Corbett v. Fortis Benefits ( 1996 )

UNPUBLISHED
UNITED STATES COURT OF APPEALS
FOR THE FOURTH CIRCUIT
ELIZABETH F. CORBETT,
Plaintiff-Appellant,
v.
No. 95-1795
FORTIS BENEFITS INSURANCE
COMPANY,
Defendant-Appellee.
Appeal from the United States District Court
for the Eastern District of North Carolina, at Wilmington.
Franklin T. Dupree, Jr., Senior District Judge.
(CA-94-43-7-D)
Argued: February 2, 1996
Decided: April 1, 1996
Before WIDENER, WILKINS, and MICHAEL, Circuit Judges.
_________________________________________________________________
Affirmed by unpublished per curiam opinion.
_________________________________________________________________
COUNSEL
ARGUED: John Lloyd Coble, MARSHALL, WILLIAMS &
GORHAM, L.L.P., Wilmington, North Carolina, for Appellant. Don-
ald John Harris, PETREE STOCKTON, L.L.P., Raleigh, North Caro-
lina, for Appellee. ON BRIEF: Lonnie B. Williams, MARSHALL,
WILLIAMS & GORHAM, L.L.P., Wilmington, North Carolina, for
Appellant.
_________________________________________________________________
Unpublished opinions are not binding precedent in this circuit. See
Local Rule 36(c).
_________________________________________________________________
OPINION
PER CURIAM:
After Waddell A. Corbett died, his widow, Elizabeth F. Corbett,
sued Fortis Benefits Insurance Company, seeking $100,000 in death
benefits under a group insurance policy. The district court granted
summary judgment to the insurance company, holding that it had no
duty to pay benefits. Mrs. Corbett appeals, and we affirm.
I.
Mr. Corbett was a partner of Corbett Package Company. On March
1, 1988, Mutual Benefit Life Insurance Benefit Company ("Mutual")
issued a group insurance policy to Corbett Package. As a partner of
the company, Mr. Corbett was covered under that policy. The policy
contained the following "incontestability" provision:
The validity of the Policy cannot be contested, except if pre-
miums are not paid after it has been in force for 2 years
from its Effective Date. The validity of the insurance and
any Person Insured cannot be contested, except if premiums
are not paid, after the insurance has been in force for 2 years
during the Person Insured's lifetime.
The Mutual policy also provided that "to be eligible for insurance,
a person must be a member of an Eligible Class" and that insurance
coverage would terminate on "[t]he date the person is no longer in an
Eligible Class." For this case, "Eligible Class" means "each active,
Full-Time Partner and salaried employee of [Corbett] who is working
in the United States of America except any temporary or seasonal
workers." "Full Time" was defined as "a regular work week consist-
ing of at least 30 hours of work."
The Mutual policy provided further that if an insured for whatever
reason were to fall out of an "Eligible Class", he could convert his
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coverage under the group policy into coverage under an individual
insurance policy. A group insurer is required under North Carolina
law to provide a conversion right. See N.C. Gen. Stat. § 58-58-140(8).
The Mutual policy provided that to convert, a person must "apply for
the Conversion Policy" within 31 days and "pay the premium required
by the Conversion Policy." If the insured dies within the 31-day con-
version period, but before actually converting, he is covered as if he
had converted the policy.
At some point after Mutual issued its policy, Western Life Insur-
ance Company ("Western") assumptively reinsured the Mutual policy.
Mutual and Western merged in 1991, forming Fortis Benefits Insur-
ance Company ("Fortis"), the defendant here.
On July 1, 1993, Fortis issued its own group insurance policy to
Corbett Package. That policy contained provisions virtually identical
to the provisions of the Mutual policy. The Fortis policy, for example,
provided, "A covered person's insurance will end on the date . . . a
person stops active work" (underlining of defined terms omitted).
"Active work" was defined as at least 30 hours of work per week at
the employee's "usual place of business." The policy also allowed an
insured to convert his group insurance into an individual policy
should his group insurance end.
The Fortis policy's incontestability provision said:
The validity of the policy cannot be contested after it has
been in force for 2 years. The validity of your coverage
under the policy cannot be contested after you have been
insured under the policy for 2 years during your lifetime.
However, if the premiums are not paid, the validity of the
policy or your coverage can be contested at any time.
(Underlining of defined terms omitted.)
Mr. Corbett worked full time at Corbett Package until June 27,
1991, when he suffered a brain hemorrhage and was diagnosed with
cancer. He was determined to be fully disabled as of October 3, 1991,
and he never again worked full time after that date. He died October
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10, 1993. At no time did Mr. Corbett, Mrs. Corbett, or anyone repre-
senting Mr. Corbett's interests apply to convert his group insurance
into an individual policy.
After Mr. Corbett died, Mrs. Corbett filed a claim for benefits with
Fortis. After Fortis denied her claim, she brought suit in North Caro-
lina court. Fortis removed the case to the United States District Court
for the Eastern District of North Carolina, invoking the court's diver-
sity jurisdiction. The parties agreed as to the facts of the case and
cross-moved for summary judgment. Thereafter, the district court
entered summary judgment in favor of Fortis. The district court based
its ruling on two grounds: (1) Mrs. Corbett could not invoke the poli-
cy's incontestability clause because when Mutual and Western
merged to create Fortis and Fortis issued a new policy, a new two-
year period of contestability began to run, and (2) in any event, the
incontestability provision does not bar Fortis from asserting as a
defense to coverage that Mr. Corbett had dropped out of the eligible
class without exercising his conversion rights.
