K.K. v. The Paul Revere Life Insurance Company

K. K., )
)
Plaintiff/Appellant, ) Appeal No.
) 01-A-01-9511-CH-00541
v. )
) Davidson Chancery
THE PAUL REVERE LIFE ) No. 95-429-I
INSURANCE COMPANY, )
Defendant/Appellee.
)
) FILED
June 7, 1996
COURT OF APPEALS OF TENNESSEE
Cecil W. Crowson
MIDDLE SECTION AT NASHVILLE Appellate Court Clerk
APPEAL FROM THE CHANCERY COURT FOR DAVIDSON COUNTY
AT NASHVILLE, TENNESSEE
THE HONORABLE IRVIN H. KILCREASE, JR., CHANCELLOR
AUGUST C. WINTER
Two Brentwood Commons, Suite 150
750 Old Hickory Boulevard
Brentwood, Tennessee 37027
ATTORNEY FOR PLAINTIFF/APPELLANT
LUIS C. BUSTAMANTE
J. FORD LITTLE
Woolf, McClane, Bright, Allen
& Carpenter
900 S. Gay Street, Suite 900
P. O. Box 900
Knoxville, Tennessee 37901-0900
ATTORNEYS FOR DEFENDANT/APPELLEE
AFFIRMED AND REMANDED
SAMUEL L. LEWIS, JUDGE
O P I N I O N
Plaintiff K. K. appeals from the trial court’s judgment
granting the defendant, The Paul Revere Life Insurance Company
("Paul Revere") his motion for summary judgment, and the failure of
the trial court to grant its motion for partial summary judgment.
The facts are not disputed. Plaintiff submitted an
application for disability insurance to Paul Revere. At the time
he submitted his application he was able to fully perform his
duties.
Plaintiff had been diagnosed as HIV positive; however, he
did not disclose the fact that he had been diagnosed and treated
for HIV in his application. Plaintiff falsely stated that he had
not, in the preceding five years, received medical advice or
treatment.
Paul Revere accepted plaintiff’s application and issued a
disability insurance policy dated 1 October 1989. Nothing in the
policy excludes coverage for illness due to HIV or AIDS. The
material provisions of the policy are as follows:
1.6 "Sickness" means sickness or disease
which first manifests itself after the
Date of Issue and while Your Policy is
in force.
1.15 "Pre-existing Condition" means a
Sickness or physical condition for
which, prior to the Date of Issue:
a. Symptoms existed that would
cause an ordinarily prudent
person to seek diagnosis, care,
or treatment; or
b. Medical advice or treatment was
recommended by or received from
a Physician.
3 . 2 P r e -
existing Condition Limitations
During the first two years from the
Date of Issue, We will not pay
benefits for a Pre-Existing condition
if it was not disclosed on Your
application. You are responsible for
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verifying the accuracy of each and
every statement on Your application.
Also, We will not pay benefits for any
loss We have excluded by name or
specific description.
9.2 Incontestable
a. After Your Policy has been in
force for two years, excluding
any time You are Disabled, We
cannot contest the statements
in the application.
b. No claim for Disability
beginning after two years from
the Date of Issue will be
reduced or denied because a
disease or physical condition
existed before the Date of
Issue unless it is excluded by
name or specific description.
Tennessee Code Annotated section 56-26-108(2)(A) provides
that a disability insurance policy is to contain a provision
stating that after a policy has been in force two years, no mis-
statements except fraudulent mis-statements made by the applicant
in the application may be used to void the policy or deny a claim.
An insurer has the option to include a broader incontestability
clause which provides that after the policy has been in force for
two years (excluding any period in which the insured is disabled),
the policy shall become incontestable as to the statements
contained in the application.
In late 1993 plaintiff’s treating physician, Dr. Judson
Rogers, determined that as of 22 October 1993 plaintiff had become
totally disabled because of AIDS. Plaintiff, was at that time,
owner and manager of a Baskin Robbins ice cream store. He
submitted a claim to Paul Revere for disability insurance benefits.
