Opinion ID: 1125183
Heading Depth: 2
Heading Rank: 1

Heading: General Legal Principles, The Controlling Hawai`i Statutes, And The Ambiguous Language Of The Policy

Text: We begin our analysis with the observation that `... insurers have the same rights as individuals to limit their liability[] and to impose whatever conditions they please on their obligation, provided they are not in contravention of statutory inhibitions or public policy.' First Ins. Co. of Hawai`i, Inc. v. State, 66 Haw. 413, 423, 665 P.2d 648, 655 (1983) (quoting 6B Appleman, Insurance Law and Practice § 4255, at 40 (1979)).... As such, [insurance] policies are subject to the general rules of contract construction; the terms of the policy should be interpreted according to their plain, ordinary, and accepted sense in common speech unless it appears from the policy that a different meaning is intended[.] Id. at 423-24, 665 P.2d at 655 (citations omitted). Moreover, [every] insurance contract shall be construed according to the entirety of its terms and conditions as set forth in the policy[.] ... []HRS[ ] § 431:10-237 [ (1993) ]; see State Farm Mut. Auto. Ins. Co. v. Fermahin, 73 Haw. 552, 556, 836 P.2d 1074, 1077 (1992); Smith v. New England Mutual Life Ins. Co., 72 Haw. 531, 534, 827 P.2d 635, 636 (1992). Nevertheless, adherence to the plain language and literal meaning of insurance contract provisions is not without limitation. We have acknowledged that [b]ecause insurance policies are contracts of adhesion and are premised on standard forms prepared by the insurer's attorneys, we have long subscribed to the principle that they must be construed liberally in favor of the insured and [any] ambiguities [must be] resolved against the insurer. Sturla, Inc. v. Fireman's Fund Ins. Co., 67 Haw. 203, 209, 684 P.2d 960, 964 (1984) (citations and internal quotation marks omitted) (cited with approval in Fermahin, 73 Haw. at 556, 836 P.2d at 1077). Put another way, the rule is that policies are to be construed in accord with the reasonable expectations of a layperson. Id. In addition, [insurance] policies are governed by statutory requirements in force and effect at the time such policies are written.... Such provisions are read into each policy issued thereunder[ ] and become a part of the contract with full binding effect upon each party. AIG Hawai`i Ins. Co., Inc. v. Estate of Caraang, 74 Haw. 620, 633, 851 P.2d 321, 328 (1993) (citations and internal quotation marks omitted). Consequently, [w]hen the terms of an insurance contract are in conflict with statutory language, the statute must take precedence over the terms of the contract. Sol [v. AIG Hawai`i Ins. Co.], 76 Hawai`i [304,] 307, 875 P.2d [921,] 924[, reconsideration denied, 76 Hawai`i 353, 877 P.2d 890 (1994) ]; see also Methven-Abreu v. Hawaiian Ins. & Guar. Co., Ltd., 73 Haw. 385, 395-96, 834 P.2d 279, 285, reconsideration denied, 73 Haw. 625, 838 P.2d 860 (1992); [ National Union Fire Ins. Co. v.] Olson, 69 Haw. [559,] 563-64, 751 P.2d 666, 669 (1988); Walton v. State Farm Mut. Auto. Ins. Co., 55 Haw. 326, 328, 518 P.2d 1399, 1400-01 (1974); Columbia Casualty Co. v. Hoohuli, 50 Haw. 212, 214-15, 437 P.2d 99, 102 (1968). Dawes v. First Ins. Co. of Hawai`i, Ltd., 77 Hawai`i 117, 121-22, 883 P.2d 38, 42-43, reconsideration denied, 77 Hawai`i 489, 889 P.2d 66 (1994) (some brackets and ellipsis points added and some in original) (footnote omitted). See also Barabin v. AIG Hawai`i Ins. Co., 82 Hawai`i 258, 260, 921 P.2d 732, 734 (1996) (`[w]hen the terms of an insurance contract are in conflict with statutory language, the statute must take precedence over the terms of the contract' (quoting Dawes ) (brackets in original)); AIG Hawai`i Ins. Co. v. Vicente, 78 Hawai`i 249, 251, 891 P.2d 1041, 1043 (1995) (insurance policies are governed by statutory requirements in force and effect at the time such policies are written.... Such provisions are read into each policy issued thereunder, and become a part of the contract with full binding effect upon each party (citation