SUPERIOR COURT OF NEW JERSEY
APPELLATE DIVISION
A-3719-96T1
RICHARD WEINSTEIN,
Plaintiff-Respondent,
v.
MUTUAL BENEFIT LIFE IN
REHABILITATION, as successor
to MUTUAL BENEFIT LIFE
INSURANCE COMPANY,
Defendant-Appellant,
and
ALTER & COMPANY, INC., and
JEFFREY DUNST,See footnote 1
Defendants.
________________________________________
Argued February 23, 1998 - Decided July 10,
1998
Before Judges Skillman, Eichen and Steinberg.See footnote 2
On appeal from Superior Court of New Jersey,
Law Division, Mercer County.
Robert E. Bennett argued the cause for
appellant (Hill Wallack, attorneys; Mr.
Bennett on the brief).
No brief was filed on behalf of respondent.
No other parties participated in this appeal.
The opinion of the court was delivered by
EICHEN, J.A.D.
The primary issue presented on this appeal is whether certain
misrepresentations made by plaintiff Richard Weinstein concerning
his income and medical history in an application for a disability
income insurance policy entitled defendant Mutual Benefit Life in
Rehabilitation (Mutual Benefit)See footnote 3 to rescind the policy. The motion
judge concluded that the misrepresentations did not bar plaintiff's
recovery under the policy because Mutual Benefit was not adversely
affected by the false statements and that reformation of the policy
was a more equitable remedy. Accordingly, the judge denied Mutual
Benefit's motion for summary judgment on its counterclaim for
rescission and its motion for reconsideration and entered final
judgment in favor of plaintiff against Mutual Benefit in the
stipulated sum of $81,508, representing plaintiff's policy
benefits, inclusive of costs and prejudgment interest. Mutual
Benefit appeals and we reverse.
In May 1991, plaintiff applied for a disability income
insurance policy (the policy) from Mutual Benefit. On July 1,
1991, the policy was issued. It contained an incontestability
clause which stated, in pertinent part:
After this policy has been in force for two
years, we will not reduce or deny a claim for
benefits on the basis of the statements in the
application, except fraudulent misstatements.
In June 1992, while the policy was still in its contestability
period, plaintiff submitted a claim to Mutual Benefit contending
that he had become disabled due to a severe lower back condition.
During the course of investigating the claim, Mutual Benefit
learned that plaintiff had been diagnosed and treated for problems
with his right knee in May 1989. The record reveals that plaintiff
had "a right medial meniscectomy" in 1981 which he failed to
include in response to questions on the application. The record
also discloses that plaintiff continued to have problems with his
knee and that he and his treating physician discussed and
contemplated various surgical procedures to correct the condition.
Plaintiff had not disclosed this medical history in his policy
application.
In addition, Mutual Benefit discovered that plaintiff had been
untruthful in stating his income for the year 1990. Specifically,
plaintiff had indicated in the application that his earned income
was $185,000, whereas his accountant verified that plaintiff had
earned only $118,000 that year. On January 13, 1993, Mutual
Benefit declined plaintiff's claim for benefits based upon the
"material misrepresentations" contained in plaintiff's
application.See footnote 4
In support of its motion for summary judgment, Mutual Benefit
submitted a certification from George S. Chumas, the director of
underwriting, indicating that if plaintiff's actual medical history
had been disclosed, it "would have affected [Mutual Benefit's]
assessment of the disability insurance risk presented by Mr.
Weinstein," and plaintiff's policy would not have been issued as
written. He stated that "a different and less favorable policy,
one which would have included an exclusion of coverage rider for
the right knee," would have been offered. Mr. Chumas also stated
that because plaintiff's actual earned income was substantially
less than indicated on the application, his monthly benefits also
would have been substantially less.See footnote 5 He further indicated that
"[b]ased upon [plaintiff's] nondisclosed medical history and
misrepresentation of his 1990 earned income, [Mutual Benefit] was
not provided with the necessary information to accurately and
appropriately underwrite Mr. Weinstein's disability policy."
During argument on the summary judgment and reconsideration
motions, the motion judge determined that rescission is required
only where the "false statement[s] materially affect[] either the
acceptance of the risk or the hazard assumed by the insurer,"
quoting N.J.S.A. 17B:24-3d and citing Massachusetts Mut. Life Ins.
