OGC Op. No. 04-03-18
The Office of General Counsel issued the following opinion on March 22, 2004, representing the position of the New York State Insurance Department.
Re: Life Insurance Contract & Misrepresentation by Agent
Under the facts presented, may the insurer rescind the insureds life insurance policy based on the misrepresentation described below?
This inquiry calls for more than an analysis of the New York Insurance Law, and contains questions of law and fact that only a court of competent jurisdiction may definitively answer. Consequently, the Department recommends that a private attorney be consulted to answer this query.
However, the analysis below does provide pertinent New York Insurance Law statutes and case law. Please be advised that this opinion does not presume that New York law would be applied to resolve this matter.
The insured met with an insurance agent, who is licensed in New York and has offices in New York and California, regarding his estate plan, and decided to buy several life insurance policies on his life from different life insurance companies, which are all duly licensed in New York. All meetings with the agent took place in New York.
In December 2000, the insured and the insureds lawyer, as trustee, signed insurance applications that did not indicate the geographical location of the applications execution in New York, but did contain unfilled sections to indicate such location, which neither the insured, nor his attorney completed. The applications were later taken by the insurance agent, and completed by the agent or some other individual in the agents office. The policies were issued as Alaska policies (i.e., the contract form is one approved for issue in Alaska).
The premiums for the policies were paid in February 2001.
The policies are all owned by an irrevocable trust, and the trust is sited in Alaska. The trustees are an Alaska bank and the insureds lawyer, an individual who lives and works in New York.
The policies were issued in February or March 2001, and delivered to one of the trustees in New York.
In June or July 2003, after reviewing the policies, the insured noticed that someone, other than himself, completed those sections that indicated the location of the applications execution, and designated Anchorage, Alaska as the place of signing. The insured and his lawyer were never in Alaska to sign the applications.
The insured is now concerned that the insurance companies could challenge the validity of the policies and deny any death claims under the policies.
The insured and the beneficiary are bound by the representations made in an application for insurance coverage. See Nationwide Ins. Co. v. Dorch, No. 94-CV-5842, slip op. at 5 (S.D.N.Y. Mar. 25, 1996) (unpublished). "The signer of a contract is conclusively bound by it regardless of whether he or she actually read it." Curanovic v. N.Y. Cent. Mut. Fire Ins. Co., 307 A.D.2d 435, 437 (3d Dept 2003). When an individual applies for insurance coverage, he or she "has the duty to read the application, correct any incorrect or incomplete answers and is presumed to have done so, even if told by the agent [that] it was unnecessary to read the application, especially where . . . the [individual] specifically represented that the answers on the application were true and the insurer could rely on them." Id. at 5 (alteration in original). See Courtney v. Nationwide Mut. Fire Ins. Co., 179 F.Supp.2d 8, 12 (N.D.N.Y. 2001). "An insured cannot remain silent while cognizant that his insurance application contains misleading or incorrect information," but "ha[s] a duty to review the entire application and to correct any incorrect or incomplete answers." North Atl. Life. Ins. Co. of Am. v. Katz, 163 A.D.2d 283, 284-285 (2d Dept 1990). Thus, an insured may be held responsible for misrepresentations contained within an insurance application regardless of the fact that an insurance agent completed the application signed by the insured. Dorch, No. 94-CV-5842 at 5. See also Bloom v. Mut. Of Omaha Ins. Co., 161 A.D.2d 1047, 1049 (3d Dept 1990) (court held that misrepresentations, which were included in application for health insurance by the insurance agent after the insured allegedly provided the agent with accurate information, were nevertheless deemed to be adopted by the insured when the insured signed the application).
N.Y. Ins. Law § 3105(a)-(c) provides the following:
(a) A representation is a statement as to past or present fact, made to the insurer by, or by the authority of, the applicant for insurance or the prospective insured, at or before the making of the insurance contract as an inducement to the making thereof. A misrepresentation is a false representation, and the facts misrepresented are those facts which make the representation false.
