(This syllabus is not part of the opinion of the Court. It has been prepared by the Office of the Clerk for
the convenience of the reader. It has been neither reviewed nor approved by the Supreme Court. Please
note that, in the interests of brevity, portions of any opinion may not have been summarized).
Argued March 15, 1994 -- Decided July 26, 1994
POLLOCK, J., writing for a majority of the Court.
The issue on appeal is whether a statutorily-mandated "incontestability clause" included in a disability
policy precludes the insurer from denying a claim when the insured intentionally failed to disclose a disabling
disease in the insurance application.
This appeal arises from a summary judgment motion filed by Gilbert Haas, seeking dismissal of Paul
Revere Life Insurance Company's (Paul Revere) complaint. Paul Revere's complaint sought rescission of the
policy or, alternatively, a declaratory judgment that the policy does not cover Haas's claim. Haas admitted
that when he applied for disability insurance he had known for about four years that he was suffering from
retinitis pigmentosa, a progressive disease of the eyes that leads to blindness. Haas also admits that he
intentionally concealed that information from Paul Revere.
Relying on Haas's false statements in his application, Paul Revere issued a disability policy to Haas
on March 5, 1987. The policy contained an incontestability clause required by statute. Section 10.2a of the
policy provides that the insurer cannot contest statements in the application after the policy has been in force
for two years, excluding any time that the insured's disabled. This section tolls the incontestability clause for
any period during which the insured is disabled. Section 10.2b prohibits denial of a claim because a disease
or physical condition existed before the date of issuance of the policy unless it is excluded by name or
specific description.
On December 1, 1990, Haas notified Paul Revere that he intended to file a claim. On January 7,
1991, he executed a proof of claim stating that as of December 1, 1990, he had become totally disabled
because of retinitis pigmentosa. Paul Revere's investigation of that claim revealed that Haas had lied in his
application and, on October 17, 1991, Paul Revere filed its complaint.
The trial court granted Haas's motion for summary judgment and dismissed Paul Revere's
complaint. On appeal, the Appellate Division affirmed in part and reversed in part, holding that, although
the incontestability clause precluded Paul Revere's defenses after two years, a question of fact existed as to
whether Haas had been disabled during the two-year incontestability period. The Appellate Division
remanded the matter to the trial court to determine whether Haas was disabled during the contestability
period.
HELD: An insured may not recover under a disability insurance policy for a disease that he or she
intentionally concealed when applying for the policy.
1. N.J.S.A. 17B:26-5 requires an incontestability clause in all health-insurance contracts. That statute
gives an insurer a choice of provisions: the insurer has the option of inserting in its policy a provision that
would specifically exclude fraudulent misstatements from the protection of the incontestability clause or the
insurer can choose a provision, such as the one chosen by Paul Revere, that tolls the incontestability clause
for "any period during which the insured is disabled." Had Paul Revere chosen the option that specifically
excludes fraudulent misstatements, that provision would have permitted the insurer to void the policy for
such fraudulent misstatements. (pp. 5-8)
2. Haas relies on Johnson v. Metropolitan Life Insurance Co. to suggest that the incontestability clause
in section 10.2a prohibits both rescission of the policy and a denial of claims on the basis of fraud. However,
Johnson is distinguishable. In Johnson the alleged fraud did not directly relate to the claim for which the
insurer denied coverage and, therefore, the insurer's denial of the claim was tantamount to a rescission of the
entire policy. In this case, a denial of the claim does not constitute rescission of the policy. Furthermore,
most courts have interpreted provisions like Section 10.2a to prohibit only rescission of the policy, not denial
of a specific claim. Thus, Section 10.2a does not bar Paul Revere from defending against Haas's claim even
if the insurer may not rescind the policy. (pp. 8-12)
3. Under the exclusions section of the policy, it is stated that Paul Revere need not pay benefits for a
pre-existing condition that was not disclosed on the application. The policy's definition of "total disability"
requires the disability to be caused by sickness or injury. "Sickness" is defined as sickness or disease which
first manifests itself after the date of issue and while the policy is in effect. Because Haas concealed that he
suffered from retinitis pigmentosa, Paul Revere could not be expected to exclude that disease or physical
condition by a more specific description. Thus, the definition of "sickness" operates as an exclusion by
specific description. The incontestability clause does not prevent insurers from limiting coverage of pre-existing conditions by excluding those conditions "from coverage by name or specific description." Thus,
insurers properly may limit the scope of the coverage to sicknesses that "first manifest" themselves after the
policy has been issued. (pp. 12-18)
4. It is doubtful the Legislature intended the incontestability clause to serve as an invitation for
fraudulent applications for disability insurance. The fact that Paul Revere did not choose the statutory
option that specifically provides for the exclusion of fraudulent misstatements does not mean that the
Legislature intended to authorize recovery based on coverage obtained through false statements that would
circumvent exclusions from coverage under the policy. Thus, the statutory language that precludes a defense
based on pre-existing disability does not protect insureds who make fraudulent misrepresentations in their
applications. Rather, the language is intended to protect those insureds who are unaware of their diseases.
As such, the dissent incorrectly characterizes the denial of coverage as a "lie" by the insurer. Haas remains
covered under the policy, except for the known disease that he intentionally concealed. (pp. 19-25)
So much of the judgment that bars Paul Revere from denying coverage on the basis of the
incontestability clause is REVERSED. The determination of the Appellate Division to remand to the Law
Division for a determination of whether Haas was disabled during the contestability period is AFFIRMED.
