Declaratory Judgment Actions Are Not A Discovery Tool (NJ)

One of the methods used by No-Fault providers to fight fraudulent claims is to establish that improprieties with a health care provider’s ownership structure, billing practices, and regulatory compliance.  But recently, the Supreme Court of New Jersey held that an insurance company cannot file a declaratory judgment action solely seeking discovery of in an effort to prevent insurance fraud, even where an insured patient has assigned personal injury protection (PIP) benefits to the health care provider.

In Selective Insurance Company of America v. Hudson East Pain Management, Selective filed for declaratory judgment against Hudson East Pain Management and several other entities because it noticed what it considered to be “suspicious patterns” in the treatments rendered to Selective’s insured patients, as well as in the corporate links among the various entities.  Selective’s insureds had assigned their PIP benefits to the health care providers after being injured in motor vehicle accidents.  Although it had requested information on ownership, billing practices, and regulatory compliance from the various entities, Selective did not receive the information it sought, and as a result, filed its declaratory judgment action, citing the “cooperation clause” in its insurance policies, as well as New Jersey statutory authority.

The trial court sided with Selective, and ordered the health care providers to produce the requested materials.  The Appellate Division reversed this order, holding that Selective’s reliance on the cooperation clause in its insurance policies was improper, and that its demands for discovery went beyond the statutory authority of New Jersey law.

On review, the Supreme Court of New Jersey affirmed the Appellate Division, but for different reasons than expressed in the Appellate Division’s decision.  The court held that because an assignee of benefits as no greater rights than an assignor, the assignee also cannot have greater duties than the assignor under the contract.  Therefore, because the Selective insurance policies did not require the insured patients to provide the information sought by Selective in its declaratory judgment action, the policies could not require the health care providers to present that information.  Additionally, the court agreed with the Appellate Division that the PIP statute, N.J.S.A. 39:6A-13, did not provide for the sort of discovery sought by Selective.  Finally, the court held that, although New Jersey had a clear public policy against insurance fraud, the means employed by Selective were not the correct avenue for preventing insurance fraud.

Although this case does not undermine the ability of an insurance company to seek injunctive or other relief, along with discovery, through the use of a declaratory judgment complaint, it does stand for the proposition that a quest for this sort of discovery cannot be the sole object of the complaint.

Thanks to Christina Emerson for her contribution to this post.  If you would like more information, please write to mbono@wcmlaw.com