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

Heading: Application Of The Controlling Hawai`i Statutes To The Language Of The Policy

Text: Incontestability provisions do not, of course, preclude [disability] insurers from expressly excluding coverage for losses arising from particular causes. Equitable Life Assurance Soc'y of the United States v. Bell, 27 F.3d 1274, 1279 (7th Cir.1994) (citations omitted). Indeed, by its plain language, HRS § 431:10A-105(2)(A)(ii) exempts diseases or physical conditions excluded from coverage by name or specific description from the general statutory mandate that [n]o claim for ... disability (as defined in the policy) commencing after three years from the date of issue of th[e] policy shall be ... denied on the ground that a disease or physical condition... effective on the date of loss had existed prior to the effective date of coverage of th[e] policy. Paul Revere urges that paragraph 10.2.b of the policy, see supra section I, which is expressly mandated by HRS § 431:10A-105(2)(A)(ii), see supra section III.A, does not protect Doe because[:] (1) Paul Revere is not denying coverage for Doe's HIV because the condition existed, but because the condition was manifest to Doe prior to the policy['s] date [of issue]; [22] and (2) because the policy defines [S]ickness to exclude conditions manifest before the policy['s] date [of issue], such conditions are excluded by specific description under Paragraph 10.2(b). We believe, however, that Paul Revere's interpretation of the relevant policy language does violence to the general rules of statutory construction, the specific rules of remedial statutory construction regarding insurance policies, and the general rules of contract construction outlined above. In particular, we agree with the following analysis of the United States Court of Appeals for the Seventh Circuit regarding a disability insurance policy's incontestability clause identical in all material respects to the one at issue in the present case: [T]he policy at issue here provides that after two years, disability coverage will not be denied on the ground that the underlying disease or physical condition pre-dated the policy, unless, effective on the date of the loss, such disease or physical condition was excluded from coverage by name or specific description.  [The insurer] suggests that this provision alone would bar coverage for [the insured's disability], in view of the policy terms defining covered sickness to include only those which first manifest themselves after the policy's effective date and excluding those that manifested themselves before. In our view, however, these terms merely address the general scope of the policy; they do not identify any disease or condition with particularity sufficient to render them excluded by name or specific description. As Judge McKinney reasoned in Wischmeyer: The most reasonable interpretation of these words is that a specific pre-existing condition, i.e., something such as tuberculosis or diabetes, may be specifically excluded from coverage by agreement of the parties if that condition is named or specifically described in the policy. If such an agreement of exclusion is reached by the parties, then the incontestable clause would not prevent the insurer from denying coverage based on that particular named pre-existing condition. If, on the other hand, such a specific pre-existing condition is not excluded from coverage by name or specific description, then the insurer cannot deny a claim based on that condition if the plaintiff's disability does not begin until more than two years from issuance of the policy. This interpretation simply follows the rule of construction that language in an insurance contract is to be given its plain, ordinary, and common sense meaning. Here the most reasonable interpretation is that in order to benefit from this final phrase of the contestable clause, the insurer must specifically name or describe a particular pre-existing condition, and not merely add a clause in the policy attempting to exclude all pre-existing conditions. [ Wischmeyer, ] 725 F.Supp. at 1004-05 [ (citations omitted) ] (emphasis in original). Bell, 27 F.3d at 1279-80 (some citations omitted) (emphasis in original). Accordingly, because we (1) construe the policy (a) according to the entirety of its terms and conditions, see HRS § 431:10-237, (b) liberally in favor of the insured, see Smith, 78 Hawai`i at 183, 891 P.2d at 270; Dawes, 77 Hawai`i at 121, 883 P.2d at 42, and (c) in accord with 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, (2) resolve any contractual ambiguities against the insurer, see Smith, 78 Hawai`i at 183, 891 P.2d at 270; Dawes, 77 Hawai`i at 121, 883 P.2d at 42, (3) read the provisions of HRS §§ 431:10A-105(2)(A) and (C) into the policy, see Vicente, 78 Hawai`i at 251, 891 P.2d at 1043; Dawes, 77 Hawai`i at 122, 883 P.2d at 43, and (4) liberally construe HRS §§ 431:10A-105(2)(A) and (C) in order to accomplish the purposes for which they were enacted, see Dawes, 77 Hawai`i at 123, 883 P.2d at 44; Flores, 70 Haw. at 12, 757 P.2d at 647, namely, (a) to suppress the perceived evil of 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 and (b) to advance the enacted remedy of requir[ing] 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, see Insurance Comm'r of Maryland, 680 A.2d at 593; Oglesby, 889 F.Supp. at 774, we hold that the contractual phrase which first manifests itself after the Date of Issue contained within the policy's definition of a covered Sickness, see supra section I, does not exclude coverage of Doe's total disability due to HIV infection, see supra note 3, by name or specific description, within the meaning of the second sentence of the policy's pre-existing conditions limitation, see supra section I, or paragraph 10.2.b of the policy's incontestability provision, see id.