JUSTICE O'HERN, concurring in part and dissenting in part, in which JUSTICE STEIN joins, is
of the view that the Court cannot graft the "except fraudulent misrepresentations" phrase onto Sections 10.2a
and 10.2b. Insurance companies cannot misrepresent the scope of coverage to policyholders. Paul Revere
promised that after two years it would not attempt to deny coverage on the basis of claims misrepresentation;
it should honor that promise.
JUSTICES CLIFFORD, HANDLER and GARIBALDI join in JUSTICE POLLOCK's opinion.
JUSTICE O'HERN filed a separate concurring and dissenting opinion in which JUSTICE STEIN joins.
CHIEF JUSTICE WILENTZ did not participate.
SUPREME COURT OF NEW JERSEY
A-
115 September Term 1993
THE PAUL REVERE LIFE INSURANCE
COMPANY,
Plaintiff-Appellant,
v.
GILBERT K. HAAS,
Defendant-Respondent.
Argued March 15, 1994 -- Decided July 26, 1994
On certification of the Superior Court,
Appellate Division, whose opinion is reported
at
266 N.J. Super. 35 (1993).
Robert Wright argued the cause for appellant
(Melli & Wright, attorneys; Mr. Wright and
Cynthia Dokas, on the brief).
Brian T. Campion argued the cause for
respondent (Herten, Burstein, Sheridan &
Cevasco, attorneys).
Theodore D. Aden submitted a brief on behalf
of amicus curiae American Council of Life
Insurance (LeBoeuf, Lamb, Greene & MacRae,
attorneys; Mr. Aden and Rita M. Theisen, a
member of the District of Columbia bar, on
the brief).
Douglas F. Johnson and Kathryn R. Renahan
submitted a brief on behalf of amicus curiae
Health Insurance Association of America
(Earp, Cohn, Leone & Pendery, attorneys;
Thomas B. Ackland, Gail E. Cohen and Monica
A. Fisher, members of the California bar, on
the brief).
The opinion of the Court was delivered by
POLLOCK, J.
We granted the petition for certification of plaintiff, The
Paul Revere Life Insurance Co. (plaintiff, the insurer, or Paul
Revere), ___ N.J. ___ (1993), to determine whether a
statutorily-mandated "incontestability clause" included in a
disability policy precludes the insurer from denying a claim when
the insured intentionally failed to disclose a disabling disease
in the insurance application. We hold that an insured may not
recover under a disability insurance policy for a disease that he
or she intentionally concealed when applying for the policy.
This appeal arises from the motion of defendant, Gilbert Haas (defendant, the insured, or Haas), for summary judgment dismissing Paul Revere's complaint. The complaint alternatively sought rescission of the policy or a declaratory judgment that the policy does not cover Haas's claim. Because the matter arises on the insured's motion for summary judgment, we consider the facts in the light most favorable to the insurer. See Maher v. New Jersey Transit Rail Operations, Inc., 125 N.J. 455, 477 (1991) (stating that on motion for summary judgment, court draws all reasonable inferences in favor of non-moving party). For the purpose of this motion, Haas admits that when he applied for disability insurance he knew he was suffering from retinitis pigmentosa, a progressive disease of the eyes that leads to
blindness. He also admits that he intentionally concealed that
information from the insurer.
On January 20, 1987, Haas applied to Paul Revere for
disability insurance. When answering questions in the
application, Haas stated that he had not been examined by or
consulted a physician in the last five years, and that he had
never had any known indication of, or been treated for, any
disease or impairment of his eyes. In response to a question
asking whether he had had "any surgical operation, treatment,
special diet, or any illness, ailment, abnormality, or injury,
not mentioned above, within the past five years," he again
answered in the negative.
His answers were false. In fact, Haas had been evaluated,
beginning on October 20, 1983, in the New York University Retinal
Clinic. As early as 1984, his doctors had told him that he had
retinitis pigmentosa. Further, Haas had also been treated for
the disease in 1985.
Relying on Haas's false statements in the application, Paul
Revere issued the policy on March 5, 1987. The policy contained
the following clauses:
10.2 INCONTESTABLE
a. After Your Policy has been in force for
two years, excluding any time you are
disabled, we cannot contest the statements in
the application.
b. No claim for loss incurred or disability
beginning after two years from the Date of
Issue will be reduced or denied because a
disease or physical condition existed before
the Date of Issue unless it is excluded by
name or specific description.
On December 1, 1990, Haas notified Paul Revere that he
intended to file a claim. On January 7, 1991, he executed a
proof of claim, stating that as of December 1, 1990, he had
become totally disabled because of retinitis pigmentosa.
Paul Revere's investigation of the claim uncovered that Haas
had lied in his application. On October 17, 1991, Paul Revere
filed its complaint. The Law Division granted Haas's motion for
summary judgment and dismissed the complaint. The Appellate
Division affirmed in part and reversed in part, holding that,
although the incontestability clause precluded Paul Revere's
defenses after two years, an issue of fact existed whether Haas
had been disabled during the two-year incontestability period.
266 N.J. Super. 35, 44-45 (1993). Under the policy, the effect
of such a disability would be to toll the contestability period.
Id. at 45. Consequently, the Appellate Division remanded the
matter to the Law Division.
Initially, this case concerns the interpretation of the terms of a disability insurance policy. Ultimately, however, it involves a policy choice concerning the effect of an insured's
concealment of a disability in an application for insurance on a
subsequent claim for the concealed disability. After a stated
period, an incontestability clause grants an insured repose from
the rescission of the policy because of misstatements in the
application. The clause, however, neither expands the coverage
provided by the policy nor prevents the insurer from defending
against a claim based on a disease that the insured knowingly
concealed when applying for insurance. Accordingly, we reverse
the judgment of the Appellate Division to the extent that it
precludes Paul Revere from denying coverage of Haas's claim for
retinitis pigmentosa, and we remand to the Law Division.
