Amex Life Assurance Co. v. Superior Court (14 Cal. 4th 1231, 1997)

Opinion

CHIN, J.

In 1991, the Amex Life Assurance Company (Amex) issued a life insurance policy to Jose Morales. The policy contained what is called an “incontestability” clause: “We will not contest coverage under the Certificate [of insurance] after it has been in force during the life of the Covered Person for two years from the Certificate Effective Date, if all premiums have been paid.”

As early as 1915, this court described this type of incontestability clause —now required by statute in all group and individual life insurance policies —as “ ‘in the nature of . . . statutes of limitations and repose . . . .’ ” (Dibble v. Reliance Life Ins. Co. (1915) 170 Cal. 199, 209 [149 P. 171] (Dibble)', see Ins. Code, §§ 10113.5, 10206.) After the premiums have been paid and the insured has survived for two years, the insurance company may not contest coverage even if the insured committed fraud in applying for the policy. The incontestability clause, we have explained, “ ‘is not a stipulation absolutely to waive all defenses and to condone fraud. On the contrary, it recognizes fraud and all other defenses but it provides ample time and opportunity within which they may be, but beyond which they may not be, established.’ ” (Dibble, supra, 170 Cal. at p. 209.)

In this case, Morales knew he was HIV (human immunodeficiency virus) positive when he applied for life insurance. He lied on the application form and sent an impostor to take the mandatory medical examination. With minimal effort, Amex could have discovered the fraud even before it issued the policy, but instead it collected the premiums for more than two years until Morales died. After the beneficiary filed a claim, Amex discovered from information long available that an impostor had taken the examination, and it denied the claim. Today, while recognizing that it is too late to contest coverage due to fraud, Amex urges us to adopt the so-called “impostor defense” that some states recognize. As generally applied, the defense provides that when a person applies for a life insurance policy and takes the medical examination but names another person as the insured, the policy does not insure the named person but, if anyone, the person who completed the application and took the examination.

We need not decide whether to adopt the impostor defense because the facts of this case do not come within it. Here, the named insured, Morales, himself applied for the policy and did everything except take the medical examination. The policy insured him, not someone else. The fraud, though abhorrent and clearly justifying rescission of the policy during the two-year contestability period, is not qualitatively different from other types of fraud California courts have held may not be used to contest coverage once the contestability period has expired if the premiums have been paid. Therefore, Amex, which did nothing to protect its interests but collect premiums until Morales died after the contestability period, may no longer challenge coverage on the basis that an impostor took the medical examination.

For these reasons, we affirm the judgment of the Court of Appeal, which reached a similar conclusion.

I. Facts and Procedure Below

Jose Morales applied for a life insurance policy from Amex in January 1991. Although he apparently knew he was HIV positive, he lied on the application form and denied having the AIDS (acquired immune deficiency syndrome) virus. As part of the application process, Amex required him to have a medical examination. In March 1991, a paramedic working for Amex met a man claiming to be Morales and took blood and urine samples. It is not disputed in this proceeding that this man was an impostor. On his application, Morales listed his height as five feet six inches, and his weight as one hundred forty-two pounds. The examiner stated the man claiming to be Morales was five feet ten inches tall and weighed one hundred seventy-two pounds. The examiner also noted that the man produced no identification and appeared to be “unhealthy or older than stated age.” The blood sample tested HIV negative.

Amex issued Morales a life insurance policy containing the incontestability clause effective May 1, 1991. All premiums have been paid. Morales died of AIDS-related causes on June 11, 1993. Shortly before his death, he sold his policy to Slome Capital Corp. (Slome), a viatical company engaged in the business of buying life insurance policies at a discount before the insured’s death. In the interim, another insurance company assumed Amex’s policies. (For convenience, we will refer to both companies collectively as Amex.) Amex states that after Morales died, an “informant” advised it that an impostor, and not Morales, appeared for the medical examination.

