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The Beginning of the End for Fraudulent No-Fault Claims?


On March 1, 2016, a significant change of the No-Fault rules regarding discovery became effective, which has the potential to both promote transparency in no-fault arbitrations, and curtail over-billing and abuse of the no-fault system. Under the newly amended Rule 12 of the Automobile Insurance Arbitration Rules, the Minnesota Rules of Civil Procedure now apply to discovery in arbitrations involving comprehensive and collision claims. This amendment stands to promote efficient and just resolutions of arbitrations under the No-Fault Act by expanding the world of information available to insurers, and, more importantly, by preventing auto-glass repair shops from billing exorbitant rates for glass repair and replacement. By extending the rules of discovery under the Minnesota Rules of Civil Procedure to no-fault arbitrations, excessive and unreasonable billing rates will no longer go unquestioned and unchallenged—and the shops charging such rates will be forced to provide justification therefor, or potentially face sanctions imposed by the Rules of Civil Procedure.

Previous Limitation of Discovery Under the No-Fault Arbitration Rules

In a 1990 Minnesota Supreme Court document entitled “In re Proposed Rule Changes for No-Fault Arbitration”, the Court notes that “[t]he most significant rule modifications deal with the following areas of concern: [ ] ‘Discovery’ or disclosure[.]” See In re Proposed Rule Changes for No-Fault Arbitration at 3 (Minn. Nov. 6, 1990). It goes on to explain that “[t]he subject of ‘Discovery’ in the no-fault arbitration context produced the greatest degree of disagreement [amongst the Standing Committee].” Id. at 10. The bases for disagreement rested largely on the issue of cost given the “informality” of the arbitration process, an issue raised by claimants’ representatives, whereas insurers’ representatives were concerned with the lack of cooperation in the discovery process given the “voluntary” nature prescribed by the rules. Id. at 11.

In an attempt to strike a balance between the opposing interests, the Committee determined that “formal discovery” as performed under the Minnesota Rules of Civil Procedure would not apply in these cases but the parties would be required to cooperate and exchange supporting documentation and information “within 90 days following the commencement of the case”. Id. at 11-12.

The focus of the Court’s discussion concerning discovery in no-fault arbitrations centered around medical examinations: the primary concern from the claimants’ perspective was that claimants would be subjected to numerous IME’s; on the other hand, from the perspective of insurers, the main issue arose of out of the requirement for a showing of “good cause”, a burden that was “inconsistent with the objective of avoiding formal discovery and the application of the Minnesota Rules of Civil Procedure.” Id. at 12.

After considering both sides of the debate, the court arrived at the following conclusion:

"[t]he proposed rule eliminates any authorization for a second independent medical examination as a matter of right and substitutes the requirement that the need for any additional independent medical examination be demonstrated to the arbitrator, who will apply a standard of good cause."

Id. at 12 (emphasis in original).

Consequently, as a matter of right, discovery under the no-fault arbitration rules was limited to a single IME in cases involving personal injury.

The Former Discovery Rules Failed to “Adequately Contemplate Damage Claims”

Recently, the Minnesota Supreme Court and the Standing Committee have shifted gears with regard to discovery in no-fault arbitrations. On December 31, 2015, an order promulgating an amendment to Rule 12 of the Automobile Insurance Arbitration Rules (“Rules”), was published, which provided that:

"The Minnesota Rules of Civil Procedure shall apply to claims for comprehensive or collision damage coverage."

See Order Promulgating Amendments to the Rules of No-Fault Insurance Arbitration Procedure (Minn. Dec. 31, 2015) (emphasis added). The amendment became “effective March 1, 2016.” Id.

Prior to implementing the amendment, the Minnesota Supreme Court No-Fault Standing Committee on the Rules of No-Fault Insurance Arbitration sought public comment concerning the proposed amendment. See Order Establishing Comment Period on Proposed Amend. To Rules of No-Fault Ins. Arb. P. (Minn. June 25, 2015). Included therein is the May 26, 2015 Final Report of the Committee (“Final Report”), which provides, in part, that:

"[t]he committee is also recommending a moderate change to the parameters of discovery, [which] . . . includes the application of the Minnesota Rules of Civil Procedure for comprehensive or collision damage claims. The Committee concluded that current discovery rules do not adequately contemplate damage claims."

