It should be axiomatic that an insurance company is entitled to determine for itself what risks it will accept, and therefore to know all the facts relative to the applicant’s physical condition. “It has the unquestioned right to select those whom it will insure and to rely upon him who would be insured for such information as it desires as a basis for its determination to the end that a wise discrimination may be exercised in selecting its risks.” (Robinson v. Occidental Life Ins. Co.  (1955) 131 Cal. App. 2d 581, 586 [281 P.2d 39].

When an insurer rescinds a policy of insurance because it was deceived by the insured the beneficiary of the policy will do almost anything to obtain the benefits of the policy. In Ronald Smith, Successor Trustee Under the James W. Coops Trust v. Pruco Life Insurance Company of New Jersey, No. 12-3071-cv (2d Cir. 03/19/2013) the Second Circuit Court of Appeal was asked to overturn the rescission of a life insurance policy.

Ronald Smith appealed the district court’s entry of judgment, following a bench trial, in favor of defendant-appellant Pruco Life Insurance Company of New Jersey (“Pruco”). Smith sought to recover benefits as the beneficiary of a term life insurance policy upon the death of the insured, Michael Coops. Relying on an application for benefits attached to Coops’s policy at the time of delivery, the district court concluded that the policy never became effective because of Coops’s failure to disclose a cancer diagnosis, and that Smith was therefore not entitled to a benefit.  Smith conceded that the application contained information Coops knew to be untrue when the policy was delivered, and that Pruco would not have issued the policy had the information been correct.

Smith alleged that he was the beneficiary of a $1 million insurance policy issued by Pruco on the life of Michael Coops; that Michael Coops had died; and that Smith was therefore entitled to a payment from Pruco of $1 million plus interest from the date of Coops’s death. Following a bench trial the district court entered judgment in favor of Pruco holding it was entitled to rescind the policy because of a material misrepresentation made by Coops in securing the policy and Smith was therefore not entitled to a benefit. Smith now appeals the district court judgment.

The material facts were not disputed. Coops applied by telephone for a term life insurance policy from Pruco in July of 2007; a Pruco employee recorded the information Coops provided. On or before September 7, 2007, Coops was diagnosed with Stage IV colon cancer. Subsequently, on September 29, 2007, Pruco delivered the life insurance policy to him. The policy contained the following statement: “This policy and any attached copy of an application, including an application requesting a change, form the entire contract.”

Coops was presented with two copies of the application when the policy was delivered to him on September 29, 2007. The first was physically attached to the policy; the second was not. Coops made two changes to the latter copy, first correcting an error in his billing address, and second, signing and dating the application, thereby attesting that: (1) “[t]o the best of [his] knowledge and belief, the statements in [the] application [were] complete, true and correctly recorded,” and (2) he would “inform the Company of any changes in [his] health, mental or physical condition, or of any changes to any answers on [the] application, prior to or upon delivery of [the] policy. A representative of Pruco also signed that copy of the application. Pruco retained the signed and amended version of the application, while Coops retained the version that was attached to his policy.

Coops never informed Pruco of his cancer diagnosis or treatment or attempted to amend or supplement the information in the application, which indicated that he had not been diagnosed with cancer. The parties agreed that Pruco issued the policy only because it did not know of the diagnosis prior to, or at the time of, delivery on September 29, 2007. Coops paid premiums until he died on April 28, 2009. Following his death, Pruco learned for the first time that Coops had been diagnosed with colon cancer before the policy was delivered. Pruco rescinded the policy, relying on New York law that permits an insurer to rescind an insurance policy ab initio (from its inception) if the insured made a material misrepresentation when he or she secured the policy. It denied Smith’s claim for a death benefit and returned Coops’s premium payments.

The district court held a bench trial at which the primary disputed issue was whether the court could consider the application attached to the policy in determining whether Coops had made a misrepresentation to Pruco.

Smith focuses on the term “true copy” of the application used in the New York statute. He presumes the application for insurance sought to be introduced in evidence is the one that bears Coops’s signature, and argues that a “true copy” of that application was not attached to the policy, as the version that was attached was unsigned and did not reflect Coops’s correction of his billing address.

Under the statute insurance companies are obligated to set forth in each policy issued the entire agreement, as well as every statement or representation which induced its making, and upon which the company relied, if it is to be available as a defense. The statute was created to protect the insured or his or her beneficiary by providing the insured with the opportunity to examine those writings, including applications that may be relevant to the policy and, particularly in the case of applications, affording an opportunity to correct any incorrect statements. By allowing the insured to review, understand and correct at the time of delivery any information that the insurance company might raise as a defense to coverage is to ensure that interested persons may avoid either being misled as to the insurance protection obtained or paying premiums for years in ignorance of facts nullifying the supposed protection.

In this case, it is undisputed the unsigned copy of the application was attached to the policy at the time of delivery. Coops had an opportunity to review and correct the terms, conditions and other information contained therein, and that information therefore could be, and indeed was, incorporated into the contract between Pruco and Coops. The precise document that was attached to the policy makes clear that the policy would not become effective unless and until it was delivered and accepted, Coops’s health remained as stated in the application, and the first premium was paid.

Because the representations, terms and conditions on which Pruco seeks to rely were expressly incorporated into the policy and were attached to that policy at the time of delivery, they may be considered in evidence.

Because the Second Circuit concluded that the application was properly admitted as evidence at the bench trial, Pruco could rely on it to establish that the contract could not come into effect unless and until those conditions were satisfied. [Stipcich v. Metro. Life Ins. Co., 277 U.S. 311, 316 (1928)] where the U.S. Supreme Court held that both by the terms of the application and familiar rules governing the formation of contracts no contract came into existence until the delivery of the policy, and at that time the insured had learned of conditions gravely affecting his health, unknown at the time of making his application. In Stipcich the Supreme Court observed that “[i]nsurance policies are traditionally contracts uberrimae fidei and a failure by the insured to disclose conditions affecting the risk, of which he is aware, makes the contract voidable at the insurer’s option.” Insurance companies seek a wealth of health history information from applicants because that information is extremely important to the underwriting decision.

I agree, also, with the Third Circuit’s decision in New York Life Ins. Co. v. Johnson, 923 F.2d 279 (3d Cir. 01/15/1991), where it explained why an innocent beneficiary could receive no benefits if grounds for rescission exist that may have affected the Second Circuit’s decision in this case. It said:

While a court might sympathize with a beneficiary who does not receive the proceeds of a policy obtained by the insured’s fraud, there are strong reasons of public policy supporting the rule … If the lie is undetected during the two year contestability period, the insured will have obtained excessive coverage for which he has not paid. If the lie is detected during the two year period, the insured will still obtain what he could have had if he had told the truth. In essence, the applicant has everything to gain and nothing to lose by lying. The victims will be the honest applicants who tell the truth and whose premiums will rise over the long run to pay for the excessive insurance proceeds paid out as a result of undetected misrepresentations in fraudulent applications (Emphasis added.)

Misrepresentation of material facts in an application for insurance known to the insured before the policy’s inception is fraud and since the insurer was deceived in the inception the policy must be voided.

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