Court mulls who is owed payout after insurance demutualization
Attorneys for the medical professionals named as policyholders on the insurance argued that the money should go to their clients.
After hearing an oral argument on a set of related cases Wednesday, the New York Court of Appeals is weighing who should receive the money paid out when a mutual insurance company responsible for medical malpractice insurance converts to a stock insurance company.
In 2019, the Medical Liability Mutual Insurance Company completed its demutualization process, which involved the distribution of $2.502 billion in consideration for the extinguishment of membership interests.
In subsequent litigation, attorneys representing the medical professionals named as policyholders on the insurance policies argued that the money should go to their clients.
“It’s very clear that the overarching concern of the [insurance law] statute is defining and protecting the rights of the policyholder,” Seth A. Nadel of Weiss Zarett Brofman Sonnenklar & Levy said.
Nadel urged the high court to uphold the appellate division’s ruling in his client’s case, captioned Columbia Memorial Hospital v. Hinds. The Second and Third Departments ruled in favor of the employees in each of the cases, finding they were entitled to the money even if they didn’t pay the premiums.
In Schoch v. Lake Champlain OB-GYN, P.C., the Third Department found that the employee was “solely entitled” to the money and would not be unjustly enriched, because the “unexpected” proceeds from the demutualization constituted a “windfall to whichever party receives them.”
“The fact that one party will receive these benefits does not mean that such party has unjustly enriched itself at the other’s expense,” the appellate court found.
Dreyer Boyajian partner James Peluso argued on behalf of Lake Champlain OB-GYN, telling the high court that the legislature was “very specific in the terminology” used in the insurance law.
“They used the word ‘policyholder.’ They did not use the word ‘insured.’ They did not use the word ‘beneficiary,’” Peluso said.
Associate Judge Michael Garcia asked Peluso why he would then define the employer as the policyholder.
“Lake Champlain contracted for the policy, and Lake Champlain was issued the policy,” Peluso said.
Garcia asked about a hypothetical scenario in which the doctor was the one to choose the insurance policy, and Peluso said the employer would remain the “policyholder” because they would be the one to bargain for the terms of the policy.
While noting that the relevant statute does not define the word “policyholder,” Peluso pointed Garcia to the property-casualty insurance statute, which does define the term as the party involved in the contract for the policy.
Justin A. Heller, managing partner of Nolan Heller Kauffman, represented the respondent in the Lake Champlain case. Heller argued that the New York Department of Financial Services is tasked with confirming that the demutualization plan is fair, reasonable and consistent with the law and already did so in this case.
“I believe that these statutory interpretation arguments are really barred at this point under the doctrine of collateral attack, because the DFS approved the plan,” Heller said.
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