorneys' fees in reaching settlement pursuant to the indemnification clause in the lease agreement.  Chopper had agreed to indemnify Estes for:

C. Any and all loss, cost, claim, expense, cause of action, loss of use and liability by reason of injury (including death) to persons or damage to property arising out of the use, operation, ownership, maintenance or control of a [leased] Vehicle whether covered by insurance or not, including claims in excess of insurance limits and all claims determined not to be covered by insurance irrespective of who, among [Chopper] or its insurance carrier or others, may be the cause for such failure of coverage or recovery in excess of coverage.

D. Any liability by reason of any claim asserted by an agent or employee of [Chopper].

Chopper refused, and Estes filed suit. 

The Virginia Supreme Court stated that indemnity provisions, including those indemnifying a party against future liability for personal injury caused by its own negligence, do not invoke the same public policy concerns as pre-injury release agreements.  The primary reason for this distinction is that, unlike pre-injury release provisions, indemnity provisions do not bar or even diminish an injury party's ability to recover from a tortfeasor.  The Court found that the indemnification was enforceable even to the extent that it would entitle Estes to be reimbursed for its own negligence.

On the same day as it rendered its Estes opinion, the Virginia Supreme Court issued its opinion in W.R. Hall, Inc. v. Hampton Roads Sanitation Dist.  In this case, the Hampton Roads Sanitation District (“HRSD”) hired W. R. Hall, Inc. to replace sewer lines.  W. R. Hall’s employee was injured when a train hit him.  The employee sued Belt Lines.  HRSD assumed Belt Line’s defense pursuant to the utility line agreement between them.  HRSD then sought indemnity from W. R. Hall for its expenses incurred in defending Belt Line under two indemnity provisions in favor of HRSD.

Article 6.16 specified that W. R. Hall

Shall assume full responsibility for any damage to any such land or area [on which the work is to be done], or to the owner or occupant thereof.  [W.R. Hall] shall indemnify and hold harmless [HRSD] from and against all claims . . . brought by any such owner or occupant against [district] to the extent caused by or based upon [W. R. Hall’s] performance of the Work.

Article 6.31 required W. R. Hall to indemnify and hold harmless HRSD against any claim or loss for bodily injury "arising out of or resulting from the performance of the Work," provided that the claim or loss was caused in whole or in part by any negligent act or omission of W. R. Hall regardless of whether or not caused in part by any negligence or omission of a person or entity indemnified.  The Court noted that this provision operates to place the ultimate burden for  personal injury upon the negligent party causing said injury.

The Virginia Supreme Court found both Articles enforceable. The Court found that HRSD held harmless Belt Line against the consequences of its operations.  HRSD then sought to transfer that risk to the entity actually performing the operations (i.e. W. R. Hall) using Article 6.16.  The Court held that this transfer of risk to the active party is not repugnant to public policy.  Similarly, Article 6.31 sought to place the ultimate burden for a personal injury upon the negligent party causing that injury, but only if the indemnitor was at least in part responsible for the injury.  Consistent with Estes, the Court held that a contractual provision whereby a party is indemnified against losses incurred as a result of personal injury caused by its own future negligence is enforceable and does not violate public policy.

It is important to ensure that clients doing business in the Commonwealth of Virginia are clear about the language of the agreements in these cases and indemnification agreements in their own contracts.  While the indemnification language in these cases may not be suitable for the needs of all clients, it provides an important foundation for creating indemnification language in other contracts.  Moreover, when a client is faced with potential liability, an understanding of the language in these cases proves important in recognizing whether a clients’ current contract will exempt them from (or expose them to) liability.

I find it important to note, however, that Virginia does have a statutory limitation on indemnification of one's own negligence specifically for construction contracts.  VA. CODE. ANN. § 11 4.1.  Otherwise, pursuant to Estes and W.R. Hall, there is no public policy in Virginia that prohibits a party from negotiating away its own negligence in indemnity agreements.

Kevin M. Cox
Semmes Bowen & Semmes
kcox@semmes.com