Coloring our perception of the subject incontestability clause is the history and purpose of such clauses. At the end of the nineteenth century, life insurance companies introduced incontestability clauses to dispel the public's fear that insurers would not honor claims if the insured had made a technical mistake in the application. See Powell v. Phoenix Mut. Life Ins. Co., 144 N.E. 825, 826-27 (Ill. 1924) (listing cases involving such clauses); 7 Williston on Contracts § 912 (Jaeger ed. 1963) (Williston) (stating that insurance companies resisted liability because of misstatements made by insureds). By the early twentieth century, many states had passed statutes mandating that certain insurance policies be incontestable.
Williston, supra, § 912 at 395; see also Wischmeyer v. Paul
Revere Life Ins. Co.,
725 F. Supp. 995, 1000 (S.D. Ind. 1989)
(discussing history and rationale behind clauses). The clauses
are unquestionably for "the benefit of the insured." 1A John A.
Appleman & Jean Appleman, Insurance Law and Practice § 311 at 321
(1981) (Appleman). Their purpose is "'to give the insured a
sense of security after the stated period elapses.'" Strawbridge
v. New York Life Ins. Co.,
504 F. Supp. 824, 829 (D.N.J. 1980)
(quoting Johnson v. Metropolitan Life Ins. Co.,
53 N.J. 423, 442
(1969)).
A leading treatise on insurance law describes the public
policies underlying the incontestability clauses:
[T]here are conflicting forces of public policy which affect the matter of contestability. If an applicant chooses to gamble when he seeks a policy of life insurance, he may be guilty of outrageous fraud, and if the insurer fails to uncover such fraud within the contestable period he has been successful. Even if he makes such discovery in time, he receives back his premiums so that he has suffered no loss. On the other hand, only a minuscule percentage of the population ever resorts to such devious conduct, and it is considered desirable to have a cutoff time as to ordinary misrepresentations for two reasons: first, to lighten the burden upon the courts, since litigation otherwise could be increased manyfold; second, since most contests would arise after the insured's death, a beneficiary is in a deplorable condition to wage battle with a large insurer over statements which may have been made years
earlier. For these reasons, it is better to
countenance the occasional risk of fraud in
order to bring an end to controversy.
The New Jersey Legislature addressed these policy considerations by enacting N.J.S.A. 17B:26-5, which requires an incontestability clause in all health-insurance contracts. N.J.S.A. 17B:26-5 gives an insurer a choice of provisions. It states:
There shall be a provision as follows:
Time limit on certain defenses:
a. After 2 years from the date of issue of
this policy no misstatements, except
fraudulent misstatements, made by the
applicant in the application for such policy
shall be used to void the policy or to deny a
claim for loss incurred or disability (as
defined in the policy) commencing after the
expiration of such 2-year period.
(2) A policy * * * [such as the one
issued by Paul Revere] may contain in lieu of
the foregoing the following provision (from
which the clause in parentheses may be
omitted at the insurer's option) under the
caption "INCONTESTABLE":
After this policy has been in force
for a period of 2 years during the lifetime
of the insured, (excluding any period during
which the insured is disabled) it shall
become incontestable as to the statements
contained in the application.
b. No claim for loss incurred or disability (as defined in the policy) commencing after 2 years from the date of issue of this policy shall be reduced or denied on the ground that a disease or physical condition not excluded from coverage by name or specific description effective on the date of loss and existed
prior to the effective date of coverage of
this policy.
Thus, the statute gave Paul Revere the option of inserting
in its policy a provision that would have excluded fraudulent
misstatements from the protection of the incontestability clause.
Such a provision would have allowed Paul Revere to void the
policy for a fraudulent misstatement. Johnson, supra, 53 N.J. at
440-41; Metropolitan Life Ins. Co. v. Lodzinski,
122 N.J. Eq. 404, 408-09 (E. & A. 1937). Paul Revere chose, instead, for
section 10.2a of its policy, a provision that tolled the
incontestability clause for "any period during which the insured
is disabled." Each of the optional statutory clauses provides
certain benefits to the insurer, which must choose between a
clause protecting it from fraudulent misstatements and one
extending the incontestability period if the insured becomes
disabled during that period. Whichever clause it chose, Paul
Revere was also required to use the language adopted in section
10.2b.
"Generally, an insurance policy should be interpreted according to its plain and ordinary meaning." Voorhees v. Preferred Mut. Ins. Co., 128 N.J. 165, 175 (1992). "[B]ecause insurance policies are adhesion contracts, courts must assume a particularly vigilant role in ensuring their conformity to public policy and principles of fairness." Ibid. As a consequence,
"[w]hen the meaning of a phrase is ambiguous, the ambiguity is
resolved in favor of the insured, and in line with an insured's
objectively-reasonable expectations." Ibid. (citation omitted).
When terms in an insurance policy are included by statutory
mandate, however, courts no longer construe the policy against
the insurer; rather, the ordinary rules of statutory construction
apply. See Wischmeyer, supra, 725 F. Supp. at 1001 (holding that
court will apply "plain and ordinary meaning" of clause where
language required by statute). In sum, "an incontestability
clause required by statute cannot be construed against the
insurer." Appleman, supra, § 332 at 384.
