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ACLI files 'friend of the court' brief in smoker case; considers decision vital for retaining special discounts.

The life insurance industry has been offering special "discounts" to non-smokers for some time now. However, of late, it has found itself embroiled in costly litigation to maintain the integrity of those discounts.

In some cases, prospects for life insurance have in their applications misrepresented the fact that they smoke heavily. In most states, the law prohibits a life insurer from denying a claim even if the applicant lied after the policy has been in force for two years. It is known, familiarly, as the incontestability clause.

However, there have been recent cases in which a claim was filed within that two-year period and life insurers have chosen to go to court to test their rights.

The most recent case is North Atlantic Life Insurance Co. v. Rothman. Phillip E. Stano, associate general counsel for the American Council Of Life Insurance, recently discussed the implications of that case, in which the ACLI has filed a "friend of the court" brief on behalf of the life insurer.

Stano said that in this case, a wife took out a life insurance policy on her husband. She clearly had insurable interest, according to Stano, so that was not in dispute. What was in dispute was that the application stated that the insured did not smoke. The man died and the wife attempted to claim the death benefit.

Investigations revealed that, within 12 months of taking out the policy, the insured visited his doctor and the doctor recorded that the man was a heavy smoker. Furthermore, the claim was filed within the two-year contestability period. The insurer denied the claim and a lower court ruled in favor of the insurer. The case is now on appeal; hence the interest of the ACLI.

"The issue is whether an insurer can rescind a policy when it is discovered within the two-year contestability period that the insured lied on an application in order to pay a lower premium," said Stano. "If the courts force insurers to pay a lower death benefit to compensate for the discount rather than allowing the insurer to rescind the coverage, then a message will be sent to every smoker that they can lie on their applications and, if they are successful, their beneficiaries will receive the death benefit.

"If they are found out, the beneficiaries will still receive a death benefit, albeit lower than the benefit with the discounted premium. Clearly, it would be in the smoker's benefit to lie. That would negate the effectiveness of smokers' discounts, which save consumers an estimated one billion dollars a year."

A similar case was decided on May 25, 1988. In that case, the United States Court of Appeals reviewed Mutual Benefit Life Insurance Co. v. JMR Electronics Corp. The court ruled that a misrepresentation made in an application for a non-smoker policy concerning the applicant's smoking history was material as a matter of law, entitling the insurer to rescind the policy. The ACLI and the Health Insurance Association of America filed an amici curiae brief on behalf of Mutual Benefit.


In that case, JMR had submitted an application to Mutual Benefit for a $250,000 "key man" life insurance policy on the life of its president, Joseph Gaon. Gaon represented in the application for the policy that he had never smoked cigarettes, although it was stipulated at the trial court level that Gaon had smoked one-half of a pack of cigarettes per day for the past 10 years.

Based on the misrepresentations in the application, Mutual Benefit issued a policy on Gaon's life at a reduced non-smoker premium rate. Gaon died within the policy's contestable period. Upon routine investigation. Mutual Benefit discovered Gaon's smoker status and rescinded the policy.

JMR, the beneficiary under the policy, alleged that Gaon's misrepresentation of his smoker status was not material to rescision of the non-smoker policy. JMR took the position that benefits should have been paid to JMR in the amount that the non-smoker premium actually paid would have purchased for a nonsmoker.

When affirming the district court's summary judgment, the Second Circuit rejected this argument stating that it would be an anomalous result to reward those insurance applicants who misrepresent facts critical to the underwriting process. The applicant "would have everything to gain and nothing to lose" from misrepresenting his or her smoker status.


In this case, the ACLI and the HIAA said that such an approach would defeat actuarial predictions based on truthful applications, causing rates to rise and inevitably lead to low-risk individuals subsidizing high-risk insureds.

Stano said that in 1984, approximately 50 percent of individual life insurance policies (62 percent by face amount) were issued as nonsmoker rates.

Dog Owner Loses Damage Suit For 'Mental Distress'

The Supreme Court, New York County, has ruled that a dog owner can not recover damages for "mental distress" allegedly caused when her dog was fatally injured in front of Barney's New York in New York City.

The dog owner moved for a default judgment against Barney 's for failing to answer the complaint in a timely manner, while the clothing store sought to have the case dismissed. Another defendant, the City of New York, moved for dismissal as well. Both defendants claimed the dog owner's complaint failed to state a cause of action.

No one disputes that the dog died. On December 29, 1987, the dog was being walked by a person hired by the owner. The owner claimed that the dog was electrocuted by faulty holiday wiring adorning a sidewalk tree.

Judge Eugene Nardelli denied the plaintiff's motion for a default judgment against Barney's. The judge explained that the "slight" delay in Barney's serving its answer was caused by the office move of the clothiers' attorneys.

Also, said the court. Barney's "has a meritorious defense to this action."

According to Judge Nardelli, the complaint contains five causes of action which sought damages for the plaintiff's alleged emotional injury from Barney's response to the plaintiff's claim for compensation.

"Under the law of this state," the judge explained, "a dog is considered to be personal property, and damages for mental distress caused by its malicious or negligent destruction may not be recovered...This is so even where the plaintiff-owner may have observed the animal's death, but wasn't himself either within the zone of danger of physically injured ..."

