Newton v. United Chambers Insured Plans

• Decision Date: 07 March 1986
• Citation: 485 So.2d 1147
• Parties: Joyce M. NEWTON v. UNITED CHAMBERS INSURED PLANS. 84-1043-CER.
• Court: Alabama Supreme Court

Page 1147

485 So.2d 1147

Joyce M. NEWTON v. UNITED CHAMBERS INSURED PLANS.

84-1043-CER.

Supreme Court of Alabama.

March 7, 1986.

David A. Simon and Richard M. Kemmer, Jr. of Owen, Ball & Simon, Bay Minette, for petitioner.

David C. Hannan and Celia J. Collins of Johnstone, Adams, Howard, Bailey & Gordon, Mobile, for respondent.

SHORES, Justice.

The United States District Court for the Southern District of Alabama, through the Honorable Virgil Pittman, Senior Judge, has certified to us certain questions which arise out of the following facts:

Joyce Newton was an employee of Dr. William J. Hooper, a Bay Minette, Alabama, dentist. Dr. Hooper contracted with United Chambers Insured Plans (United) for group medical insurance for himself and his dependents and his employees and their dependents. Dr. Hooper paid the premiums; the employees did not contribute in any way.

The policy provided benefits for covered medical expenses. Specifically, Joyce Newton had Plan V, coverage which paid 80% of the first $3,000 of covered expenses exceeding the annual deductible of $100 and 100% of further expenses in excess of $3,000, up to a maximum benefit of $1 million.

The policy became effective on September 1, 1982. On October 2, 1982, Mrs. Newton's teenage son, Tracy, was involved in an automobile accident which left him paralyzed for life. He was rendered "totally disabled" as that term is defined in the policy.

Following the accident, Mrs. Newton began filing claims for medical expenses incurred for Tracy's treatment. The payment of these benefits was coordinated with benefits available for Tracy's expenses through his father's group insurance carrier, Blue Cross-Blue Shield, pursuant to a provision in the United policy. Under that policy, United was responsible for covered expenses not covered by the Blue Cross-Blue Shield policy, not to exceed 100% of total expenses, up to the policy limits.

The premium on the policy was payable monthly. Dr. Hooper made each payment until March 1983, when his check for the premium was returned for insufficient funds. Under the policy, coverage was automatically terminated at the end of the month in which no premium was paid. Mrs. Newton was unaware of the termination of coverage until June or July 1983. She continued to incur expenses for Tracy's medical treatment after March 31, 1983. United rejected claims for these expenses because they were for charges incurred after the termination date of the policy.

In August 1983, Mrs. Newton sought to reinstate the coverage or to convert to individual coverage under the conversion provisions of the policy. United informed her again that the policy had terminated as of March 31, 1983, and also informed her that the policy did not allow conversion under these circumstances. It also denied coverage under the extended benefits provision of the policy. United denies that any amount is due under the policy. Mrs. Newton thereupon filed this action, in which she contends that her son's medical expenses are covered under the policy. She also asks the Court to order United to permit her to convert to individual coverage under the conversion provisions of the policy.

The federal court asks us whether under Alabama law United was required to give notice of the employer's default in paying premiums to participants in the group policy under these facts and whether there is a right of conversion under these facts.

As the federal court observed, this Court has not had occasion to address the question of whether a group insurer must notify a participant of termination of the policy for non-payment of the premium where the covered employee does not contribute to the premium. We have held that a participant is entitled to notice of changes made in a group policy in a case where the employee did pay part of the premium. Harrison v. Insurance Company of North America, 294 Ala. 387, 318 So.2d 253 (1975). A sounder basis for requiring notice to the employee of changes in or cancellation of the policy than the fact that he pays part of the premium is the fact that he has an interest in the policy which will be affected. Whether one pays part of the premium for medical coverage or whether it is a fringe benefit paid for by his employer, it is a valuable part of his compensation, and if it is cancelled or terminated, he has a right to notice of that fact.

Our cases have recognized the right to notice under some circumstances. Harrison, supra, required the insurer to give notice to the employee of a change in coverage which adversely affected the employee's coverage. Harrison relied on Shears v. All States Life Ins. Co., 242 Ala. 249, 5 So.2d 808 (1942), and said:

" 'The policy may be allowed to lapse by non-payment of premiums by the employer, or the insurer may cancel it for that reason, or it may terminate upon the expiration of its term without action on the part of anyone, or upon the termination of the employee's employment, because the contract so provides. Undoubtedly, where the employee contributes to the premium payment, he should have something to say regarding the cancellation; at least where the cancellation is by the affirmative action of either the insurer or the employer or both. Under such circumstances, he has more than the interest of a third party beneficiary. He has an interest obtained through an expenditure of his own money. He must be regarded as a party to the insurance contract at least to the extent that the group policy cannot be cancelled without his consent.'

"Poch v. Equitable Life Assur. Society, 343 Pa. 119, 22 A.2d 590, was relied on in Shears, and the following statement from the Supreme Court of Pennsylvania was approved:

" '... "Upon a review of the authorities, and upon reason as well, our conclusion is that, under a group policy like that now before us [and in all material respects like the one involved here], the insured employee must be regarded as a party to the insurance contract at least to the extent that the group policy cannot be cancelled or any of its effective provisions eliminated by either the employer or insurer, except in a manner provided by the policy, without giving such employee notice of the intended cancellation or modification, so that he may timely exercise any conversion privilege which may be available to him under the terms of the policy or, where such privilege is not given, in order that he may seasonably obtain similar insurance protection on his own account elsewhere; further, that in the absence of notice, an agreement of cancellation or modification like that here entered into between the Association [employer] and the Society [insurer] is, as to such employee, legally ineffective to relieve the insurance company from liability under the original policy." ' (242 Ala. at 254, 5 So.2d at 812)

"Shears was closely examined by the Court of Appeals in Metropolitan Life Ins. Co. v. Korneghy, 37 Ala.App. 497, 71 So.2d 292 (1954). In Korneghy, the insured employee received written notice of the termination of the group coverage, but contended that it could not be terminated without his consent. The Court of Appeals held that a group policy could be terminated without the consent of the insured but said:

" 'Our diligent study of the authorities leads us to the conclusion that a majority of the appellate courts of the country hold to the view that, under factual circumstances analogous to those in the case at bar, timely...