Before us, Paul Revere makes three points. First, it claims
that although the incontestability clause bars rescission, the
clause does not prevent Paul Revere from denying benefits due to
lack of coverage. Second, it contends that the policy excludes
by specific reference Haas's condition, and therefore that he is
not covered. Third, it argues that the incontestability clause
precludes defenses only against conditions that existed but were
not manifested at the time of the application. Claims that the
insured knew existed, Paul Revere argues, fall outside the
incontestability clause.
We first consider Paul Revere's claim that the
incontestability clause does not prevent it from denying
coverage. Our analysis starts with the terms of section 10.2a,
which states that after the policy "has been in force for two
years, . . . [w]e cannot contest the statements in the
application."
Haas contends that in addition to preventing rescission,
section 10.2b also prohibits Paul Revere from defending against
his claim. He relies on Johnson, supra, 53 N.J. at 439, in which
we held that the insurer could not raise the defense of equitable
fraud to bar the claim when an incontestability clause prohibited
rescission. In Johnson, the insured became disabled, and
ultimately died, from Alzheimer's disease. Id. at 427. The
insurer denied coverage because the insured had failed to
disclose that his physicians had stated that he possibly suffered
from a heart condition. Id. at 428-31. The insurer suggested
that
a distinction be drawn between voiding the
policy and denying a claim, so that even if
the insurer could not void the policy after
two years except for "fraudulent"
misstatements, it could nonetheless defend at
any time against a claim for disability which
arose within the two-year period on the basis
of misstatements although not "fraudulent."
This distinction will not withstand analysis.
The fallacy in the insurer's suggestion lies in the assumption there is a difference
between voiding the policy and denying a
claim under it. There can be no such
distinction when the fraud relied upon
reposes in the making of the contract.
Thus, Johnson suggests that the incontestability clause in
section 10.2a prohibits both rescission of the policy and a
denial of claims on the basis of fraud.
Johnson, however, is distinguishable from the present case.
In Johnson, the alleged fraud did not directly relate to the
claim for which the insurer denied coverage. Hence, the
insurer's denial of the claim was tantamount to rescission of the
entire policy. Denial of the claim stemmed not from fraud
peculiar to the claim itself, but from fraud in the application.
In contrast, Paul Revere seeks to deny a claim on the basis of
fraud relating only to that claim. Denial of that claim does not
constitute rescission of the policy. Thus, Johnson does not
control the outcome of this case.
Most courts have read the language in section 10.2a, or similar language, to prohibit only rescission of the policy, not denial of a specific claim. See Keaten v. Paul Revere Life Insurance Co., 648 F.2d 299, 301 (5th Cir. Unit B June 1981) (providing under Georgia law, after contestability period has
run, insurer may not contest validity of policy itself, but "reserves the right to deny any claim if it is not within the coverage as stated under the policy's terms"); Massachusetts Casualty Insurance Co. v. Forman, 516 F.2d 425, 428 (5th Cir. 1975) (applying Florida law and holding incontestability clauses do not cut off defenses relating to coverage), cert. denied, 424 U.S. 914, 96 S. Ct. 1114, 47 L. Ed.2d 319 (1976); Home Life Insurance Co. v. Regueira, 313 So.2d 438, 439 (Fla. Dist. Ct. App. 1975) (holding that incontestability clauses prohibit challenges to validity of policy but not defenses relating to limitation of coverage), cert. denied, 328 So.2d 844 (Fla. 1976); Carlson v. New York Life Insurance Co., 222 N.E.2d 363, 371 (Ill. App. Ct. 1966) (noting that clause prohibits insurer from defending on grounds of invalidity, but allows contests involving scope of coverage); Metropolitan Life Insurance Co. v. Conway, 169 N.E. 642, 642 (N.Y. 1930) (Cardozo, C.J.) (holding that incontestability clause precludes defense of invalidity of policy but not denial of coverage on claim); Minnesota Mut. Life Insurance Co. v. Morse, 487 S.W.2d 317, 319-20 (Tex. 1972) (stating that policy is valid after expiration of contestability period but insurer may still dispute whether claim covered); see also Golden v. Northwestern Mutual Life Insurance Co., 229 N.J. Super. 405, 413-14 (App. Div. 1988) (noting that "an action for rescission based on equitable fraud must be commenced prior to
the incontestability clause in the policy taking effect as
mandated by N.J.S.A. 17B:25-4").
We find the majority rule persuasive. As Appleman points
out, the "better rule is clearly that the incontestability clause
relates only to the validity of the contract, and should not
affect in any way whatsoever the construction of the terms
thereof." Appleman, supra, § 331 at 372. Accordingly, we hold
that section 10.2a does not bar Paul Revere from defending
against Haas's claim even if the insurer may not rescind the
policy.
The next question is whether Paul Revere has a defense against Haas's claim for coverage for disability resulting from retinitis pigmentosa. Paul Revere initially contends that its policy does not cover Haas's condition. That contention implicates paragraph 10.2b, which prohibits denial of a claim "because a disease or physical condition existed before the Date of Issue unless it is excluded by name or specific description." Thus, the question becomes whether a concealed disease is specifically excluded under the terms of the policy.
Under those terms, Paul Revere agreed to pay benefits to Haas if he became totally disabled. Under the "exclusions" section, the policy further stated that Paul Revere need not "pay benefits for a pre-existing condition if it was not disclosed on your application." The policy's definition of "Total Disability" further requires that the disability be caused by a "Sickness or Injury." "Sickness" is defined as "sickness or disease which first manifests itself after the Date of issue and while Your Policy is in force." Haas's retinitis pigmentosa manifested itself as early as 1983, four years before Paul Revere issued the policy. Haas acknowledges that his sickness does not satisfy the definition. He contends, however, that section 10.2b requires a more specific description to justify exclusion from coverage. We disagree. Because Haas concealed that he suffered from retinitis
pigmentosa, Paul Revere could hardly be expected to exclude "that
disease or physical condition" by a more specific description.
