Insurer's ability to contest claims after the contestability cutoff.

• Author: Hughes, Mark F., Jr.

Most states in the United States allow by statute a two-year contestable period for voiding life or health policies,[1] and some insurers require only a one-year contestable period.[2] Because the normal period for rescinding policies is two years from the date of issue, this article refers to that period. Courts have evolved several doctrines to elongate the contestable period to prevent the raiding of the insurer's treasury. This article discusses these doctrines and cases.

DELAY IN SUING

The standard contestability clause provides:

This policy shall become incontestable after it has been in force during the lifetime of the insured for 2 years after the date of issue.[3]

If an insured under a life insurance policy dies within the two-year period but the beneficiary delays suit until the two-year period has elapsed, the insurer nevertheless may seek rescission of the policy.[4] The rationale for this result is that the courts are just, enforcing the clause, as written. Even though beneficiaries urge that the strict construction of the policy against the insurer should lead to ignoring the language extending the deadline, that plea has not been successful.

USE OF AN IMPOSTOR

1. Posing as Insured

   Assume a very ill man with an understandable desire to buy life insurance. How can he achieve that goal? Several individuals have sent someone else to the medical examination or the blood test. The courts have thwarted this sort of gross fraud and rescinded the policies although two years had elapsed after the delivery of the policy. Take the seminal case of Maslin v. Columbia National Life Insurance Co., for instance, in which the U.S. District Court for the Southern District of New York reasoned as follows:

   I think it equally clear, however, that the other defense, the alleged impersonation of Samuel Maslin by another who is said to have made the application and, more important still, to have taken the physical examination, is not barred by the incontestability clause. In substance, the [insurer's] position is that it never insured the life of the [applicant] at all and never had any contract or contractual dealings with him, that the man it insured was another person altogether, a healthy man whom the [insurer's] medical examiner saw and accepted as a risk and who chose to call himself Samuel Maslin, further that there is nothing to show that this man is dead or that the plaintiff had any insurable interest in his life. In reality, this is not an affirmative defense at all, it may be proved under the denial that the defendant insured the life of Samuel Maslin. If the facts pleaded are borne out by the proof, the [insurer] is under no liability to the plaintiff. There cannot be the slightest doubt that the person whom an insurance company intends to make a contract with and intends to insure is the person who presents himself for physical examination.[5]

   More succinctly, as the Pennsylvania Supreme Court said: "Insurance companies do not insure names. They insure lives."[6]

   In 1993, the U.S. District Court for the Southern District of Florida in Fioretti v. Massachusetts General Life Insurance Co.[7] rescinded a life insurance policy in a situation in which an applicant with the human immunodeficiency virus sent a friend to a walk-in clinic to give blood in the name of the applicant. Needless to say, the impostor's blood was clean. The HIV-positive man paid a substantial premium to get a predated policy for $1,914,111. He died within two years of the date of delivery of the policy but more than two years after the date shown on the policy as "the date of issue." If the contestable period were to run from the "date of issue" as listed on the policy, the contestable period allegedly cut off the insurer's fraud defense.

   The court held, however, that:

   * The insurer relied on the blood test and never would have issued the policy if the truth had been known about HIV in the body of the named insured.

   * The insurer insured the impostor, not the named insured.

   * The imposture is,markedly worse than "garden variety fraud," because, the court said, "it is stealthily ingenious - piercing right to the heart of the deal and virtually impossible for the insurance company to detect through reasonable and ordinary business procedures."

   Although all the impostor cases have been decided in favor of insurers, the California Court of Appeals recently refused to follow Fioretti in Amex Life Assurance Co. v. Superior Court (Slome Capital Corp.)[8] and distinguished the impostor decisions by holding that a cheat who signs the false application and who thereafter sends the impostor to the medical examination successfully cheats the insurer after the elapse of two years.

   The court stated that (1) it found no impostor decision where the insured signed the application (but Fioretti was such a case); (2) the insurer did intend to deal with the applicant-in-sured, (3) the use of the impostor for the medical exam did not affect that intent; and (4) the situation was akin to a law firm's hiring a law graduate who proffered writing samples of others to induce his hiring and whose valid employment contract resulted (without citation).

   This analysis is flawed, because:

   * Parties make many statements or assert positions that are rejected and not placed in a final contract and are not part of a deal.

   * Focusing on a statement made at the start of the application process does not obliterate the most important "statement" or event - "This is my blood that you may test."

   * The law firm analogy fails, because (1) the firm could rescind the contract of employment as void from its inception;[9] (2) the firm could sue the associate for damages, if the supervisor of the associate had to spend an abnormal amount of time correcting his work; (3) the firm might be entitled to a refund of the salary paid to the associate, and (4) the partial completion of a fraudulent contract does not mean that the contract must be completed.

   Most important, the analogy also fails because courts...