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Fact Questions About Materiality Of Misrepresentations Precluded Summary Judgment For Beneficiaries Of Contested Policies, Says Appeals Court

Blogs, Life Insurance

New York’s intermediate appellate court not too long ago weighed in on a case that revolves around whether life insurance policies’ premiums were paid by strangers as part of a STOLI (stranger-originated life insurance) scheme, or whether the beneficiaries – now that the insured had died – were entitled to judgment as a matter of law on their claims to recover.

The decision was that fact issues precluded summary judgment, and that the insurer – which was contesting the validity of the policies – could assert a claim under New Jersey law, as both New York and New Jersey law could apply to various parts of the insurance transaction.

In Johnson v. Metropolitan Life Ins. Co., 79 A.D.3d 450, 913 N.Y.S.2d 44 (N.Y.A.D. Dec. 7, 2010), New York’s Appellate Division had before it a case where beneficiaries of two life insurance policies sued an insurer for benefits, after the insurer had disclaimed coverage on ground of misrepresentations in the insured’s applications. The insurer, after the policies were issued, learned in 2004 that the insured had not made a single premium payment on his own, but rather that a third person had been making all the payments. Based on this, the insurer informed the insured in writing that it considered the policies null and void because the insured had not paid any premiums himself, and requested identification of the person to whom it could return the premiums. The court noted that it did not appear that the insurer ever received a response, in 2005, the insured died.

After the insured’s death, the insurer disclaimed coverage on the grounds that: (1) the policies were void because the insured decedent had misrepresented on the applications that he would pay the premiums when, in fact, a third party paid them; (2) the insured, contrary to his representations in the policy applications, had a known history of serious and chronic medical problems; and (3) the policies were void because it appeared that the insured had not actually participated in the application process himself.

The beneficiaries of the policies filed suit in 2006 to recover the proceeds of the policies. In 2009, they moved for summary judgment on their complaint and to dismiss the insurer’s counterclaims. The insurer cross-moved for leave to amend its answer to include a defense and counterclaim under the New Jersey Insurance Fraud Prevention Act (N.J. Stat. Ann. § 17:33A-7).

On appeal, the Appellate Division said that the trial court properly denied summary judgment:

The motion court properly denied summary judgment. Defendant submitted affidavits from long-term employees, including its Vice President of Corporate Ethics and Compliance, Chief Underwriter and Senior Technical Claims Advisor, as well as internal underwriting and compliance documents. These submissions raise questions of fact regarding the materiality of the decedent’s misrepresentations that he would be the payor, sufficient to defeat summary judgment at this juncture . . . .

The appellate court also addressed the insurer’s request to allow it to amend its defenses and counterclaims under the New Jersey IFPA. The beneficiaries contended that the law is the same in New York and New Jersey, and the operation of either state’s “incontestability” statute bars defendant from pleading fraud as a defense or counterclaim more than two years after issuance of the policies.

The appeals court disagreed. Both states, said the court, “have statutes that mandate that all life insurance policies contain a clause making the policy incontestable by the life insurer after the policy is in force for two years (Insurance Law § 3203[a] [3]; NJSA § 17B:25-4).” Under New Jersey law, however, an insurer may deny a claim even after the expiration of the contestability period “if the insured committed fraud in the policy application . . . .” Additionally, the court said, “no court in New York has directly held that an insurance company is restricted to the two-year period where the insured has lied about his or her health in an application for insurance.”

More importantly, said the Appellate Division, New Jersey law applies in the Johnson case, based on the insured’s representations in the applications that he was a resident of New Jersey, and also based on other facts showing that New Jersey was the place of contracting and the location of the insured risk. “Accordingly, the court properly permitted defendant to amend its answer to include a fraud defense and counterclaim asserting that the insured decedent knowingly provided false and misleading information on the applications regarding the decedent’s medical history, even though defendant raised this defense outside the two-year contestability period . . . .”

The Johnson v. Metropolitan Life Ins. Co., 79 A.D.3d 450, 913 N.Y.S.2d 44 (N.Y.A.D. Dec. 7, 2010), opinion is available here. (Cross-posted at our Secondary Insurance Market blog.)