Mutual Life Insurance v. Insurance Commissioner

ELDRIDGE, Judge. We issued a writ of certiorari in this case to decide whether an insurer may lawfully deny a disability claim, more than two years after the issuance of a disability insurance policy, on the ground that the disabling condition manifested itself prior to the effective date of the insurance policy, where the policy contains a statutorily required incontestability clause providing that no claim shall be denied on the ground that a disease ⁵⁶⁴ or physical condition existed prior to the effective date of policy coverage. I. On November 27, 1985, Mary Holland submitted an application to the Mutual Life Insurance Company of New York for a disability insurance policy which would provide monthly income benefits in the event that Holland became disabled while the policy was in force. The policy application made several inquiries about Holland’s health history.

In response to a question as to whether she had any previous history of mental or nervous disorders, Holland answered “no.” Pursuant to the application, the insurer issued a disability insurance policy to Holland. The policy contained a statutorily required incontestability provision which stated: “We may not reduce or turn down any claim for loss incurred or Disability starting after two years from the Policy Date on the grounds that a disease or physical condition existed prior to the Policy Date, unless that disease or physical condition is excluded from coverage by name or specific description.” This provision was included pursuant to the Insurance Code, Maryland Code (1957, 1994 Repl.Vol.), Art. 48A, § 441(2), which requires an insurer to include the following provision as a time limit on certain defenses: “No claim for loss incurred or disability (as defined in the policy) commencing after two years from the date of issue of this policy shall be reduced or denied on the ground that a disease or physical condition not excluded from coverage by name or specific description effective on the date of loss had existed prior to the effective date of coverage of this policy." 1 ⁵⁶⁵ In the policy issued to Holland, the insurer defined “disability” as “either a Total Disability or a Partial Disability, provided that in either case the Disability starts while this Policy is in force.” Both total and partial disability were defined as the insured not being able to work “because of injury or sickness.” The policy defined “sickness” as a “sickness or disease which first manifests itself while this Policy is in force.” On June 6, 1989, almost four years after the policy’s effective date, Holland filed a claim with the insurer for disability income benefits resulting from a condition diagnosed as “Acute and Chronic Anxiety with Panic Attacks.” In a letter dated October 1, 1991, the insurer denied Holland’s claim on the ground that Holland’s disability was caused by a condition which first manifested itself prior to the effective date of the policy and that, therefore, the condition did not fall within the policy’s definition of “sickness.” The insurer reached this conclusion based on information provided by Holland’s doctors that she had complained of “feelings of anxiousness” in 1985 and 1986. The insurer explained to Holland, in an October 18, 1991, letter reaffirming its position, that a “pre-existing condition would be one such as a congenital condition, which an individual could have without ever being aware of or, even have experienced symptoms of.” The parties in this case have stipulated that the sickness which caused Holland’s disability, “Acute and Chronic Anxiety with Panic Attacks,” manifested itself prior to the effective date of the policy and that the policy did not exclude this sickness from coverage by name or specific description. The parties also stipulated that Holland, when answering the questions on the insurance application, did not know that the sickness had manifested itself.

After the denial of her claim, Holland filed a complaint with the Maryland Insurance Administration. Following an investigation, the Administration issued an order deciding in favor of Holland. The Administration, by an Associate Commissioner, ordered the insurer to refrain from denying Holland’s claim on the ground that the condition which caused her ⁵⁶⁶ disability first manifested itself prior to the effective date of the policy and ordered the insurer to pay Holland’s claim. The Associate Commissioner reasoned that the plain meaning of the pertinent incontestability statute, Article 48A, § 441(2), includes “both those [pre-existing diseases and conditions] which have and have not manifested themselves.” Consequently, the Associate Commissioner found that the insurer violated § 441(2) when it denied Holland’s claim on the ground that the sickness first manifested itself prior to the effective date of the policy.

Finally, the Associate Commissioner found that the Insurer’s denial of Holland’s claim violated Art. 48A, §§ 55(2)(i), 55(2)(iv), and 230A(c)(2). 2 Pursuant to Art. 48A, § 35, the insurer sought review of the Associate Commissioner’s order and a hearing before the Insurance Commissioner. By agreement of the parties, the Commissioner heard the case upon the parties’ stipulation of facts and briefs. Thereafter, the Commissioner issued a Memorandum and Order enforcing the Associate Commissioner’s order and requiring the insurer to pay Holland “all benefits due her under the policy.” The Commissioner held that under § 441(2), incontestability extends to a pre-existing condition regardless of whether the condition manifested itself prior to the policy’s effective date. The Commissioner stated that the insurer was seeking to avoid the “common sense result” of the incontestability clause by “defining disability as including only a sickness or disease which ‘manifests itself after the policy was issued.” The Commissioner reasoned that a disease or condition clearly exists “whether it manifests itself or not.” The Commissioner stated that the purpose of incontestability clauses is to achieve certainty as to coverage ⁵⁶⁷ and to avoid litigation.