Co. v. Manzo,
122 N.J. 104 (1991) and Ledley v. William Penn Life
Ins. Co.,
138 N.J. 627 (1995). Because Mutual Benefit had conceded
that it would have issued some form of policy to plaintiff even if
he had disclosed all of the relevant information, the judge
concluded that the false statements had not "materially affected
the hazard assumed" by Mutual Benefit. The judge reasoned that
Mutual Benefit was not "adversely affected" by the earnings
misrepresentation or the withheld medical information concerning
plaintiff's knee because it simply would have excluded coverage for
plaintiff's knee (which was not the subject of the disability
claim) and paid a reduced benefit based on plaintiff's lower
income. The judge also noted that the premium charged to plaintiff
was already one-third higher than the "standard" premium because of
plaintiff's high blood pressure. Accordingly, the judge concluded
that the misrepresentations were not "material" justifying denial
of coverage under the policy.
The Legislature defined the term "materiality" in the
disjunctive, providing that a false statement would bar recovery if
it affects "either the acceptance of the risk or the hazard assumed
by the insurer." N.J.S.A. 17B:24-3d (emphasis added). In Manzo,
our Supreme Court concluded that no causal connection between an
insured's false statements and the ultimate cause of death is
required to bar recovery. In so concluding, the Court stated that
"[a]n insurer is entitled to relief when it relies on incorrect
information provided by an insured in an insurance application if
the information was material either to the insurer's decision to
insure or to the terms of the contract." Massachusetts Mut. Life
Ins. Co. v. Manzo, supra, 122 N.J. at 118 (emphasis added).
The Manzo Court interpreted the term "material" expansively,
embracing the broad definition given by the Court of Errors and
Appeals in Kerpchak v. John Hancock Mut. Ins. Co.,
97 N.J.L. 196
(E. & A. 1922), and concluding that "the Kerpchak test comports
with the legislative intent." Massachusetts Mut. Life Ins. Co. v.
Manzo, supra, 122 N.J. at 116. There, our then highest court
indicated that a false concealment of medical history on a life
insurance application was material if "it would naturally and
reasonably influence the judgment of the underwriter in making the
contract at all, or in estimating the degree or character of the
risk, or in fixing the rate of premium." Kerpchak v. John Hancock
Mut. Ins. Co., supra, 97 N.J.L. at 198 (emphasis added). Hence, in
determining whether a false statement is material, the focus is on
the underwriter's view of the risk at the inception of the policy,
not after a claim has been asserted. This conclusion is supported
by the holding in Longobardi v. Chubb Ins. Co.,
121 N.J. 530, 541
(1990), where the Court indicated that the "materiality" of a false
statement "should be judged as of the time when the
misrepresentation is made [because] [i]n hindsight, the
significance of an untruth may turn out to be greater or lesser
than expected. [Therefore] [h]indsight ... is irrelevant to the
materiality of an insured's misrepresentation." Ibid.
We believe that the motion judge misinterpreted the
materiality test by analyzing the effect of plaintiff's
misrepresentations on the "hazard assumed" by Mutual Benefit after
the issuance of the policy, rather than at its inception. Although
we agree with the judge that the false statements did not affect
Mutual Benefit's decision to issue a disability income insurance
policy to plaintiff because, as Mutual Benefit conceded, it would
have issued plaintiff a policy even if it had known of plaintiff's
true income and knee condition, we disagree that the
misrepresentations did not affect "the hazard assumed" by Mutual
Benefit. Mutual Benefit would have issued a policy significantly
different from the one offered here had it not been mislead by
plaintiff. Hence, plaintiff's false statements were "material" to
"the hazard assumed" or, to state it another way, "to the terms of
the contract" at its inception. See Massachusetts Mut. Life Ins.
Co. v. Manzo, supra, 122 N.J. at 118. Consequently, plaintiff was
not entitled to recover any benefits under the contract and Mutual
Benefit's motion for summary judgment rescinding the policy should
have been granted. As the Manzo Court observed, the law "should
encourage insureds to tell the truth, not to conceal information
from the insurer and gamble that they will not die [or be disabled
from] a concealed disease." Ibid. Plaintiff failed to tell the
truth in his application for disability insurance and cannot now be
heard to complain.
Reversed.
Footnote: 1 The record reflects that plaintiff settled his claim against the other defendants. Footnote: 2 Judge Steinberg did not participate in oral argument. However, appellant consented to his participation in the decision. Footnote: 3 Mutual Benefit Life in Rehabilitation is successor to Mutual Benefit Life Insurance Company. We use the name "Mutual Benefit" interchangeably to refer to both entities in this opinion since any distinctions between them are not pertinent to this appeal. Footnote: 4 Plaintiff does not dispute that his answers were false or that the questions in the application were objective. See Massachusetts Mut. Life Ins. Co. v. Manzo, 122 N.J. 104, 114 (1991). Footnote: 5 Instead of a monthly benefit of $7,000, plaintiff would have been entitled to only $5,600.