We conclude that the definition of "sickness" operates as an
"exclu[sion] by specific description."
Generally, "[i]n construing exclusionary clauses, the court
is obligated to interpret such clauses strictly and in favor of
coverage." Township of Gloucester v. Maryland Casualty Co.,
668 F. Supp. 394, 400 (D.N.J. 1987). Moreover, "where the insurer
fails to include certain exceptions in the provisions of the
incontestable clause, the courts will not read them into the
policy." Appleman, supra, § 311 at 316.
The majority rule is that the incontestability clause does
not provide a basis for an insured to recover for a condition
that is not covered under the policy. Most courts have held that
[w]here loss is claimed by reason of
disability, it is necessary, under the
average policy, that the cause of such
disability arise within the policy terms and
after the insurance has been effected. This
is a condition of liability, a condition of
the insurance . . .. The incontestable
clause does not apply under those
circumstances, and there can be no recovery
unless the cause of disability arose within
the time designated.
See, e.g., Neville v. American Republic Ins. Co.,
912 F.2d 813,
815 (5th Cir. 1990) (holding that under Mississippi law,
incontestability clause does not extend coverage of policy to
include pre-existing conditions); Button v. Connecticut Gen. Life
Ins. Co.,
847 F.2d 584, 588 (9th Cir.) (allowing challenge under
Arizona law to disability claim, despite incontestability clause,
on grounds that policy did not cover pre-existing conditions),
cert. denied,
488 U.S. 909,
109 S. Ct. 261,
102 L. Ed.2d 250
(1988); Keaten, supra, 648 F.
2d at 301 (noting that Georgia
follows majority rule that, after contestability period has run,
insurer may not contest validity of policy itself, but "reserves
the right to deny any claim if it is not within the coverage as
stated under the policy's terms"); Forman, supra, 516 F.
2d at 428
(stating that under Florida law "incontestable clause in a
disability policy does not deprive the insurer from defending on
the ground that the particular disability was never within the
policy coverage"), cert. denied,
424 U.S. 914,
96 S. Ct. 1114,
47 L. Ed.2d 319 (1976); National Life & Accident Ins. Co. v. Mixon,
282 So.2d 308, 316 (Ala. 1973) (finding that disability caused
by pre-existing glaucoma not covered under policy although
one-year incontestability period had passed); id. at 314 (noting
that majority rule allows insurer to contest on grounds that risk
was never covered and listing cases); Carlson, supra, 222 N.E.
2d
at 371 (incontestability clause does not alter scope of
coverage); Morse, supra, 487 S.W.
2d at 319 ("Incontestability
clause should not be applied to change the meaning of the terms
of the policy or to enlarge its coverage."); see also cases cited
in Appleman, supra, § 333. Some courts, however, have reached a
contrary conclusion. See Equitable Life Assurance Society of v.
Bell,
818 F. Supp. 245, 250 (N.D. Ind. 1993) (holding that, under
Indiana law, "if an insured is not disabled * * * [during the
contestability period], then his claim for benefits cannot be
denied on the grounds that he had a pre-existing condition");
Wischmeyer, supra, 725 F. Supp. at 1001-02 (holding that under
Indiana law, if insured's pre-existing disability results in
claim arising after contestability period expires, insurer may
not defend on basis of pre-existing disability); Fischer v.
Massachusetts Casualty Ins. Co.,
458 F. Supp. 939, 944 (S.D.N.Y.
1978) (holding that under New York law, policy defining covered
conditions as those that first manifest themselves after coverage
begins was not proper exclusion by "name or specific description"
under incontestability clause); McMackin v. Great American
Reserve Insurance Co.,
99 Cal. Rptr. 227, 234-35 (Cal. Ct. App.
1971) (noting pre-existing illnesses and injuries "irrelevant"
once contestability period has expired); White v. Massachusetts
Casualty Ins. Co.,
465 N.Y.S.2d 345, 346 (App. Div. 1983)
(following Fischer, supra, and holding that incontestability
clause precludes exclusion of pre-existing illnesses through
coverage provisions), appeal withdrawn,
512 N.E.2d 558 (N.Y.
1987).
The Law Division, following the minority rule, adopted an
argument similar to that advanced by Haas. In Lindsay v. United
States Life Insurance Co.,
80 N.J. Super. 465 (1963), the policy
contained a statutorily-required incontestable provision similar
to that in section 10.2a here. See id. at 467. It further
defined sickness as "'sickness . . . contracted while this policy
is in force and causing loss covered by this policy commencing
while this policy is in force . . ..'" Id. at 471 (quoting
policy). The insurer argued that, because the insured's sickness
was contracted before the policy was in force, it was not covered
under the policy. Ibid.
The Law Division rejected the insurer's defense. It held
that "[d]efinition of a policy term cannot be allowed to alter
the effect of a 'required provision' in the uniform law. . . .
The policy contains no appropriate exclusion 'by name or specific
description.' The full benefit of the 'incontestable' clause
must accrue to plaintiffs, unaffected by collateral provisions."
Id. at 471. Thus, the Lindsay court interpreted the
incontestability clause as requiring the insurer to cover
pre-existing conditions. See also Manzella v. Indianapolis Life
Ins. Co.,
814 F. Supp. 428, 434 (E.D. Pa. 1993) (applying New
Jersey law, following Lindsay, and holding that "once the
incontestability clause has matured, no pre-existing conditions
can be excluded").
