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MANZELLA v. INDIANAPOLIS LIFE INS. CO.

January 26, 1993

JOHN R. MANZELLA, M.D.
v.
INDIANAPOLIS LIFE INSURANCE COMPANY



The opinion of the court was delivered by: WILLIAM H. YOHN, JR.

 Yohn, J.

 This is a diversity action in which plaintiff seeks payment of benefits under two disability insurance policies issued to him by defendant. Plaintiff and defendant have filed cross motions for summary judgment. The case was referred to a magistrate judge, who recommended that plaintiff's motion for summary judgment be granted and that defendant's motion for summary judgment be denied. For reasons discussed below, this court accepts the Report and Recommendation of the Magistrate Judge with regard to the disability income protection policy and will grant partial summary judgment for the plaintiff. With regard to the business overhead policy, the court will deny the summary judgment motions of both plaintiff and defendant because of an issue of material fact not raised before the magistrate judge.

 BACKGROUND

 Plaintiff, John R. Manzella, M.D. ("Manzella"), applied to defendant Indianapolis Life Insurance Company ("Indianapolis") on June 26, 1988, for two insurance policies, which are the subject of this lawsuit. Indianapolis issued the policies to Manzella on December 1, 1988. One policy provided for disability income protection and had premiums of $ 14,153.00 annually. The other was designed to cover business overhead expenses and had premiums of $ 1352.00 annually. Manzella paid and Indianapolis collected all premiums due under the terms of the two insurance contracts.

 Manzella is an orthopedic surgeon who is licensed to practice medicine in the State of New Jersey. Indianapolis granted Manzella's request for a "letter of specialty for orthopedic surgery" in conjunction with the issuance of the insurance policies. Manzella actively practiced medicine until February, 1991 when he succumbed to health problems that prevented him from continuing with his practice. Manzella subsequently filed a claim with Indianapolis seeking the payment of benefits under the two insurance contracts. Indianapolis denied payment to Manzella, who responded by filing this action. Indianapolis answered and filed a counterclaim, asserting, inter alia, that Manzella knowingly made material misrepresentations of fact in his policy applications, and that such misrepresentations entitle the insurer to rescind the policies.

 The parties agree that New Jersey law should govern the resolution of this action.

 DISCUSSION

 Federal Rule of Civil Procedure 56(c) provides that summary judgment shall be granted "if the pleadings, depositions, answers to interrogatories, and admissions on file, together with the affidavits, if any, show that there is no genuine issue as to any material fact and that the moving party is entitled to judgment as a matter of law." See Anderson v. Liberty Lobby, Inc., 477 U.S. 242, 106 S. Ct. 2505, 91 L. Ed. 2d 202 (1986). The mere existence of a factual dispute will not defeat an otherwise properly supported motion. Id. at 247. Only disputes over facts "that might affect the outcome of the suit under governing law will properly preclude the entry of summary judgment." Id. at 248.

 Indianapolis has advanced several arguments in support of its motion for summary judgment and in opposition to plaintiff's motion for summary judgment. First, it claims that it is entitled to summary judgment because the plaintiff engaged in fraudulent misrepresentations in his applications for the policies, and that this justifies their rescission. Secondly, and in the alternative, Indianapolis contends that Manzella's motion for summary judgment must be denied because there are issues of fact for jury determination, most notably whether Manzella's sickness began during the period of the policy or was an excluded pre-existing condition.

 Manzella's counters that Indianapolis is barred by the express language of the insurance policies and state statute from contesting any statements, even if fraudulent, made in the policy application.

 Interpretation of the insurance contracts hinges on so-called "incontestability clauses," which limit the right of the insurer to question statements in the insured's application after two years have passed. New Jersey insurers offering health insurance have a statutory choice of two incontestability clauses to use, and the court concludes that the one they choose determines whether intentional misstatements in the application with the purpose of deceiving will or will not void the policy.

 The statutory section in question is N.J.S.A. § 17B:26-5, entitled "Time limit on certain defenses," and it grants insurance companies two options in writing their policies, of which they must choose one. It states that, in health policies for individuals, there "shall be a provision as follows:"

 
(a). After 2 years from the date of issue of this policy no misstatements, except fraudulent misstatements, made by the applicant in the application for such policy shall be used to void the policy or to deny a claim for loss incurred or disability (as defined in the policy) commencing after the expiration of such 2-year period.

 (1) . . .

 
(2) A policy which the insured has the right to continue in force subject to its terms by the timely payment of premium (a) until at least age 50 or, (b) in the case of a policy issued after age 44, for at least 5 years from its date of issue, may contain in lieu of the foregoing the following provision (from which the clause in parentheses may be omitted at the insurer's option) under the caption "INCONTESTABLE":
 
After this policy has been in force for a period of 2 years during the lifetime of the insured, (excluding any period during which the insured is disabled) it shall become incontestable as to the statements contained in the application.

 N.J.S.A. § 17B:26-5.

 Defendant argues that because plaintiff committed fraud in his application, the court should grant its summary judgment motion. Assuming, arguendo, that plaintiff knowingly made fraudulent misstatements in his application, what are the implications for the disability coverage that he now claims, more than two years after defendant issued the policy? It is important to note that defendant chose the optional incontestible clause under subsection (a)(2), which does not make an exception for fraudulent misstatements; it is also important to note that only the business overhead policy included another optional clause, which excluded any period of disability from the two year maturation period of the incontestability clause.

 In the income protection policy, the incontestability provision does not except fraudulent ...


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