On appeal from Superior Court of New Jersey, Chancery Division, Middlesex County.
Before Judges Shebell, A.a. Rodr¡guez and Coburn.
The opinion of the court was delivered by: Coburn, J.A.D.
Plaintiff, Provident Life and Casualty Insurance Company, sued in the Chancery Division to rescind a disability insurance policy issued to the defendant, Bruce A. Fein; alternatively, Provident sought a declaratory judgment that defendant was not disabled under the terms of the policy. Defendant filed a counterclaim for breach of contract, claiming entitlement to the policy's benefits. Both parties sought summary judgment on the issue of rescission. Provident prevailed, and defendant filed this appeal. Since we believe Provident was not entitled to rescind the policy, we reverse and remand for trial on the issue of disability.
In 1982, Fein, then a twenty-six-year-old commodities trader, purchased a Provident disability insurance policy. In 1986, Fein accepted Provident's solicitation to increase the monthly benefits from $1,800 to $2,800. The application asked Fein to state his "current annual rate of earned income (net after business expenses, if any)," and he responded by inserting the figure of "$175,000." This application did not inquire about the existence of any other disability policies owned by the applicant.
In June 1988, Fein inadvertently failed to remit a premium payment. In September, Fein's insurance agent notified him of the failure, and on September 6, 1988, Fein mailed a check to Provident for the June and September premiums. Fifteen days later Provident wrote to Fein acknowledging receipt of the check "to place the . . . policy back in force effective June 1988."
The policy remained in force and nothing untoward occurred until December 1993 when Fein again inadvertently failed to remit a premium payment due on the nineteenth of the month. Because he had previously made a double premium payment, he had assumed, incorrectly, that the second payment was for December 1993.
On March 15, 1994, Fein's insurance agent notified him of his failure to pay the December premium, and on that very same day he sent Provident a check in the amount of $506.04 covering the payments due December 19, 1993 and March 19, 1994.
At the end of April, Fein's agent called him to advise that Provident required submission of a reinstatement application. During that conversation, the agent questioned Fein about his income, reminding him that in 1986 he had stated on his application that his income was $175,000. Fein responded by telling the agent that his average annual income over the past ten years was $175,000, and the agent inserted that figure on the application before sending it to Fein for signature and submission to Provident. This application also inquired about other disability policies. Fein responded by listing a "Nat Life" policy which provided benefits of $4,000 per month.
On May 2, 1994, according to Fein, he signed the reinstatement application and mailed it to Provident. However, the application bears a date-stamp indicating that it was received by Provident "June 02."
On June 2, 1994, Provident mailed a letter to Fein which said:
Your payment of $506.04 has been received in our Home Office, along with your application for reinstatement of your lapsed policy.
You may consider this letter as a conditional receipt for the premium tendered. We have accepted your payment subject to the following condition:
Approval of your application for reinstatement under the underwriting rules and practices of the company in effect for the type of policy for which reinstatement is requested.
You will then be notified by the company of its decision as to your reinstatement application. If denied, your payment will be refunded to you in a timely manner. If accepted, you will be notified of any additional premium which may then be due.
On June 6, 1994, Provident deposited Fein's check and mailed a letter to Fein which said:
We are pleased to inform you that we have reinstated the above captioned policy effective June 6, 1994.
Please understand that we are reinstating this policy based on the representation made in the enclosed reinstatement application which should be attached to your policy. Loss from injuries is covered only if they are sustained after the date of reinstatement; loss from sickness starting more than 10 days after the date of reinstatement is covered.
On February 20, 1996, Fein, still employed as a commodities trader, filed a disability claim under the policy based upon various physical and emotional ailments which, according to him, had begun in February 1995 and had worsened to the point that he was no longer capable of performing his job. He indicated on the application that his "Current year-to-date" income was $47,000. He further stated that he had disability polices with two other insurance companies, National Life and CNA. The May 2, 1994, reinstatement application had listed the National Life policy, which provided monthly benefits of $4,000, but not the policy issued by CNA. The CNA insurance was a group disability policy purchased December 31, 1993, by the New York Mercantile Exchange, where Fein worked. It provided monthly benefits of $6,000.
Provident rejected Fein's claim for disability benefits on two grounds: the failure to list the CNA disability policy on the reinstatement application and the representation of a level of income which was far in excess of his actual current income. Based upon Provident's certifications, we will accept for purposes of this that it would not have voluntarily reinstated the policy had it been informed of the CNA policy and the true status of Fein's income. Provident's reasoning in this regard is straightforward. In determining whether an applicant may be approved for a particular level of benefits, the goal is to avoid undue encouragement of disability claims by the grant of benefits which approach or exceed the applicant's usual earnings. According to Provident, annual earnings of $175,000 would support a maximum allowable monthly benefit of $9,750, a figure already exceeded by the other two policies, which together provided a monthly benefit of $10,000. Since the applicant's current income in 1994 was less than $175,000, Provident would not have reinstated its policy.
In rendering judgment for Provident, the Chancery Division ruled that the income statement and the omission of the CNA policy in the reinstatement application constituted equitable fraud justifying rescission. In addition to assuming that Provident would not have voluntarily reinstated the policy, we will also assume for purposes of this opinion that those defects in Fein's reinstatement application constituted equitable fraud. However, we note that would be true with respect to the CNA policy only if Fein knew of its existence when he submitted the application. See, e.g., Bonnco Petrol, Inc. v. Epstein, 115 N.J. 599, 602-11 (1989); Jewish Ctr. of Sussex County v. Whale, 86 N.J. 619, 622-26 (1981). The record tends to support Fein's contention that he did not become aware of this policy until some four or five months after he filed the reinstatement application. After reaching the conclusion that equitable fraud was present as a matter of law, the court rejected these contentions of Fein: (1) the reinstatement application was inadmissible because it was not attached to the policy as required by N.J.S.A. 17B:24-3a; (2) the reinstatement application was irrelevant because the policy had been reinstated by operation of law pursuant to N.J.S.A. 17B:26-7; and (3) the suit was filed more than two years after the policy was reinstated and was thus violative of the "incontestability clause" contained in the policy, as modified by N.J.S.A. 17B:26-34.
Although we endorse the rejection of the first contention, see Massachusetts Mut. Life Ins. Co. v. Manzo, 214 N.J. Super. 385, 388-90 (App. Div. 1986) and N.J.S.A. 17B:24-3b, the point is irrelevant in light of our Conclusion that the Chancery Division erred with respect to the second and third contentions, under either of which Fein was entitled to ...