New York’s highest court decides Carothers case, holding that a finding of fraud is not required for an insurer to withhold payments to a medical service corporation that violates material licensing requirements

PR Newswire

ALBANY, N.Y., June 11, 2019 /PRNewswire/ -- In a major victory for the insurance industry, the New York Court of Appeals, the highest court in New York, has affirmed the 2017 order of the Appellate Division upholding the trial verdict and judgment in favor of 54 NY automobile insurers and self-insurers in Andrew Carothers, M.D., P.C. v. Progressive Insurance Co. Rivkin Radler partner Barry I. Levy successfully argued the appeal before the Court of Appeals with the rest of Rivkin Radler's team: partners Evan H. Krinick, Michael A. Sirignano, Cheryl F. Korman, and Stuart M. Bodoff. The Court of Appeals' opinion preserves a 2008 jury verdict in favor of the insurers, which expunged approximately $20 million in pending claims against these members of the New York automobile insurance industry.

Driven to Deliver ® (PRNewsfoto/Rivkin Radler LLP)

This original jury trial, Andrew Carothers, M.D., P.C., Plaintiff v. Insurance Companies, more than 10 years ago, resulted in a unanimous defense verdict, in the first significant trial verdict addressing the "Corporate Practice of Medicine Prohibition" principles established in the landmark decision of State Farm v. Mallela, in which Rivkin Radler partner Evan H. Krinick argued on behalf of State Farm in the Court of Appeals. In Carothers, the Court of Appeals on June 11, 2019 affirmed the Appellate Division order, ruling, among other things, that insurance carriers seeking to demonstrate that a professional service corporation engaged in corporate practices that violate licensing requirements, need not show that the professional service corporation or its managers engaged in common-law fraud. The Court expressly clarified its decision in Mallela, stating that "Mallela does not require a finding of fraud for the insurer to withhold payments to a medical service corporation improperly controlled by nonphysicians."

Judge Fahey, writing for a unanimous Court, noted that the Appellate Division had reasoned that there was "overwhelming evidence" that Dr. Carothers was merely the nominal owner of the professional service corporation, which was actually owned and controlled by nonphysicians who funneled the profits to themselves. The Court of Appeals stated that "[b]y statute, regulation, and common law, the corporate form cannot be used as a device to allow nonphysicians to control the practice of medicine." The Court of Appeals further stated that, in Mallela, it drew the term "fraudulently incorporated" from the Second Circuit's certified question, but the term may be misleading. "A corporate practice that shows 'willful and material failure to abide by' licensing and incorporation statutes … may support a finding that the provider is not an eligible recipient of reimbursement under 11 NYCRR 65-3.16 (a) (12) without meeting the traditional elements of common-law fraud."

Barry I. Levy, of Rivkin Radler, called the Court of Appeals opinion another significant step in the fight against no-fault insurance fraud. "We are glad that the Court of Appeals recognized the substantial evidence presented at trial that nonphysicians illegally controlled Dr. Carothers' practice, and that the governing regulation, 11 NYCRR 65-3.16 (a) (12), renders healthcare providers who violate material licensing requirements ineligible to receive no-fault reimbursement from no-fault insurers." Mr. Levy further stated that "the Court of Appeals put healthcare providers and nonphysicians on notice that violations of material or foundational rules of professional licensure will not be countenanced."

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Established in 1950, Rivkin Radler LLP has offices in Albany, NY; Hackensack, NJ; New York City; Poughkeepsie, NY; and Uniondale, NY. The firm, with more than 190 attorneys across 21 practice groups, is nationally recognized and was named an American Lawyer Media "Go-To" Firm by its clients. In addition, the firm is among the National Law Journal's 350 largest firms in the U.S. For more information, visit www.rivkinradler.com.