Insurance Company Rebuffed for Denying Benefits to Policyholders With AIDS
California Supreme Court Rejects Common Industry Practice of Evading "Incontestability" Clauses
June 19, 2000
Los Angeles -- The California Supreme Court Monday unanimously ruled that insurers cannot deny benefits to policyholders who develop AIDS several years after becoming insured, a practice that is widespread in the industry but which the Court said is illegal, Lambda Legal said.
The 7-0 decision in Galanty v. The Paul Revere Life Insurance Company ordered the insurer to honor a disability insurance policy issued to Mark Galanty, a 52-year-old Studio City man represented by Lambda. The case has been closely watched by the state Insurance Commissioner and disability rights, women's, consumer, legal, AIDS and other civil rights groups, all of whom had warned against allowing insurers to flout state insurance law.
"The highest court in California has sent a powerful message to insurers that they cannot take payments from policyholders for years, and then try to avoid obligations to pay benefits when claims are made," said Mary Newcombe, a Lambda cooperating attorney with the law firm Caldwell, Leslie, Newcombe & Pettit who argued the case before the Supreme Court.
Said Lambda Supervising Attorney Jon W. Davidson, "The court's opinion is a victory for all California consumers. People who become disabled -- regardless of the cause -- need no longer worry that an insurance company will dig through their medical files in an attempt to find a previous lab result, genetic test or medical condition to use as an excuse for refusing payment."
He added, "People with HIV who have disability policies now will have peace-of-mind, knowing that they will receive benefits when they need them instead of being forced into poverty. The Court wisely put an end to the same sort of post-claim underwriting practices novelist John Grisham exposed in The Rainmaker."
Galanty said, "I was trying to be responsible when I accepted a sales agent's pitch about this policy, and I was shocked when years later, my claims were rejected. This ruling comes as a great relief to me today."
Galanty was HIV-positive when Paul Revere sold him a disability insurance policy in 1989, and he diligently paid premiums for the next several years, continuing to work without illness. The policy's "incontestability" clause stated that claims made for disabilities occurring more than two years after the start of a policy could not be denied.
Five years after his policy was issued, Galanty was diagnosed with AIDS; at that time, pain in his hands and other medical complications forced him to stop working as a court reporter. But Paul Revere refused to pay; it claimed that Galanty's AIDS diagnosis was "manifest" before the policy took effect.
In its ruling, California's highest court reversed two lower courts which had sided with the insurer. Ruling that under the law, incontestability clauses prevent insurers from denying disability claims after the policy has been in effect two years, the Court said in its 30-page decision, "In short, the incontestability clause controls."
Writing for the majority, Justice Kathryn M. Werdegar said that historically, "Such clauses were intended to promote the sale of policies to a public generally distrustful of insurers, and to address the perception that insurers tended to avoid paying benefits because of minor misstatements in applications for insurance." The Court sent Galanty's claims for bad faith and emotional distress back to the Court of Appeals since they were not considered in previous rulings.
Once voluntary, incontestability clauses now are required in insurance policies by most states, including California. Similar efforts by other insurers to evade those laws also have failed. Last year, for example, New York's highest court rejected attempts by New England Mutual Life to confuse an HIV-test result with an AIDS diagnosis and ordered the company to pay the benefits it owed to a policyholder.
Headquartered in New York and with regional offices in Los Angeles, Chicago, and Atlanta, Lambda is the nation's oldest and largest legal organization serving lesbians, gay men, and people with HIV/AIDS.
(Galanty v. The Paul Revere Life Insurance Company, No. B113007)
This article was provided by Lambda Legal. Visit Lambda Legal's website to find out more about their activities, publications and services.