Author(s): David A. Wilson, Sarah L. Wahlburn

CORVEL’S METHODOLOGY QUESTIONED IN CONNECTION WITH THE IMPOSITION OF ATTORNEY’S FEES PURSUANT TO MCL 500.3148

The Michigan Supreme Court is currently considering accepting leave to appeal from the Michigan Court of Appeals in the case of St. Francis Hospital of Escanaba v Home Owners Insurance Company, Court of Appeals docket number 292530, Supreme Court docket number 139919. This case involved a balance bill dispute between the plaintiff hospital and the defendant insurer, which utilized the services of CorVel as the medical auditor.

On May 7, 2007, the plaintiff filed its Complaint in the Delta County District Court seeking payment of the $2,211.29 balance bill. The jury returned a verdict for the plaintiff for only $1,420.51 of the remaining balance claimed by the plaintiff. Following the jury verdict, the plaintiff filed its motion for attorney’s fees pursuant to MCL 500.3148, which permits the award of attorney’s fees where an insurer “unreasonably refused to pay the claim or unreasonably delayed in making proper payment.”

In granting the plaintiff’s motion for attorney’s fees, the Delta County District Court held that a reasonable comparison between hospital charges must contain a factoring of the operating costs of each facility. Essentially, the plaintiff argued, and the District Court agreed, that CorVel’s comparison of the plaintiff’s charges to that of distant hospitals which were either much larger or much smaller than plaintiff was unfair. The District Court also determined that CorVel’s methodology was “faulty” and “unreasonable.” It further ruled that:

Had CorVel factored in cost to charge information, a comparison of hospital’s charges to those in almost any geographic area may have resulted in a reasonable comparison. But in simply comparing charges to hospitals within their database as close in proximity to the subject hospital as possible would not in this Court’s opinion, constitute a reasonable basis to form a valid comparison. (Emphasis in original).

The defendant insurer appealed to the Delta County Circuit Court. The Circuit Court noted that CorVel’s practice was “acceptable” and does in fact create a legitimate factual uncertainty (like in AOPP v Auto Club Ins Ass’n, 257 Mich App 365 (2003)). The Circuit Court held:

Thus, as determined in AOPP, the practice of comparing only charges is not prohibited and not unreasonable. As the practice like that used by CorVel in considering only a comparison of charges was accepted by the Court of Appeals in AOPP, the trial court in this matter erred by adding cost-to-charge ratio as necessary additional analytical requirement. Consequently, and like the insurers in AOPP, the criterion the Defendant used in determining whether a particular charge was reasonable is not precluded under the plain language of the statute or case law. . . . . Therefore, when initially rejecting the total charges of the Plaintiff, the Defendant faced a legitimate factual uncertainty which was eventually resolved by the jury’s verdict. This legitimate question of factual uncertainty precludes an award of attorney’s fees. . . . (Internal citations omitted).

The Circuit Court also noted that:

The Plaintiff’s criticism of Defendant’s adjuster for accepting without question the work and analysis of CorVel in determining the reasonableness of Plaintiff’s charges is likewise without merit. Nothing in MCL 500.3148(1) requires the Defendant to go beyond the professional conclusions of its auditor, CorVel.

Ultimately, the Circuit Court reversed the District Court’s holding as to the award of attorney’s fees. The plaintiff filed an application for leave to the Michigan Court of Appeals, which denied the application for lack of merit.

As stated above, the plaintiff has filed an application for leave to the Michigan Supreme Court. It is unknown when the Supreme Court will decide whether or not to grant or deny the application for leave. Nonetheless, the issue involved in the appeal to the Supreme Court is whether the holding in AOPP v Auto Club Ins Ass’n stands for the proposition that any medical bill audit, regardless of methodology, constitutes a bona fide factual uncertainty, thereby, precluding an award under MCL 500.3148. The plaintiff argues that “by merely sanctioning the specific Review Works’ 80th percentile methodology, the court in AOPP did not, therefore issue a blanket endorsement that any and every formula or methodology employed in medical bill auditing is, ipso facto, ‘based upon a proper determination’ or constitutes a ‘bona fide factual uncertainty.’”