Amex conducted an investigation and then denied Slome’s claim for the policy proceeds. The letter denying the claim noted the discrepancies between the stated height and weight of the applicant and the person who appeared for the medical examination. It stated that a handwriting expert determined that the person who signed the insurance application was not the person who signed the medical test form and medical questionnaire. The expert’s report stated that the signatures contained “gross differences.” The letter concluded “that the person who was examined and gave blood is different from the person who applied for coverage. The only possible explanation for this is that the applicant, who we have reason to believe was previously diagnosed as HIV positive, intended to deceive Amex in order to get insurance coverage.” Amex denied payment on the basis that “When Mr. Morales applied for life insurance on his own life but substituted another individual for himself in the examination so that the policy would be issued based on the other person’s medical condition, he caused Amex to issue a policy on the life of someone other than himself.”

Slome sued Amex for breach of contract, insurance bad faith, and equitable estoppel. The superior court denied Amex’s motion for summary judgment, ruling that “California does not recognize the impostor defense to the incontestability clause.” Amex filed the instant proceeding in the Court of Appeal seeking a writ of mandate directing the superior court to grant its summary judgment motion. The court granted the petition as to the bad faith cause of action but, finding that the impostor defense, even if it exists, does not apply here, denied it in all other respects.

The majority opinion, authored by Justice Godoy Perez, concluded that its “refusal to adopt the impostor defense on these facts will place a minimal burden on insurance companies: before providing a medical exam and issuing a policy, they must at least take reasonable steps to ensure the person being examined is the person he claims to be. A contrary ruling will undermine the public policy of requiring diligence by the insurer and instead place a potentially heavy burden on policyholders and the courts as a result of litigation arising from the additional policy contests which are sure to ensue.” (Fn. omitted.) Presiding Justice Turner authored a concurring opinion urging “the Legislature to consider narrow changes in the law relating to incontestability clauses” and to provide an exception “when a person other than the insured takes” the mandatory physical examination.

We granted Amex’s petition for review.

II. Discussion

A. Incontestability Clauses

“Incontestability clauses have been used by the insurance industry for over one hundred years to encourage persons to purchase life insurance.” (Note, AIDS and the Incontestability Clause (1990) 66 N.D. L.Rev. 267.) “Insurance companies initially offered the incontestability clause as a policy provision because of public distrust of insurers and their promises to pay benefits in the future.” (Id. at p. 268.) Today, these clauses are “required by statute in most states because without them, insurers were apt to deny benefits on the grounds of a pre-existing condition years after a policy had been issued. This left beneficiaries, particularly those in life insurance settings, in the untenable position of having to do battle with powerful insurance carriers. See 7 Williston on Contracts § 912.394 (3d ed. 1963) (noting that these clauses came from the ‘early greed and ruthlessness of the insurers’ who ‘too often . . . resisted liability stubbornly on the basis of some misstatement made by the insured at the time of applying for the policy’).” (Wischmeyer v. Paul Revere Life Ins. Co. (S.D.Ind. 1989) 725 F.Supp. 995, 1000.) The “clauses are designed ‘to require the insurer to investigate and act with reasonable promptness if it wishes to deny liability on the ground of false representation or warranty by the insured.’ G. Couch, 18 Couch on Insurance § 72.2 at 283 (1983). ‘It prevents 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 belatedly, possibly after the death of the insured.’ Id. at 283-84.” (Ibid.)

Justice Holmes stated succinctly the purpose behind the incontestability clause: “The object of the clause is plain and laudable—to create an absolute assurance of the benefit, as free as may be from any dispute of fact except the fact of death, and as soon as it reasonably can be done.” (Northwestern Life Ins. Co. v. Johnson (1920) 254 U.S. 96, 101-102 [41 S.Ct. 47, 49, 65 L.Ed. 155].)

The California experience followed the usual historical pattern: Incontestability clauses came first, then statutes requiring them. We first confronted an incontestability clause in Dibble, where we concluded “that a provision in a life insurance policy to the effect that after being in force the specified time, it shall be incontestable, precludes any defense after the stipulated period on account of false statements warranted to be true, even though such statements were fraudulently made . . . .” (Dibble, supra, 170 Cal. at p. 208.) This conclusion does not condone fraud but merely establishes a time limit within which it must be raised. “ ‘It is not a stipulation absolutely to waive all defenses and to condone fraud. On the contrary, it recognizes fraud and all other defenses but it provides ample time and opportunity within which they may be, but beyond which they may not be, established. It is in the nature of and serves a similar purpose as statutes of limitations and repose, the wisdom of which is apparent to all reasonable minds. It is exemplified in the statute giving a certain period after the discovery of a fraud in which to apply for redress on account of it and in the law requiring prompt application after its discovery if one would be relieved from a contract infected with fraud.’ ” (Id. at p. 209.)