Paul Revere began an investigation of plaintiff’s pre-
application medical history and on 3 February 1994, Paul Revere
sent plaintiff a letter stating that the company had discovered
information indicating that plaintiff had been diagnosed as HIV
positive in 1985. Paul Revere requested additional information
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regarding his pre-application history which plaintiff provided.
Following the expiration of the policy’s ninety-day waiting
period, Paul Revere paid plaintiff monthly disability insurance
benefits under a reservation of rights until 27 December 1994.
Paul Revere, at that time, took the position that plaintiff was not
entitled to benefits because the policy’s definition of sickness
did not cover illnesses which manifested themselves before the
policy was issued. Paul Revere then, without notice to plaintiff,
resumed making automatic premium withdrawals from plaintiff’s
checking account.
Plaintiff brought suit to recover disability payments
withheld and post-claim premiums taken with interest, plus a 25%
bad faith penalty pursuant to Tennessee Code Annotated section 56-
7-105. Plaintiff also seeks a declaration in order that he is
entitled to receive future disability benefits under the policy.
The trial court granted Paul Revere’s motion for summary
judgment, denied plaintiff’s motion for partial summary judgment,
and ordered plaintiff to repay Paul Revere the sum of $11,700.00
which Paul Revere had paid to plaintiff as disability benefits.
On appeal, it is Paul Revere’s insistence that the insurance
contract did not afford coverage for a disease which manifested
itself before the issuance of the policy. Paul Revere also insists
that plaintiff cannot use the statutory mandated incontestability
clause to create coverage. There is no dispute in the record that
plaintiff was armed with the knowledge that he had been previously
diagnosed and treated for HIV, and that he did not disclose this to
Paul Revere when the application was presented. The record is also
clear that plaintiff’s disease had manifested itself before the
issuance of the policy.
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In this appeal it is plaintiff’s insistence that he is
entitled to disability insurance benefits because his disability,
though caused by a known and undisclosed pre-existing condition, is
covered by the policy’s incontestability clause which did not
preserve the insurer of defense to fraudulent mis-statements. It
is Paul Revere’s insistence that the trial court properly granted
summary judgment because the statutory mandated incontestability
clause does not preclude Paul Revere from asserting an insurer’s
right to deny coverage pursuant to the terms of the policy.
The courts of this state have repeatedly held that although
incontestable clauses and the statutes which require them "cut-off
challenges to the validity of an insurance policy...[they] do not
affect a policy’s coverage." Norman v. Plateau Ins. Co., 1989 WL
28775 (Tenn. App. 1989); see also Carothers v. Atlanta Life Ins..
Co., 159 S.W.2d 830, 831 (Tenn. 1942); Smith v. Equitable Life
Assurance Soc’y of the United States, 89 S.W.2d 165, 167 (Tenn.
1936); Scales v. Jefferson Standard Life Ins.. Co., 295 S.W. 58, 60
(Tenn. 1927) (which holds that an incontestable clause does "not
make the insurer liable for a larger sum than would otherwise be
due under the policy.") Searcy v. Fidelity Banker’s Life Ins..
Co., 656 S.W.2d 39, 40 (Tenn. App. 1983), holding that an
incontestable clause does not expand or enlarge coverage.
In Searcy, plaintiff brought suit seeking the proceeds of
a credit life insurance policy issued to her deceased father under
a master group policy sold by defendant to the bank. 656 S.W.2d 39(Tenn. App. 1983). The defendant asserted two provisions of the
policy had been violated and denied coverage. Id. at 40.
Plaintiff insisted that the incontestability clause precluded the
defendant from relying upon the two provisions of the policy to
deny coverage. Id.
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In affirming the Chancellor’s dismissal of plaintiff’s suit,
the court stated: "The crux of the issue that this court is here
called upon to review is the decision of the Chancellor that the
incontestability clause did not bother defendant from asserting a
defense of lack of coverage in the case where the person sought to
be insured did not meet two of the insuring conditions in the
policy." Id. at 41. The court went on to state "incontestability
clauses such as codified above, while precluding the raising of the
defense that an insurance policy is invalid, do not effect the
raising of coverage questions by the insurer." Id. at 40.
