I say to you again: Hard insurance coverage cases make bad law.
The litigation history of Social Security Old-Age Insurance is a good example. The one and only time so far that "old age benefits" came before the Court was in 1960 in the case of Flemming v. Nestor.
Ephraim Nestor came from Bulgaria to the United States in 1913. In 1933, he and many other people joined the Communist Party. Also like many other people did, he quit. Mr. Nestor quit the Communist Party in 1939.
17 years later, he was deported. Not because he quit the Communist Party, of course, but because he had joined it before he quit it.
After he was deported, the United States Government terminated Mr. Nestor's Social Security "old age benefits."
Nestor's lawyers filed suit to halt the termination of benefits, and won in the District Court. The District Court for the District of Columbia ruled that it was a violation of "the Due Process Clause of the Fifth Amendment" to terminate Mr. Nestor's Social Security benefits.
The Government appealed to the Supreme Court. There was already Supreme Court precedent in the form of Lynch v. United States, a unanimous decision. In the opinion written for the Court by Mr. Justice Brandeis, the Court determined in Lynch that an insurance contract with the United States is like any other contract with the United States, and so is constitutionally protected under the Takings Clause of the Fifth Amendment. Simply put, the U.S. Government cannot constitutionally take away insurance under a contract to which the U.S. is a party, without complying with the Fifth Amendment. The sanction is that the insurance benefits are due and owing, and the Government's attempt to take the insurance away is a nullity.
So, the question in 1960 became whether what a majority of the Court called the Social Security "old age benefits" of the former Communist Ephraim Nestor, qualified for constitutional protection as insurance.
This must be clearly understood or nothing wonderful can come out of the story of Flemming v. Nestor.
The issue in the case was most decidedly not of the kind that the Court was used to, namely, whether the benefits Ephraim Nestor received were constitutionally protected but instead whether they were insurance, which the unanimous holding in Lynch v. United States had already established 26 years before, is constitutionally protected.
There is no other way of describing the way this issue was treated in Flemming v. Nestor besides saying that the Court flubbed it. The 5 Justices in the majority ruled that Nestor's old age benefits were not insurance because they said so in two sentences.
Here are the two sentences. Read them for yourself:
"BUT EACH WORKER'S BENEFITS, THOUGH FLOWING FROM THE CONTRIBUTIONS HE MADE TO THE NATIONAL ECONOMY WHILE ACTIVELY EMPLOYED, ARE NOT DEPENDENT ON THE DEGREE TO WHICH HE WAS CALLED UPON TO SUPPORT THE SYSTEM BY TAXATION." (e.s.)
That is the first sentence. See how receipt of benefits is thought to match the degree of contributions through the worker's payment of taxes. The "degree of contributions," however, is not a tit-for-tat match with benefits to be received under Social Security Old-Age Insurance. It is not a quid pro quo. Moreover, workers have never been called upon to support "the system" by taxation; the Act and the people who wrote the Act address contributions to the national economy at the time of the Great Depression, not contributions to the Social Security Old-Age Insurance "system."
Here is the second of the two sentences:
"IT IS APPARENT THAT THE NONCONTRACTUAL INTEREST OF AN EMPLOYEE COVERED BY THE ACT CANNOT BE SOUNDLY ANALOGIZED TO THAT OF THE HOLDER OF AN ANNUITY, WHOSE RIGHT TO BENEFITS IS BOTTOMED ON HIS CONTRACTUAL PREMIUM PAYMENTS." (e.s.)
The fact that the 5 Justices in the passing majority which ruled in Flemming that Nestor, the deported former Communist, should have his old age benefits taken away, could not soundly analogize Nestor's benefits to the right to benefits under an annuity, is not worth very much. Their collective experience with insurance issues was to put it charitably, not great. Their decision is rather a collective call to include a person who understands insurance coverage issues on your team if you are ever in court in any case involving insurance, and not just if your case involves the termination of your benefits.
The collective ignorance of insurance is fully illustrated by the misunderstanding of what constitutes an annuity that is announced in this quotation. The Flemming majority clearly believed that the holder of an annuity receives benefits in proportion to her or his contractual premium payments. Not so, judges, not so.
Annuities are based on the payment of premiums, it is certain, but benefits are not paid out under an annuity in proportion to what was paid in. In more recent times, that would perhaps characterize a 401(k) plan, but it is not the mark of an annuity.
Like Social Security Old-Age Insurance, an annuity pays out after premiums have been paid (or, the case of Social Security, after taxes have been deducted from paychecks), but the benefits paid out under the contract are not paid out in direct proportion to the premiums (or taxes) paid in. In both cases, the contract is protected and the contract conveys rights to receive benefits in exchange for the payments made by the holder (or, in the case of Social Security, made by the worker).
In the end, "it is apparent" that the Flemming decision "cannot be soundly analogized to that of" a respected insurance coverage analysis. To the contrary. The majority in that case never even mentioned the full title of the law they were called upon to interpret:
THE FEDERAL OLD AGE, SURVIVORS, DISABILITY AND HEALTH INSURANCE PROGRAM.
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