Third Department Reverses Award of MLMIC Demutualization Proceeds to Employer, Rules Employee-Policyholder is Legally Entitled to Disputed Funds

By Seth A. Nadel, Esq.

As discussed in a prior article, on April 24, 2020, the Appellate Division, Fourth Department, in the case of Maple-Gate Anesthesiologists v. Nasrin, 182 A.D. 3d 984 (4th Dep’t 2020), unanimously affirmed a decis*ion of the Erie County Supreme Court that a physician-policyholder was entitled to the proceeds resulting from the demutualization of Medical Liability Mutual Insurance Company (“MLMIC”). Notably, in Maple-Gate, the Fourth Department had chosen not to follow the early precedent set by the First Department in Schaffer, Schonholz & Drossman, LLP v. Title, 171 A.D. 3d 465 (1st Dep’t 2019) holding that an employer who paid a policyholder’s malpractice insurance premiums was entitled to the funds under a theory of unjust enrichment. Now, the Third Department, in Albany, has now weighed in and sided with the employees’ position, as reflected in Maple-Gate.

In the Supreme Courts of Saratoga and Broome Counties, respectively, the cases of Schoch v. Lake Champlain OB-GYN, P.C. and Shoback v. Broome Obstetrics and Gynecology, P.C. presented the standard set of facts in a MLMIC dispute. Namely, an employed practitioner was a named MLMIC policyholder, and their employer had agreed to pay their medical malpractice premiums in connection with their employment. Facing motions for summary judgment by the policyholders in both cases to resolve the question as to which party was entitled to demutualization proceeds, the lower courts had deemed themselves constrained to follow the Schaffer decision as binding precedent and denied the policyholders’ motions. Both cases were appealed, and the appeals were heard concurrently by the Third Department during its May 2020 term.

In two decisions issued on June 18, 2020, the Third Department reversed the determinations of the lower courts and held that the employee-policyholders were entitled to summary judgment awarding them the MLMIC demutualization proceeds. In doing so, the Court affirmed that the demutualization was governed by the New York Insurance Law and MLMIC Plan of Conversion, and that a lawful policyholder was entitled to the proceeds absent an assignment of that right. Furthermore, the Court rejected the employer’s argument that it was entitled to the proceeds under a theory of unjust enrichment, explaining that the demutualization proceeds were a “windfall” which neither party anticipated nor bargained for, and thus the employee-policyholder’s receipt of the funds was not unjust when the employer had received everything it had bargained for under the parties’ employment agreement.

With Schoch and Shoback, both the Third and Fourth Departments have now agreed that an employee-policyholder is legally entitled to the proceeds resulting from the demutualization and sale of MLMIC. In the First Department, Schaffer arguably remains controlling precedent, but appeals from subsequent lower court decisions are expected to clarify the scope of its holding. The Second Department, meanwhile, has not had the opportunity to pass on the issue, but pending appeals will afford it the chance to do so in the near future.

A copy of the Third Department’s decisions in Schoch and Shoback may be found here and here, respectively.

Weiss Zarett represents numerous physician-policyholders in MLMIC disputes. If you have any questions about the MLMIC demutualization, please reach out to Seth A. Nadel, Esq. at snadel@weisszarett.com or 516-627-7000.

Weiss Zarett Brofman Sonnenklar & Levy, P.C. is a Long Island law firm providing a wide array of legal services to the members of the health care industry, including corporate and transactional matters, civil and administrative litigation, healthcare regulatory issues, bankruptcy and creditors’ rights, and commercial real estate transactions.

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