Witherspoon v. St. Paul Fire & Marine Ins. Co.

• Decision Date: 01 April 1976
• Docket Number: No. 43960,43960
• Parties: Charlotte S. WITHERSPOON, as Executrix of the Estate of William W. Witherspoon, Respondent, v. ST. PAUL FIRE AND MARINE INSURANCE COMPANY, a corporation, Appellant.
• Court: Washington Supreme Court

Page 641

86 Wn.2d 641

548 P.2d 302

Charlotte S. WITHERSPOON, as Executrix of the Estate of William W. Witherspoon, Respondent, v. ST. PAUL FIRE AND MARINE INSURANCE COMPANY, a corporation, Appellant.

No. 43960.

Supreme Court of Washington, En Banc.

April 1, 1976.

Lukins, Annis, Bastine, McKay & Van Marter, P.S., Robert G. Beaumier, Jr., Spokane, for appellant.

Witherspoon, Kelley, Davenport & Toole, William D. Symmes, Spokane, for respondent.

HOROWITZ, Associate Justice.

Defendant insurer appeals a summary judgment permitting recovery on the insured's medical expense insurance policy of hospital and medical expenses paid under the Medicare provisions of the Social Security Act, notwithstanding the policy's exclusionary and deductible clauses. The correct construction of these clauses is the only issue on this appeal. We affirm.

Defendant St. Paul Fire & Marine Insurance Company issued a so-called 'Top-Brass Supplement--Personal Catastrophe Liability' policy to the insured, William W. Witherspoon, on September 1, 1971. Mr. Witherspoon was then only two month's away from his 65th birthday, when he would become eligible for Medicare benefits. Defendant knew this. While the policy was in effect and the insured was eligible for Medicare benefits, he was hospitalized and incurred hopsital and medical expenses in the sum of $22,215.19. After a Medicare adjustment, the final bill was $21,610.10. Of this amount, Medicare paid the sum of $18,775.52, leaving a balance of $2,834.58 unpaid. Without waiver of rights, defendant paid $2,267.74 of this remaining amount--approximately 80 percent--which defendant contends fulfilled its obligations under the insurance policy.

The medical expense portion of the policy states the insurer will pay 80 percent of the amount by which 'Eligible Expenses' exceed the 'Deductible Amount,' up to a maximum of $25,000. The 'Deductible Amount' is defined in the policy as the greater of $10,000 or the amount of benefits provided for 'Eligible Expenses under Other Medical Expense Coverage.'

The insurer maintained below, first, the insured's expenses paid for by Medicare are included within the policy's 'Deductible Amount' as 'Other Medical Expense Coverage,' and alternatively that those same expenses are not 'Eligible Expenses' as defined in the policy.

Plaintiff (the insured's executrix) contended the minimum deductible of $10,000 applied, and that the insurer was therefore liable for 80 percent of $11,610.10 (total expenses less $10,000), or $9,288.08. Since defendant had tendered $2,267.74, plaintiff maintained she was still due $7,020.24. The trial court agreed and entered summary judgment for this amount. This appeal followed.

We first consider insurer's basic contention that the Medicare benefits are includable within the policy's 'Deductible Amount' as 'Other Medical Expense Coverage.'

The 'Deductible Amount' is defined in the policy as follows:

The Deductible Amount shall be the greater of:

(a) the Minimum Deductible shown in the Declaration ($10,000) or

(b) the amount of benefits provided for Eligible Expenses under Other Medical Expense Coverage as defined herein.

The definition of 'Other Medical Expense Coverage' states 'Other Medical Expense Coverage' means coverage provided for hospital, surgical or other medical expenses by any other insurance or welfare plan or prepayment arrangement (including Blue Cross and Blue Shield plans), whether provided on an individual or family basis or on a group basis through an employer, union or membership in an association . . .

It is undisputed that the $10,000 minimum deductible from the 'Eligible Expenses' payable under the policy is available to the insurer. The insurer contends a greater amount is deductible--the Medicare benefits of $18,775.52--as 'Other Medical Expense Coverage.' The insurer argues Medicare is clearly 'any other insurance or welfare plan or prepayment arrangement (including Blue Cross and Blue Shield plans), whether provided on an individual or family basis or on a group basis through an employer, union or membership in an association.'

To determine whether the 'Other Medical Expense Coverage' limitation applies to expenses paid by Medicare, we must first decide whether Medicare constitutes 'any other insurance or welfare plan or prepayment arrangement.' The Medicare benefits in question were paid from both Part A and Part B Medicare. It is important to note the significant differences in the nature and administration of Parts A and B.

(T)he Medicare program is a dual structure comprising two separate insurance programs, distinct as to benefits, coverage, financing, and administration. Part A, hospital and related benefits, is incorporated within the existing social security patterns. Contributions are universal and mandatory. After a transitional period . . . eligibility will be a right only for persons 65 and over who meet the conditions required for cash social security benefits.

