An important decision recently came down from the U.S. Court of Appeals for the Sixth Circuit, finding that individual state bans on mandatory hospitalization prior to a stay at a long-term care (LTC) facility do not apply to LTC insurance policies that were already in effect before the ban.

The case, Smith et al vs. Continental Casualty Co., involved residents of two states, Maybelle Smith from Ohio and Mary Fleming from Florida, who purchased LTC policies from Continental Casualty Company (CCC). The policies committed to paying the insured daily benefits if they ever moved into a LTC facility in exchange for the insured paying the premiums. The policies also required the insured to spend three days in a hospital before they could qualify for coverage. The two plaintiffs paid their annual premiums for the policies that were “guaranteed renewable for life” and eventually ended up in LTC facilities. However, after the women bought their policies, Ohio and Florida each banned the sale of LTC policies with mandatory hospital stay requirements. Neither woman spent time in a hospital prior to being admitted to their LTC facilities, so CCC denied their LTC coverage in accordance with their policies.

Smith and Fleming sued CCC arguing that the annual premiums they paid were consideration for a new annual contract with the insurance company, so when the states banned mandatory hospitalization requirements, this should have automatically been applied to their policies. The court found for CCC and dismissed the women’s claims, ruling that because the state bans occurred after the initial purchase of both Smith’s and Fleming’s policies, the mandatory three-day hospital stay was still in force as a requirement for coverage.

Representatives for Fleming and Smith (who have died since the start of the court case) appealed the district court’s decision, suggesting that the plaintiffs entered a new policy with CCC every year, so the state ban on mandatory hospital stays should have been included in the new annual policy.

In early October 2021, the U.S. Court of Appeals for the Sixth Circuit affirmed the lower court’s decision, holding that the state laws of Florida and Ohio outlawing mandatory hospitalization requirements did not apply to the LTC policies that Smith and Fleming signed because the policies remained in force continuously from when they became effective.

The court ruled that the original LTC policies were not intended to last only a year, as the trustee for Fleming’s estate and executor for Smith’s estate argued, because each year the limitations period did not restart, lifetime benefits did not reset, and the policies could not be renegotiated. The court maintained that the plaintiffs intended for their LTC policies to be extended indefinitely and had no end date. The insured did not have to go through a renewal or reapplication process each year as long as they were paying their premiums. Therefore, the original contract/policies and their provisions must stand.  

This decision is significant because it demonstrates that a contractual provision agreed to between two parties may survive a change in the law prohibiting such contractual provisions from being entered into in future agreements.

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