• The New Jersey Courts Apply the Insurance Fraud Prevention Act to Take a Bite Out of Fraud
  • July 23, 2003 | Author: Frank P. Brennan
  • Law Firm: Marshall, Dennehey, Warner, Coleman & Goggin - Cherry Hill Office
  • The New Jersey Insurance Fraud Prevention Act was enacted in 1992. This act provides a private right of action for insurance companies to pursue insurance fraud schemes and recoup not only compensatory damages but also treble damages, attorney's fees and costs. Until recently, the courts have been reluctant to impose these sanctions upon frauds perpetrated against insurance companies.

    This situation changed dramatically in the matter of Material Damages Adjustment Corp. v. Open MRI of Fairview, et al., decided on March 19, 2002. The matter was heard before the Honorable Judge Fuentes in Hudson County Superior Court, Law Division.

    Material Damages Adjustment Corp. ("MDA") filed an action seeking a declaration that the bills of Open MRI of Fairview ("Open MRI") were not compensable under the PIP statutes, the Personal Injury Protection policies of insurance, and for violations of the Insurance Fraud Prevention Act. The insurer moved for summary judgment in the Superior Court of Hudson County, Law Division before Judge Fuentes in a matter of first impression. The motion sought judgment that the medical provider was not entitled to PIP benefits for MRI services provided to insureds during the period of its "unlicensed operation," that it violated the Insurance Fraud Prevention Act, and that the insurer was entitled to restitution of all payments, including treble damages.

    The court held that Open MRI was not legally entitled to collect PIP benefits because of its non-licensed status. In addition, the submission of bills, when they knew they were unlicensed, was a violation of N.J.S.A. 17:33A-1, et al. (The Fraud Act). The court further found that each bill submitted was a violation of that Act and, therefore, constituted a pattern of violation which allowed not only compensatory damages but also treble damages, as well as attorney's fees and costs.

    In March of 1997, Open MRI filed a certification of incorporation with the Secretary of State. In July of 1997, they filed for a Certificate of Need under N.J.S.A. 8:33-5.1. On August 27, 1997, that Certification of Need was approved. However, specifically within the correspondence to this provider it was stated that "no services shall be rendered until a license issued by the certification of need and acute care licensing program has been issued." Open MRI had never applied for a license, and yet they started providing services in August of 1997 and proceeded to do so until June of 1999. In addition to providing the services, Open MRI billed numerous insurance carriers, including MDA, using the standard health insurance claim forms or HICFA.

    Open MRI claimed that Dr. Pevsner was the "medical director" of the facility, that he tailored procedures and policies for the provision of services, and oversaw over the entire operation. However, these polices and procedures were not written, nor was there any indication of who appointed the doctor as medical director. Most importantly, it appeared that Dr. Pevsner was not "on site" when the specific services were provided, except for four hours per week. The court found specifically that there was no means in place to determine the safety of present exposure when the actual test was being performed by an unsupervised non-medical staff.

    The 1998 amendment to the New Jersey PIP statute was passed with the express purpose of containing the escalating cost of auto insurance in this state. The court in this matter specially found that one of the principal means of containing insurance premiums was the detection and deterrence of insurance fraud. With this as the public policy backdrop, the court analyzed the current matter as follows; first, the court found that the services being provided by Open MRI came within the definition of medical expenses found within N.J.S.A. 39:6A-2-1 and, therefore, concluded that the defendant was a health care provider. As such, they were governed by N.J.S.A. 26:2H-2, which indicates that all health care facilities must be licensed. The court found specifically that the regulations requiring a license applied, as well as other regulations providing protection to the public, including issues of staffing levels, training and experience and quality assurance programs. Unlicensed operations represented a flagrant violation of the statues and regulatory requirements. The court specifically noted that Open MRI "conducted the services without government oversight, all of which were done without the regard to legal standards set by the Legislature and state department. This is a rogue operation functioning completely outside of a law."

    The court found as a matter of law that entities wishing to engage in a highly regulated business which directly impact upon the safety and welfare of the public, such as delivery of healthcare, are constructively on notice of the existence of legal requirements governing their practice and operations. The court stated, "[t]hose who, nonetheless, venture forth without first obtaining the required governmental approvals, whether out of ignorance or arrogance, do so at their risk and must face the legal consequences for their action. Public policy can accept no lesser standard."

    Citing Allstate v. Orthopedic Evaluations, this court reiterated that "the law should accord no recognition to the activities and operations which place the public at risk by failing to provide the professional supervision and control deemed essential by the board of medical examiners."

    The defendant's argument that the agency in charge of enforcement took no action in this matter, and that this inaction amounted to "administrative ratification," was dismissed in its entirety. Among other things, the court indicated that no agency has the authority to ratify non-compliance with regulations by administrative fiat.

    The courts reviewed the statutes and regulations, including the Automobile Reparation Reform Act and the Insurance Fraud Prevention Act, and found that the carrier had both the right to the denial of coverage to the provider, and that the Legislature had authorized the private right of action of the carrier with regard to the insurance fraud violations. Perhaps of even greater importance was the statement of the court that treble damages may be awarded if the court determines that the defendant has engaged in a "pattern of violation of the Act."

    In this instant matter, the court found that the defendant presented hundreds of claims and received payment on hundreds of claims from both the plaintiff MDA as well as other carriers. Further, the defendant knew that they were not licensed to provide the services, but forwarded the bills for services nonetheless. HICFA forms require the signature of the physician or supplier of services, including "degrees or credentials" of the signatory. The court found that the defendant's representative, when signing this form, was attesting to their license or status and their authority to perform services and receive payment under the PIP statute. Because the defendant knew of their lack of authority to provide services, given the fact of their unlicensed status, this was a direct material misrepresentation. Further, this misrepresentation prompted the plaintiff's decision to pay the PIP benefits to this provider.

    Judge Fuentes found that the policy goal of the fraud act is to aggressively confront the problem of insurance fraud, and that it dictated an outcome "requiring the restitution of fraudulent benefits." This ultimately will reduce premium dollars by eliminating the payment of fraudulent claims. The defendant argued that the payment of compensatory damages in the matter of Open MRI, where services were provided to legitimately injured individuals and where these services provided aid to physicians in the diagnosis and treatment of patients, would constitute an enormous windfall for the insurance carriers. The court specifically indicated that this argument was not supported by law or public policy.

    This holding was consistent with the expressed public policy purpose of the statue, namely, the restitution of fraudulently obtained insurance benefits. Citing Judge Giribaldi in Merin v. Maglaki, 126 N.J. 430, 436 (1992), the court underscored that "in discerning the intent of the Legislature, we considered not only the particular statute in question, but also the entire legislative scheme of which it is a part."

    This case supports the use of affirmative, declaratory judgment actions for insurance fraud violations. Although this is a Law Division matter and not an Appellate Division decision and, therefore, only advisory, it does provide significant support and guidance to both insurance carriers and other courts as to the appropriate handling of insurance fraud schemes, as well as demands for compensatory damages for violations of the fraud act. This is a case of first impression with regard to the issue of an otherwise "legitimate" medical facility providing services in violation of pertinent regulations. More importantly, it is also a case of first impression for granting and imposing with the full force and effect provisions in the Insurance Fraud Prevention Act authorizing the award of not only the appropriate damages to insurance companies, but also treble damages and attorney's fees and costs where appropriate.