SIXTH DIVISION
April 13, 2001

No. 1-00-0340

JUSTICE O'BRIEN delivered the opinion of the court:

Plaintiff, Marilyn Lauer, the beneficiary under her husband'slife insurance policy, filed a two-count complaint seeking a declaratoryjudgment that the policy was incontestable at the time of her husband's death(count I), and alleging defendant, American Family Life Insurance Company,breached the contract by failing to pay death benefits under the policy (countII). The circuit court dismissed count I pursuant to section 2-615 of the Codeof Civil Procedure (725 ILCS 5/2-615 (West 1998)), explaining that based uponthe contract and the law, the two-year contestability period commenced on thepolicy date rather than the conditional receipt date. Further, the circuit courtdismissed count II pursuant to section 2-619 of the Code of Civil Procedure (725ILCS 5/2-619 (West 1998)), explaining that Albert Lauer had made a materialmisrepresentation in his insurance application. Plaintiff appeals.

On March 23, 1997, Albert Lauer applied for a life insurancepolicy with defendant. On March 26, 1997, Albert Lauer paid his first premiumand the defendant issued a conditional receipt (the Conditional Receipt). OnApril 12, 1997, defendant issued the 20-year decreasing term life insurancepolicy for which Albert Lauer had applied (the Policy). By its terms, the Policytook effect retroactively on April 2, 1997, and terminated April 1, 2017. AlbertLauer died from lung cancer on March 28, 1999.

His beneficiary, Marilyn Lauer, submitted the Policy, alongwith Albert Lauer's death certificate, to defendant for payment. Defendantinitiated a routine contestable investigation during which it received medicalrecords from, inter alia, Dr. Patel, indicating that Albert Lauer hadbeen diagnosed with lung cancer in May of 1996 and had received multipleregimens of chemotherapy during 1996 and 1997. Defendant refused to pay benefitsunder the Policy because Albert Lauer's death occurred within the two-yearcontestability period and because Albert Lauer's answers to questions on hisapplication for life insurance about his medical condition were incomplete inthat they failed to disclose his diagnosis and treatment for lung cancer.Defendant asserted that, had it known of the condition, it would not have issuedthe Policy.

On appeal, plaintiff argues that the Policy becameincontestable on March 26, 1999, the two-year anniversary of the date upon whichAlbert Lauer paid his first premium and the defendant issued its ConditionalReceipt. Plaintiff relies primarily upon Holtze v. Equitable Life AssuranceSociety of the United States, 548 F.2d 1037 (D.C. Cir. 1976), and upon thepublic policy expressed by the Illinois legislature in section 224(c) of theIllinois Insurance Code (215 ILCS 5/224(c) (West 1998)), in support of herargument.

In Holtze, the decedent completed an application forlife insurance on October 24, 1969, paid the first premium, and received aconditional receipt. The insurance company conducted its examinations and issueda formal policy on November 28, 1969, which contained a standard two-yearincontestability clause. Holtze died on November 19, 1971. The United StatesCourt of Appeals for the District of Columbia certified two questions to theMaryland Court of Appeals asking it to define whether the definition of"Policy" under Maryland law would call the conditional receipt a"written instrument" as used in the policy definition, and what wasthe date of issue of the policy. The Maryland court found that the conditionalreceipt together with the application are part of the "writteninstrument" in which the contract was set forth on October 24, 1969, andthe two-year inconstestability period started that day. Applying this ruling,the federal court reasoned that because the insurance company had accepted thefirst premium, issued, and delivered the formal policy, it was in no position toraise the point that coverage did not exist prior to November 26, 1969.Accordingly, the federal court ruled that under Maryland law, where theconditional receipt was issued on October 24, 1969, and the formal policy wasissued on November 23, 1969, the policy became incontestable on October 24,1971.

Section 224(c) of the Illinois Insurance Code provides, inrelevant part:

"A provision that the policy, together with the application therefor, a copy of which shall be endorsed upon or attached to the policy and made a part thereof, shall constitute the entire contract between the parties and that after it has been in force during the lifetime of the insured a specified time, not later than 2 years from its date, it shall be incontestable except for nonpayment of premiums ***; provided that the application therefor need not be attached to or made a part of any policy containing a clause making the policy incontestable from the date of issue." (Emphasis added.) 215 ILCS 5/224(c) (West 1998).

Defendant counters that the Policy became incontestable onApril 12, 1997, the two-year anniversary of the date upon which defendant issuedthe Policy. Defendant relies primarily upon Malone v. North Atlantic LifeInsurance Co., 256 A.D. 2d 1077, 1078, 682 N.Y.S.2d 760, 761 (1998), and thelanguage of the Conditional Receipt and of the Policy, in support of itsargument.

