Opinion ID: 885337
Heading Depth: 1
Heading Rank: 5

Heading: issues

Text: ¶ 37 Did the District Court err when it refused to decide the issue of the legality of Paul Revere's disability policy? ¶ 38 Deonier contends that the District Court erred when it refused to construe Paul Revere's disability policy on the grounds that doing so would be to render an advisory opinion. Deonier claims that the issue of whether Paul Revere asserted the Forman defense to deny Vestal's claim, in violation of Montana law, is an essential element of Deonier's punitive damage claim against Paul Revere. Deonier argues that, as part of its plan to implement the Forman defense, Paul Revere fraudulently and maliciously invoked the policy definition of sickness to circumvent the preexisting condition and incontestability provisions of its own policy, thereby nullifying the incontestability provisions mandated by Montana law. ¶ 39 The District Court stated, and Paul Revere argues, as follows: It has been requested by Deonier that the Court rule that the interpretation of this particular policy asserted by Revere is improper as a matter of law. Such a determination is not necessary. Revere was entitled to make its legal argument. Any opinion concerning the interpretation of the policy would be an advisory opinion which would be inappropriate for the Court to make. By reason of this ruling as to Count II which is the only tort claim of Deonier, she is necessarily precluded from claiming punitive damages or damages for emotional distress. ¶ 40 Because we have reversed the District Court's award of summary judgment in Paul Revere's favor on Count II, Deonier's tort claim regarding breach of fiduciary duty, Deonier is no longer precluded from claiming punitive damages. Moreover, because the question of whether Paul Revere's definition of Sickness conflicts with the statutorily required incontestability clause is a question of law on which Deonier's claim for punitive damages rests, we conclude that reaching this issue does not constitute an inappropriate advisory opinion. ¶ 41 Section 33-22-202, MCA, provides: Required provisions-captions-omissions-substitutions-order. (1) Except as provided in subsection (2), each policy delivered or issued for delivery to any person in this state must contain the provisions specified in XX-XX-XXX through XX-XX-XXX, as those provisions appear.... ¶ 42 Section 33-22-205, MCA, provides: Time limit on certain defenses. (1) There shall be a provision as follows: Time Limit on Certain Defenses: (1) After 2 years from the date of issue of this policy no misstatements, except fraudulent misstatements, made by the applicant in the application for such policy shall be used to void the policy or to deny a claim for loss incurred or disability (as defined in the policy) commencing after the expiration of such 2-year period. (2) No claim for loss incurred or disability (as defined in the policy) commencing after 2 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. .... (3) 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 50 or, in the case of a policy issued after age 44, for at least 5 years from its date of issue, may contain in lieu of policy provision (1) of subsection (1) the following provision (from which the clause in parentheses may be omitted at the insurer's option) under the caption Incontestable: After this policy has been in force for a period of 2 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. ¶ 43 As noted previously, Paul Revere's policy contained the language in § 33-22-205(1), MCA, which provided that no claim for Disability beginning after two years from the Date of Issue will be reduced or denied because a disease or physical condition existed before the Date of Issue unless it is excluded by name or specific description. Paul Revere's policy then limited the definition of Sickness in their policy to that which first manifests itself after the Date of Issue and while Your Policy is in force. ¶ 44 Based on its definition of Sickness, Paul Revere contends that its policy does not apply to a sickness which manifests itself prior to the date of the policy, and that the requisite language in the incontestability clause does not create such coverage. ¶ 45 In Wellcome v. Home Insurance Co. (1993), 257 Mont. 354, 356-57, 849 P.2d 190, 192, we set forth the following principles of insurance policy interpretation: The interpretation of an insurance contract is a question of law in Montana. Well-established principles guide our interpretation. The language of the policy governs if it is clear and explicit. Ambiguities are construed against the insurer. Furthermore, exclusions from coverage will be narrowly and strictly construed because they are contrary to the fundamental protective purpose of an insurance policy. (Citations omitted.) However, the statutory incontestability clause must necessarily invoke different rules of construction. Because the language is required by statute, the interpretation of that language must be construed to effect the intent of the legislature, not the intent of the parties. See § 1-2-102, MCA. ¶ 46 Furthermore, based on the language in § 33-22-203(3) and (4), MCA, the incontestability clause for disability policies mandated by the legislature takes precedence over other language in the policy. Pursuant to § 33-22-203(3), MCA, policy provisions not required by law, such as definitional provisions, may not make a policy, or any portion thereof, less favorable in any respect to the insured or the beneficiary than the provisions thereof which are subject to this chapter. Moreover, pursuant to § 33-22-203(4), MCA, [w]hen any provision in a policy subject to ... this chapter is in conflict with any provision ... of this chapter, the rights, duties, and obligations of the insurer, the insured, and the beneficiary shall be governed by the provisions ... of this chapter. ¶ 47 We have not previously addressed this issue. However, in a recent case, Galanty v. Paul Revere Life Insurance Company (2000), 23 Cal.4th 368, 97 Cal.Rptr.2d 67, 1 P.3d 658, the Supreme Court of California addressed and analyzed the exact issue and arguments before this Court. It is important to note that the two forms of incontestability clauses set forth in the California Insurance Code § 10350.2, are the exact clauses set forth in the Montana Code at § 33-22-205, and patterned after Section 3(A)(2) of the Uniform Accident and Sickness Policy Provisions Law, promulgated by the National Association of Insurance Commissioners (NAIC) in 1950. In Galanty, the California Supreme Court stated: Explanatory comments prepared by the NAIC described this aspect of the model law as introducing