(b) No misrepresentation shall avoid any contract of insurance or defeat recovery thereunder unless such misrepresentation was material. No misrepresentation shall be deemed material unless knowledge by the insurer of the facts misrepresented would have led to a refusal by the insurer to make such contract.
(c) In determining the question of materiality, evidence of the practice of the insurer which made such contract with respect to the acceptance or rejection of similar risks shall be admissible.
When an insured misrepresents facts in his or her insurance policy application, and such misrepresentations are material, the insurer may assert its right to rescind1 the policy under N.Y. Ins. Law § 3105 (McKinney 2000), provided that the insurer returns all premiums and honors all claims of innocent third parties as required by law.2 See Courtney, 179 F.Supp.2d 8, 10 (N.D.N.Y. 2001). But the time allotted to rescind a life insurance policy is not indefinite. N.Y. Ins. Law § 3203(a)(3) (McKinney Supp. 2004) places a two-year limitation on the time in which an insurer may contest statements made on an insurance application by providing that:
(a) All life insurance policies, except as otherwise stated herein, delivered or issued for delivery in this state, shall contain in substance the following provisions, or provisions which the superintendent deems to be more favorable to policyholders:
. . . .
(3) that the policy shall be incontestable after being in force during the life of the insured for a period of two years from its date of issue, and that, if a policy provides that the death benefit provided by the policy may be increased, or other policy provisions changed, upon the application of the policyholder and the production of evidence of insurability, the policy with respect to each such increase or change shall be incontestable after two years from the effective date of such increase or change, except in each case for nonpayment of premiums or violation of policy conditions relating to service in the armed forces. At the option of the insurer, provisions relating to benefits for total and permanent disability and additional benefits for accidental death may also be excepted . . . .
However, if an insurer could not have ascertained such material misrepresentation by investigating the applicant at the time the life insurance contract was effected, the insurer will not be precluded from raising this fact as a defense after the period provided for in the incontestable clause has elapsed. Simpson v. Phoenix Mut. Life Ins. Co., 24 N.Y.2d 262, 267 (1969).
Under the facts presented here, the threshold question involves the choice of either New York or Alaska law to resolve this matter. N.Y. Ins. Law § 3103(b) (McKinney 2000) provides the following regarding New Yorks choice-of-law rules for insurance policies delivered or issued for delivery in New York:
(b) No policy of insurance or contract of annuity delivered or issued for delivery in this state shall provide that the rights or obligations of the insured or of any person rightfully claiming thereunder, with respect to:
(1) a policy of life, accident and health insurance or contract of annuity upon a person resident in this state,
(2) a policy of insurance upon property then in this state, or
(3) the liabilities to be incurred by the insured as a result of activity then carried on by the insured in this state,
shall be governed by the laws of any jurisdiction other than this state. This subsection shall not apply to policies of marine insurance.
Consequently, if the policies were delivered in New York, New York law should govern.
The law of the jurisdiction that controls will determine: (1) the materiality of the misrepresentation; (2) who is liable or responsible for the misrepresentation; (3) the length of the life insurance policies contestability period; (4) whether an insurer may contest certain statements made in insurance applications after the contestability period has ended; and (5) any remaining questions of law or fact.
All of these questions must necessarily be resolved by a court of competent jurisdiction, and not by the Insurance Department. Therefore, the Department recommends that a private attorney be consulted to answer this query.
For further information you may contact Senior Attorney Kristian Earl Lynch at the New York City Office.
1 Under New York law, the remedy of "[r]ecission is available even if the material misrepresentation is innocently or unintentionally made." Nationwide Mut. Fire. Ins. Co. v. Pascarella, 993 F.Supp. 134, 136 (N.D.N.Y. 1998).
2 Rescissions under § 3105 nullify insurance contracts, effectively making them nonexistent.