We believe that Lindsay was wrongly decided. Contrary to
the Law Division's perception in Lindsay, the present case is not
so much an attempt by the insurer to escape from the
incontestability clause by an unwarranted exclusion of a
"sickness or physical condition" as it is an attempt by the
insured to obtain coverage of a condition that the insurer would
not have covered if the insured had not concealed its existence.
"'A provision for incontestability does not have the effect of
converting a promise to pay on the happening of a stated
contingency into a promise to pay whether such contingency does
or does not happen.'" Equitable Life Assurance Soc'y v.
Rothstein,
122 N.J. Eq. 606, 609 (Ch. 1937) (quoting Sanders v.
Jefferson Standard Life Ins. Co.,
10 F.2d 143, 144 (5th Cir.
1925)), aff'd,
123 N.J. Eq. 591 (E. & A. 1938). See Appleman,
supra, § 311 at 320-21. ("An incontestable clause does not
. . . extend the liability under the contract to any degree.").
On balance, we are persuaded by the majority rule.
In short, the incontestability clause does not prevent
insurers from limiting coverage of pre-existing conditions by
excluding those conditions "from coverage by name or specific
description." Thus, we hold that insurers properly may limit the
scope of the coverage to sicknesses that "first manifest"
themselves after the policy has been issued.
The Appellate Division embraced the minority view and
concluded "that if defendant's disability began after the
expiration of the two-year period, plaintiff may not deny
coverage based on defendant's preexisting condition." 266 N.J.
Super. at 44. We disagree with the Appellate Division in several
respects.
The Appellate Division began its analysis by stating that an
insurance contract should be read as an ordinary insured would
understand it, particularly because insurance policies are
contracts of adhesion. Id. at 42-43. Provision 10.2b, however,
is not the result of the insurer's dominant bargaining power.
Rather it results from the statutory mandate of N.J.S.A.
17B:26-5b, which requires the inclusion of the provision in a
disability policy.
"A specific provision integrated into the contract by force of a statute, as a matter of public policy, 'must be interpreted and given effect in accordance with the intention of the legislature, irrespective of how the contractors understood it.'" Saffore v. Atlantic Casualty Ins. Co., 21 N.J. 300, 310 (1956) (quoting 3 Corbin on Contracts § 551 at 200-01 (l960)); Appleman, supra, § 332 at 384 ("An incontestability clause required by statute cannot be construed against the insured."). The rationale is that a statutorily-mandated clause is not included
in the policy because of the insurer's superior bargaining
powers.
We disagree, moreover, with the Appellate Division's belief
that an ordinary insured would read the policy so that section
10.2b would render an insured invulnerable to his or her own
fraud in concealing a known sickness from an insurer when
applying for disability insurance. Disability insurance
policies, like many other types of insurance policies, are
aleatory contracts in which the insurer for a premium agrees to
compensate the insured for certain risks if they occur. The
premium would be vastly different if the insured could deceive
the insurer into insuring against risks that had already arisen.
Finally, unlike the Appellate Division, see 266 N.J. Super. at
44, we do not see any inconsistency between the
pre-existing-condition clause and the provisions of N.J.S.A.
17B:26-5b, which states that no such claim "shall be . . . denied
on the ground that a disease or physical condition" existed
before the date of issue. We doubt that the Legislature, when
enacting N.J.S.A. 17B:26-5b, contemplated that it was authorizing
insureds to conceal a known disability and then reap the benefit
of their deception by recovering for the disability that was so
concealed.
Paul Revere notes that section 10.2b prohibits the insurer
from denying coverage for claims on the grounds that they
"existed" on the date of issue. It argues that this language
should be construed to prohibit defenses only when the insured
was unaware of the condition. Thus, when a condition existed,
but was not manifest, the insurer may not use it as a defense;
but when the condition was known to the insured, the insurer may
deny coverage. So read, the clause denies the benefit of the
incontestability clause to insureds who, like Haas, lie on their
applications.
Courts have divided on the issue of the distinction between diseases that "exist" and those that are "manifest." Compare Forman, supra, 516 F. 2d at 429-30 (applying Florida law and holding that policy protected insured only concerning claims for diseases that existed but were not manifested prior to policy date) and Mutual Life Ins. Co. of N.Y. v. Hayden, 386 N.Y.S.2d 978, 982 (Sup. Ct. 1976) (following Forman and allowing insurance company to deny claim "where the disease existed and was manifested prior to the policy's issuance"), aff'd o.b., 401 N.Y.S.2d 992 (App. Div.), appeal dismissed, 378 N.E.2d 121 (1978) with Bell, supra, 818 F. Supp. at 250 (insurer's interpretation, that incontestability language referring to "existing" conditions does not speak to situation where sickness has manifested itself, "does not give [the] clause its plain meaning"); Fischer, supra,
458 F. Supp. at 944 (noting that interpretation of clause that
allows insurer to defend against existing and manifested diseases
"has the effect of rendering the clause an absolute nullity") and
Monarch Life Ins. Co. v. Brown,
512 N.Y.S.2d 99, 103 (App. Div.
1987) (holding that "term 'exist' as used by the Legislature
subsumes the term 'manifest.' . . . [T]o follow the Forman
exist-manifest distinction renders the statutorily-mandated
incontestability clause a nullity . . ."). The Appellate
Division followed the cases that rejected the distinction between
diseases that "existed" and those that are "manifested." 266
N.J. Super. at 43-44. We, however, find the distinction valid.
