Kirven v. Central States Health & Life Co.

Citations: 409 S.C. 30; 760 S.E.2d 794; 2014 WL 2880575; 2014 S.C. LEXIS 211Docket: Appellate Case No. 2013-000273; No. 27403

Court: Supreme Court of South Carolina; June 25, 2014; South Carolina; State Supreme Court

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Two certified questions were posed by the United States District Court for the District of South Carolina regarding the applicability of the definition of “actual charges” in S.C.Code Ann. Section 38-71-242. The court ruled that the definition cannot be applied retroactively to insurance contracts executed before the statute's effective date, nor can the South Carolina Department of Insurance enforce its application to existing policies by prohibiting claims payments without adherence to this definition.

The case involves supplemental health insurance policies, which provide cash benefits directly to policyholders, differing from primary health insurance that pays healthcare providers. Supplemental policies aim to cover medical expenses while also offering additional income for unrelated living costs. In this context, the plaintiff, Diane Kirven, purchased a supplemental Cancer and Specified Disease policy from Central States Health and Life in 1999, which promised benefits based on “actual charges” for treatments, a term left undefined in the policy. After her cancer diagnosis in 2003, Central States paid benefits reflecting her billed medical costs. 

A relevant precedent, Ward v. Dixie Nat’l Life Ins. Co., addressed the ambiguity of “actual charges” in a similar supplemental policy, concluding that such ambiguities must be resolved in favor of the insured under South Carolina law.

Approximately eight months after the decision in Ward I, the South Carolina General Assembly enacted section 38-71-242, which defines “actual charges” in specified disease insurance policies that lack a definition for the term. This statute aligns with the interpretation favored by insurance companies in Ward I and establishes that “actual charges” refer to the amounts a healthcare provider agrees to accept as full payment under specific agreements, including network agreements and government healthcare programs. The section applies to all specified disease insurance policies issued in South Carolina that include terms related to “actual charges” but lack an explicit definition. Furthermore, it prohibits insurers from paying claims that exceed the defined “actual charges” after the statute's effective date.

In response to the enactment, the Ward defendants contended that the statute barred them from paying “actual charges” as previously defined in Ward I. However, the district court rejected this argument, citing the presumption against statutory retroactivity, which it found applicable to the Ward plaintiffs' insurance policies. The Fourth Circuit upheld this decision, concluding that the claims arose before the statute's effective date and that there was no legislative intent to retroactively apply the new definition.

In a related case, Kirven, whose cancer recurred in 2009, relied on her pre-existing policy to file a claim for benefits after undergoing chemotherapy. Philadelphia American Life Insurance Co., which had acquired the relevant policies, required Kirven to provide an explanation of benefits form reflecting the discounted amounts negotiated by her primary health insurers.

Philadelphia American utilized the amount in the Explanation of Benefits (EOB) to determine the benefit due to Kirven, aligning with the definition of “actual charges” in section 38-71-242. Kirven subsequently initiated a federal court lawsuit seeking a declaratory judgment on the term “actual charges” in her insurance policy and claiming damages for an alleged breach of contract. She contends that the definition in section 38-71-242 cannot be retroactively applied to policies established before its enactment. The parties concur that the legal interpretation of “actual charges” in Kirven’s policy is central to the case, leading them to jointly request the Court to address two questions regarding the applicability of section 38-71-242.

Kirven asserts that the section cannot be applied to existing insurance contracts due to the presumption against statutory retroactivity and the doctrine of constitutional avoidance, arguing it would violate the Contract Clause of both the U.S. and South Carolina constitutions. However, the Court disagrees, emphasizing the importance of ascertaining legislative intent in statutory construction. It notes that courts typically presume statutes apply prospectively unless indicated otherwise by the legislature. While the presumption against retroactivity is acknowledged, Kirven’s claims arose after the statute's effective date of June 4, 2008, which includes claims submitted post-enactment as specified by the General Assembly. Thus, the legislature's intent for section 38-71-242 to apply to Kirven’s claims is clear, negating the need for default judicial rules regarding retroactivity or constitutional avoidance.