In Smith v. Equitable Life Ins.. Soc’y, 169 Tenn. 477, 89
S.W.2d 165 (Tenn. 1935) the Supreme Court stated:
We think it apparent that the confusion which seems
to have arisen in this case, and in several of
those relied on for the insured, is due to the
failure to appreciate the distinction between "a
denial of coverage and a defense of invalidity"
which Chief Justice Cardozo, when on the Court of
Appeals of New York, so clearly emphasized in his
opinion in Metropolitan Life Ins.. Co. v. Conway,
252 NY 449, 169 N.E. 642. In that case he said:
"the provision that the policy shall be
incontestable after it has been enforced...for a
period of two years is not a mandate as to
coverage.... It means only ... 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 the condition broke it."
169 Tenn. at 403, 89 S.W.2d at 167.
The court recognized that it was "dealing here with a matter
of coverage, and not the matter of the validity of the policy
itself." Id. at 42. In Norman v. Plateau Ins.. Co., 1989 WL 28775(Tenn. App. 1989), plaintiff and her husband purchased a car and
group credit insurance as part of its purchase of an automobile
from Hippodrome Oldsmobile in March 1985. The certificate of
insurance was prepared by Hippodrome, Plateau’s insurance company’s
agent, and identified Mr. Norman as 56 years old, although he
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actually was 73. Id. Hippodrome was unaware of Mr. Norman’s
correct age and the Normans were likewise unaware that persons over
65 years of age were ineligible for Plateau’s policy. Id. Ms.
Norman requested that Plateau pay off the remaining balance on the
automobile loan upon Mr. Norman’s death in 1987. Id. In denying
the claim, Plateau stated that Mr. Norman had been ineligible for
insurance. Id. Plaintiff Norman filed suit against Plateau and
sought summary judgment asserting that the policy’s incontestable
clause prevented Plateau from denying coverage. Id. Plateau
answered arguing that the policy’s age adjustment clause limited
its liability to the amount of the premium. Id. In vacating the
trial court’s decision to grant summary judgment on behalf of
plaintiff, the court held that defendant Plateau may raise defenses
arising from the policy despite the policy’s incontestable clause.
Id. at 4. The court further stated:
[Incontestable clauses] cut off challenges to the
validity of an insurance policy except for those
expressly accepted from the clauses operation....
However, incontestable clauses do not affect a
policy’s coverage...they do not expand or enlarge
coverage,...and they do not make the insurer liable
for a larger sum than would otherwise be due under
the policy.
Thus, the threshold issue in cases construing
the effect of an incontestable clause is whether
the insurance claim relates to the validity of the
policy or whether it relates to limitations of
coverage. If it relates to the former it is
barred; if it relates to the latter it is not.
...In this case, Plateau is raising a matter of
coverage. It is asserting one, that Mr. Norman was
not eligible for insurance because he was over 65
years old when he bought the car, and two, that the
certificate of insurance was issued contrary to the
terms of the group policy and the agency agreement.
We find that Plateau may raise these defenses
despite the policy’s incontestable clause. Id. at
3-4. We think it is clear that Tennessee has
adopted the majority rule concerning the
application of incontestability clauses by finding
that an incontestable clause is not a mandate as to
coverage or to risk assumed and "notwithstanding
the exception in such clause, the insurer may deny
liability for the full amount of the policy by
invoking the application of another clause in the
policy involving exceptions of risk not enumerated
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in the incontestability clause..." See Carothers
v. Atlanta Life Ins.. Co., 159 S.W.2d 830, 831-32
(Tenn. 1942).
It is plaintiff’s contention that Tennessee’s statutory
mandated incontestability clause precludes insurers from contesting
coverage for any reason after the expiration of the two year
contestable period. The incontestability clause in the subject
policy states that:
a. After your policy has been in force for two
years, excluding any time you are disabled, we
cannot contest the statements in the application.
b. No claims for disability beginning after two
years from the date of issue will be reduced or
denied because a disease or physical condition
existing from the date of issue unless it is
excluded by name or specific description.
