Two STATE SUPREME COURTS INVOKE INCONTESTABILITY STATUTE To BAR LIFE INSURER FROM DENYING CLAIMS THROUGH DEFENSE OF PREEXISTING CONDITION.
The incontestability clause has been a part of life insurance policies for perhaps 150 years. Legislation mandating such clauses became common in the 20th century. Later, the provision spread to disability clauses through either legislation or contract drafting by the insurer. Incontestability provisions state that after a policy has been in force for more than two years, an insurer may not rescind the policy on grounds of misrepresentation in the application. In effect, the incontestability provision creates a two-year "statute of limitations" for insurers to investigate statements made and the underwriting facts surrounding an application. After the "statute" expires, the insurer is "stuck" with the policy unless the misrepresentation was intended to deceive or was otherwise fraudulent. However, the clear majority rule is also that the incontestability provision of a policy (whether voluntary or statutorily imposed) does not prevent an insurer from asserting other defenses such as lack of coverage or applic ability of an exclusion.
But what happens when these two principles clash because of particular language in an incontestability statute or the particular context of a loss claim? The California and Montana supreme courts recently resolved these conflicts in favor of the policyholder, holding that two disability insurers could not use preexisting condition limitations in their policies to deny coverage because of conflicts with state incontestability law.
In June 1987, Californian Mark Galanty had his blood tested, and the result was HIV positive. He was told to take another test to check the accuracy of this test but never did. In May 1988, he was treated for flu symptoms, and his doctor apparently knew about the blood test results. In Fall 1988, he applied for disability insurance and answered "no" to the application questions asking whether he had any "disorder of the circulatory system" or was "currently receiving any medical advice or treatment" for such problems. He mentioned his treatment for "flu" but did not talk about his blood test. The Paul Revere application did not ask whether Galanty was HIV positive or had AIDS. 1 P.3d at 659-60.
Things were uneventful until 1994, when Galanty presented a disability claim to Paul Revere, claiming total disability due to AIDS and accompanying problems of numbness in the arms and legs that made it impossible for Galanty, a court reporter, to continue to work in that capacity. Revere initially accepted the claim and paid benefits but then challenged the claim, arguing that the disabling disease had first manifested itself before the policy was issued. Galanty sued for coverage in 1996. Both the trial court and the intermediate appellate court found for the insurer, holding that the claim was barred because of the problems arising before the inception of coverage. Galanty argued that he was covered because state law provides a required incontestability period preventing the insurer from reducing or denying a claim because of preexisting conditions. 1 P.3d at 661-62.
The California Supreme Court unanimously reversed, finding that Galanty was covered because state law required that incontestability clauses in disability policies not only bar misrepresentation defenses but also defenses based on preexisting conditions once the policy had been in effect more than two years. The court provided a lengthy historical review of the incontestability clause and incontestability legislation for both life insurance and disability insurance. 1 P.3d at 665-67. See also Note, AIDS and the Incontestability Clause, 66 N.D. L. Rev. 267 (1990) (reviewing history of incontestability clauses). It also noted the degree to which courts in other states have divided over the issue. 1 P.3d at 662-64 (noting that state courts in Delaware, Hawaii, Maryland, Minnesota, and New York and federal courts applying the law of Georgia, Indiana, Michigan, and Wisconsin have sided with policyholders in similar circumstances, while the law of New Jersey, Arizona, Florida, Massachusetts, Mississippi, Tennessee, and Washington has sided with the insurer).
The Galanty court's analysis is consistent with the decisions of other states finding for the policyholder, but Galanty itself was focused on construction of a California statute, albeit one commonly found in the states because it is based on a uniform law promulgated by the National Association of Insurance Commissioners (NAIC). California Civil Code [sections]10350.2 requires all disability policies sold in the state to contain either Form A or Form B of the incontestability clause. Although Form A was read by the court as more favorable to the insurer than Form B, which was contained in the Paul Revere policy (Form B does not permit challenges based on intentionally fraudulent misrepresentation; Form A does), both clauses are subject to the following statutory language:
No claim for loss incurred or disability (as defined in the policy) commencing after two 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 had existed prior to the effective date of coverage of this policy.
1 P.3d at 662.
This type of statutory language "beefing up" the incontestability statute is common regarding disability policies, but life insurance incontestability legislation generally only strips the insurer of misrepresentation defenses. See 1 P.3d at 668. However, the average life insurance policy does not contain the same restrictions on pre-inception injuries or problems found in the typical disability policy.