On the other hand, the defendant insurer argues, among other things, that the jury decided the issue of the reasonableness of the charge based upon the evidence presented and determined that the hospital charge was unreasonable. Therefore, it argues that a legitimate question of factual uncertainty existed as to whether the plaintiff’s charge was a reasonable one. Morever, the defendant argues that it acted reasonably in delaying payment and, in utilizing CorVel, conducting a survey of charges from other providers.

I have most of the filings in my possession. If anyone would like copies or would like to discuss the case, please feel free to contact me at swalburn@garanlucow.com or 616-742-5500.

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What Claims Representatives Should Know (but some don’t) regarding Indiana “Insured-Insurer Privilege.”

In reviewing claims materials received on a recently assigned claim, the materials submitted to Arbitration Forms for property damage arbitration contained as one of the attached exhibits the statement of the insured. The statement was not particularly strong against liability, but was surprising to the extent the claims representative waived the insured-insurer privilege.

Under Indiana law, where the policy of insurance requires the insurer to defend claims against the insured, statements from the insured to the insurer concerning an occurrence which may be made the basis of a claim by a third party are protected from disclosure. Richey v.Chapel, 594 N.E.2d 443 (Ind. 1992); Strack and Van Til, Inc. v Carter, 803 N.E.2d 666 (Ind. Ct. App. 2004). In Richey, an appeal was taken from the trial court’s order of disclosure, by defense counsel, of documents in response to a plaintiff’s request for production, including a statement of the insured to his insurance carrier. Appeal was taken, and the Indiana Supreme Court reversed.

The Supreme Court began its analysis by reviewing the scope of attorney-client privilege under Indiana law, and then, by extension, the insured-insurer privilege. Reviewing traditional insured-insurer relationships, the Court noted that the insured effectively delegates to the insurer the selection of an attorney and the conduct of the defense of any civil litigation. Since it was expected that the statement could ultimately be used by the insured’s selected attorney, the Court treated the statement as one given to his attorney. Following the Illinois Supreme Court’s decision in People v Ryan, the Court concluded that public policy dictated that the statement of the insured to his insurance carrier was clothed with the attorney-client privilege while in control of the insurer.

The Indiana Court of Appeals more recently reaffirmed the rule in a claim involving the disclosure of a store accident report. (The report at issue specifically contained language indicating the statement was given pursuant to the privilege announced in Richey v Chappel.) It doesn’t matter whether such explicit reliance is stated – as long as the statement, or document, is made to the insurance carrier, typically at the initial reporting stage or during recorded statements, the statement is protected from disclosure. The discovery inquiries of plaintiffs’ counsel notwithstanding, it matters not that the statement was given prior to litigation being filed, or “in the normal course of business,” particularly since the normal course of our business is to expect that litigation may be filed.

The nature of the privilege, analyzed as it was as an extension of attorney-client privilege, carries with it abundant protections from disclosure, and also risks of exposure. Attorneys are ethically obligated not to disclose statements of clients, the scope of the privilege and privacy expectation belonging to the client, with very rare exceptions.. It would stand to reason that insurance carriers are equally bound, absent waiver by the client, from disclosure. Consider, for example, the potential cause of action from disclosure of a statement by an insured where allegations of operating while intoxicated are raised, along with companion criminal proceedings, and the claims representative, in response to a subpoena, or even more inadvertently, in a property damage arbitration, discloses a recorded statement, waiving privilege belonging to the insured, and resulting in disclosure of a statement very likely containing discussions (and therefore admissions) of the companion criminal charge. (The scope of the privilege, as enunciated in Richey is sufficient to protect disclosure even in criminal prosecutions, thought that has yet to be tested in Indiana courts.)

While for many, this might seem a familiar issue, it is a good refresher that statements of the insured are protected from disclosure from the moment the statement is made, and disclosure of the statement to third parties should not occur unless the insured has agreed that the statement can be disclosed.