We believe that insurers should compensate victims to the extent "that compensation will not condone and encourage intentionally wrongful conduct." Voorhees, supra, 28 N.J. at 181. Thus, we doubt that the Legislature intended the incontestability clause to serve as an invitation for fraudulent applications for disability insurance. In another context, we noted that "[i]nsurance fraud is a problem of massive proportions that currently results in substantial and unnecessary costs to the general public in the form of increased rates." Merin v. Maglaki, 126 N.J. 430, 436 (1992). Indeed, the Legislature has expressed its intention to fight insurance fraud in the New Jersey Insurance Fraud Prevention Act, N.J.S.A. 17:33A-1 to -15. As the act itself states, its purpose "is to confront
aggressively the problem of insurance fraud in New Jersey by
facilitating the detection of insurance fraud, eliminating the
occurrence of such fraud through the development of fraud
prevention programs requiring the restitution of fraudulently
obtained insurance benefits, and reducing the amount of premium
dollars used to pay fraudulent claims." N.J.S.A. 17:33A-2. If
we were to permit a dishonest insured to recover, insurers would
include the cost of that risk in premiums charged to honest
insureds.
Our decisions reflect similar concerns. For example, in
Massachusetts Mutual Life Insurance Co. v. Manzo,
122 N.J. 104
(1991), we considered whether an applicant's misstatements
"materially affected" the insurer's acceptance of the risk under
N.J.S.A. 17B:24-3(d). That statute allows an insurer to rescind
during the contestability period only when the misstatements are
material. We concluded that a statement was material regardless
of whether the insured lied with the intent to defraud and
whether the misrepresented disability rendered the insured
uninsurable or was causally related to his death. Id. at 113.
Accordingly, we adopted a broad materiality test under which the
insurer may rescind if the false concealment "'naturally and
reasonably influence[d] 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.'" Id. at 115
(quoting Kerpchak v. John Hancock Mut. Ins. Co.,
97 N.J.L. 196,
198 (E. & A. 1922) (alteration in original)). We noted that
"[b]y denying coverage to insureds who lie, th[is] test
encourages applicants to tell the truth." Id. at 116.
Similarly, in Longobardi v. Chubb Insurance Co.,
121 N.J. 530, 533 (1990), we held that "when an insurance policy clearly
states that material misrepresentations will void the policy, the
insurer need not pay the insured for an alleged loss if the
insured makes a material misrepresentation to the insurer while
it is investigating the claim." We noted that post-loss
misrepresentations "strike at the heart of the insurer's ability
to acquire the information necessary to determine its obligations
and to protect itself from false claims." Id. at 539.
Furthermore, when considering the right of insurers to
rescind life-insurance policies because of misrepresentations in
the insured's application, we have recognized that insurers
ordinarily rely on the "truthfulness of the insured's rendition
of his medical history." Equitable Life Assurance Soc'y v. New
Horizons, Inc.,
28 N.J. 307, 312 (1958). In that same context,
we have also noted the duty of the insured to disclose known
facts about his or her health when the application requests that
information. Gallagher v. New England Mut. Life Ins. Co.,
19 N.J. 14, 22 (1955).
Also relevant is the principle that "[o]ne cannot obtain
insurance for a risk that the insured knows has already
transpired." Township of Gloucester, supra, 668 F. Supp. at 403.
Here, Haas knew when he applied for the policy that his retinitis
pigmentosa existed and that the disease would disable him. Haas
argues that his fraud is irrelevant because Paul Revere could
have selected a clause that would have excluded fraudulent
misstatements from the contestability period. That the
Legislature provided the insurer with that option, however, does
not mean that it intended to authorize recovery based on coverage
obtained through false statements that would circumvent
exclusions from the coverage under the policy.
We hold that the statutory language that precludes a defense
based on a pre-existing disability does not protect insureds who
make fraudulent misrepresentations in their applications.
Rather, the language is intended to protect those insureds who
are unaware of their diseases. Consequently, we believe that
the dissent incorrectly characterizes the denial of coverage as a
"lie" by the insurer. Post at ___ (slip op. at 1). The insured
remains covered under the policy except for the known disease
that he intentionally concealed. To characterize as a "lie" the
denial of a claim arising out of a disease that the insured
intentionally concealed is to stand the duty to tell the truth on
its head.
We reverse that part of the judgment of the Appellate Division that bars Paul Revere from denying coverage on the basis of the incontestability clause. We affirm the remand to the Law Division for determination whether Haas was disabled during the contestability period.
So ordered.
Justices Clifford, Handler, and Garibaldi join in this
opinion. Justice O'Hern has filed a separate concurring and
dissenting opinion in which Justice Stein joins. Chief Justice
Wilentz did not participate.
SUPREME COURT OF NEW JERSEY
A-
115 September Term 1993
THE PAUL REVERE LIFE INSURANCE
COMPANY,
Plaintiff-Appellant,
v.
GILBERT K. HAAS,
Defendant-Respondent.
O'HERN, J., concurring in part and dissenting in part.
I dissent primarily for the reasons stated by the Appellate
Division in the opinion below,
266 N.J. Super. 35 (1993), but I
add these observations. It is not easy to write an opinion
upholding the rights of a liar. The majority is rightly
indignant in its phrasing of the issue: "If we were to permit a
dishonest insured to recover, insurers would include the cost of
that risk in premiums charged to honest insureds." Ante at ___
(slip op. at 22). If, however, we change the majority's
statement of the question slightly, the issue becomes whether a
dishonest insurance company may lie to a policyholder by making
an unqualified promise that after two years the company will
never contest coverage on the basis of any of the policyholder's
statements, while intending all along to contest any claims on
that very basis. That is what this case is about.