When the language of a statute is clear and unambiguous, courts should not impose alternative meanings, and the application of section 38-71-242 to Kirven’s claims is not hindered by presumptions against retroactivity or constitutional avoidance. However, a further analysis is necessary to determine if applying this section to Kirven’s insurance policy violates the Contract Clause. Kirven contends that the definition of "actual charges" in section 38-71-242 cannot retroactively apply to contracts made before the statute’s effective date, as it would violate both state and federal Contract Clauses, which protect against laws impairing contractual obligations. Retroactive legislation is not inherently prohibited, but it must not substantially impair existing contracts without a significant public purpose. 

To assess a Contract Clause claim, a three-step analysis is employed: first, determine if the law substantially impairs a contractual relationship; second, identify a legitimate public purpose behind the regulation; and third, evaluate if the adjustment of contractual rights is reasonable and appropriate for that purpose. The court examines whether the law affects the reasonable expectations of the parties involved. A similar case, Montague v. Dixie Nat. Life Ins. Co., previously addressed the application of section 38-71-242 regarding supplemental cancer insurance, and the court found that its application would substantially impair the contractual relationship, violating the Contract Clause. Therefore, the application of section 38-71-242 to Kirven's claims is deemed a substantial impairment of contract rights.

The legislature has the power to alter a court's interpretation of contractual terms; however, retroactive changes to existing contractual obligations risk violating the Contract Clause. In Harleysville, it was determined that applying new statutory definitions to existing contracts contravenes this clause. Similarly, the retroactive application of statutes may infringe upon the Contract Clause, Takings Clause, and Due Process Clause. The application of section 38-71-242 to Kirven’s policy significantly undermines her contractual rights. Judge Anderson noted that while the state can impair contract rights for a legitimate public purpose, the changes must be reasonably related to that purpose. 

In Kirven's case, benefits were historically paid based on her medical provider charges, making the defendants' claim for protection against the adhesion contract unconvincing. There was no evidence that altering the definition of “actual charges” in her policy met a pressing societal need regarding the affordability of specified disease policies. The distinction between primary and supplemental insurance policies was emphasized: primary policies pay healthcare providers directly, while supplemental policies provide cash benefits to insureds for discretionary use. Kirven contends that any attempt by the South Carolina Department of Insurance to enforce section 38-71-242 on pre-existing policies exceeds its authority and violates the Contract Clause, a position that is supported here.

A Department Bulletin following the enactment of the statute affirmed its interpretation of “actual charges” as requiring insurers to pay benefits based on expenses incurred, rather than exceeding what providers accepted as payment. This interpretation aligns with the principle of indemnification in insurance contracts, preventing insureds from receiving benefits greater than actual expenses, which could lead to increased premiums and reduced availability of supplemental policies.

Insurers in South Carolina that have issued supplemental cancer or specified disease policies containing terms such as "actual charge" or "actual fees," without an explicit definition, are prohibited from paying claims exceeding the amounts specified in S.C.Code Ann. 38-71-242, unless mandated by a final judgment issued before June 4, 2008. Defendants argue that the Bulletin requires applying the definition of "actual charges" from section 38-71-242 to all policies, regardless of their issuance date. However, they concede that if the court finds section 38-71-242 inapplicable to pre-effective date policies, the Department cannot enforce the statute contrary to that finding. The Bulletin is characterized as a policy guidance statement lacking legal force, as agency-issued guidance outside regulation does not constitute law. 

Both certified questions were answered negatively. In this context, Central States Insurance paid the billed amounts for medical services, while the insureds argued that "actual charges" referred to those billed amounts. The insurer contended that "actual charges" were the prenegotiated amounts accepted as payment-in-full. Defendants further claimed that each monthly premium payment renewed Kirven’s policy, incorporating the definition from section 38-71-242 into these new policies. The court rejected this argument, stating Kirven's policy was a continuing contract, supported by its guaranteed renewable nature and grace period for payments, contrasting it with the case of Webb v. South Carolina Insurance Co., where a new contract was formed upon policy renewal. The court confirmed that continuous policies do not constitute new contracts with each premium payment. The Bulletin itself clarifies it does not have the force of law, serving only as an interpretative communication by the Department of Insurance.