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Your Benefits and You

Rights of the Insured Protected by State Supreme Court

August 2000

Past columns in this space have discussed court cases involving the Incontestable Clause in both life and disability policies. Incontestable Clauses are required by most states to be part of any life, health or disability contract. They generally give an insurance company two years after issuing the policy to rescind the contract on the basis of false statements on the application but prohibit such actions after that period.

Although the concept sounds simple, insurance companies have regularly tried to circumvent the provision, or, in their words, "avoid opening the door to fraud."

Some History

A few years ago in Amex Life Assurance Co. v. Superior Court, the California Supreme Court ruled that the Incontestable Clause could not be ignored and ordered Amex Life to pay the death claim of a person with AIDS who died four years after fraudulently purchasing a life insurance policy by having another person take his insurance physical examination.

The Incontestable Clause was held to nonpayment even for fraud. The Legislature subsequently passed a law confirming the decision but allowing an insurance company to rescind, or cancel, the policy if an imposter took the insurance exam in place of the insured.

For the past few years, an argument over the Incontestable Clause in a Disability Income policy has been working its way through the California state court system. In June, the California Supreme Court issued its opinion on Galanty v. Paul Revere Life Insurance Company, and ruled unanimously, 7-0, in favor of Galanty and against the insurance company. The Incontestable Clause of a disability policy does prevent an insurance company from rescinding a disability policy or otherwise avoiding paying a claim after it has been in effect beyond the two-year incontestable period.

Case Background

The facts of this case are: Mark Galanty purchased a Disability Income policy in late 1988 and it was issued in March 1989. Although totally asymptomatic and not undergoing any treatment at that time, Galanty had tested HIV positive some years earlier before buying the insurance. He told no lies on the application. In fact, before issuing the policy the insurance company got his medical records and reviewed them. Although there were notes about a "viral syndrome" and his participation in "a UCLA double-blind study," the insurance company made no further inquiries and issued the policy.

In 1994, some five years later, Galanty filed a claim under the policy due to becoming disabled with AIDS. After making payments for some time, Paul Revere Life Insurance Company stopped paying benefits. They maintained that, despite the Incontestable Clause, their contract only agreed to pay benefits for "loss due to sickness." The contract defined "sickness" as "a sickness or disease which first manifests itself after the date of issue."

They insisted that since Galanty was HIV positive before the policy was issued, AIDS is not a covered sickness for him and he is not eligible for benefits. This is despite the fact that the contract, like all other disability policies in California, had a statutory Incontestable Clause that said in part, "No claim for loss incurred or disability (as defined in the policy) commencing after two years from the date of issue of this policy shall be reduced or denied on the ground that [the condition] had existed prior to the effective date of coverage of this policy." The provision seems clear enough, but Paul Revere has had a history of trying to get around these clauses in other states with this rationale and elected to do the same in California.

The Ruling

At the trials, Galanty was represented by Jon Davidson of the Lambda Legal Defense and Education Fund and Mary Newcombe, both well-known, experienced attorneys who have considerable experience arguing HIV issues against insurance companies.

They argued very successfully. In addition to deciding unanimously, the Supreme Court stated in no uncertain terms that the other provisions in a disability insurance contract, such as definitions, may not change the meaning of any statutory provisions, such as the Incontestable Clause. This means in this case that regardless of how the policy defined "sickness," it cannot change the meaning of the Incontestable Clause. The clause means what it says, i.e., after two years, the validity of the policy cannot be challenged as long as that wording of the incontestable clause is used.

California law permits an alternate wording to the Incontestable Clause which limits the Incontestable Period for two years but "with the exception of fraud." Thinking that those policies would have competitive problems in the marketplace, insurance companies have resisted this wording. They may rethink that position.

Several consumer advocacy groups as well as the California Department of Insurance submitted amicus curiae briefs in support of Galanty's position. AIDS Project Los Angeles joined with Robert Gianelli, a private attorney who specializes in insurance issues in submitting an amicus curiae brief as well. Of passing interest is that the APLA brief is singled out for mention in one of the footnotes in the Court's judicial notice to one of the points the brief is making.

Current Trends

Does this mean it is now OK to commit fraud to get disability insurance? Certainly not, no more than the Amex case opened the door to life insurance fraud. The commission of fraud is still a criminal offense, and there are indications that insurance companies are starting to encourage the prosecution of people committing insurance fraud in this manner.

In order to please their selling agents, insurance companies have been encouraged to streamline the issuance of insurance policies. This gets the policy to the insured while they're still in the mood to purchase it and it gets the commission to the agent quickly. If there are changes to be made as the result of this decision, one will be that insurance companies will start being more cautious and thorough with applications before issuing the policy in the first place. This means there will be more frequent use of HIV tests with applications, a more thorough review of medical records and possibly more refusals.

But this will also prevent cases like this one -- where Galanty purchased his policy in good faith and honestly believed he had coverage, only to have it almost pulled out from under him just when he needed it most.

This article was provided by AIDS Project Los Angeles. It is a part of the publication Positive Living.
See Also
More on HIV and Health Insurance in Western U.S. States