and internal quotation marks omitted) (ellipsis points in original)); AIG Hawai`i Ins. Co. v. Smith, 78 Hawai`i 174, 183, 891 P.2d 261, 270 (`[b]ecause insurance policies are contracts of adhesion and are premised on standard forms prepared by the insurer's attorneys, we have long subscribed to the principle that they must be construed liberally in favor of the insured and any ambiguities must be resolved against the insurer' (quoting Dawes ) (brackets in original)), reconsideration denied, 78 Hawai`i 421, 895 P.2d 172 (1995). As of October 22, 1985 ( i.e., the policy's date of issue), disability income insurance policies, such as that issued to Doe by Paul Revere in this case, were governed by HRS §§ 431-461 through 431-500 (Accident and Sickness Insurance) of the Hawai`i Insurance Law, HRS ch. 431 (1985). Effective July 1, 1988, the Insurance Law was replaced by a newly enacted Insurance Code, HRS ch. 431. 1987 Haw. Sess. L. (Vol.2) Act 347, §§ 1-2, 4 at 1-342. The purpose of the new Insurance Code was to recodify, without substantive change, the insurance law in effect immediately prior to July 1, 1988. HRS § 431:1-100.5 (1993). Accordingly, HRS §§ 431-461 through 431-500 (1985) were replaced by HRS chapter 431, article 10A, part I of the Code (Individual Accident and Sickness Policies), presently located at HRS §§ 431:10A-101 through 431:10A-117 (1993 & Supp.1997). For the sake of simplicity, we will refer in our analysis to the current sections of the Code, noting their previous designations parenthetically. The term[ ] policy of accident and sickness insurance[] includes any policy or contract covering the class of insurance described in [HRS § ] 431:1-205. HRS § 431:10A-102 (1993) (formerly HRS § 431-462 (1985)). HRS § 431:1-205 (1993) (formerly HRS § 431-7 (1985)) provides: Disability insurance defined. Disability insurance, also referred to as accident and sickness insurance, is insurance against bodily injury, disablement, or death by accident, or accidental means, or the expense thereof; against disablement or expense resulting from sickness; and every insurance appertaining thereto. (Emphases added.) HRS § 431:10A-105 (1993) (formerly HRS §§ 431-464 through 431-476 (1985)) provides in relevant part: Required provisions. Except as provided in section 431:10A-107, [19] each policy of accident and sickness insurance delivered or issued for delivery to any person in this State shall contain the provisions set forth below. These provisions shall be in the words in which they appear below, provided that the insurer may substitute corresponding provisions of different wording approved by the [insurance] commissioner which are in each instance not less favorable in any respect to the insured or the beneficiary. The provisions shall be preceded individually by the specified caption, or by such appropriate individual or group captions or subcaptions as the commissioner may approve. The provisions are as follows: .... (2) (A) Time Limit on Certain Defenses: (i) After three years from the date of issue of this policy no misstatements, except fraudulent misstatements, made by the applicant in the application for this policy shall be used to void this policy or to deny a claim for loss incurred or disability (as defined in the policy) commencing after the expiration of the three-year period. (ii) No claim for loss incurred or disability (as defined in the policy) commencing three 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. .... (C) A policy which the insured has the right to continue in force subject to its terms by the timely payment of premium until at least age fifty or, in the case of a policy issued after age forty-four, for at least five years from its date of issue, may contain in lieu of subparagraph (A)(i) the following provision (from which the clause in parentheses may be omitted at the insurer's option): Incontestable: After this policy has been in force for a period of three years during the lifetime of the insured (excluding any period during which the insured is