Part B, the supplementary medical benefits plan, is voluntary and open to any person aged 65 or over (except nonresident aliens) irrespective of social security status. Premiums are paid on a current basis. Benefit payments under the two plans are made by different administrative 'intermediaries' (called 'carriers' under Part B).

H. Somers & A. Somers, Medicare and the Hospitals--Issues and Prospects 19--20 (1967); See Department of Health, Education & Welfare, Pub. No. SSA 74--10050, Your Medicare Handbook 44--45 (1974).

May either Part A or Part B Medicare be classified as 'insurance'? The essence of insurance, as that term is commonly understood, is 'a contract whereby one undertakes to indemnify another or pay a specified amount upon determinable contingencies.' RCW 48.01.040; See In re Knight's Estate, 31 Wash.2d 813, 816, 199 P.2d 89 (1948). Part A Medicare, therefore, is not 'insurance.' Part A benefits (hospitalization) are not obtained by beneficiaries who voluntarily enter into a contract with the federal government. Part A benefits are paid as a result of mandatory payroll or self-employment taxes to those persons 65 and over who meet the conditions for Social Security benefits. Thus it has been administratively determined that amounts paid as self-employment taxes under Int.Rev.Code § 1401(b) and as employee taxes under Int.Rev.Code § 3101(b) (taxes used to finance Part A), do not qualify as amounts paid for insurance for purposes of the medical expense deduction under Int.Rev.Code § 213. Rev.Rul. 216, 1966--2 Cum.Bull. 100. In addition, Rev.Rul. 341, 1970--2 Cum.Bull. 31, characterizes Part A Medicare in this manner:

(T)he basic medicare benefits (Part A) paid to (or on behalf of) an individual are in the nature of disbursements made in furtherance of the social welfare objectives of the Federal government.

See Imvris v. Michigan Millers Mut. Ins. Co., 39 Mich.App. 406, 198 N.W.2d 36 (1972); Jones v. Aetna Cas. & Sur. Co., 497 S.W.2d 809 (Mo.App.1973).

It might be argued, however, that Part B Medicare is 'insurance,' if the latter term is construed by itself unmodified by language we later discuss. Thus, Part B (supplementary medical) is available to all persons age 65 and over, and is financed through monthly premiums of a uniform amount, paid only by those who voluntarily enroll in the program and through matching contributions from the ferderal government. Thus, Part B does have a 'contract aspect not present in Part A. Also, unlike Part A which is financed in part by Social Security payroll and self-employment taxes, Part B has no built-in welfare effect favoring those in lower income groups. Part B requires a uniform monthly payment from each enrollee. In addition, Part B premiums qualify as amounts paid for insurance covering medical care, and are deductible as medical expenses under Int.Rev.Code § 213(a). Rev.Rul. 216, Supra. In addition, Rev.Rul. 341, Supra, holds that benefits received under Part B 'are in the nature of medical insurance proceeds' and are therefore excluded from gross income under Int.Rev.Code § 104(a), which excludes amounts received through accident and health insurance for personal injuries or sickness. We shortly point out, however, that it would be improper to treat the term 'insurance' as used in the deduction clause as if it stood alone.

Neither Part A nor Part B Medicare constitute a 'welfare plan.' This phrase is not defined in the policy. The term 'welfare' is commonly understood to refer to benefits of a gratuitous nature, as 'public relief for the poor as provided under relief or welfare acts.' Ballentine's Law Dictionary 1365 (od ed. 1969). Inasmuch as the beneficiaries of Medicare pay for this coverage through Social Security taxes and Part B premiums, Medicare cannot be classified as 'welfare' as that term is understood in modern usage.

For the amount paid on his hospital bill by the Social Security Administration, it may be presumed that plaintiff paid his share of the social security taxes which partially finance Part A of Medicare, and it was stipulated that he paid $3.00 per month for Part B coverage. Medicare is not a free or charitable program under which a governmental agency provides hospitalization services or expenses 'without cost' to aged citizens.

Black v. American Bankers Ins. Co., 478 S.W.2d 434, 439 (Tex.1972). Alternatively, the term 'welfare plan' might have been intended to refer to labor union health and welfare plans authorized by 29 U.S.C. § 186(c) (1970), and illustrated by the health and welfare plan which was the subject of Occidental Life Ins. Co. v. Blume, 65 Wash.2d 643, 399 P.2d 76 (1965). If this was the intended meaning, it would not encompass Medicare.

Nor is Medicare a 'prepayment arrangement (including Blue Cross and Blue Shield plans).' Again, this term is not defined in the policy. It may refer to plans which differ from Medicare in two significant respects. First, 'prepayment' contracts differ from Medicare in the size of...