Court Opinion

ID: 1081890
Source: CourtListenerOpinion
Date Created: 2013-10-09 20:53:34.617132+00
Date Added: 2024-06-11T13:20:50.905387
License: Public Domain

K. K.,                           )
                                 )
      Plaintiff/Appellant,       )      Appeal No.
                                 )      01-A-01-9511-CH-00541
v.                               )
                                 )      Davidson Chancery
THE PAUL REVERE LIFE             )      No. 95-429-I
INSURANCE COMPANY,               )

      Defendant/Appellee.
                                 )
                                 )                          FILED
                                                            June 7, 1996
                COURT OF APPEALS OF TENNESSEE
                                                        Cecil W. Crowson
                 MIDDLE SECTION AT NASHVILLE           Appellate Court Clerk

     APPEAL FROM THE CHANCERY COURT FOR DAVIDSON COUNTY

                    AT NASHVILLE, TENNESSEE

     THE HONORABLE IRVIN H. KILCREASE, JR., CHANCELLOR

AUGUST C. WINTER
Two Brentwood Commons, Suite 150
750 Old Hickory Boulevard
Brentwood, Tennessee 37027
     ATTORNEY FOR PLAINTIFF/APPELLANT

LUIS C. BUSTAMANTE
J. FORD LITTLE
Woolf, McClane, Bright, Allen
  & Carpenter
900 S. Gay Street, Suite 900
P. O. Box 900
Knoxville, Tennessee 37901-0900
     ATTORNEYS FOR DEFENDANT/APPELLEE

                       AFFIRMED AND REMANDED

                                         SAMUEL L. LEWIS, JUDGE
                               O     P I N I O N

          Plaintiff K. K. appeals from the trial court’s judgment

granting the defendant, The Paul Revere Life Insurance Company

("Paul Revere") his motion for summary judgment, and the failure of

the trial court to grant its motion for partial summary judgment.

          The    facts   are   not   disputed.     Plaintiff    submitted   an

application for disability insurance to Paul Revere.             At the time

he submitted his application he was able to fully perform his

duties.

          Plaintiff had been diagnosed as HIV positive; however, he

did not disclose the fact that he had been diagnosed and treated

for HIV in his application.           Plaintiff falsely stated that he had

not, in the preceding five years, received medical advice or

treatment.

          Paul Revere accepted plaintiff’s application and issued a

disability insurance policy dated 1 October 1989.              Nothing in the

policy excludes coverage for illness due to HIV or AIDS.                    The

material provisions of the policy are as follows:

          1.6     "Sickness" means sickness or disease
                  which first manifests itself after the
                  Date of Issue and while Your Policy is
                  in force.
          1.15    "Pre-existing    Condition"   means  a
                  Sickness or physical condition for
                  which, prior to the Date of Issue:
                  a. Symptoms existed that would
                      cause an ordinarily prudent
                      person to seek diagnosis, care,
                      or treatment; or
                  b. Medical advice or treatment was
                      recommended by or received from
                      a Physician.
                                        3 . 2 P r e -
                      existing Condition Limitations
                  During the first two years from the
                  Date of Issue, We will not pay
                  benefits for a Pre-Existing condition
                  if it was not disclosed on Your
                  application. You are responsible for

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               verifying the accuracy of each and
               every statement on Your application.
               Also, We will not pay benefits for any
               loss We have excluded by name or
               specific description.
        9.2    Incontestable
               a. After Your Policy has been in
                   force for two years, excluding
                   any time You are Disabled, We
                   cannot contest the statements
                   in the application.
               b. 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.

        Tennessee Code Annotated section 56-26-108(2)(A) provides

that a disability insurance policy is to contain a provision

stating that after a policy has been in force two years, no mis-

statements except fraudulent mis-statements made by the applicant

in the application may be used to void the policy or deny a claim.

An insurer has the option to include a broader incontestability

clause which provides that after the policy has been in force for

two years (excluding any period in which the insured is disabled),

the   policy   shall   become   incontestable   as   to   the   statements

contained in the application.

        In late 1993 plaintiff’s treating physician, Dr. Judson

Rogers, determined that as of 22 October 1993 plaintiff had become

totally disabled because of AIDS.       Plaintiff, was at that time,

owner and manager of a Baskin Robbins ice cream store.                  He

submitted a claim to Paul Revere for disability insurance benefits.