a new principle in accident and sickness insurance by guarantying to the insured that, after the policy has been in force for [two years], ... no claim will be denied on the basis of misstatements in the application or on the contention that any infirmity existed prior to the date of issue of the policy. (NAIC, Explanatory Comments on the Uniform Individual Accident and Sickness Policy Provisions Law Adopted in June 1950, p. 3). The NAIC also described the provision as effecting the surrender by the insurer, after [two] years, of the right to base a defense upon a misstatement in the application or upon prior origin of any condition. ... This background illuminates the parties' arguments. Paul Revere contends it has no obligation, despite the incontestability clause, to pay benefits for Galanty's disability because the causative sickness first manifested itself, in the form of a positive HIV test, before the policy was issued. Paul Revere thus seeks to harmonize the policy provisions defining the scope of coverage with the incontestability clause. Galanty, in opposition, argues that Paul Revere may not deny a claim for disability benefits, no matter when the causative sickness first existed, so long as he did not become disabled until more than two years after the policy's date of issue. Galanty would, thus, find a conflict between the coverage provisions and the incontestability clause, and resolve the conflict by giving priority to the latter. Paul Revere begins its argument by assuming that incontestability clauses do not affect coverage and that the Legislature, in adopting section 10350.2, shared that assumption. That an incontestability clause does not affect coverage is, as we have seen, the prevailing interpretation of the standard clause contained in many life insurance policies. The assumption is consistent, Paul Revere notes, with the general principle that an insurer has a right to limit the policy coverage in plain and understandable language, and is at liberty to limit the character and extent of the risk it undertakes to assume. If we accept these premises, we must construe the incontestability clause to be consistent with the clauses defining coverage.... This argument was first articulated, and accepted, in Massachusetts Casualty Ins. Co. v. Forman, supra, 516 F.2d 425, 428-430. Most of the courts that have decided the present issue in the insurer's favor have relied on Forman. Paul Revere's argument has serious flaws, beginning with the assumption on which it depends. In the present context, the assumption that an incontestability clause cannot affect coverage is erroneous. The assumption, as noted, finds its origin in Chief Judge Cardozo's explanation that an incontestability clause is not a mandate as to coverage, a definition of the hazards to be borne by the insurer. The clause means only this, that within the limits of the coverage the policy shall stand, unaffected by any defense that it was invalid in its inception, or thereafter became invalid by reason of a condition broken. ( Metropolitan Life Ins. Co. v. Conway, supra, 169 N.E. at p. 642.) This explanation makes perfect sense in its original context: a conflict between an incontestability clause in a life insurance policy, providing simply that the policy shall be incontestable after two years, and a provision excluding coverage for a specific hazard, namely, travel by aircraft. But the proposition that no incontestability clause, regardless of wording, can ever affect coverage has no logical force in the present context of a statutorily required clause that expressly bars the insurer, after two years, from denying coverage because a sickness or physical condition not excluded by name or specific description before the date of loss had existed before the Date of Issue. Galanty, 23 Cal.4th at 383-84, 97 Cal.Rptr.2d 67, 1 P.3d 658 (citations omitted) (emphasis added). ¶ 48 Paul Revere's definitional and coverage provisions purport to limit the coverage available to disabilities caused by Sickness or disease which first manifests itself after the Date of Issue, and to exclude coverage for preexisting conditions that were not disclosed on [the] application. While, at the same time, the incontestability clause bars the insurer from denying coverage because a sickness or physical condition ... had existed before the Date of Issue. ¶ 49 We agree with the California court's analysis of the effect of the statutory provisions. Moreover, based on the statutory provisions in § 33-22-203(3) and (4), MCA, and the plain language of § 33-22-205, MCA, which states that no 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 this policy, the two provisions drafted by Paul Revere in its disability policy which define Sickness and Pre-Existing Condition, create a conflict in which the incontestability clause must control. ¶ 50 We agree with the following, as expressed by the California Supreme Court in Galanty : In the particular context of disability insurance, the Legislature has given insurers the following protections against fraud: The insurer may use a form of incontestability clause that expressly preserves its right to void the policy and to deny claims based on fraudulent misstatements at any time [§ 33-22-205(1), MCA]. Moreover, if the insurer chooses to use the other form of incontestability clause [§ 33-22-205(3), MCA], the insurer still has two years after issuing the policy to investigate the insured's medical condition and statements in the application. Only an insurer, like Paul Revere in the case before us, that chooses to forgo both contractual protection against fraud and timely verification of the insured's medical condition runs the risk of having to pay a claim that may turn out to be related to a sickness that first manifested itself before the policy's inception date. Under these circumstances, there is nothing unfair in the Legislature's evident policy judgment that any risk of fraud is outweighed, after the period of contestability has run, by the need to protect the value of the policy to the insured and to reduce litigation. To hold otherwise would be to permit such a clause in its unqualified form to remain in a policy as a deceptive inducement to the insured. Galanty, 23 Cal.4th at 388-89, 97 Cal.Rptr.2d 67, 1 P.3d 658 (citations omitted) (emphasis added). ¶ 51 Consequently, we conclude that the incontestability clause bars insurers from denying coverage for a disability, whether or not the causative sickness first manifested itself before the policy's date of issue. We further conclude that Paul Revere's assertion of the Forman defense to deny Vestal's disability claim was in violation of Montana law.