On certification of the Superior Court, Appellate Division, whose opinion is reported at 266 N.J. Super. 35 (1993).
Pollock, Clifford, Handler, Garibaldi, O'Hern, Stein
The opinion of the court was delivered by
We granted the petition for certification of plaintiff, The Paul Revere Life Insurance Co. (plaintiff, the insurer, or Paul Revere), N.J. (1993), to determine whether a statutorily-mandated "incontestability clause" included in a disability policy precludes the insurer from denying a claim when the insured intentionally failed to disclose a disabling disease in the insurance application. We hold that an insured may not recover under a disability insurance policy for a disease that he or she intentionally concealed when applying for the policy.
This appeal arises from the motion of defendant, Gilbert Haas (defendant, the insured, or Haas), for summary judgment dismissing Paul Revere's complaint. The complaint alternatively sought rescission of the policy or a declaratory judgment that the policy does not cover Haas's claim. Because the matter arises on the insured's motion for summary judgment, we consider the facts in the light most favorable to the insurer. See Maher v. New Jersey Transit Rail Operations, Inc., 125 N.J. 455, 477 (1991) (stating that on motion for summary judgment, court draws all reasonable inferences in favor of non-moving party). For the purpose of this motion, Haas admits that when he applied for disability insurance he knew he was suffering from retinitis pigmentosa, a progressive disease of the eyes that leads to blindness. He also admits that he intentionally concealed that information from the insurer.
On January 20, 1987, Haas applied to Paul Revere for disability insurance. When answering questions in the application, Haas stated that he had not been examined by or consulted a physician in the last five years, and that he had never had any known indication of, or been treated for, any disease or impairment of his eyes. In response to a question asking whether he had had "any surgical operation, treatment, special diet, or any illness, ailment, abnormality, or injury, not mentioned above, within the past five years," he again answered in the negative.
His answers were false. In fact, Haas had been evaluated, beginning on October 20, 1983, in the New York University Retinal Clinic. As early as 1984, his doctors had told him that he had retinitis pigmentosa. Further, Haas had also been treated for the disease in 1985.
Relying on Haas's false statements in the application, Paul Revere issued the policy on March 5, 1987. The policy contained the following clauses:
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 loss incurred or 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.
On December 1, 1990, Haas notified Paul Revere that he intended to file a claim. On January 7, 1991, he executed a proof of claim, stating that as of December 1, 1990, he had become totally disabled because of retinitis pigmentosa.
Paul Revere's investigation of the claim uncovered that Haas had lied in his application. On October 17, 1991, Paul Revere filed its complaint. The Law Division granted Haas's motion for summary judgment and dismissed the complaint. The Appellate Division affirmed in part and reversed in part, holding that, although the incontestability clause precluded Paul Revere's defenses after two years, an issue of fact existed whether Haas had been disabled during the two-year incontestability period. 266 N.J. Super. 35, 44-45 (1993). Under the policy, the effect of such a disability would be to toll the contestability period. Id. at 45. Consequently, the Appellate Division remanded the matter to the Law Division.
Initially, this case concerns the interpretation of the terms of a disability insurance policy. Ultimately, however, it involves a policy choice concerning the effect of an insured's concealment of a disability in an application for insurance on a subsequent claim for the concealed disability. After a stated period, an incontestability clause grants an insured repose from the rescission of the policy because of misstatements in the application. The clause, however, neither expands the coverage provided by the policy nor prevents the insurer from defending against a claim based on a disease that the insured knowingly concealed when applying for insurance. Accordingly, we reverse the judgment of the Appellate Division to the extent that it precludes Paul Revere from denying coverage of Haas's claim for retinitis pigmentosa, and we remand to the Law Division.
Coloring our perception of the subject incontestability clause is the history and purpose of such clauses. At the end of the nineteenth century, life insurance companies introduced incontestability clauses to dispel the public's fear that insurers would not honor claims if the insured had made a technical mistake in the application. See Powell v. Phoenix Mut. Life Ins. Co., 144 N.E. 825, 826-27 (Ill. 1924) (listing cases involving such clauses); 7 Williston on Contracts § 912 (Jaeger ed. 1963) (Williston) (stating that insurance companies resisted liability because of misstatements made by insureds). By the early twentieth century, many states had passed statutes mandating that certain insurance policies be incontestable. Williston, supra, § 912 at 395; see also Wischmeyer v. Paul Revere Life Ins. Co., 725 F. Supp. 995, 1000 (S.D. Ind. 1989) (discussing history and rationale behind clauses). The clauses are unquestionably for "the benefit of the insured." 1A John A. Appleman & Jean Appleman, Insurance Law and Practice § 311 at 321 (1981) (Appleman). Their purpose is "'to give the insured a sense of security after the stated period elapses.'" Strawbridge v. New York Life Ins. Co., 504 F. Supp. 824, 829 (D.N.J. 1980) (quoting Johnson v. Metropolitan Life Ins. Co., 53 N.J. 423, 442 (1969)).
A leading treatise on insurance law describes the public policies underlying the incontestability clauses:
There are conflicting forces of public policy which affect the matter of contestability. If an applicant chooses to gamble when he seeks a policy of life insurance, he may be guilty of outrageous fraud, and if the insurer fails to uncover such fraud within the contestable period he has been successful. Even if he makes such discovery in time, he receives back his premiums so that he has suffered no loss. On the other hand, only a minuscule percentage of the population ever resorts to such devious conduct, and it is considered desirable to have a cutoff time as to ordinary misrepresentations for two reasons: first, to lighten the burden upon the courts, since litigation otherwise could be increased manyfold; second, since most contests would arise after the insured's death, a beneficiary is in a deplorable condition to wage battle with a large insurer over statements which may have been made years earlier. For these reasons, it is better to countenance the occasional risk of fraud in order to bring an end to controversy.
[Appleman, supra, § 311 at 305-06.]
The New Jersey Legislature addressed these policy considerations by enacting N.J.S.A. 17B:26-5, which requires an incontestability clause in all health-insurance contracts. N.J.S.A. 17B:26-5 gives an insurer a choice of provisions. It states:
There shall be a provision as ...