JUNE 2015 BAD FAITH CASES: NO VIOLATION OF NEW JERSEY’S INSURANCE FRAUD PREVENTION ACT WHERE INSURER COULD NOT PROVE INDIVIDUALS’ FRAUDULENT INTENT (New Jersey Appellate Division)

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In Allstate Insurance Company v. Northfield Medical Center, P.C., the court found that a business partnership between a chiropractor and a doctor, that submitted claims to the insurer, was not intentionally structured to violate the Insurance Fraud Prevention Act. Thus, it overturned a nearly $4 million judgment for the insurer.

The case arose out of a partnership that a chiropractor set up in the mid-1990’s that was meant to be a multi-disciplinary practice.  An entity called “Practice Perfect,” gave lectures and sold corporate kits and documents to assist in the structuring of multi-disciplinary practices. Defendant chiropractor attended a Practice Perfect lecture given by a healthcare lawyer, in which the attorney reviewed legal issues, such as state-law prohibitions against medical doctor/chiropractor combinations, medical professional company/management company relationships, ownership and organization of the management company, and company practice prohibitions. The attorney also reviewed laws banning self-referrals and fee-splitting between a physician and limited license holder, and advised him to seek the advice of an attorney regarding the differences between state laws.

The business model would give a nonphysician investor more control of profits in a multidisciplinary practice in which only a physician could have majority stake. The investor would form a management company that would fund the medical corporation for payment of rent, equipment leases and staff salaries, and a medical practice, which would be owned by a medical doctor and repay the management company from patient fees. The Court found that attorney and creator of this model “believed that the scheme was a legitimate tool for accomplishing the goal of allowing limited license holders to increase their earnings by creating multi-disciplinary practices.”

The defendant chiropractor incorporated a multi-disciplinary medical practice, and a management company.  The insurer sued after a fraud analyst investigated the medical practice “as part of a general inquiry into illegally structured chiropractic offices which were issuing unlawful billing,” and concluded that the medical practice “should not have been billing [the insurer] under the personal injury protection statute because [the chiropractor] tried to make it appear as though a medical doctor owned [the practice] when in fact it was he who owned and controlled it.”

The appeals court reversed the trial court’s ruling and held that “[a]part from any legal definition of knowledge, the point is that [the insurer] has failed to establish, by a preponderance of the evidence, that [the appellants] showed an awareness or understanding that their aid or advice to [the chiropractor] would assist him in violating the law.” Thus, because the individuals did not have fraudulent intent, they could not be held liable under New Jersey’s Insurance Fraud Protection Act.

Date of Decision: May 4, 2015

Allstate Ins. Co. v. Northfield Medical Ctr., P.C., DOCKET NOS. A-0636-12T4, A-0964-12T4, 2015 N.J. Super. Unpub. LEXIS 1018 (App. Div. May 4, 2015) (Alvarez, Waugh, and Maven, JJ.)

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