In this case, the owner neither observed her dog's death, nor was within the zone of danger or physically harmed. "Therefore, although the court sympathizes with plaintiff," said Judge Nardelli, her complaint must be dismissed because damages for her mental distress are not recoverable on the lacts alleged ...

Thus, the plaintiff's motion was denied, both defendants' cross-motions were granted and the complaint was dismissed for failure to state a cause of action.

Tachna v. Barney's, Inc., New York Law Journal, February 8, 1989, Page 21.

Court Finds For Claimant Who Just Wrote 'No' On Back of Settlement Check

Does the acceptance of a full payment check by a claimant offered as settlement of a tort action, but with a "No" written on the back, constitute an accord and satisfaction barring further claims?

In this small claims court action before Judge Alice Schlesinger, Civil Court, New York County, the claimant, DeVerna, sought recovery for damages to his automobile while it was parked in defendant Kinney Systems' parking garage. Prior to the trial, Kinney tendered a check for $200 to DeVerna. Kinney stamped the following on the back of the check:

"In consideration of the sum hereby paid all claims and demands of any nature whatsoever against Kinney Systems. Inc., and all affiliated and subsidiary companies, and all officers and employees thereof are hereby settled released and forever discharged."

DeVerna rejected this condition by writing the word "No" on the back of the check and initialing it. He then deposited the check.

At trial, the garage moved to dismiss the suit on the ground that acceptance of the check constituted an accord and satisfaction, and that since the check was offered to satisfy a disputed or unliquidated claim, the claimant could not reject the condition and also accept payment.

The court declined to follow the common law rule of accord and satisfaction, for a number of reasons.

According to the court, application of this common law doctrine as it applied to commercial and quasi-commercial transactions have been changed by Section 1-207 of the Uniform Commercial Code (UCC), which was tested by the case of Horn Waterproofing v. Bushwick Iron and Steel Co. (66 NY2d 321[1985]), among others.

In Horn Waterproofing, the Court of Appeals held that Section 1-207 allows a good-faith creditor to deposit a "full-payment" check provided he indicates his intent to preserve all rights through the use of words such as "without prejudice," "under protest" or the like.

That court noted that "[r]egardless of whether the underlying transaction between the parties was a contract for the performance of services rather than for the sale of goods, defendant's tender of a check to plaintiff brought the attempted full payment or satisfaction of the underlying obligation within the scope of Article 3 [commercial paper], thereby rendering it a 'code-covered' transaction to which the provisions of Section 1-207 are applicable ..."

According to Judge Schlesinger, while the underlying obligation in the Horn case arose out of a contract for services, and the DeVerna case arose out of a tort, "the application of the doctrine of accord and satisfaction should be consistent ... In both instances payment was made by check, therefore both are code-covered transactions. This view is supported by the Horn court's extension of Section 1-207 to reach all commercial and quasi-commercial transactions where the UCC is invoked based on payment of an Article 3 instrument ..."

She continued that the Horn court stated that "[b]y construing the section to permit a reservation of rights whenever a negotiable instrument is used to make payment on an existing debt, regardless of the nature of the underlying obligation between the parties, the commercial law of negotiable instruments is rendered more simple, clear and uniform ..."

According to Judge Schlesinger, other courts, subsequent to the ruling in Horn Waterproofing. have held that Section 1-207 applies to noncommercial obligations where satisfaction is attempted by a negotiable instrument. "The reasoning of the courts that strictly interpreted Section 1-207 to apply to only UCC Code covered commercial transactions" has been rejected by Horne, the judge added.

In another case, Cohen v. Ricci (120 Misc. 2d 712 [city court Mount Vernon. 1983]). which the judge said was "strikingly similar" to the DeVerna case, the court applied the UCC rule of accord and satisfaction to damages caused to the plaintiff's automobile by the defendant's negligent conduct.

Judge Schlesinger said she agreed with what the Cohen court ruled: "The same reasoning which impelled the legislative change in the common law as applied to code transactions would justify a rejection at this time by the courts of the common law in all other transactions where payment is made by a written instrument. There is neither logic nor reason to the invocation of one rule where payment is made by check for goods sold and delivered and another where payment is made by a check for damages to a motor vehicle."

She added that the application of the UCC rule on accord and satisfaction to noncommercial transactions was "equitable" and that the code's extension would not result in abuse. "The condition precedent to recovery under this rule is that the creditor must act in good faith in seeking to protect his rights to future monies by registering his protest," said the judge.

She pointed out that the defendant garage conceded liability for the damage done to DeVerna's car from its spray painting of the garage wherein his automobile was parked. DeVerna, in turn, submitted two itemized estimates as to the cost of removing the white spots from the car and repainting it. These both exceed $2,000.

Thus, said Judge Schlesinger, consistent with the application of Section I -207 and deducting the $200 already paid to DeVerna, the court found for the claimant in the amount of $1,800.

DeVerna v. Kinney Systems, New York Law Journal, January 27,1989, Page 23.
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Title Annotation:LOOKING BACK ... Insurance Advocate, 25 years ago
Author:Zinkewicz, Phil
Publication:Insurance Advocate
Date:Mar 17, 2014
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