        Paul Revere began an investigation of plaintiff’s pre-

application medical history and on 3 February 1994, Paul Revere

sent plaintiff a letter stating that the company had discovered

information indicating that plaintiff had been diagnosed as HIV

positive in 1985.      Paul Revere requested additional information

                                    3
regarding his pre-application history which plaintiff provided.

         Following the expiration of the policy’s ninety-day waiting

period, Paul Revere paid plaintiff monthly disability insurance

benefits under a reservation of rights until 27 December 1994.

Paul Revere, at that time, took the position that plaintiff was not

entitled to benefits because the policy’s definition of sickness

did not cover illnesses which manifested themselves before the

policy was issued.    Paul Revere then, without notice to plaintiff,

resumed making    automatic    premium     withdrawals   from   plaintiff’s

checking account.

         Plaintiff   brought   suit   to   recover   disability    payments

withheld and post-claim premiums taken with interest, plus a 25%

bad faith penalty pursuant to Tennessee Code Annotated section 56-

7-105.    Plaintiff also seeks a declaration in order that he is

entitled to receive future disability benefits under the policy.

         The trial court granted Paul Revere’s motion for summary

judgment, denied plaintiff’s motion for partial summary judgment,

and ordered plaintiff to repay Paul Revere the sum of $11,700.00

which Paul Revere had paid to plaintiff as disability benefits.

         On appeal, it is Paul Revere’s insistence that the insurance

contract did not afford coverage for a disease which manifested

itself before the issuance of the policy. Paul Revere also insists

that plaintiff cannot use the statutory mandated incontestability

clause to create coverage.     There is no dispute in the record that

plaintiff was armed with the knowledge that he had been previously

diagnosed and treated for HIV, and that he did not disclose this to

Paul Revere when the application was presented. The record is also

clear that plaintiff’s disease had manifested itself before the

issuance of the policy.

                                      4
         In this appeal it is plaintiff’s insistence that he is

entitled to disability insurance benefits because his disability,

though caused by a known and undisclosed pre-existing condition, is

covered by the policy’s incontestability clause which did not

preserve the insurer of defense to fraudulent mis-statements.                    It

is Paul Revere’s insistence that the trial court properly granted

summary judgment because the statutory mandated incontestability

clause does not preclude Paul Revere from asserting an insurer’s

right to deny coverage pursuant to the terms of the policy.

         The courts of this state have repeatedly held that although

incontestable clauses and the statutes which require them "cut-off

challenges to the validity of an insurance policy...[they] do not

affect a policy’s coverage."        Norman v. Plateau Ins. Co., 1989 WL
28775 (Tenn. App. 1989); see also Carothers v. Atlanta Life Ins..

Co., 159 S.W.2d 830, 831 (Tenn. 1942); Smith v. Equitable Life

Assurance Soc’y of the United States, 89 S.W.2d 165, 167 (Tenn.

1936); Scales v. Jefferson Standard Life Ins.. Co., 295 S.W. 58, 60

(Tenn. 1927) (which holds that an incontestable clause does "not

make the insurer liable for a larger sum than would otherwise be

due under the policy.")          Searcy v. Fidelity Banker’s Life Ins..

Co.,   656 S.W.2d 39,   40   (Tenn.       App.    1983),   holding    that   an

incontestable clause does not expand or enlarge coverage.

         In Searcy, plaintiff brought suit seeking the proceeds of

a credit life insurance policy issued to her deceased father under

a master group policy sold by defendant to the bank.              656 S.W.2d 39

(Tenn. App. 1983).      The defendant asserted two provisions of the

policy   had   been   violated     and       denied   coverage.     Id.    at    40.

Plaintiff insisted that the incontestability clause precluded the

defendant from relying upon the two provisions of the policy to

deny coverage.    Id.

                                         5
       In affirming the Chancellor’s dismissal of plaintiff’s suit,

the court stated:   "The crux of the issue that this court is here

called upon to review is the decision of the Chancellor that the

incontestability clause did not bother defendant from asserting a

defense of lack of coverage in the case where the person sought to

be insured did not meet two of the insuring conditions in the

policy."   Id. at 41.   The court went on to state "incontestability

clauses such as codified above, while precluding the raising of the

defense that an insurance policy is invalid, do not effect the

raising of coverage questions by the insurer."     Id. at 40.