He pointed out that an insurance company can seek medical information before issuing the policy, can exclude specific illnesses, and can conduct such further investigation as it deems appropriate. Nevertheless, the Commissioner concluded, once the policy has been issued and has been in effect for two years, “the two year bar contained in § 441 prohibits [the insurer] from now denying the claim.” The Commissioner decided that the insurer’s refusal to pay benefits in this circumstance violated § 441(2) and also violated §§ 55(2)(i) and 55(2)(iv). The insurer filed an action in the Circuit Court for Baltimore City for judicial review of the Insurance Commissioner’s decision. Although stating that it agreed with the Insurance Commissioner’s interpretation of Art. 48 A, § 441(2), the circuit court reversed the Insurance Commissioner’s order that the insurer pay the claim.

The circuit court apparently was of the view that the Insurance Commissioner had no authority to order payment of the claim. Both parties appealed to the Court of Special Appeals. While upholding the circuit court’s and Insurance Commissioner’s interpretation of Art. 48A, § 441(2), the Court of Special Appeals reversed the circuit court’s judgment with regard to payment of the claim. The Court of Special Appeals, in agreement with the Insurance Commissioner, held that the insurer “must pay Ms. Holland’s claim.” Insurance Commissioner v. Mutual Life, 111 Md.App. 156, 193 , 680 A.2d 584, 602 (1996).

The insurer filed a petition for a writ of certiorari which this Court granted. Mutual Life Insurance Co. of New York v. Insurance Commissioner, 344 Md. 115 , 685 A.2d 450 (1996). Essentially two questions are presented for our review. The first is whether an insurer is entitled to deny a disability claim on the ground that the condition first “manifested” itself prior to the effective date of the insurance policy despite the statutorily prescribed incontestability clause contained in § 441(2) which provides that no claim “shall be reduced or denied on the ground that a disease or physical condition not ⁵⁶⁸ excluded from coverage by name or specific description ... had existed prior to the effective date of coverage.” The second question is whether the Insurance Commissioner has the authority to order the payment of the claim.

II

A. In the nineteenth century, some United States insurance companies began to offer incontestability clauses in their life insurance policies as an inducement to the purchase of life insurance. An early opinion, Plotner v. Northwestern Nat. Life Ins. Co., 48 N.D. 295, 304 , 183 N.W. 1000, 1003 (1921), observed: “The incontestability clause is one, no doubt, used by the defendant as an inducement to those desiring to purchase insurance.

It, no doubt, points out to them, by its agents, that by the terms of the policy after the expiration of the year there can be no defense of any kind or character interposed against the collection of the amount specified in the policy, in case the death of the insured should occur and proceedings were had to collect the amount specified in the policy, except only for the nonpayment of premium. The defendant ought not be permitted to lull the insured into a feeling of security by the use of the incontestability clause, and then endeavor to avoid its contract when death has forever sealed the lips of the insured, after having had the time specified by that clause to rescind the whole contract, which it wholly failed to do.” See also Note, AIDS and the Incontestability Clause, 66 N. Dakota L. Rev. 267, 268 (1990). Escalating public pressure caused states to enact laws requiring insurers to include such incontestability provisions. The first of these laws was enacted in New York in 1906.

Laws of New York 1906, ch. 326. The reason such clauses were statutorily required ⁵⁶⁹ “ ‘lies in the early greed and ruthlessness of the insurers. All too often, instead of paying the beneficiary, they resisted liability stubbornly on the basis of some misstatement made by the insured at the time of applying for the policy, as to which they carefully refrained from comment until the insured had died and was unable to testify on his own behalf.’ ” Fischer v. Massachusetts Cas. Ins.

Co., 458 F.Supp. 939 , 944 n. 1 (S.D.N.Y.1978) (quoting 7 Williston on Contracts, § 912 at p. 394 (3d ed.1963)). See also Oglesby v. Penn Mut. Life Ins. Co., 889 F.Supp. 770, 774 (D.Del.1995), aff'd 127 F.3d 1096 (3rd Cir.1997) (incontestability “clauses arose as a reaction to the ‘early greed and ruthlessness of the insurers’ ... who were apt to deny benefits years after the policy had issued based on technicalities or pre-existing conditions”); Estate of Doe v. Paul Revere Ins.