The plaintiff cites several cases in support of his argument
that once the two year time period has passed, the incontestability
clause provides that "an insurer cannot avoid a claim on the ground
that the insured submitted a fraudulent application."
However, we are of the opinion that these cases stand only
for the proposition that the incontestable clause prevents an
insurer from voiding the policy, that is, contesting the validity
of the policy. Plaintiff does not recognize the distinction
between the facts and the legal arguments of the instant case and
those cited by plaintiff.1 Here, Paul Revere does not contest the
validity of the policy due to the fraudulent misrepresentations
made by plaintiff in his application for insurance. Paul Revere
contends that the policy’s limiting definition of covered sickness
excludes plaintiff’s claim from coverage under the policy. We are
of the opinion that Paul Revere is not barred by the
incontestability clause from arguing that plaintiff’s disability
1
Humpston v. State Mut. Life, 256 S.W. 438, 431 (1923); Union Central
Life Ins.. v. Fox, 61 S.W. 62 (Tenn. 1901); Natl. Burial Life Ins.. Co. v.
Evans, 347 S.W.2d 34 (Tenn. 1961).
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claim is not covered under the policy.
In the instant case, the trial court’s judgment conforms to
the majority rule applied in other jurisdictions concerning the
application of the incontestability clause to the issue of
coverage.
The majority of jurisdictions that have addressed this issue
have adopted the rule that the incontestability clause relates only
to the validity of the contract and should not affect in any way
whatsoever the construction of the terms of the policy. Button v.
Connecticut General Life Insurance Co., 847 F.2d 584, 588 (9th Cir.
1988); Minnesota Mutual Life Insurance Co. v. Morse, 487 S.W.2d 317(Tex. 1972), holds that the policy is valid after expiration of a
contestability period but that the insurer may still dispute
whether the claim is covered. Id. at 319-20.
Tennessee has adopted the majority rule that an
incontestability clause limits only the insurer’s ability to
contest the validity of a policy which would otherwise be voidable
because of the insured’s fraud; the clause does not expand coverage
beyond the terms of the policy. Scales v. Jefferson Standard Life
Ins.. Co., 295 S.W. 58, 60 (Tenn. 1927); Searcy v. Fidelity
Banker’s Life Ins.. Co., 656 S.W.2d 39, 40 (Tenn. App. 1983).
Plaintiff does not in his brief appear to dispute the adoption of
the majority rule in Tennessee; however, plaintiff requests this
Court to simply ignore precedent adverse to it.
Paul Revere’s incontestability clause states, in pertinent
part, that "no claim for disability beginning after two years from
the date of issue will be reduced or denied because of a disease or
physical condition existing from the date of issue unless it is
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excluded by name or a specific description." This limiting
definition of covered sickness serves as an exception by specific
description to part two of the incontestability clause.
The policy issued to the plaintiff entitled plaintiff to
benefits when "because of injury or sickness" the plaintiff is
"unable to perform the important duties of [his] regular
occupation." "Sickness" is defined as "sickness or disease which
first manifests itself after the date of issue and while your
policy is in force." Disease is manifest when it is capable of
diagnosis by a physician. See Christopher v. Consolidation Coal
Co., 262 Tenn. 727, 440 S.W.2d 281 (Tenn. 1969). Plaintiff’s
sickness, for which he made claim, manifested when he was first
diagnosed as HIV positive. Paul Revere is entitled to limit the
scope of coverage to sicknesses that "first manifest" themselves
after the policy has been issued. See Paul Revere Life Ins.. Co.
v. Haas, 644 A.2d 1098, 1106 (N.J. 1994). Plaintiff was diagnosed
and treated as HIV positive before the policy was issued.
Therefore, plaintiff is not covered under Paul Revere’s policy
which limits covered sicknesses to those which first manifest
themselves after the policy was issued.