       In Smith v. Equitable Life Ins.. Soc’y, 169 Tenn. 477, 89
S.W.2d 165 (Tenn. 1935) the Supreme Court stated:

       We think it apparent that the confusion which seems
       to have arisen in this case, and in several of
       those relied on for the insured, is due to the
       failure to appreciate the distinction between "a
       denial of coverage and a defense of invalidity"
       which Chief Justice Cardozo, when on the Court of
       Appeals of New York, so clearly emphasized in his
       opinion in Metropolitan Life Ins.. Co. v. Conway,
       252 NY 449, 169 N.E. 642. In that case he said:
       "the   provision   that   the   policy   shall   be
       incontestable after it has been enforced...for a
       period of two years is not a mandate as to
       coverage....   It means only ... 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 the condition broke it."

169 Tenn. at 403, 89 S.W.2d at 167.

       The court recognized that it was "dealing here with a matter

of coverage, and not the matter of the validity of the policy

itself."   Id. at 42.   In Norman v. Plateau Ins.. Co., 1989 WL 28775

(Tenn. App. 1989), plaintiff and her husband purchased a car and

group credit insurance as part of its purchase of an automobile

from Hippodrome Oldsmobile in March 1985.        The certificate of

insurance was prepared by Hippodrome, Plateau’s insurance company’s

agent, and identified Mr. Norman as 56 years old, although he

                                   6
actually was 73.      Id.   Hippodrome was unaware of Mr. Norman’s

correct age and the Normans were likewise unaware that persons over

65 years of age were ineligible for Plateau’s policy.        Id.   Ms.

Norman requested that Plateau pay off the remaining balance on the

automobile loan upon Mr. Norman’s death in 1987.     Id.   In denying

the claim, Plateau stated that Mr. Norman had been ineligible for

insurance.    Id.   Plaintiff Norman filed suit against Plateau and

sought summary judgment asserting that the policy’s incontestable

clause prevented Plateau from denying coverage.        Id.    Plateau

answered arguing that the policy’s age adjustment clause limited

its liability to the amount of the premium.    Id.   In vacating the

trial court’s decision to grant summary judgment on behalf of

plaintiff, the court held that defendant Plateau may raise defenses

arising from the policy despite the policy’s incontestable clause.

Id. at 4.    The court further stated:

       [Incontestable clauses] cut off challenges to the
       validity of an insurance policy except for those
       expressly accepted from the clauses operation....
       However, incontestable clauses do not affect a
       policy’s coverage...they do not expand or enlarge
       coverage,...and they do not make the insurer liable
       for a larger sum than would otherwise be due under
       the policy.

             Thus, the threshold issue in cases construing
       the effect of an incontestable clause is whether
       the insurance claim relates to the validity of the
       policy or whether it relates to limitations of
       coverage.    If it relates to the former it is
       barred; if it relates to the latter it is not.
       ...In this case, Plateau is raising a matter of
       coverage. It is asserting one, that Mr. Norman was
       not eligible for insurance because he was over 65
       years old when he bought the car, and two, that the
       certificate of insurance was issued contrary to the
       terms of the group policy and the agency agreement.
       We find that Plateau may raise these defenses
       despite the policy’s incontestable clause. Id. at
       3-4.    We think it is clear that Tennessee has
       adopted    the  majority    rule   concerning   the
       application of incontestability clauses by finding
       that an incontestable clause is not a mandate as to
       coverage or to risk assumed and "notwithstanding
       the exception in such clause, the insurer may deny
       liability for the full amount of the policy by
       invoking the application of another clause in the
       policy involving exceptions of risk not enumerated

                                  7
           in the incontestability clause..." See Carothers
           v. Atlanta Life Ins.. Co., 159 S.W.2d 830, 831-32
           (Tenn. 1942).

           It is plaintiff’s contention that Tennessee’s statutory

mandated incontestability clause precludes insurers from contesting

coverage for any reason after the expiration of the two year

contestable period.       The incontestability clause in the subject

policy states that:

           a.    After your policy has been in force for two
           years, excluding any time you are disabled, we
           cannot contest the statements in the application.
           b.    No claims for disability beginning after two
           years from the date of issue will be reduced or
           denied because a disease or physical condition
           existing from the date of issue unless it is
           excluded by name or specific description.

