Incontestability clause bars denial of benefits despite false statement on application

Law Reporter, Aug 1999

Incontestability clause bars denial of benefits despite false statement on application.

New England Mut. Life Ins. Co. v. Doe, _ N.E.2d _, No. 39, 1999 WL 171451 (N.Y. Mar. 30,1999).

The New York Court of Appeals held that an incontestability clause-which prohibits an insurer from contesting a policy after a certain period of time based on statements contained in the application-bars an insurer from denying benefits to an insured who incorrectly stated on his application that he was not receiving medical treatment.

Here, Doe purchased a disability insurance policy from New England Mutual Life Insurance Company. The policy excluded coverage for preexisting conditions that were not disclosed on the application. When he applied for the policy, Doe had been diagnosed HIV positive and was being treated for that condition. On his application, however, Doe stated that he was not receiving medical treatment. Five years later, Doe became disabled due to AIDS and submitted a claim for benefits to New England Mutual.

New England Mutual filed a declaratory judgment action seeking an order allowing it to disclaim coverage on the ground that Doe's disabling condition manifested itself before the effective date of the policy. The trial court granted Doe's motion to dismiss. An appellate court affirmed, holding the policy's two-year incontestability clause precluded the insurer from denying benefits to Doe. The court ordered that New England Mutual pay benefits to Doe under the policy.

Affirming, the state high court noted there are two lines of authority regarding incontestability clauses. Under the first line of authority, an incontestability clause does not preclude a carrier from denying benefits where the policyholder knew, before the policy was issued, of any symptom or condition related to the eventual cause of the disability and did not disclose it. The second line of authority, the court explained, holds that once the incontestability period is over, a carrier may not deny coverage by claiming that the applicant knew of any symptom or condition related to the eventual cause of the disability.

Adopting the latter view, the court rejected the insurer's argument that the incontestability clause should be interpreted to apply only where an insured had no knowledge of any symptoms at the time of his or her application. The court said such an interpretation would undermine the purpose of incontestability clauses-to encourage consumers to purchase insurance with confidence that after a certain period of time they will receive benefits if they become disabled.

Insured's Counsel:

Mark P. Scherzer, New York, N.Y.

[Comment: For another case holding that an insurance policy's incontestability clause precluded a disability insurer from denying coverage of a preexisting condition that was undisclosed on the insured's policy application, see Equitable Life Assurance Soc'y v. Poe, 143 F.3d 1013 (6th Cir. 1998), 41 ATLA L. Rep. 340 (Nov. 1998). Merrill H. Gordon, Farmington Hills, Mich., represented the insured in that case.]