By Seth A. Nadel, Esq.

As discussed in a prior client alert, in late-2018, MLMIC – a mutual medical malpractice insurance company – was sold to Berkshire Hathaway and “demutualized,” meaning it was converted from a mutual insurance company owned by its physician-policyholders to a stock insurance company owned by conventional shareholders. As part of that transaction, physicians covered by malpractice insurance policies issued by MLMIC between July 2013 through July 2016 became eligible to receive cash payouts representing the value of their mutual ownership interests in MLMIC prior to the sale.

Following the announcement of the demutualization and sale of MLMIC, litigation has been commenced by many hospitals and medical practices against the physician-policyholders which they employed during the MLMIC eligibility period. The employer-hospitals and practice groups principally assert that because they paid the insurance premiums for their employed physicians, they should be entitled to the demutualization proceeds. The physicians, on the other hand, contend that the New York Insurance Law, the Plan of Conversion, and the decisions of the New York State Department of Financial Services approving and interpreting the Plan directed payment to the physician-policyholder and favor a determination that the physicians are entitled to the proceeds.

The first substantive decision to be issued in a MLMIC litigation, Maple-Gate Anesthesiologists v. Douglas Brundin, 63 Misc.3d 703 (Sup. Ct., Erie County 2019), endorsed the physician-policyholder’s position and dismissed the employer’s complaint. In the opinion of the Maple-Gate court, the statutory and regulatory authorities governing the MLMIC demutualization completely foreclosed the possibility that the employer was entitled to the demutualization proceeds, irrespective of whether that employer had paid the physician’s MLMIC premiums. Maple-Gate is currently on appeal to the Appellate Division, Fourth Department.

Maple-Gate, however, was quickly followed by Schaffer, Schonholz & Drossman, LLP v. Title, 171 A.D.3d 465 (1st Dep’t 2019), an expedited proceeding submitted directly to the Appellate Division, First Department on an agreed-upon set of facts. As a result, the Appellate Division found that the employer was entitled to the demutualization based on equitable principles. Several lower courts quickly followed suit, and summarily reached the same conclusion, based on the belief that Schaffer was binding precedent, despite differing facts and without a full legal analysis.

Most recently, in Columbia Memorial Hospital v. Hinds, Case No. 14064-19 (Sup. Ct., Columbia County 2019), an OB-GYN physician formerly employed by Columbia Memorial Hospital was sued because Columbia had remitted Dr. Hinds’ premium payments to MLMIC and served as the policy administrator for Dr. Hinds’ policy. As a policy administrator, Columbia was permitted to perform certain limited clerical functions related to the policy. In its lawsuit, Columbia – in much the same fashion as other employers similarly situated – argued that by its payment of Dr. Hinds’ MLMIC premiums and its role as policy administrator entitled it to the demutualization payment under a theory of unjust enrichment. It further alleged a contractual entitlement to the funds pursuant to Dr. Hinds’ employment agreement.

Like the defendants in Maple-Gate, Dr. Hinds moved to dismiss Columbia’s complaint, arguing that the statutory and regulatory authorities foreclosed the possibility that the hospital could have any interest in the demutualization funds which arose from the sale of Dr. Hinds’ membership interest in MLMIC. Furthermore, Dr. Hinds asserted that Columbia’s allegation that it “paid” the MLMIC premiums was itself untrue, because under the language of his employment agreement, the cost of Dr. Hinds’ malpractice premiums were deducted from his incentive compensation.

On September 3, 2019, the Court in Columbia County issued a written decision granting Dr. Hinds’ motion to dismiss Columbia’s case in its entirety and finding that Dr. Hinds alone was entitled to the MLMIC demutualization funds. Among its findings, the Court determined that Columbia’s agreement to pay Dr. Hinds’ MLMIC premiums was part of his compensation in exchange for Dr. Hinds’ agreement to provide medical services to patients of the hospital, and thus the hospital’s claim of “unjust enrichment” had no merit. Furthermore, the Court found that Columbia’s interests under the employment contract could not have been compromised, because neither party likely anticipated the windfall from the demutualization or the value of Dr. Hinds’ membership interest in MLMIC.

Finally, the Court rejected Columbia’s argument that Schaffer was controlling precedent. In the Court’s opinion, “the doctrine of stare decisis clearly exists to provide guidance and consistent results in cases that share essentially the same facts… it does not apply where, as here, the facts are not the same.” In Hinds, as in Maple-Gate, the physician’s malpractice premiums were paid in lieu of compensation, and Dr. Hinds was likewise entitled to dismissal of the complaint. The court additionally noted, with respect to Schaffer, that “it is equally well-established that courts are free to correct prior erroneous interpretations of the law.”

A copy of the decision and order in the Hinds case can be found here.

Weiss Zarett represented Dr. Hinds in the litigation and is handling a number of cases on behalf of physician-employees involved in MLMIC disputes with their current or former employers.

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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