The more nettlesome question is whether, despite the statutorily required provision prohibiting a denial of coverage for pre-existing illnesses after three (or in this case two) years, the insurer is free to exclude coverage for pre- manifesting illnesses. Bell, 27 F.3d at 1280 (emphasis in original). The Bell court, which was faced with a disability insurance policy the terms and conditions of which were virtually identical in all material respects to Paul Revere's policy in the present case, had no doubt that, with the incontestability clause put aside, the policy terms quite clearly eliminate coverage for pre-manifesting illnesses. Id. In the present case, however, given the ambiguities inherent in the contractually defined terms Sickness, Pre-existing Condition, and Total Disability, see supra section III.A, we are not so certain. In any event, whether, pursuant to the `first manifest' doctrine, see Oglesby, 889 F.Supp. at 773, the construct of a preexisting condition includes only those diseases and conditions that, although they existed before the policy became effective, did not manifest themselves, on the one hand, or whether that approach represent[s] an impermissible attempt to restrict the coverage otherwise compelled by the legislature, on the other, is a question that has sharply divided the courts. Bell, 27 F.3d at 1280. And, as was the case in Bell and Oglesby, the question is one of first impression in Hawai`i. We discern the most satisfying analysis of and answer to the foregoing question in Oglesby, supra . Because we agree with that decision as it applies to the issue before us, we quote it at length: The present issue hinges on construction of the policy's statutorily required incontestability provisions and their impact on the scope of the policy's coverage, which is limited to sickness first making itself known while the policy is in force. See Equitable Life Assurance Soc'y v. Bell, 27 F.3d 1274, 1277 (7th Cir.1994) (confronting same dilemma).... .... ... [The insurer] maintains its denial of [the insured's] claim as not within the scope of the policy's coverage, asserting [the insured's illness] as an excluded condition. The policy explicitly circumscribes its scope of coverage to any sickness which first makes itself known while this policy is in force. [The insurer] seeks to argue ... that because [the insured's] current disability for which he seeks insurance benefits stems from his [predating] disability, it does not fall within the definition of a covered sickness and is therefore excluded. At first blush, [the insurer's] argument seems like a reasonable interpretation of the policy; upon further scrutiny, however, it meets with terminal difficulty. In addition to the ... clause concerning misstatements by the insured, Delaware statutory law also requires a policy to include the following provision: (2) No claim for loss incurred as disability (as defined by the policy) commencing 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. 18 Del.C. § 3306(a)(2). [23] This subsection reflects a legislative mandate that if an insured does not suffer disability for two years following the policy's issue date, his claim for benefits cannot be denied on the ground of pre-existing condition. See Wischmeyer v. Paul Revere Life Ins. Co., 725 F.Supp. at 1001 (construing substantially identical statute). .... Many courts have been confronted with the dilemma posed in this case: whether, despite the statutorily required provision prohibiting a denial of coverage for pre-existing illnesses after two years, the insurer is able to exclude coverage for premanifesting illnesses. See, e.g., Paul Revere Life Ins. Co. v. Haas, 137 N.J. 190, 644 A.2d 1098 (1994); Equitable Life Assurance Soc'y v. Bell, 27 F.3d 1274 (7th Cir.1994); Neville v. American Republic Ins. Co., 912 F.2d 813, 815 (5th Cir.1990) (construing Mississippi law); Button v. Connecticut Gen. Life Ins. Co., 847 F.2d 584 (9th Cir.) (construing Arizona law), cert. denied, 488 U.S. 909, 109 S.Ct. 261, 102 L.Ed.2d 250 (1988); Provident Life and Accident Ins. Co. v. Altman, 