In April 1991, Defendant submitted an application for disability insurance to Plaintiff insurance carrier. In the application, Defendant denied that he had any pre-existing medical conditions and denied that in the past five years he had any "medical advice or operation, physical exam, treatment, illness, abnormality, or injury," and that he was not "currently receiving any medical advice or treatment." Actually, Defendant had recently been diagnosed as HIV positive and was receiving treatment for that condition. Plaintiff, without knowledge of this condition, issued a disability insurance policy on April 15, 1991. In March 1996, Defendant became disabled as a result of HIV and AIDS, and submitted a claim for benefits to Plaintiff. Plaintiff paid the claim, reserving its rights, and commenced an action for declaratory judgment seeking an order allowing it to disclaim coverage on the ground that Defendant's sickness arose before the date of issuance of the policy. The trial court granted Defendant's motion to dismiss, and the Appellate Division affirmed, holding that the policy's incontestability clause prevented Plaintiff from denying benefits to Defendant. The incontestability clause, mandated by New York Insurance Law § 3216(D)(1)(b), provides, in pertinent part, that a claim for disability cannot be denied after two years from the issuance of a policy because of a sickness or a physical condition existing before the effective date of the policy which was not excluded by name or specific description in the policy. The Court of Appeals granted the carrier leave to appeal.
Whether an insurance carrier, consistent with New York law, can disclaim coverage for a claim made after the expiration of the incontestability clause, contending that the disability manifested itself before the effective date of the policy.
No. Once the incontestability period is over, an insurance carrier may not deny coverage by claiming that the applicant, before the issuance of the policy, knew of any symptom or condition related to the eventual cause of the disability.
In 1906, New York enacted a statute requiring insurance carriers to put incontestability clauses into their life insurance policies. In 1951, New York required accident and sickness policies to have incontestability clauses as well. The legislative intent behind these laws was two-fold. First, incontestability clauses, like life insurance policies, were introduced to assure insurance purchasers that once the incontestability period passed, they would receive benefits if they became disabled. Second, the incontestability clause gave the insurance carrier a reasonable period of time to research the applicants' statements. Lower courts had held that after the incontestability period is past, a carrier may not deny coverage by claiming that the applicant knew (by manifestation) of any symptom or condition related to the eventual cause of the disability.
After New England Mutual, given an incontestability clause similar to the one at issue in that case, an insurance carrier could not deny coverage to a policy holder, once the incontestability period is over, claiming that the policy holder knew (by manifestation) of a symptom or condition related to the disability. New England Mutual follows lines of authority from several jurisdictions that had held that a carrier cannot disclaim coverage to a policyholder once the incontestability period is over by claiming that the policyholder knew of a condition, at the time of issuance, that would lead to a disability. Once the incontestability period is over, it becomes irrelevant that a policyholder did not disclose the known information; a claim must be honored even though the condition existed before the date of issuance of the policy. The term "existed" must include symptoms and conditions that were manifest to the policyholder at the time of issuance. Otherwise, a carrier could litigate every claim, asserting that an illness or disease had been manifest before the date of issuance, in contravention of the legislative intent.
A carrier may include a protective provision in its incontestability clause creating an exception for fraudulent misstatements. Therefore, an insurance carrier does have some protection against policyholders who intentionally fail to disclose an illness during the contesability period.
Now that the Court has held that fraud is not a viable defense to an incontestible claim that does not have a fraud provision in the policy, will insurance companies utilize stricter screening and investigatory techniques of the policy holders' statements made during the contestability period?
The opinion suggests that this carrier may have intentionally omitted a portion of the incontestability clause for fraudulent misrepresentations. The omission could further suggest that this intentional omission may have been potentially made to promote marketing of this product. It is unclear whether this opinion will lead carriers operating in New York to include the fraud provision, despite marketing concerns, thereby changing the market for disability insurance in this state.
As noted by the Court, two conflicting approaches have emerged in national case law regarding incontestability clauses. One approach indicates that statutorily mandated incontestability clauses in disability policies allow an insurer to deny claims when the insured intentionally failed to disclose a pre-existing disabling disease in the insurance application even after the incontestability period has expired. See Paul Revere Life Ins. Co. v. Haas, 644 A.2d 1098 (N.J. 1994). The United States Court of Appeals for the Fifth Circuit held that, under Mississippi law, an incontestability clause does not extend the coverage of a policy to include pre-existing conditions. See Neville v. American Republic Ins. Co., 912 F.2d 813, 815 (5th Cir. 1990). In another case, the Fifth Circuit held that, under Florida law, an "incontestability 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." Massachusetts Cas. Ins. Co. v. Forman, 516 F.2d 425, 428 (5th Cir. 1975). Finally, the Alabama Supreme Court found that a disability caused by pre-existing glaucoma was not covered under the policy even though the one-year incontestability period had passed. See National Life & Accident Ins. Co. v. Mixon, 282 So.2d 308, 316 (Ala. 1973).
The other approach applies the plain and ordinary meaning of the incontestability clause's language to preclude the insurer from denying benefits once the incontestability period expires. See, e.g., Equitable Life Assur. Soc. of U.S. v. Bell, 818 F. Supp. 245, 250 (N.D. Ind. 1993). The Maryland Court of Appeals concluded that if terms were given their ordinary meanings then, after expiration of the incontestability clause, a disability claim not specifically excluded may not be denied. See Insurance Comm. of Md. v. Mutual Life Ins. Co. of New York, 680 A.2d 584 (Md. 1996). In California, the District Court of Appeals stated that pre-existing illnesses and injuries are irrelevant once the incontestability period has expired. See McMackin v. Great American Reserve Ins. Co., 99 Cal. Rptr. 227, 234 (Cal. Ct. App. 1971).