Id. at 2 of Final Report (emphasis added).

In response to the Standing Committee’s request for public comment, the Minnesota State Bar Association submitted remarks addressing the proposed amendment to Rule 12 in particular:

"The MSBA expressed concern regarding changes that would allow for expanded discovery under Rule 12. The concern is that expanded discovery in collision and comprehensive cases could be contrary to traditional, low-cost no-fault procedures and significantly burden the parties and the arbitrator. The comments suggest a way to address this issue."

See Bench & Bar, MSBA to Comment on No-Fault Insurance Arbitration Rules (Sept. 4, 2015).[1]

Specifically, the MSBA explained that:

"The Committee is concerned that, as written, the amendment to Rule 12 relating to expanded discovery in comprehensive or collision damage cases may engender expansive use of discovery, and attendant motion practice for the parties and arbitrator, contrary to the spirit of low-cost no-fault procedures. This will potentially add significant burdens to the parties and to the assigned arbitrator not co-extensive with the magnitude of the case or the compensation of the arbitrator. It is noted that Rule 40 addresses the issue of arbitrator compensation, but that is limited to consolidated glass cases while this rule applies to any comprehensive or collision damage matter."

See Rep. of the Court Rules and Admin. Comm. to the MSBA Council Re: Proposed Changes to the Minn. No-Fault Arb. Rules at 1 – 2 (Aug. 14, 2015)[2]; see also August 24, 2015 Correspondence from MSBA to Minnesota Clerk of Appellate Courts at 1-2.

In light of such concerns, the MSBA recommended the following modification to the proposed rule, specifically omitting the portions providing for discovery under the Minnesota Rules of Civil Procedure:

"However, upon application and good cause shown by any party, the arbitrator may permit any Discovery allowable under the Minnesota Rules of Civil Procedure for the District Courts. Similarly, the voluntary exchange of information is encouraged for comprehensive or collision damage claims. Upon application and good cause shown by any party, the arbitrator may permit any discovery allowable under the Minnesota Rules of Civil Procedure for such claims. Any medical examination for which the respondent can establish good cause shall be completed within 90 days following the commencement of the case unless extended by the arbitrator for good cause.

The Minnesota Rules of Civil Procedure shall apply to claims for comprehensive or collision damage coverage."

See Rep. of the Court Rules and Admin. Comm. to the MSBA Council Re: Proposed Changes to the Minn. No-Fault Arb. Rules at 1 – 2 (Aug. 14, 2015)[3]; see also August 24, 2015 Correspondence from MSBA to Minnesota Clerk of Appellate Courts at 1-2.

On December 31, 2015, the Minnesota Supreme Court issued its Order promulgating the amendments to the Rules. See Order Promulgating Amendments to the Rules of No-Fault Insurance Arbitration Procedure (Minn. Dec. 31, 2015). While the Standing Committee did not make any comments concerning the amendment to Rule 12 for the purpose of the Order, nor did it specifically address the MSBA’s recommendations, that the Court did not adopt the MSBA’s recommendations, as the proposed rule remained unchanged. Compare id. at 6-7 with Rep. of the Court Rules and Admin. Comm. to the MSBA Council Re: Proposed Changes to the Minn. No-Fault Arb. Rules at 1 – 2 (Aug. 14, 2015); see also Bench & Bar Vol. LXXIII No. 11 at 8 (February 2016). In fact, a Bench & Bar article observed that:

"[t]he MSBA had filed comments expressing concern with some of the proposed changes and proposing alternative language. While the court’s order mentions they received comments from the MSBA, the court did not incorporate any of the changes proposed by the MSBA or provide any explanation of why they were rejected."