Because of procedural requirements, we must assume that
defendant willfully concealed his medical history. If that is
true, defendant is not deserving of our sympathy. But what of
the next policyholder who, not having known that she had cancer
at the time she purchased her health insurance despite having
felt a lump in her breast, must face costly and lengthy
litigation brought by her insurance company, which claims that
she concealed her cancer? That occurring at a time when she most
needs peace of mind.
The only reason we have incontestability clauses in
insurance policies is because of widespread "charges of
corruption, fraud, and dishonesty" in the insurance industry.
Eric K. Fosaaen, Aids and the Incontestability Clause,
66 N.D. L.
Rev. 267, 269 (1990). At the turn of the century in New York,
the Armstrong Commission carefully probed
into every aspect of the insurance industry.
The Armstrong Commission uncovered many
scandals within the insurance industry and
unleashed a reform movement that quickly led
to extensive regulation of what had largely
been an unrestrained industry.
The Armstrong Commission was quickly followed by other reformer-minded groups. The most important of these reform groups was a national conference of governors, attorneys general, and insurance commissioners held in Chicago in 1906. The conference formed a Committee on Uniform Legislation, known as the Committee of Fifteen. The Committee of Fifteen drafted model insurance policies which included the reform measures recommended by The Armstrong Commission. The Committee of Fifteen included the incontestability clause in the model life insurance policies it proposed. Following
the Armstrong Investigation, the state of New
York enacted the Standard Policy Law which
required an incontestability clause in all
life insurance policies sold in New York. In
1907, North Dakota adopted New York's
Standard Policy of life insurance as its own.
In 1946, the National Association of
Insurance Commissioners (hereinafter
N.A.I.C.) drafted a model incontestability
clause statute based on the 1907 New York
Standard Policy language. At least 47 states
have adopted statutes requiring the inclusion
of an incontestability clause in every policy
of life insurance sold in that state. Most
of these states, in enacting incontestability
legislation, have adopted the model
incontestability clause statute of the
N.A.I.C. Thus, the form of the
incontestability clause required by various
state statutes is quite consistent.
Today, a policy providing reliable health benefits is the
single most important insurance product that the public seeks.
However, the escalating cost of health care is driving insurance
companies to seek ways to hold down claims costs. I do not
object to an insurer's frank statement to its policyholders that
it will contest any and all claims on a policy should it discover
that the policyholder intentionally concealed medical history.
After all, ours is a free-market society; we get only what we pay
for. However, I disapprove of an insurance company's attempt to
avoid providing the coverage for which it has freely chosen the
terms and for which it has accepted premiums. That is the case
here.
Our Legislature has provided insurance companies with two
types of incontestability clauses. The first allows the insurer
to deny coverage any time after issuance of the policy when the
insured has made "fraudulent misstatements" in the application.
N.J.S.A. 17B:26-5(a). The other type of clause bars, after two
years, any contest over policy statements but tolls the running
of the two-year contestability period for any period during which
the insured was disabled. N.J.S.A. 17B:26-5(a)(2). (The theory
behind the latter type of clause must be that if the policyholder
were seriously ill when applying for the policy, any disease
would probably manifest itself in two years.) Thus, the
Legislature intended that insurance companies choose one option
or the other.
Presumably for marketing reasons, Paul Revere chose the
incontestability clause that tolls the contestability period
rather than the clause permitting the insurer to contest coverage
at any time on the basis of fraudulent misrepresentations.See footnote 1 It
argues that when it denies coverage for a preexisting condition,
it is not using the statement to void the policy as it could
under N.J.S.A. 17B:26-5(a), but rather is denying coverage for a
claim that the policy does not cover. Of course, I agree that
the presence of an incontestability clause does not increase
coverage under a policy or provide coverage where it does not
exist. If a policy specifically excludes coverage for cancer or
diabetes, an incontestability clause does not extend coverage to
include such diseases after two years. But when the coverage
provisions of a policy are subsumed by the statutorily-mandated
promise of incontestability regarding claims for diseases "not
excluded from coverage by name or specific description," N.J.S.A.
17B:26-5(b), an ordinary policyholder would understand that if he
or she were to become disabled once the contestability period had
expired, "the carrier [would be] barred from raising any
challenge, by way of rescission or `denial' of coverage, if the
challenge [were] predicated on the insured's preexisting
condition." 266 N.J. Super. at 43. To hold otherwise would
allow insurance companies to delete the statutory requirement
from the books.
In short, the Appellate Division was correct. We cannot
"graft the `except fraudulent misrepresentations' phrase upon the
clause pertinent here." Id. at 40 (quoting N.J.S.A. 17B:26-5).
Insurance companies cannot misrepresent the scope of coverage to
policyholders. This company promised that after two years it
would not attempt to deny coverage on the basis of claimed
misrepresentations; it should honor its promise. The next
policyholder may be entirely blameless.
The court below was also correct in holding that the clause
tolling the two-year contestability period for any period during
which the insured was disabled requires a factual determination
of whether defendant was disabled for any period subsequent to
the policy's effective date. Thus, I concur in the majority's
affirmance of that part of the judgment below. I, however, would
affirm the Appellate Division's judgment in its entirety.
Justice Stein joins in this opinion.
Footnote: 1Marketing considerations have long played a part in the use
of incontestability clauses. "Insurance companies initially
offered the incontestability clause * * * because of public
distrust of insurers and their promises to pay benefits in the
future." Fosaaen, supra,
66 N.D. L. Rev. at 268. In fact, the
first incontestability clause provided that the insurer would not
contest a policy for any reason. Ibid.