795 F.Supp. 216 (E.D.Mich.1992) (construing Michigan law); Wischmeyer v. Paul Revere Life Ins. Co., 725 F.Supp. 995 (S.D.Ind.1989) (construing Indiana law); Massachusetts Casualty Ins. Co. v. Forman, 516 F.2d 425 (5th Cir.1975) (construing Florida law); see also Annotation, Construction of Incontestable Clause Applicable to Disability Insurance, 13 A.L.R.3d 1383 (1967) (collecting cases).... Some courts have concluded that the incontestability clause, despite its reference to `pre-existing' illnesses and conditions, leaves the insurer free to exclude pre-manifesting diseases and condition [sic] from the policy coverage. [ Bell, 27 F.3d at 1280] (citing Button v. Connecticut Gen. Life Ins. Co., 847 F.2d at 588-89; Keaten v. Paul Revere Life Ins. Co., 648 F.2d 299, 301-03 (5th Cir.1981); Allen v. Aetna Life Ins. Co., 563 F.2d 1240, 1241-42 (5th Cir.1977)). Many of these courts have reasoned that there is a distinction between conditions that are pre- existing as contrasted with those that are pre- manifesting. See, e.g., Paul Revere Life Ins. Co. v. Haas, 644 A.2d at 1107. If an insured was unaware of the condition, the condition existed but was not manifest, and the insurance company could not use it as a defense; when the insured knew of his condition, the insurer could deny coverage. Id. Under this interpretation, the first manifest doctrine denies the benefit of the incontestability clause to insureds who lie on their application. Id. As a practical matter, the constructional preference accorded to the policy terms excluding coverage for pre- manifesting conditions nullifies the provision barring denials for pre- existing conditions. See Massachusetts Casualty Ins. Co. v. Forman, 516 F.2d 425, 429-30 (5th Cir.1975), cert. denied, 424 U.S. 914, 96 S.Ct. 1114, 47 L.Ed.2d 319 (1976) (under Florida law, pre-existing conditions clause has no effective field of operation in light of first manifest clause); accord Weiner v. Paul Revere Life Ins. Con., No. 90-72772, 1991 WL 353370 at -3 (E.D.Mich. July 31, 1991). One court, concluding that insurers should compensate victims without condoning wrongful conduct and fraudulent statements, has reconciled the two provisions by construing the policy's definition of `sickness' as operating as an `exclusion by specific description.' Paul Revere Life Ins. Co. v. Haas, 644 A.2d at 1105. Thus, any sickness manifesting itself prior to the policy's effective date, whether explicitly referenced or not by the insurer, would be excluded. [24] The Haas court reasoned [that] any other result would be tantamount to finding the legislature contemplated it was authorizing insureds to conceal a known disability and then reap the benefit of their deception by recovering for the disability that was so concealed. Id. at 1107. A growing minority of courts have rejected the above rationales by favoring a plain meaning approach to the statutory and policy language. These cases uniformly hold that if an insured is not disabled for two years after issuance of the policy, then his claim for benefits cannot be denied on the grounds that he had a pre-existing condition. Wischmeyer v. Paul Revere Life Ins. Co., 725 F.Supp. 995, 1001 (S.D.Ind.1989); accord Equitable Life Assurance Soc'y v. Bell, 27 F.3d 1274 (7th Cir.1994); Provident Life & Accident Ins. Co. v. Altman, 795 F.Supp. 216 (E.D.Mich. 1992); Manzella v. Indianapolis Life Ins. Co., 814 F.Supp. 428 (E.D.Pa.1993); White v. Massachusetts Casualty Ins. Co., 96 A.D.2d 732, 465 N.Y.S.2d 345 (1983); Fischer v. Massachusetts Casualty Ins. Co., 458 F.Supp. 939 (S.D.N.Y.1978); Taylor v. Metropolitan Life Ins. Co., 106 N.H. 455, 214 A.2d 109 (1965). These courts reason that the policy terms defining sickness merely address the general scope of the policy's coverage and do not identify any disease or condition with particularity sufficient to render them excluded by `name or description.' Equitable Life Assurance Soc'y v. Bell, 27 F.3d at 1280; Wischmeyer v. Paul Revere Life Ins. Co., 725 F.Supp. at 1004-05. In order to benefit from this final phrase of the incontestability