           The plaintiff cites several cases in support of his argument

that once the two year time period has passed, the incontestability

clause provides that "an insurer cannot avoid a claim on the ground

that the insured submitted a fraudulent application."

           However, we are of the opinion that these cases stand only

for the proposition that the incontestable clause prevents an

insurer from voiding the policy, that is, contesting the validity

of the policy.         Plaintiff does not recognize the distinction

between the facts and the legal arguments of the instant case and

those cited by plaintiff.1       Here, Paul Revere does not contest the

validity of the policy due to the fraudulent misrepresentations

made by plaintiff in his application for insurance.              Paul Revere

contends that the policy’s limiting definition of covered sickness

excludes plaintiff’s claim from coverage under the policy.             We are

of   the     opinion   that   Paul    Revere    is   not   barred    by   the

incontestability clause from arguing that plaintiff’s disability

      1
       Humpston v. State Mut. Life, 256 S.W. 438, 431 (1923); Union Central
Life Ins.. v. Fox, 61 S.W. 62 (Tenn. 1901); Natl. Burial Life Ins.. Co. v.
Evans, 347 S.W.2d 34 (Tenn. 1961).

                                      8
claim is not covered under the policy.

       In the instant case, the trial court’s judgment conforms to

the majority rule applied in other jurisdictions concerning the

application   of   the   incontestability        clause   to    the    issue    of

coverage.

       The majority of jurisdictions that have addressed this issue

have adopted the rule that the incontestability clause relates only

to the validity of the contract and should not affect in any way

whatsoever the construction of the terms of the policy.                Button v.

Connecticut General Life Insurance Co., 847 F.2d 584, 588 (9th Cir.

1988); Minnesota Mutual Life Insurance Co. v. Morse, 487 S.W.2d 317

(Tex. 1972), holds that the policy is valid after expiration of a

contestability period but that the insurer may still dispute

whether the claim is covered.     Id. at 319-20.

       Tennessee     has    adopted       the    majority      rule     that    an

incontestability   clause   limits        only   the   insurer’s      ability   to

contest the validity of a policy which would otherwise be voidable

because of the insured’s fraud; the clause does not expand coverage

beyond the terms of the policy.       Scales v. Jefferson Standard Life

Ins.. Co., 295 S.W. 58, 60 (Tenn. 1927); Searcy v. Fidelity

Banker’s Life Ins.. Co., 656 S.W.2d 39, 40 (Tenn. App. 1983).

Plaintiff does not in his brief appear to dispute the adoption of

the majority rule in Tennessee; however, plaintiff requests this

Court to simply ignore precedent adverse to it.

       Paul Revere’s incontestability clause states, in pertinent

part, that "no claim for disability beginning after two years from

the date of issue will be reduced or denied because of a disease or

physical condition existing from the date of issue unless it is

                                      9
excluded by       name     or   a     specific     description."          This   limiting

definition of covered sickness serves as an exception by specific

description to part two of the incontestability clause.

          The policy issued to the plaintiff entitled plaintiff to

benefits when "because of injury or sickness" the plaintiff is

"unable     to    perform       the     important       duties    of    [his]     regular

occupation."       "Sickness" is defined as "sickness or disease which

first manifests itself after the date of issue and while your

policy is in force."                Disease is manifest when it is capable of

diagnosis by a physician.               See Christopher v. Consolidation Coal

Co., 262 Tenn. 727, 440 S.W.2d 281 (Tenn. 1969).                            Plaintiff’s

sickness, for which he made claim, manifested when he was first

diagnosed as HIV positive.                  Paul Revere is entitled to limit the

scope of coverage to sicknesses that "first manifest" themselves

after the policy has been issued.                  See Paul Revere Life Ins.. Co.

v. Haas, 644 A.2d 1098, 1106 (N.J. 1994).                  Plaintiff was diagnosed

and   treated      as    HIV    positive       before    the     policy    was    issued.

Therefore,        plaintiff is not covered under Paul Revere’s policy

which limits covered sicknesses to those which first manifest

themselves after the policy was issued.