In Malone, the plaintiff obtained a life insurancepolicy with a two-year incontestability provision, and died more than two yearsafter the issuance of the conditional receipt, but less than two years after theissue date of the policy. Upon plaintiff's death, the insurer contested thepolicy, claiming that the decedent had concealed the fact that he had cancer.The Malone court held the two-year incontestability period did not beginto run until the issue of the date of the policy, not on the date the insuredreceived the conditional receipt. The insurance policy was, therefore,contestable. According to the Malone court, "[a] conditional receiptis simply a binder that provides for temporary or preliminary insurance,covering the applicant until the insurance company's investigation ofinsurability is completed." Malone, 256 A.D. 2d at 1078, 682N.Y.S.2d at 761. Accord Loyda v. New England Life Insurance Co., 409 F.Supp. 754 (D.P.R. 1976).

The Policy contains a standard two-year incontestabilityprovision which provides:

"INCONTESTABILITY. We will not contest the validity of this Policy except for nonpayment of Premium after it has been in force during the Primary Insured's lifetime for two years from the later of:

1. the Issue Date; or

2. the date We approve any Reinstatement Application."

The Conditional Receipt provides:

"INSURANCE UNDER THIS RECEIPT ENDS ON THE EARLIER OF:

1. 120 days after Today's Date; or

2. the date insurance takes effect under the Policy applied for."

 

"INSURANCE UNDER THIS RECEIPT IS SUBJECT TO LIMITATIONS:

1. The amount of insurance under this Receipt * * * is the lesser of $500,000 or the Amount of Insurance applied for * * *."

 

The Policy defines "ISSUE DATE" as "[t]hedate the Policy was issued as shown in the Schedule." The schedule liststhe "issue date" as April 12, 1997.

Based upon this language, and employing the reasoningutilized in Malone, defendant contends, in essence, that it issued twoinsurance policies to Albert Lauer. The first of these was the temporaryinsurance policy represented by the Conditional Receipt. This policy exposed thedefendant to significant liability, but for a limited period of time. Coverageunder this policy terminated by its terms on the date the 20-year decreasingterm life insurance Policy, for which Albert Lauer had applied, took effect.That second policy took effect on April 2, 1997. The incontestability period inthe second, 20-year Policy started on its "issue date" and the issuedate clearly noted on the Policy is April 12, 1997.

Thus, the question presented is whether the two years beganto run from March 26, 1997, when decedent received the Conditional Receipt upontender of the first premium payment, or whether it began to run on April 12,1997, the issue date of the Policy.

Although defendant is correct that here, as in Malone,the Conditional Receipt is not incorporated into the Policy by reference, wenevertheless decline to follow the Malone court's analysis because inIllinois, unlike in New York, the application (which is the basis for issuingthe Conditional Receipt) is incorporated into the Policy by statute. Accordingto section 224(c) of the Illinois Insurance Code, the application and the policytogether constitute the entire "contract." Because the Illinoislegislature employed the singular "contract," rather than the plural"contracts," the Conditional Receipt and the Policy at issue herecannot be viewed as separate insurance contracts with two separate policy issuedates.

Moreover, section 224(c) provides that the clock starts torun on the "contract *** date," not on the policy "issuedate." 215 ILCS 5/224(c) (West 1998). By any reasonable analysis, the"contract *** date" is the first date on which the parties enteredinto any part of the "contract." In contrast, the "issuedate" is an arbitrary date selected at the sole discretion of the insurancecompany. The Illinois legislature's selection of the term "contract ***date," rather than the term "issue date," evinces an intent toimpose a limitations period upon an insurance company's ability to contest alife insurance policy, which the insurance company is without ability to extendby creative drafting. As this court has previously noted, any attempt by aninsurance company to dilute or diminish statutory provisions applicable to itsmethod of insurance is contrary to public policy, and any conflict betweenstatutory and policy provisions will resolve in favor of the statutoryprovisions. DC Electronics, Inc. v. Employees Modern Life Co., 90 Ill.App. 3d 342 (1980). Indeed, as early as 1911, this court stated:

"Where an intent to make the application a part of the policy appears, the court, no matter what the phraseology may be, will read the application into the policy of insurance. [Citations.]

If the language of an insurance policy is ambiguous, it will be most strongly construed against the insurance company and in favor of the insured. A clause in an insurance policy providing that the policy shall be incontestable, except for non-payment of premiums,