*This is a selection from the book titled "Catastrophe Claims: Insurance Coverage for Natural and Man-Made Disasters," Chapter 18A by Dennis J. Wall (©May 2017, Thomson Reuters). This selection is reprinted with permission of Thomson Reuters. Any further reproduction without the consent of the publisher is expressly prohibited.
An annuity is not payable in direct proportion to the total amount of premiums paid by the person holding the annuity. Justice Harlan's opinion seems to imply the opposite, that annuities are payable on the basis of the premiums paid in by the holder, which is not the case now and was not the case in 1960 when Justice Harlan wrote his opinion in Nestor's case.
The analogy to annuities is helpful, nonetheless, to understand the nature of Social Security old-age insurance benefits. They are not based on how much the holder has paid for them. And the holder has a contract right to receive them.
When the federal government issues the insurance, the holder may or may not also hold "Due Process" rights before the federal government takes the insurance payments away, and that decision from a case decided in 1960 may or may not be valid today, but other constitutional rights may be implicated in that situation.
In 1976, the Court held that the Fifth Amendment and "procedural due process" binds the federal government to hold a hearing when it acts to take away the statutorily created "property interest" in receiving Social Security Disability Benefits.[1] The Court in that case, Mathews v. Eldridge, actually said that its decision in Flemming v. Nestor, among other cases, recognized a "property interest" in continued receipt of benefits under the Social Security Act.[2] To the extent that the Mathews decision rests on a ruling concerning Due Process, it has a long and checkered history of state-law and criminal cases which reject or distinguish it. All but one of these citing cases has come from lower courts, and in the one case subsequently decided by the Court itself in which Mathews was cited,[3] it did not affect the outcome of the case nor the validity of Mathews.
Earlier precedent exists which, by analogy, supports the simple proposition that strictly considered from an insurance point of view, there is an interest which the law protects in receiving insurance benefits under a contract of insurance. A constitutional perspective is added in those cases -- but from our perspective in this book it is an added perspective, not the only or even the central perspective -- that when the federal government issues the insurance, then the federal government is constrained by the federal Constitution. Still, our perspective here is on insurance first, and for present purposes other issues certainly exist in these cases, but here those non-insurance issues come second.
The federal government acted to terminate insurance benefits payable under federally issued insurance under the Risk Insurance Act of 1917. When the Great Depression began, the federal government acted in March, 1933 to terminate the payment of all insurance benefits under this and other laws. Two consolidated challenges to the federal government's termination of insurance benefits reached the United States Supreme Court after lower courts had dismissed the claims, in the consolidated appeals considered in Lynch v. United States.[4]
The Supreme Court reversed. In a unanimous opinion authored by Mr. Justice Brandeis, the Court's reasons for decision addressed both the nature of insurance including the status an insurance policy has as a contract, and the nature of the constitutional constraints upon the actions of the federal government, particularly with respect to its contracts. The Court held:
[W]ar risk policies, being contracts, are property and create vested rights. The terms of these contracts are to be found in part in the policy, in part in the statutes under which they are issued and the regulations promulgated thereunder.
* * *
The Fifth Amendment commands that property be not taken without making just compensation. Valid contracts are property, whether the obligor be a private individual, a municipality, a state, or the United States. Rights against the United States arising out of a contract with it are protected by the Fifth Amendment.[5]
Next: Rights Under an Insurance Contract.
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[1] Mathews v. Eldridge, 424 U.S. 319, 332, 96 S. Ct. 893, 901 (1976).
[2] Mathews v. Eldridge, 424 U.S. 319, 332, 96 S. Ct. 893, 901 (1976).
[3] Henderson ex rel. Henderson v. Shinseki, 562 U.S. 428, 437, 131 S. Ct. 1197, 1204 (2011).
[4] Lynch v. United States, 292 U.S. 571, 54 S. Ct. 840 (1934).
[5] Lynch v. United States, 292 U.S. 571, 577, 579, 54 S. Ct. 840, 842, 843 (1934) (emphasis added). In a footnote, a panel of the Seventh Circuit Court of Appeals distinguished Lynch on the ground that in its view, later Supreme Court decisions on the "Takings Clause" had impliedly overruled Lynch. As of the present time, no Supreme Court decision has ever explicitly attempted to limit Lynch, let alone overrule it. Moreover, the circuit court panel thought that Lynch should have been decided only on the basis of the "Due Process" Clause in any event. Pro-Eco, Inc. v. Board of Comm'rs, 57 F.3d 505, 510 n.2 (7th Cir. 1995), cert. denied, 516 U.S. 1028, 116 S. Ct. 672 (1995).
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