Years after Dibble, the Legislature enacted statutes requiring every life insurance policy to contain an incontestability clause: in 1935 for group policies (Ins. Code, § 10206 [“[t]he policy shall provide that the validity of the policy shall not be contested, except for nonpayment of premiums, after it has been in force for two years from its date of issue”]), and, effective in 1974, for individual policies (Ins. Code, § 10113.5 [“[a]n individual life insurance policy delivered or issued for delivery in this state shall contain a provision that it is incontestable after it has been in force, during the lifetime of the insured, for a period of not more than two years after its date of issue, except for nonpayment of premiums”]). (The parties question which of these two statutes applies to the policy of this case. As the Court of Appeal recognized, it does not matter; for our purposes, the two statutes are substantially identical.)

The Court of Appeal opinion summarized the case law following Dibble: “Numerous decisions since Dibble have held that even gross fraud by an insured who lied about his health in applying for life insurance falls within the terms of an incontestability provision. (Metzinger v. Manhattan Life Ins. Co. [(1969) 71 Cal.2d 423, 428-429 (78 Cal.Rptr. 463, 455 P.2d 391)] [relying on Dibble's holding that fraud as to insured’s health condition fell within an incontestability clause when construing [Insurance Code] section 10206]; New York Life Ins. Co. v. Hollender (1951) 38 Cal.2d 73, 77-79 [237 P.2d 510] [after the prescribed lapse of time, the incontestability clause ‘prevents nullification of the insurance contract for any cause not excepted in the clause’]; Coodley v. New York Life Ins. Co. (1937) 9 Cal.2d 269, 272, 274 [70 P.2d 602] [incontestability clause prevents policy contest on grounds the policy was procured by fraud]; Schaefer v. California-Western States Life Ins. Co. (1968) 262 Cal.App.2d 840, 845 [69 Cal.Rptr. 183] [same]; John Hancock etc. Ins. Co. v. Markowitz (1944) 62 Cal.App.2d 388, 396-397 [144 P.2d 899] [incontestability clause binding on insurance company even in the face of gross fraud]; Trousdell v. Equitable Life Assur. Soc. (1942) 55 Cal.App.2d 74, 77-81 [130 P.2d 173]; Braun v. New York Life Ins. Co. (1941) 46 Cal.App.2d 335, 346 [115 P.2d 880]; Blair v. New York Life Ins. Co. (1940) 40 Cal.App.2d 494, 501 [104 P.2d 1075]; Mutual Life Ins. Co. v. Margolis (1936) 11 Cal.App.2d 382, 384-385 [53 P.2d 1017].)”

The Court of Appeal discussed the “[s]ound public policy considerations” behind this rule. “The Dibble court adopted in part the Court of Appeal’s earlier decision, which stated: ‘ “. . . It has often been held that a provision of that kind is valid because it is in the nature of a limitation of the time within which the defendant [insurer] may avoid the policy for this cause. Such a provision is reasonable and proper, as it gives the insured a guaranty against possible expensive litigation to defeat his claim after the lapse of many years, and at the same time gives the company time and opportunity for investigation, to ascertain whether the contract should remain in force. It is not against public policy, as tending to put fraud on a par with honesty.” ’ (Dibble, supra, 170 Cal. at p. 202, quoting Reagan v. Union Mutual Life Ins. Co. (1905) 189 Mass. 555 [76 N.E. 217].) ‘The incontestable clauses are enforced with particularity by the courts because of the desirable purpose which they have. It is their purpose to put a checkmate upon litigation; to prevent, after the lapse of a certain period of time, an expensive resort to the courts—expensive both from the point of view of the litigants and that of the citizens of the state. In that way, it is a statute of limitations upon the right to maintain certain actions or certain defenses . . . .’ (1A Appleman, Insurance Law and Practice (rev. ed. 1981) § 311, p. 311, fns. omitted.) [