The Paul Revere policy defined covered "sickness" as a problem that "first manifests itself after the Date of Issue," and the policy contained a similar preexisting condition exclusion. However, neither was considered effective to defeat Galanty's coverage in view of the strong California statutory language stating that claims from preexisting conditions could not be reduced or denied after the policy had been in effect for more than two years. 1 P.3d at 662-64. In effect, the court stated that the statute trumps any inconsistent language contained in the disability policy itself. 1 P.3d at 669.
Although California law thus seriously limits the insurer's defenses after a disability policy has been in force two years, the court noted that the law does not preclude the insurer from tailoring policy coverage to exclude particular types of diseases or injury--the statute only precludes the insurer from invoking pre-policy manifestation of otherwise covered problems. Thus, an insurer can in California draft a policy that does not cover AIDS or HIV-related illnesses. 1 P.3d at 671. However, other laws, such as the Americans with Disabilities Act, may limit such restrictions on coverage (although most reported cases on this controversy currently favor insurers).
The Montana case began when Kathryn Vestal sought to recover under her Paul Revere disability policy, suing the insurer and its agent, Marie Deonier & Associates. Vestal settled with Revere, leaving cross-claims ongoing between Deonier and Revere, who were realigned by the courts as plaintiff and defendant in view of their dispute. Vestal, a University of Montana law student, sought medical care in May 1989 regarding insomnia and was prescribed low-dose antidepressants, which she took for several months. In 1990, she began work in the Billings, Montana, office of the Social Security Administration. In June 1991, she contacted Deonier about insurance and was applied for a Paul Revere policy. Deonier completed the form based on Vestal's interview. The application disclosed the insomnia episode. Revere issued the policy in June 1991.
Vestal's policy with Revere contained an incontestability clause providing that "[n]o claim for Disability beginning after two years from the Date of Issue will be reduced or denied because of a disease or physical condition that existed before the Date of Issue unless it is excluded by name or specific description." 9 P.3d at 624. The policy stated that Revere "will not pay benefits for a Pre-Existing Condition if it was not disclosed on Your application," and covered sickness was defined as beginning after the inception of the policy. 9 P.3d at 624-25. In particular, a preexisting condition was defined as something for which
a. Symptoms existed that would cause an ordinarily prudent person to seek diagnosis, care, or treatment; or
b. Medical advice or treatment was recommended by or received from a Physician.
9 P.3d at 625.
In February 1992, Vestal was admitted to a hospital emergency room with problems of depression. In September 1993, she was diagnosed with major depression and was unable to work. She was awarded Social Security benefits and in November 1993 filed a claim against Paul Revere for disability benefits. As in Galanty, Revere initially paid and then balked, asserting the preexisting condition restrictions on coverage and arguing that Vestal had been treated for depression-related problems as a law student in 1989 but that she had failed to adequately disclose this in her 1991 insurance application. Vestal sued for coverage in 1995.
Vestal and Revere settled in 1998, but Deonier and Revere continued to litigate, with Deonier alleging that Revere breached its duties to Deonier as agent in contesting the Vestal claim without having told Deonier that it would dispute such claims notwithstanding the incontestability clause of the policy. Further, Deonier asserted that Revere should have known that its position was at odds with Montana law but pressed on nonetheless. 9 P.3d at 626-27. Revere asserted that its position was reasonable and that it was entitled to assert it under the law. The trial court agreed and entered judgment for Revere.
The Montana Supreme Court reversed, finding that Revere had a duty to warn Deonier about this matter and the likely consequences if it litigated the issue of coverage under these circumstances and should not have denied the Vestal claim. The incontestability language of the policies, as in California, was required by state statute. Under the Montana statute (Montana Stat. Ann. [sections]33-22-202) and the policy, an insurer cannot attempt to reduce or deny a claim because of a preexisting condition after the policy has been in force for more than two years. 9 P.3d at 630-32. In reaching this decision, the Deonier court cited Galanty with favor and followed a similar analysis. 9 P.3d at 628-29. Like the Galanty court in California, the Montana Supreme Court in Deonier concluded that statutory language trumps inconsistent portions of the policy. 9 P.3d at 630. Deonier also engaged in considerable review of precedent regarding the incontestability clause. 9 P.3d at 625-26.
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|Publication:||Journal of Risk and Insurance|
|Date:||Jun 1, 2001|
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