Alev Med. Supply, Inc. v Progressive Ins. Co. (2010 NY Slip Op 50813(U))

Nassau Dist Ct, First District

10218/09

Amos Weinberg, Esq. – Plaintiff

John E. McCormack, Esq. – Defendant

Fred J. Hirsh, J.

Defendant Progressive Insurance Company (“Progressive”) moves for an order compelling Valadimir Alexsandrovich (“Alexsandrovich”) to appear for a deposition and answer questions concerning Bener Wholesale (“Bener”) and to provide actual documented costs of material supplied, alternatively for an order dismissing this action on the grounds plaintiff has wilfully refused to comply with defendant’s discovery demands or alternatively an order precluding plaintiff from producing evidence at trial as a result of its wilful failure to comply with defendant’s discovery demands.

BACKGROUND

This action raises issues about the extent to which a defendant can obtain discovery on defenses a defendant may be precluded from raising at a trial of an action for seeking payment of first party no-fault benefits.

Alev Medical Supply, Inc. (“Alev”) is in the business providing medical equipment and supplies. Alev commenced this action seeking to obtain payment of first party no-fault benefits for medical supplies it provided to Jason Bailey (“Bailey”).

Defendant served a discovery demand dated May 19, 2009. The demand seeks, inter alia, information regarding the amounts paid by Alev to the supplier of the medical equipment for the equipment furnished to Bailey.

Defendant also served a demand for interrogatories and a demand to take a deposition of a representative of Alev.

Progressive asserts its has conducted an investigation and believes Alev is part of a scheme involving an entity known as Bener Wholesale, Inc. (“Bener”) devised to defraud insurance companies.

Progressive claims that Bener does not really exist. Progressive asserts Bener was formed to generate invoices for medical supplies and equipment so Alev and other providers of medical equipment could bill no-fault and other insurance carriers.

Progressive seeks discovery primarily on its assertion that Bener does not exist [*2]and has not been selling medical equipment to Alev.

Progressive has sent an investigator to the addresses listed on invoices it has obtained through verification and has discovered Bener does not maintain any offices or other facilities at those locations.

Progressive does not indicate whether it has ever sent an investigator to the address Bener listed in its Certificate of Incorporation as the address to which the Secretary of State should mail process made upon the Secretary of State as statutory agent for process for Bener.

Progressive is essentially raising defenses of fraud and bills not in accordance with the no-fault payment schedule.

DISCUSSION

The No-Fault Law provides the provider of medical services and/or supplies shall be paid the amount “…the charges permissible under the schedules prepared and established by the chairman of the workers’ compensation board for industrial accidents.” Insurance Law §5108(a). A provider of medical equipment is permitted to charge a no-fault insurance carrier 150% of the documented cost of the equipment to the provider. 11 NYCRR 68 Part E (b)(1).

Translated into this action, Alev would be permitted to bill Progressive and Progressive would be would required to pay Alev 150% of the amount Alev paid to Bener or any other wholesale supplier of medical equipment for the equipment it provided to Bailey. Therefore, the amount Alev paid to Bener or any other medical supplier would appear at first glance to be relevant to this action.

However, this is an action to obtain payment of first party no-fault benefits. Unless a no-fault carrier seeks verification [11 NYCRR 3.5], a no-fault insurance carrier has 30 days from the date of receipt of the claim to pay or deny a claim in whole or in part. 11 NYCRR 65-3.8. A no-fault insurance carrier who fails to deny a claim within 30 days of receipt is precluded from asserting most defenses to the claim. A no-fault insurance carrier is also precluded from asserting at the trial of an action any precludable defense not asserted in a timely denial. Fair Price Medical Supply Corp. v. Travelers Indemnity Co., 10 NY3d 556 (2008); and Hospital for Joint Diseases v. Travelers Property Casualty Ins. Co., 9 NY3d 312 (2007); and Presbyterian Hosp. in City of NY v. Maryland Cas. Co., 90 NY2d 274, rearg. denied 90 NY2d 937 (1997).^[FN1] Fraud and charges not in accordance with the worker’s compensation fee schedule are [*3]defenses the carrier is precluded from asserting unless raised in a timely served denial. Fair Price Medical Supply Corp. v. Travelers Indemnity Co., supra; New York Hosp. Medical Center of Queens v. Country-Wide Ins. Co., 295 AD2d 583 (2nd Dept. 2002); Davydov v. Progressive Ins. Co., 25 Misc 3d 19 (App. Term 2nd & 11th Jud. Dist. 2009); and Lincoln General Ins. Co. v. Alev Medical Supply Inc., 25 Misc 3d 1019 (Dist. Ct. Nassau Co. 2009).