clause, the insurer must specify or describe a particular pre-existing condition and not merely insert a catch-all clause elsewhere in the policy attempting to exclude pre-existing illness. Id. ... Conflicting authority notwithstanding, the contractual provisions and relevant state law in this case ultimately directs this Court's analysis. Delaware law dictates that clear language in an insurance policy should be given its ordinary and usual meaning. Rhone-Poulenc Basic Chemicals Co. v. American Motorists Ins. Co., 616 A.2d 1192, 1195 (Del.1992). The [insurer's] policy clearly establishes its contractual boundaries by defining coverage for any sickness that first makes itself known while the policy is in force. Pursuant to legislative mandate, the policy also sets forth what the policy does not cover, by way of an incontestability provision relating to what is excluded under the policy. The provision distinguishes between disabilities starting within two years of the issuance of the policy, and after two years from issuance of the policy. Where, as here, the insured did not suffer disabling symptoms until more than two years after the policy issued, the policy states it does not cover a disability resulting from a pre-existing condition if the policy excludes that condition by name or specific description. The converse is also true: if, after more than two years after the policy issued, a disability arises from a pre-existing condition not specifically excluded, then it is covered. This plain meaning interpretation of the policy is supported by examination of the corresponding statutory language in the Delaware Code, which provides in relevant part that No claim for loss incurred as disability... commencing 2 years from the date of issue of this policy shall be ... denied on the ground that a disease or physical condition not excluded from coverage by name or specific description ... had existed prior to the effective date of coverage of this policy. 18 Del.C. § 3306(a)(2). [25] The clear import of both the statutory and policy provisions is that if an insured is not disabled for two years after issuance of the policy, then his claim for benefits cannot be denied on the grounds that he had a pre-existing condition. Wischmeyer v. Paul Revere Life Ins. Co., 725 F.Supp. 995, 1001 (S.D.Ind.1989). The statute requires an unequivocal promise by the insurer that that [sic] after two years, no disability claim shall be denied on the ground that the underlying disease or condition `existed' before the policy became effective. See Equitable Life Assurance Soc'y v. Bell, 27 F.3d at 1282 (construing substantially identical statute). The statute speaks plainly in terms of existing, not manifesting (or first making itself known); the term exist ordinarily refers to a state of being, without qualification as to other qualities, such as manifestation. Id. Consequently, in the absence of such a distinction by the legislature, one must conclude that the Delaware legislature intended that a pre-existing condition includes those both known and unknown to the insured prior to the policy date. See id. It is also important to emphasize the crux of this incontestability provision: the onset of disability (as opposed to [the] onset of the pre-existing condition).... By use of the two year period, the legislature struck a balance: The clause protects an insured who is healthy enough to work throughout the two-year period from losing the security of disability insurance because of some prior condition that might eventually disable him. On the other hand, the insurer is protected in that it is not precluded from denying benefits to an applicant whose pre-existing condition is so bad that he becomes disabled during the two-year period. [26] Wischmeyer v. Paul Revere Life Ins. Co., 725 F.Supp. at 1001-02. Delaware law requires that language integrated into an insurance policy by force of a statute be interpreted and given effect in accordance with the apparent intent of the legislature. Suskind v. American Republic Ins. Co., 458 F.Supp. at 684 (D.Del. 1978); John A. Appleman and Jean Appleman, 12 Insurance Law and Practice § 7043 (1981). Moreover, when any provision in a policy subject to Delaware's health insurance code is in conflict with any provision of that chapter of the code, the rights, duties, and obligations of the insurer, the insured and the beneficiary shall be governed by the provisions as set forth by the legislature. 