Johnson v. Hospital Service Plan

Around 1955, the Newark City Hospital (city hospital) medical director modified an existing agreement with the Hospital Service Plan of New Jersey (plan) (defendant). The agreement provided that the plan would pay the city hospital a flat rate of $100 for treating a plan member, regardless of the length of stay. The agreement also provided that either party could terminate the contract with notice. Although New Jersey law did not authorize a medical director to negotiate insurance agreements, the city officials who had the authority to do so were aware of the agreement and made no attempt to terminate or modify it. After the modifications, infant Alfreida Johnson, who was covered by the plan, was hospitalized for 70 days following an automobile accident. Her hospital bill, as a nonindigent patient, was $1,190. The plan paid the city hospital the $100 flat rate. The city hospital then filed a lien for the remaining $1,090. During this time, Alfreida’s father, William Johnson (plaintiff) successfully pursued damages against the automobile driver for Alfreida’s injuries. However, the driver’s insurance carrier refused to pay Johnson $1,090 of the settlement because, under New jersey law, the lien filed by the hospital automatically attached to the settlement. Johnson filed suit against the plan, arguing that either the plan was obligated to pay $1,090 or the $100 payment to the city hospital constituted the full payment. After the plan and the city hospital agreed that Johnson should not be personally liable for the remainder of the bill, litigation began between the plan and the City of Newark (city) (plaintiff). The city claimed that the contract was invalid because the medical director was not authorized to act as the city’s agent in insurance-plan negotiations. The lower court returned a verdict for the plan on the ground that the medical director was an authorized agent and even if the medical director was unauthorized, the city ratified the agreement. The city appealed, and the New Jersey Supreme Court heard the case.