If Progressive did not deny the claim submitted by Alev on the grounds of fraud or charges not in accordance with the no-fault schedule in a timely denial, Progressive is precluded from raising those defenses at trial.

The no-fault regulations provide an insurance carrier with the ability to investigate a claim prior to paying or denying the claim by demanding written verification [11 NYCRR 65 – 3.5] and/or an examination under oath [11 NYCRR 65-1.1]. The insurance carrier’s time to pay or deny a claim is extended by making a timely demand for verification. Infinity Health Products, Ltd. v. Eveready Ins. Co., 67 AD3d 862 (2nd Dept. 2009). A claim does not have to be paid or denied until the insurance carrier has been provided with all timely demanded verification. Mount Sinai Hosp. v. Chubb Group of Insurance Companies, 43 AD3d 899 (2nd Dept. 2007); and New York & Presbyterian Hosp. v. Progressive Cas. Ins. Co., 5 AD3d 569 (2nd Dept. 2004).

The entire purpose of the verification process is to provide the insurance carrier with the opportunity to seek additional information and time to review a claim before the carrier is required to pay or deny the claim. Fair Price Medical Supply Corp. v. Travelers Indemnity Co., supra.

CPLR 3101(a) provides for full disclosure by a party to an action of “… all matter material and necessary in the prosecution or defense of an action regardless of the burden of proof.”

Material demanded in discovery is “material and relevant” for the purposes of CPLR 3101(a) if the demanded matter, “…will assist preparation for trial by sharpening the issues and reducing delay and prolixity. The test is one of usefulness and reason.” Allen v. Crowell-Collier Publishing Co., 21 NY2d 403, 406 (1968). The demanded material must be produced if it can be used as evidence in chief, for rebuttal or for cross-examination. Allen v. Crowell-Collier Publishing Co., Id.; and Wind v. Eli Lilly & Co., 164 AD2d 885 (2nd Dept. 1990).

The party demanding discovery has the burden of establishing the production of the demanded material will lead to the discovery of evidence relevant to the action. Crazytown Furniture, Inc. v. Brooklyn Union Gas Co., 150 AD2d 420 (2nd Dept. 1989); Carp v. Marcus, 116 AD2d 854 (3rd Dept., 1986); and Herbst v. Bruhn, 106 AD2d 546 (2nd Dept., 1984).

To determine whether Progressive is permitted discovery on the issue of fraud or billing in excess of the amount permitted by the no-fault law and regulation, the court must know whether the claim was timely denied and the basis for the denial. If the claim made by Alev was not denied on the grounds of fraud or billing in excess of the amount permitted by the no-fault law and regulations, Progressive is precluded from raising those defenses at trial. Discovery cannot be obtained regarding matters that will not be in issue at trial. Since the defendant has not provided the court with copies of either the claims or the denials, the court cannot determine on the present record [*4]whether the material defendant seeks is subject to discovery.

Furthermore, the court believes Progressive is seeking discovery that cannot be obtained in the manner demanded. Progressive is seeking discovery from a party regarding a non-party. Bener is not a party to this action.