18 Del.C. § 3331. [27] By choosing language different from the statutory model, [the insurer] attempts to nullify the protection of the incontestable clause by excluding from coverage illness which first makes itself known before the policy is issued. Fischer v. Massachusetts Casualty Ins. Co., 458 F.Supp. at 945. [The insurer's] interpretation would thwart the legislatively imposed incontestability clause, and reduce its protection to less than that which was contemplated by the Delaware General Assembly. Accord Equitable Life Assurance Soc'y v. Bell, 27 F.3d at 1282.... . . . . Despite its lachrymose cries, [the insurer] must bear the responsibility for the predicament in which it finds itself.... Delaware law afforded [the insurer] the teeth it needed to contest any and all fraudulent misstatements by [the insured] and to preserve the insurer's right to rescind the policy. See Del.C. § 3306(a)(1) (fraudulent misstatements excepted from incontestability clause relating to validity of the policy). [28] [The insurer] took a calculated risk by removing that protection and opting for a more lenient, and thus more marketable version of the incontestability clause. [29] Courts are not in the habit of relieving parties, especially sophisticated insurance companies, of their improvident decisions.... .... Accordingly, for the reasons discussed above, the Court holds that under Delaware law, the terms of [the insured's] disability insurance policy issued by [the insurer] do not allow [the insurer] to avail itself of a defense based on the doctrine of first manifest. Oglesby, 889 F.Supp. at 773-79 (footnotes and some citations omitted) (emphases in original). In the present case, Paul Revere is not seeking to void the policy on the ground that Doe fraudulently misstated his physical or medical condition on his disability insurance application. See supra section I & note 17. [30] Indeed, having opted for the statutory protections of HRS § 431:10A-105(2)(C), rather than those of HRS § 431:10A-105(2)(A)(i), Paul Revere could not lawfully do so. See supra notes 22, 28, and 29; see also Oglesby, 889 F.Supp. at 778-79. Moreover, we have held that the contractual phrase which first manifests itself after the Date of Issue contained within the policy's definition of a covered Sickness, see supra section I, does not exclude coverage of Doe's total disability due to HIV infection, see supra note 3, by name or specific description, within the meaning of the second sentence of the policy's preexisting conditions limitation, see supra section I, or paragraph 10.2.b of the policy's incontestability provision, see id. See supra section III.B.1. Finally, Paul Revere having issued the policy to Doe on October 22, 1985, it is uncontroverted that the two-year contestability period set forth in paragraph 10.2.b thereof had already lapsed when Doe became totally disabled as of October 29, 1991. See supra section I & note 3. We therefore hold, pursuant to HRS chapter 431, article 10A, part I, in general, and HRS § 431:10A-105(2)(A)(ii), in particular, that the standard incontestability clause set forth in paragraph 10.2.b of the policy precludes Paul Revere from denying Doe's estate the Total Disability benefit for which Doe contracted, see supra section I & notes 12, 13, 14, and 15, notwithstanding that the HIV infection that caused the disability arguably manifested itself prior to the policy's effective date of coverage. We therefore further hold that the circuit court erred as a matter of law when it (1) granted Paul Revere's motion for summary judgment as to all claims raised in Doe's amended complaint and (2) entered final judgment in favor of Paul Revere and against Doe in accordance therewith.