Opinion ID: 1452435
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Heading: Incontestability Clauses

Text: 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.) (1) 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.) [¶] The need for such protection becomes especially clear for life insurance policies, where the contest is usually made after the named insured has died, robbing the beneficiaries of their most potent witness. A recent decision has reaffirmed the continuing application of incontestability clauses to fraud claims. In United Fidelity Life Ins. Co. v. Emert (1996) 49 Cal. App.4th 941 [57 Cal. Rptr.2d 14], the insurance company issued Emert a life insurance policy with a disability rider. Although knowing he was HIV positive, Emert stated on the application he did not have an immune deficiency disorder, and, when asked to list all physicians he had seen in the last five years, listed only a general practitioner and not an HIV specialist who had been treating him regularly. ( Id. at p. 943.) After the two-year contestability period, Emert submitted a disability claim. Relying on many of the cases cited above, the Court of Appeal held that the incontestability clause prevented the insurance company from contesting the claim on the basis of the fraudulent conduct. ( Id. at pp. 945-947.) With this backdrop, we now consider the impostor defense that Amex seeks to assert.