disabled), it shall become incontestable as to the statements contained in the application. (Emphases added.) Statutes, such as HRS §§ 431:10A-105(2)(A) and (C), requiring incontestability clauses are not unique to Hawai`i. [A]pproximately 47 states have enacted legislation requiring life, disability, and health insurance policies to contain incontestability clauses as tools to promote certainty and reduce litigation. Oglesby v. Penn Mut. Life Ins. Co., 889 F.Supp. 770, 774 (D.Del. 1995) (citing Wischmeyer v. Paul Revere Life Ins. Co., 725 F.Supp. 995, 1000 (S.D.Ind. 1989), and Eric K. Fosaaen, AIDS and the Incontestability Clause, 66 N.D. L.Rev. 267, 270-71 (1990)). Incontestability clauses set temporal limits on an insurer's right to challenge its insurance policy. See, e.g., Velez-Gomez v. SMA Life Assurance Co., 8 F.3d 873, 875 (1st Cir.1993) (two year period of contestability as to statements by the insured during application process). Historically, these clauses arose as a reaction to the early greed and ruthlessness of the insurers, 7 Williston on Contracts § 912 at 394 (3d ed.1963), who were apt to deny benefits years after the policy had issued based on technicalities or pre-existing conditions. Paul Revere Life Ins. Co. v. Haas, 137 N.J. 190, 644 A.2d 1098, 1102 (1994); Wischmeyer v. Paul Revere Life Ins. Co., 725 F.Supp. 995, 1000 (S.D.Ind.1989). As a result, many beneficiaries, especially those claiming under life or health insurance policies, were left in the untenable predicament of litigating against powerful insurance carriers. Wischmeyer v. Paul Revere Life Ins. Co., 725 F.Supp. 995, 1000 (S.D.Ind.1989). Id. Accordingly, [s]uch 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 be best ascertained and proved, only to litigate them belatedly, possibly after the death of the insured. [20] Id. at 283-84. Insurance Comm'r of Maryland v. Mutual Life Ins. Co. of New York, 111 Md.App. 156, 680 A.2d 584, 593 (Md.Ct.Spec.App.1996) (quoting Wischmeyer, 725 F.Supp. at 1000). Being remedial statutes, [21] HRS §§ 431:10A-105(2)(A) and (C) are `to be construed liberally in order to accomplish the purpose for which [they were] enacted.... [Remedial] statutes are liberally construed to suppress the [perceived] evil and advance the [enacted] remedy.' Dawes, 77 Hawai`i at 123, 883 P.2d at 44 (quoting Flores v. United Air Lines, Inc., 70 Haw. 1, 12, 757 P.2d 641, 647 (1988)) (brackets and ellipsis points in original). Moreover, as noted above, inasmuch as [every] insurance contract shall be construed according to the entirety of its terms and conditions as set forth in the policy, HRS § 431:10-237, and, because insurance policies are contracts of adhesion, they must likewise be construed liberally in favor of the insured, any ambiguities in their terms and conditions must be resolved against the insurer. Id. at 121, 883 P.2d at 42; Fermahin, 73 Haw. at 556, 836 P.2d at 1077; Sturla, Inc., 67 Haw. at 209, 684 P.2d at 964. Close scrutiny of the policy's terms and conditions in the present case reveals much that is ambiguous, so as foreseeably to confound the reasonable expectations of a lay-person. See Dawes, 77 Hawai`i at 121, 883 P.2d at 42; Sturla, Inc., 67 Haw. at 209, 684 P.2d at 964. As noted supra in section I, Paul Revere contracted generally to pay Doe the benefits provided in [the policy] for loss due to ... Sickness.  (Emphasis added.) The policy defines Sickness, as a contractual term of art, in relevant part as a disease which first manifests itself after the Date of Issue while [the policy] is in force. (Emphasis added.) Thus, according to Paul Revere, the policy purports to restrict a covered Sickness to a sickness or disease that was not symptomatic, see supra note 18, or according to the plain, ordinary, and accepted sense in common speechthat had not show[n] [itself] plainly, see Webster's Encyclopedic Unabridged Dictionary of the English Language 871 (1989) (defining the transitive verb manifest), on or before October 22, 1985the date on which Paul Revere issued the policy to Doe. Simultaneously, however, the policy excludes coverage for a Pre-existing Condition if it was not disclosed on [Doe's] application. In this connection, the policy defines a Preexisting Condition, as a contractual term of art, in relevant part as a Sickness ... for which, prior to [October 22, 1985,] ... [s]ymptoms existed that would cause an ordinarily prudent person to seek diagnosis, care, or treatment[ ] or ... [m]edical advice or treatment was recommended by or received from a [p]hysician.  (Emphases added.) Thus, by the policy's plain language, the term Pre-existing Condition is an oxymoron because, as of the date of issue, it literally describes an asymptomatic or non-apparent sickness, which, at the same time, is either so objectively symptomatic or sufficiently apparent as presently to prompt diagnosis, care, ... [m]edical advice or treatment. Meanwhile, the policy's primary undertaking is to pay the Total Disability benefit during [Doe's] continuous Total Disability. The policy defines Total Disability, as a contractual term of art, in relevant part as a condition whereby the insured is substantially unable to engage in his or her regular occupation, is otherwise not gainfully employed, and is under the regular and personal care of a[p]hysician, all because of ... Sickness. In other words, the policy defines Total Disability as a disability resulting from a disease that is not symptomatic and/or has not shown [itself] plainly as of the policy's date of issue. Thus, because Paul Revere regarded Doe's HIV infection as having been symptomatic prior to the policy's date of issue, it asserted in writing on April 10, 1992 that, insofar as Doe's current disabling condition does not satisfy the contractual definition of `Sickness', it is not a covered loss under the terms of his policy, and, therefore,  [Doe] is not disabled under the terms of his contract.  (Emphasis added.) On the other hand, as indicated above, a Pre-existing Condition, as defined by the policy, is a Sickness, which, as of the date of issue, is simultaneously asymptomatic and symptomatica definition that, by bonding mutual exclusivities, both directly contradicts and significantly expands the contractual definition of Sickness. Moreover, Total Disability, as defined by the policy, exists as a function of Sickness. It appears that not even Paul Revere can navigate the labyrinthine terms of its own contract because, notwithstanding its stated position on April 10, 1992, it stipulated on August 25, 1995 that, for purposes of the litigation in the above-captioned matter and all matters related thereto, [Doe] has been totally disabled within the meaning of [the policy] due to HIV infection ... and continues to remain totally disabled thereunder.  (Emphasis added.) See supra note 3. Paul Revere's stipulation is nonsensical if (1) the existence of a Total Disability is conditioned upon the presence of a Sickness that was asymptomatic or that had not shown [itself] plainly as of the policy's date of issue and, as Paul Revere contends, (2) Doe's HIV infection was symptomatic and had shown [itself] plainly as of that date. On the other hand, the stipulation makes perfect sense if, as of the date of issue, Doe was suffering from what Paul Revere regarded as a Pre-existing Condition, for which it was precluded under the policy from denying a claim for benefits by virtue of the incontestability clause. It is within the context of the foregoing hall of mirrors, constructed by Paul Revere's contract of adhesion, that we liberally apply HRS §§ 431:10A-105(2)(A) and (C) to the terms and conditions of the policy, in accordance with (1) the general rules of statutory construction set forth supra in section II.B, (2) the specific rules of remedial statutory construction governing insurance policies set forth supra in this section, and (3) the general rules of contract construction also set forth supra in this section, in order to suppress the perceived evil that the statute was designed to address and advance the enacted remedy.