          Plaintiff acknowledges the terms of the policy issued by

Paul Revere which provide coverage for total disability resulting

from sickness which first becomes manifest during the policy

period. Additionally, the terms and conditions of the policy quite

clearly eliminate coverage for illnesses which manifests themselves

prior to the issuance of the policy.                      The policy only extends

coverage for illnesses occurring during the policy period and

expressly        precludes      coverage        for   illnesses        which     manifest

thelmselves        prior       to     the    effective     date    of      the    policy.

Furthermore, plaintiff’s argument fails because of his failure to

                                              10
recognize and accept the obvious distinction between a pre-existing

condition and manifestation of an illness.                     This difference is

demonstrated in Paul Revere Life Ins.. Co. v. Haas, where the court

recognized a distinction between a manifest condition and one that

exists.    Haas, 644 A.2d at 1106.           This distinction is also apparent

in comparing the statutorily mandated incontestable clause in the

coverage provisions of the policy. Under the incontestable clause,

coverage will not be denied because a condition existed "before the

date of issue."          Whereas the policy specifically states that

coverage is only provided for sickness which must "manifest itself

after the date of issue."

          Within   the    context      of    the    contract   of   insurance,     the

incontestability         clause   is        clear    and   does     not   result    in

inconsistency or ambiguity.             The incontestability clause bars a

defense based on an insurer’s claim that a disease existed as

opposed to a claim that it manifested itself prior to the issuance

of the policy. The incontestability clause protects an insured who

fills out an insurance application without knowledge or reason to

know that he is suffering from a particular illness or disease;

however, the clause would not protect an insured who knows that he

suffers from a disease and nevertheless fails to inform the insurer

of this fact.       Here, plaintiff proposes a system whereby the

incontestability clause would grant the same degree of protection

to insureds who fraudulently misrepresent their medical status to

those who unknowingly are afflicted by an illness which does not

manifest itself prior to the issuance of the policy.                  To adopt such

a system would be to encourage dishonesty and reward deception

contrary to clear public policy.

          Consumers should not be encouraged nor allowed to purchase

insurance for a risk that is known to have already occurred.

                                            11
         The distinction between a "manifest" condition and one that

"exists" is recognized under Tennessee law.              In Horace Mann Mutual

Ins. Co. v. Burrow, 213 Tenn. 262, 373 S.W.2d 469 (1963), the

insurer attempted to deny coverage for an operation required to

correct an esophageal bronchial fistula which was caused by a

congenital condition existing before the policy was in force.                 The

insurance company argued that the loss was not caused by a sickness

defined in the policy as "sickness as used herein means sickness or

disease occurring while the insurance is in force."                  Id. at 471.

The court concluded that although the "fistula...existed dormant

all these years in the (insured’s) body, it was not a sickness as

the court interpreted the term."            Id.   The court, quoting from CJS

Insurance Section 893 stated "an illness or disability has been

deemed to    have    its   inception   when       the   disease    first   becomes

manifest or active and not at the earlier time when the medical

cause of the disease may have begun or had its origin."                    Id. at

472.

         Paul Revere has complied with the judicial interpretation

of the term "manifestation."       Pursuant to the distinction between

"manifesting and existing" recognized in Tennessee, plaintiff’s

condition had manifested when he was diagnosed as HIV positive,

well before the policy was issued.           Coverage is not afforded under

the policy and the statutorily mandated incontestable clause cannot

be employed to create coverage.

         The statutorily mandated incontestable clause does not

prohibit Paul Revere from denying plaintiff’s claim based upon a

lack of coverage due to the prior manifestation of his illness.

The    statutorily   mandated   incontestable           clause    only   prohibits

denials of claims based upon the prior existence of a disease,

rather than the manifestation of a disease prior to the issuance of

                                       12
the policy.

          For the reasons herein we are of the opinion that extension

of coverage to plaintiff would only serve to reward and shelter a

fraudulent insured.     See Township of Gloucester v. Maryland Cas.

Co., 668 F.2d 394, 403 (D.N.J. 1987), holding that a person "cannot

obtain insurance for a risk that the insured knows has already

transpired."

          It therefore results that the judgment of the trial court

is affirmed, and the cause is remanded to the trial court for any

further necessary proceedings.         Costs on appeal are taxed to

plaintiff/appellant.

                                       ________________________________
                                       SAMUEL L. LEWIS, JUDGE

CONCUR:

_________________________________
HENRY F. TODD, P.J., M.S.

_________________________________
BEN H. CANTRELL, J.

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