CPLR 3101(a)(4) permits a party to an action to obtain disclosure from a non- party “…upon notice stating the circumstances or reasons such disclosure is sought or required.”CPLR 3120 permits a party to an action to obtain discovery of documents from a non-party upon service of a notice to produce and a subpoena duces tecum.

The party seeking a deposition of a non-party must demonstrate special circumstances. Brooklyn Floor Maintenance Co. v. Providence Washington Ins. Co., 296 AD2d 520 (2nd Dept. 2002); and CPLR 3101(a)(4).

The motion specifically seeks the deposition of Valadimir Alexsandrovich to answer questions regarding Bener. The court cannot order a person who has not been subpoenaed to appear and give testimony regarding a non-party. If Progressive wants to obtain discovery from Bener, it must do so through subpoena.

Finally, the court notes many of the questions posed in the interrogatories relate to a Malella defense.^[FN2] CPLR 3018(b) requires a party to plead all matters that would likely take an adverse party by surprise or that would not appear on the face of the pleading. A Malella defense must be plead as an affirmative defense. New York First Acupuncture P.C. v. State Farm Mut. Auto. Ins. Co., 25 Misc 3d 134(A) (App Term2nd, 11th & 13th Jud. Dists. 2009). The answer does not plead a Malella defense in its answer.

Malella does not apply to the claim asserted in this action. The principle underlying Malella is that only a licensed professional can be officer, shareholder or director of a professional corporation, a partner in a professional limited liability partnership or a manager of a professional limited liability company. The “fraudulent incorporation” element of Malella is that a non-professional has the actual ownership or controlling interest in such a business entity that only a licensed professional can own.

Alev is the provider of medical supplies. Defendant has failed to establish that the owner of a medical supply company must have a license. In fact, it would appear to the contrary since Alev is a domestic, business corporation.

Thus, to the extent defendant seeks material that cannot be in issue in this litigation, the discover demands are palpably improper. Saratoga Harness Racing, Inc. v. Roemer, 274 AD2d 887 (3rd Dept. 2000); and Titleserv, Inc. v. Zenobio, 210 AD2d 314 (2nd Dept. 2000); and Grossman v. Lacoff, 168 AD2d 484 (2nd Dept.,1990).

The no-fault law is designed to insure prompt payment of claims of medical claims arising from automobile accidents. Medical Society of the State of New York v. Serio, 100 NY2d 854, 860 (2003). See, Fair Price Medical Supply Corp. v. Travelers Indemnity Co., supra; and Hospital for Joint Disease v. Travelers Property Casualty Ins. Co., supra.

Permitting a defendant to conduct discovery on defenses it is precluded from raising at [*5]trial would defeat this goal.

Therefore, defendant’s motion is denied with leave to renew upon proper papers including a copy of the claim and a copy of the denial.

SO ORDERED:

Hon. Fred J. Hirsh

District Court Judge

Dated: May 3, 2010

Footnotes

Footnote 1:There are four defenses a carrier can raise that are not subject to the preclusion rule: (1) fraudulent incorporation, [State Farm Mutual Ins. Co. v. Malella, 4 NY3d 313 (2005)], (2) lack of coverage, [Central General Hosp. v. Chubb Group of Ins. Cos., 90 NY2d 195 (1997)], (3) staged accident [Central General Hosp. v. Chubb Group of Ins. Cos., supra; Allstate Ins. Co. v. Massre, 14 AD3d 610 (2nd Dept. 2005); and V.S. Medical Services P.C. v. Allstate Ins. Co., 11 Misc 3d 334 (Civil Ct. Kings Co. 2006)] and (4) exhaustion of coverage [Hospital for Joint Disease v. Hertz Corp., 22 AD3d 724 (2nd Dept.2005); and Hospital for Joint Disease v. State Farm Mut. Auto. Ins. Co., 8 AD3d 533 (2nd Dept. 2004)].

Footnote 2:The names of the shareholders and owners in a management company and the services provided by the management company are Mallela issues.