Merritt Personal Lines Manual: How One Catastrophic Medical Policy Compared to Major Med

The supreme court of Nevada considered the mechanics of catastrophic coverage in its 1993 decision State Farm Mutual Automobile Insurance Co. v. Ronald Cramer.

In November 1987, Cramer was injured in an automobile collision and incurred a total of $35,120.95 in medical expenses. At the time of the accident, Cramer had medical expense coverage through his automobile and health insurance policies. Cramer purchased both policies from State Farm and paid separate premiums for the policies.

The automobile insurance policy provided medical payment coverage (MPC) up to $25,000. The health insurance policy provided basic medical coverage for hospital, surgical and miscellaneous medical expenses.

A catastrophic medical expense rider (CMER) appended to the health insurance policy provided an additional $1 million in medical expense coverage. Benefits under the CMER were payable if Cramer's medical expenses exceeded the sum of benefits payable to him from other medical expense coverage.

"Other medical expense coverage" included automobile MPC.

In 1987, Cramer submitted $3,991.26 in accident-related medical bills to State Farm. Of that amount, $1,378.40 was paid under the base health insurance policy. State Farm also paid $4,442.09 under the automobile MPC. So, Cramer received $1,829.23 over and above his actual medical expenses for 1987.

In 1988, Cramer submitted bills totaling $31,129.69 for accident-related medical expenses. State Farm paid $12,960.20 in accordance with the terms of the basic medical policy, leaving a balance of $18,169.49 in expenses. It then paid Cramer $20,557.91, the remainder of the automobile MPC policy limits. So, Cramer received $2,388.42 more than he incurred for medical expenses in 1988.

In total, Cramer received $4,217.56 in excess payments from State Farm. He also received $47,739.51 for bodily injury and an unspecified amount for property damage from the adverse driver's insurance company.

Despite all of this, Cramer didn't pay his health care providers either from the insurance proceeds he had received from State Farm or otherwise. Consequently, he sought additional medical expense benefits from State Farm pursuant to the CMER. State Farm denied coverage.

By letter dated February 1990, State Farm explained that since Cramer had not incurred any out-of-pocket expenses and in fact had received benefits in excess of his medical expenses, he had not met the threshold amount entitling him to benefits under the CMER.

Dissatisfied with this response, Cramer sued, alleging tortious breach of contract, breach of fiduciary duty, unfair settlement practices and fraud. He sought compensatory and punitive damages.

After a year of discovery, State Farm moved for a summary judgment dismissing Cramer's claims. It argued that coverage under the catastrophic medical expense rider was precluded because Cramer had not satisfied the threshold amount. Also, it argued that it wasn't liable for bad faith or punitive damages because it had reasonably interpreted its CMER to preclude coverage.

Cramer countered by arguing that, by including the automobile MPC in the CMER's "threshold amount" calculation, State Farm had created a so-called "set-off violation" of Nevada insurance law.

First, the disputed provision stated:

If, while this rider is in force, a Covered Person incurs Covered Medical Expenses during a calendar year in excess of the Threshold Amount, the Company will pay, subject to the provisions, exclusions and limitations of this rider, benefits for that Covered Person's Covered Medical Expenses incurred during such calendar year. The amount of such benefits payable under this rider is the amount by which all such Covered Medical Expenses incurred for that Covered Person during the calendar year exceed the Threshold Amount.

Second, the "threshold amount" was defined as the sum of:

A. The amount of benefits provided for a Covered Person's Covered Medical Expenses by Other Medical Expense Coverage and

B. Fifteen Hundred Dollars ($1,500) Out-of-Pocket Expenses per Covered Person.

Third, Nevada insurance law provided:

The insurer shall include in [any set-off] provision a definition of "other valid coverage" approved... by the commissioner. Such term may include hospital, surgical, medical or major medical benefits provided by individual or family-type coverage, government programs or workmen's compensation. Such term shall not include any group insurance, automobile medical payments or third party liability coverage.

The district court sided with Cramer, ruling that State Farm's definition of threshold amount violated Nevada law. State Farm appealed.

The state supreme court defined the dispute as one over whether the CMER, as a form of excess insurance, fell under the terms of a coordination of benefits (COB) provision of state law.

Under a COB provision, if a policyholder's benefits under more than one policy exceeded his medical expenses, each insurer's liability was determined on a pro rata basis. This permitted an insurer to apportion liability between or among other valid coverage, whether provided by other insurers or the same insurer. However, automobile medical payments were expressly excluded from "other valid coverage."

The court wrote:

A COB clause is, essentially, a non-duplication of benefits provision. The primary characteristic of a COB provision is a structure of priority of claims payments enabling insurers to reduce liability and preventing double recovery by an insured. By contrast, an excess clause provides for the payment of a loss to the extent the loss exceeds other available insurance. An excess insurer becomes liable once the primary insurer's policy limits have been exhausted.

The court ruled that the purpose of a catastrophe policy was to provide additional coverage to meet substantial medical expenses not paid by other insurance. Coverage under a catastrophe policy didn't come into effect until after lesser policies were exhausted.

"The CMER is more appropriately construed as excess coverage," the court ruled. "The unambiguous terms of the CMER provide for payment of medical expenses which exceed the sum of benefits paid by other medical coverage and $1,500 in out-of-pocket medical expenses not covered by other insurance."

Since CMER provided excess coverage, it didn't fall under the set-off proscription of Nevada law. So, State Farm properly denied Cramer additional coverage under the CMER.