Although we disagree with the district court on the first point, we
agree on the second. Accordingly, we affirm because an incontestabil-
ity clause does not prohibit an insurer from denying coverage on the
ground that the employee -- once eligible as a member of the insured
group -- has dropped out of the eligible class.
II.
The incontestability period began to run on March 1, 1988, when
coverage began under the Mutual policy. Thus, that policy became
incontestable on March 1, 1990. When Fortis was created it took over
all obligations under the Mutual policy. In addition, the new policy
Fortis issued on July 1, 1993, substantially duplicated the terms of the
earlier Mutual policy and provided for the same death benefit. At no
time did Fortis give any new consideration to persons initially insured
under the Mutual policy. Because there was no "issuance of new or
additional insurance," Fortis stood in the shoes of Mutual with respect
to the incontestability provision. See Chavis v. Southern Life Ins. Co.,
347 S.E.2d 425, 428 (N.C. 1986). An insurer cannot obtain new rights
with respect to its policy holders merely by restructuring itself or by
merging with another insurer. "Where one insurer assumes the risk of
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another which had issued a life policy containing an incontestable
clause, and the assuming insurer issues a new policy containing a sim-
ilar clause, the contestable period, in the absence of a specific provi-
sion to the contrary, will be regarded as running from the date of the
first policy." 18 Couch on Insurance § 72:41 (2d ed. rev. vol. 1983).
Thus, the district court erred in holding that a new period of con-
testability began to run with the issuance of the Fortis policy.
III.
The question remains, however, whether the insurer's defense (that
Mr. Corbett was no longer a member of the covered group at the time
of his death) is barred by the incontestability provision. We agree
with the district court that the defense is not barred and that it is valid.
An incontestability provision bars the insurer from asserting that
the insured was never covered at all or that the policy was never valid.
The purpose of the clause is to prevent "an insurer from lulling the
insured, by inaction, into fancied security during the time when the
facts could best be ascertained and proved, only to litigate them belat-
edly, possibly after the death of the insured." 18 Couch on Insurance
§ 72:2 (2d ed. rev. vol. 1983). Such a clause, however, does not bar
an insurer from asserting that a particular risk is not covered. An
incontestability clause
is not a mandate as to coverage, a definition of the hazards
to be borne by the insurer. It means only this, that within the
limits of the coverage, the policy shall stand, unaffected by
any defense that it was invalid in its inception, or thereafter
became invalid by reason of a condition broken.
Hooks v. Colonial Life & Acc. Ins. Co., 259 S.E.2d 567, 569-70 (N.C.
Ct. App. 1979) (quoting Matter of Met. Life Ins. Co. v. Conway, 252
N.Y. 449, 452 (1930)(Cardozo, C.J.)). In this case, the insurer is not
seeking to disaffirm the validity of the policy; instead it is only claim-
ing that Mr. Corbett fell outside of the class of persons covered in the
policy itself.
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The critical point in this case is that the insurer's defense is based
on the fact that Mr. Corbett dropped out of the covered group. For this
reason, Groll v. Safeco Life Ins. Co., 566 A.2d 269 (Pa. Super. Ct.
1989), Rapak v. Companion Life Ins. Co., 990 F.2d 801 (4th Cir.
1993), and similar cases relied upon by the plaintiff are inapposite. In
those cases the insurer claimed that the insured was never a member
of the covered group. Here, however, we are not faced with a claim
that Mr. Corbett was never covered. See Poffenbarger v. New York
Life Ins. Co., 277 F. Supp. 726, 728 (S.D. W. Va. 1967). The policy
expressly provided for termination of coverage if an insured ceased
to be an active full-time employee. An incontestability clause does
not bar an insurer from invoking specific policy provisions to argue
that the coverage of a previously-covered insured had terminated
before the time of the insured's death. Rasmussen v. Nebraska Nat'l
Life Ins. Co., 170 N.W.2d 370, 376 (Iowa 1969); 18 Couch on Insur-
ance § 72:59 (2d ed. rev. vol. 1983) ("The fact that a policy has
become incontestable does not affect the rule that the insurer's liabil-
ity is measured by the terms and provisions of the policy itself.").
Here, both the Mutual and Fortis policies expressly denied contin-
ued coverage to those persons who were no longer active full-time
employees of Corbett Package. It would not make sense to apply the
incontestability clause to bar the insurer from asserting that a former
insured was no longer covered because he ceased to be an active full-
time employee. Under Mrs. Corbett's view, once a person had worked
for the company for two years, he would be entitled to perpetual cov-
erage under the company's group insurance plan. The insurer never
bargained to bear such a risk.
Both the terms of the policies and North Carolina law protect an
insured from having his insurance suddenly ended in the event he
unexpectedly falls out of the covered group. The insured may exercise
his right to convert his group coverage into individual coverage.
Unfortunately, neither the insured nor anyone representing his inter-
ests sought to do so in this case.
Because Mr. Corbett dropped out of the covered group, we affirm
the judgment of the district court.
AFFIRMED
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