Paul Revere Life Insurance v. Haas

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 , 628 A.2d 772 (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 209, 644 A.2d at 1107. 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.

*212 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.

[Id. at 269-71 (footnotes omitted).]

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.

*213 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. 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 *214 [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 48 , 628 A.2d 772 . 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 , 628 A.2d 772 (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.

STEIN, J., joins in this opinion.

For reversal in part and affirmance in part — Justices CLIFFORD, HANDLER, POLLOCK and GARIBALDI — 4.

For concurrence in part and dissent in part — Justices O’HERN and STEIN — 2.

Marketing 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.