Defense Digest

No You May No Cut In:  Insisting On Strict Compliance Of The Restrictions On Assigning Benefits
By Nestor H. Smith, Esq. and Jack S. Senechal, Esq.*

In New Jersey, clauses in automobile insurance contracts placing restrictions on the assignment of benefits have been coming under attack.   A specific assignment clause found in many insurance policies prohibiting an assignment in the absence of the written consent of the carrier has garnered the most attention.  Medical providers have argued that this assignment provision is not a reasonable restriction but, rather, establishes a system of dominance by the carriers over the provider community.  However, prior written consent has been held by New Jersey courts to be a reasonable condition on the assignment of benefits, and failure to comply with such a pre-condition warrants dismissal of the plaintiff's case.

The statutory authority governing the assignment of PIP benefits is contained in the Automobile Insurance Cost Reduction Act at N.J.S.A. 39:6A-4(2).  This statute provides that:

PIP benefits shall not be assignable except to a provider of service benefits under this section in accordance with policy terms approved by the Commissioner [of the Department of Banking and Insurance], nor subject to levy, execution, attachment or other process for satisfaction of debts.

The implementing regulation promulgated by the Commissioner provides that "insurers may file for approval policy forms that include reasonable procedures for restriction on the assignment of personal injury protection benefits."   N.J.A.C. 11:3-4.9(a).  A policy form stating that rights and duties under a policy, including those concerning PIP benefits, may not be assigned without the insurer's written consent was approved by the Commissioner as ISO PAP 94.

Subsequent to that approval, carriers began using the approved language in their policies.  One of the early challenges to the validity of such an assignment clause was addressed by Judge Villanueva in Parkway Insurance Co. v. New Jersey Neck and Back, 330 N.J. Super. 172 (Law Div. 1998).  In that case, New Jersey Neck and Back, a medical provider, filed a demand for arbitration seeking payment of PIP medical expense benefits by Parkway Insurance Company for services rendered to a Parkway insured.  Id. at 175, 176.  Parkway countered by bringing an action in Superior Court seeking a declaration that the provider had no standing to file for PIP arbitration on the grounds that an assignment of benefits issued by the insured to the medical provider was invalid given that Parkway's insurance policy prohibits such an assignment without Parkway's written consent, and no such consent was given.  Id.

The court phrased the issue as "whether the prohibition against assignment of medical expense benefits contained in Parkway's automobile insurance policies is enforceable against the medical provider assignees in this case without the written consent of Parkway."   Id. at 176.  After a thorough review of the history of the assignment aspect of the No Fault statute, Judge Villanueva stated in his decision that, "It is clear to this Court that the [No Fault] statute as amended did not intend to authorize an insured to unilaterally assign his rights or duties under a contract for insurance to a medical provider."  Id. at 182.  Judge Villanueva was convinced that permitting unrestrained assignments is contrary to the legislative intent of the Act and the public policy of attempting to reduce insurance premiums to New Jersey drivers.  Id. at 184.  The court concluded that, "Parkway's automobile insurance policy clause requiring its written consent prior to the assignment of the policy's rights or benefits should be given effect."   Id. at 184.  As a result, the assignment of benefits to the medical provider was declared void and unenforceable, and arbitrations instituted by the provider were dismissed.  Id. at 189.

A subsequent challenge to policy language prohibiting an assignment in the absence of written consent from the carrier came several years later by a group of associations representing personal injury attorneys and health care providers.   This group, calling themselves the Coalition For Quality Healthcare, sought judicial review of, among other things, the Commissioner of Banking and Insurance's decision to approve language in automobile insurance policies prohibiting assignments in the absence of written consent from the carrier.  This case, Coalition For Quality Healthcare v. New Jersey Department of Banking & Insurance, 348 N.J. Super. 272 (App. Div. 2002), made its way through the courts and was eventually heard by the Appellate Division.  The three-judge Appellate panel held that policy language that voids an assignment of benefits for non-compliance by the provider or insured constitutes a reasonable restriction on the assignment of PIP benefits and is enforceable.  Id. at 319.  The court, in illustrating its holding, stated:

We agree with the Parkway analysis.  Policy forms which require an insurer's written consent, or allow an insurer to accept assignments "at its option," can help an insurer reduce costs by eliminating fraud and the propensity for overutilization of services.  Id. at 317.

Further, the Parkway and Coalition cases are not isolated decisions. By comparison, courts in Pennsylvania, Delaware, Connecticut, Kansas, Nebraska, and the District of Columbia have held that an assignment of benefits without the written consent of the insurer is void and unenforceable.   This position was even adopted by the Colorado Supreme Court in Parrish Chiropractic Centers, P.C. v. Progressive Casualty Insurance Company, 874 P.2d. 1049 (Colo. 1994). There, the plaintiff, a chiropractic clinic, sought to enforce an assignment it received from one of its patients. The defendant, a no-fault insurer, refused to honor the assignment. In resolution, the Court addressed the issue of whether a medical provider can enforce a unilateral assignment of medical benefits if there is a requirement in the insurance policy mandating an insured to obtain written consent of the insurer.  The Court held that when there is a restriction on assignment clause in the policy, assignments of benefits without the written consent of the insurer are void and unenforceable.

Despite this legal framework, medical providers are not reluctant to continue to challenge the enforceability of policy language containing restrictions on the assignment of benefits.   Two arguments raised by providers have had varying degrees of success lately.  First, many policies contain general provisions, as well as a separate PIP endorsement section.  Providers have argued that, when restrictions appear solely in the general provisions, as opposed to simultaneously in the general, as well as the PIP endorsement, the restriction cannot be applicable to the PIP benefits.  To combat this challenge, carriers should consider making the restrictions on an assignment in a policy as conspicuous and unambiguous as possible.  Where a policy contains a separate PIP endorsement, the intended restrictions should be written into the separate endorsement as well.  Second, providers have argued that a carrier waives its right to contest an assignment if the issue is not timely raised at the beginning of litigation.  To combat this challenge, carriers should be vigilant in enforcing the assignment restriction provisions.  This should include insisting that written consent is obtained if an insured attempts to assign his or her benefits and raising the defense of an invalid assignment at the earliest stages of litigation if suit is instituted by a provider.

*  Nestor and Jack, associates in the Cherry Hill, New Jersey office, can be reached at (856) 414-6000 or nsmith@mdwcg.com and jsenechal@mdwcg.com.