Plaintiff acknowledges the terms of the policy issued by
Paul Revere which provide coverage for total disability resulting
from sickness which first becomes manifest during the policy
period. Additionally, the terms and conditions of the policy quite
clearly eliminate coverage for illnesses which manifests themselves
prior to the issuance of the policy. The policy only extends
coverage for illnesses occurring during the policy period and
expressly precludes coverage for illnesses which manifest
thelmselves prior to the effective date of the policy.
Furthermore, plaintiff’s argument fails because of his failure to
10
recognize and accept the obvious distinction between a pre-existing
condition and manifestation of an illness. This difference is
demonstrated in Paul Revere Life Ins.. Co. v. Haas, where the court
recognized a distinction between a manifest condition and one that
exists. Haas, 644 A.2d at 1106. This distinction is also apparent
in comparing the statutorily mandated incontestable clause in the
coverage provisions of the policy. Under the incontestable clause,
coverage will not be denied because a condition existed "before the
date of issue." Whereas the policy specifically states that
coverage is only provided for sickness which must "manifest itself
after the date of issue."
Within the context of the contract of insurance, the
incontestability clause is clear and does not result in
inconsistency or ambiguity. The incontestability clause bars a
defense based on an insurer’s claim that a disease existed as
opposed to a claim that it manifested itself prior to the issuance
of the policy. The incontestability clause protects an insured who
fills out an insurance application without knowledge or reason to
know that he is suffering from a particular illness or disease;
however, the clause would not protect an insured who knows that he
suffers from a disease and nevertheless fails to inform the insurer
of this fact. Here, plaintiff proposes a system whereby the
incontestability clause would grant the same degree of protection
to insureds who fraudulently misrepresent their medical status to
those who unknowingly are afflicted by an illness which does not
manifest itself prior to the issuance of the policy. To adopt such
a system would be to encourage dishonesty and reward deception
contrary to clear public policy.
Consumers should not be encouraged nor allowed to purchase
insurance for a risk that is known to have already occurred.
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The distinction between a "manifest" condition and one that
"exists" is recognized under Tennessee law. In Horace Mann Mutual
Ins. Co. v. Burrow, 213 Tenn. 262, 373 S.W.2d 469 (1963), the
insurer attempted to deny coverage for an operation required to
correct an esophageal bronchial fistula which was caused by a
congenital condition existing before the policy was in force. The
insurance company argued that the loss was not caused by a sickness
defined in the policy as "sickness as used herein means sickness or
disease occurring while the insurance is in force." Id. at 471.
The court concluded that although the "fistula...existed dormant
all these years in the (insured’s) body, it was not a sickness as
the court interpreted the term." Id. The court, quoting from CJS
Insurance Section 893 stated "an illness or disability has been
deemed to have its inception when the disease first becomes
manifest or active and not at the earlier time when the medical
cause of the disease may have begun or had its origin." Id. at
472.
Paul Revere has complied with the judicial interpretation
of the term "manifestation." Pursuant to the distinction between
"manifesting and existing" recognized in Tennessee, plaintiff’s
condition had manifested when he was diagnosed as HIV positive,
well before the policy was issued. Coverage is not afforded under
the policy and the statutorily mandated incontestable clause cannot
be employed to create coverage.
The statutorily mandated incontestable clause does not
prohibit Paul Revere from denying plaintiff’s claim based upon a
lack of coverage due to the prior manifestation of his illness.
The statutorily mandated incontestable clause only prohibits
denials of claims based upon the prior existence of a disease,
rather than the manifestation of a disease prior to the issuance of
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the policy.
For the reasons herein we are of the opinion that extension
of coverage to plaintiff would only serve to reward and shelter a
fraudulent insured. See Township of Gloucester v. Maryland Cas.
Co., 668 F.2d 394, 403 (D.N.J. 1987), holding that a person "cannot
obtain insurance for a risk that the insured knows has already
transpired."
It therefore results that the judgment of the trial court
is affirmed, and the cause is remanded to the trial court for any
further necessary proceedings. Costs on appeal are taxed to
plaintiff/appellant.
________________________________
SAMUEL L. LEWIS, JUDGE
CONCUR:
_________________________________
HENRY F. TODD, P.J., M.S.
_________________________________
BEN H. CANTRELL, J.
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