Bench & Bar Vol. LXXIII No. 11 at 8 (February 2016) [4].

Using the Amendment to Deter Unreasonable and Unfounded Billing Practices

Because the amendment only recently became effective, and likely flew under the radar of most, the question remains: how do insurers go about using the amendment to their advantage? Some insurers may be familiar with serial no-fault arbitration filers, which continue to see success in arbitrating meritless claims for bills over-and-above those bills in the local market or prescribed by national specifications. Up until the March 1, 2016 amendment, an insurer was unlikely to get little more than an invoice from an auto shop through the recommended document exchange process; however, now interrogatories and document production requests can be used to shed more light on auto shops’ billing practices, giving rise to stronger arguments to deny inflated bills, and potentially deterring seriatim arbitrations for payment of such bills.

While most auto glass repair shops do not abuse the process, there are a few that have taken advantage of the system. For instance, if an auto-glass repair and replacement shop bills at rates over 150% of those rates in the local market, or the rates prescribed by the National Auto Glass Specifications, an insurer can now use discovery to force that shop to substantiate such high rates and justify its billing structure. Prior to the amendment, over-billing shops needed to do little more than assert, without support, that their billing rates were justified in order to prevail in an arbitration. In fact, as a result of such regular success, a shop that overbills can be emboldened, and will continue overbilling and seeking reimbursement in routinely filed arbitrations. And there is no limit on the number of times an overbilling shop can come back to arbitration, sometimes even hundreds of times.

The allowance of discovery under the Minnesota Rules of Civil Procedure will hopefully deter egregious billing practices, and will moreover, curtail continued abuse of the no-fault arbitration system. “A 2014 Minnesota Senate report on fraud identified the state’s no-fault system as one area of concern regarding an increasing incidence of insurance fraud in Minnesota.” See No-Fault Automobile Task Force Report to the Legislature at 18 (Feb. 29, 2016) (citing Fraud Working Group Report, Recommendations to Senate commerce Committee (March 12, 2014)).[5] “[T]he incidence of insurance fraud has been an increasing problem in Minnesota and in other no-fault states. * * * [T]he design of the no-fault system itself leaves it open to fraud and abuse[,] * * * [which is] another area affecting premium rates and contributing to delays in the arbitration” Id.

Perhaps in recognition of this problematic result and abuse of the system, or perhaps in light of the recent trend of increasing transparency in discovery practices, the Standing Committee specifically included the provision requiring the application of the discovery rules in the Minnesota Rules of Civil Procedure to claims for comprehensive or collision damage coverage. This is an important turning point in the no-fault arbitration process, and will hopefully put an end to serial arbitration filers and shops billing at inflated rates.

 

For any questions please contact our office.

[1] http://mnbenchbar.com/2015/09/msba-to-comment-on-no-fault-insurance-arbitration-rules/

[2] https://www.mnbar.org/docs/default-source/general-policy/msba-files-comments-with-court-regarding-proposed-changes-to-minnesota-s-no-fault-arbitration-rules-nbsp-.pdf?sfvrsn=0

[3] https://www.mnbar.org/docs/default-source/general-policy/msba-files-comments-with-court-regarding-proposed-changes-to-minnesota-s-no-fault-arbitration-rules-nbsp-.pdf?sfvrsn=0

[4] http://mnbenchbar.com/wp-content/uploads/2016/02/0216-Digital-Edition.pdf

[5] http://mn.gov/commerce-stat/pdfs/nofault-report.pdf

1 Comment

  1. This is an important tool for insurers in no-fault arbitrations involving auto glass claims. Prior to this change, there was no tool for insurers to use to determine the validity of auto glass claims. We believe this change is a recognition by the Legislature and Standing Committee that auto glass claims, unlike injury claims, needed transparency. We would encourage all insurers who receive such claims to aggressively use discovery to ferret out the merits of any claim, including depositions, interrogatories, requests for documents and requests for admission.

    Brownson & Linnihan attorneys have already successfully used this change in the law; and done so effectively.

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