Group, 86 Hawai‘i 262, 273, 948 P.2d 1103, 1114 (1997); Schajer v. NML, 304 N.J.Super. 394, 406 , 701 A.2d 132, 138 (1997) (“The purpose was to meet widespread charges of corruption, fraud, and dishonesty in the insurance industry”); Wischmeyer v. Paul Revere Life Ins. Co., 725 F.Supp. 995, 1000 (S.D.Ind.1989). The Maryland General Assembly enacted provisions requiring incontestability clauses in certain types of life insurance policies as early as 1937. See Ch. 196 of the Acts of 1937.

In 1951, the General Assembly enacted the Uniform Individual Accident and Sickness Policy Provisions Law which had been proposed by the National Association of Insurance Commissioners in 1950. See Ch. 687 of the Acts of 1951. This enactment contained the provisions for incontestability clauses in disability policies which were then codified as Code (1951), Art. 48A, § 153, and later codified as Code (1957, 1994 Repl.Vol.), Art. 48A, § 441. In the eighty-first annual report of the Maryland Insurance Commissioner in 1952, it was pointed out that the 1951 law “provides new and substantially increased protection to policyholders.” The purpose of incontestability clauses is to protect insureds and beneficiaries.

In Equitable Life Assurance v. ⁵⁷⁰ Jalowsky, 306 Md. 257, 262-263 , 508 A.2d 137, 140 (1986), Chief Judge Murphy for the Court explained as follows: “Clearly, this [incontestability] provision was intended to protect the insured, together with the policy beneficiary, from either the nonpayment or dilatory payment of proceeds by the insurer. Of course, the purpose of incontestability provisions is ‘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.’ 1A J. Appleman, Insurance Law and Practice § 311 at 311 (rev.1981); see generally Suskind v. North American Life & Cas. Co., 607 F.2d 76 (3d Cir.1979) (discussing history of incontestability clauses).” See Beard v. American Agency, 314 Md. 235, 263 , 550 A.2d 677, 691 (1988) (“the incontestability statute serves the substantial public interest in protecting claimants from the possibility of expensive litigation”). See also 1A Appleman, Insurance Law and Practice, § 311 at 305-306, 321 (1981) (“a beneficiary is in a deplorable condition to wage battle with a large insurer over statements which may have been made years earlier. * * * Such clauses, of course, are for the benefit of the insured, not the insurer”); 18 Couch On Insurance 2d, § 72:16 at 293-294 (1983) (“The purpose of an incontestable clause statute is to protect the insured and prevent litigation, and it operates as a statute of limitations. * * * The statute also encourages the insured to have confidence that after the period passes they are assured of receiving benefits upon the happening of a covered loss”).

Incontestability clauses also serve the purpose of allowing the “insurer a reasonable opportunity” to investigate “the statements made by the applicant in procuring the policy.” Massachusetts Casualty Insurance Co. v. Forman, 516 F.2d 425, 428 (5th Cir.1975), cert. denied, 424 U.S. 914 , 96 S.Ct. 1114 , 47 L.Ed.2d 319 (197-6). See Schajer v. NML, supra, 304 N.J.Super. at 407 , 701 A.2d at 138 (the incontestability clause provides “ample time for the carrier to investigate fraud and other defenses”). The clause provides a time ⁵⁷¹ limit so that the insurer must investigate with “reasonable promptness if it wishes to deny liability on the ground of false representation or warranty by the insured.” Couch, supra, § 72:2. See Equitable Life Assur.

Soc. of U.S. v. Bell, 27 F.3d 1274, 1278 (7th Cir.1994) (the incontestability clause obliges “the insurer to investigate the insured’s medical history promptly else it become bound by representations contained on the insured’s application”). B. This Court has not previously addressed the question of whether, in applying a statutorily prescribed incontestability clause such as Art. 48A, § 441(2), there is a distinction between a condition which manifests itself prior to the issuance of the policy and a condition which existed prior to the issuance of the policy. A few courts have agreed with the insurer’s position in this case that there is a distinction between a pre-existing condition and a pre-manifesting condition, and that standard statutorily mandated incontestability clauses are not applicable to conditions which manifest themselves prior to the policies. See Neville v. American Republic Ins.

Co., 912 F.2d 813 (5th Cir.1990);