Insurance and incontestability clause and new jersey supreme court and haas v paul revere life insurance company

Along with the word "unconscionability," "incontestability" ("IN") has the most syllables of any word in normal legal parlance. It points to a reality that has bothered the insurance industry for a century: how to ferret out fraudulent applicants while, at the same time, not get the reputation for refusing to pay on legitimate life insurance claims? This mini-essay explores the history of IN clauses with emphasis on the way that the New Jersey Supreme Court has construed their IN statute. I am writing this essay because I think the treatment of the subject in Abraham's casebook on Insurance Law glides over this very difficult issue much too easily. Important to note in the following discussion is the distinction between rescinding the policy, which the insurer can do if it is within the window of time assumed in the "IN" clause, and exclusion from coverage under the policy.

A Word on History

As almost every case dealing with an IN clause will say, "Insurance companies initially offered the IN clauses [early in the twentieth century] as a policy provision because of public distrust of insurers and their promises to pay benefits in the future" (Amex, 930 P2d 1264). The means by which these IN clauses were "offered" was not, however, simply out of the goodness of the insurers' hearts. Statutes were passed requiring such clauses.

Sometimes the statutes have become more complex over the years, like one from NJ, which requires the insurer to make a choice with respect to an IN clause: (1) either to say that the policy becomes incontestable after two years with respect to all statements made by the insured, except fraudulent misstatements or (2) say that the policy becomes incontestable after two years with respect to all statements except that the two year period is tolled should the insured beome disabled within that period. The effect of this choice is to give the insurer either a protection against fraud forever OR a protection against other disabilities that may not have been disclosed, but were not necessarily concealed fraudulently and were manifest within the first two years of the policy period. If the insured fraudulently violated the IN provision, the insurer could void the policy ab initio or, in other words, rescind the policy.

The Facts of the Haas Case

The NJ Supreme Court considered the case of Gilbert Haas in 1994. Haas applied for disablity insurance coverage with Paul Revere Life Insurance Co. in 1987. Revere's policy chose # 2 above, thus being able to toll the incontestability clause for "any period [before the two-year incontestability period had run] during which the insured is disabled." When Haas applied for disability insurance he stated in his application that he had not been examined by a physician in the previous five years and that he had never been treated for or had any impairment or disease of the eyes. His answers were false. He was treated for retinitis pigmentosa as early as 1985.

However, he did not notify Revere of a claim for his retinitis pigmentosa until Dec. 1990. It appeared that Haas was home free. Since he had "waited out" the two year period, and since Revere had chosen the non-fraud provision of the statute [item # 2 above], it appeared that Revere could not rescind the policy.

Indeed, the NJ Supreme Court held that the policy was not rescindable, but that this did not affect the issue of whether the policy language itself allowed for coverage of Mr. Haas' condition. The Court then read the following exclusions from coverage: that 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 required that the disability be caused by a "sickness or injury." A "sickness" was defined as "sickness or disease which first manifests itself after the Date of issue and while Your Policy is in force." By putting together all these provisions from the policy, the NJ Supreme Court held that no coverage was afforded Haas because his sickness, treated since 1985, did not satisfy the definition.

Conclusion

The Haas case probes carefully the nuances of an incontestability statute as well as the issue of how a person who has not disclosed medical facts about himself or herself might be able to survive or overcome the incontestability defense but may not still not actually have coverage. What the Amex case from our textbook does is to give the misleading impression that the incontestability issue is not only a "slam dunk" issue once two years have passed, but that issues of fraud are ignored or soft-pedaled by courts as long as such a period has seemingly passed. Haas demonstrates that in many instances there is no statute of limitations for fraud, with respect to rescinding the policy, but that when the statute compels a choice, as it did for Revere, the company may lose on the issue of rescission while still emerging victorious on coverage.