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Lauer v. American Family Life Insurance Co.

April 13, 2001

MARILYN LAUER, PLAINTIFF-APPELLANT
v.
AMERICAN FAMILY LIFE INSURANCE COMPANY, DEFENDANT-APPELLEE.



Appeal from the Circuit Court of Cook County. No. 99 CH 13893 Honorable Julia Nowicki, Judge Presiding

The opinion of the court was delivered by: Justice O'brien

Plaintiff, Marilyn Lauer, the beneficiary under her husband's life insurance policy, filed a two-count complaint seeking a declaratory judgment that the policy was incontestable at the time of her husband's death (count I), and alleging defendant, American Family Life Insurance Company, breached the contract by failing to pay death benefits under the policy (count II). The circuit court dismissed count I pursuant to section 2-615 of the Code of Civil Procedure (725 ILCS 5/2-615 (West 1998)), explaining that based upon the contract and the law, the two-year contestability period commenced on the policy date rather than the conditional receipt date. Further, the circuit court dismissed count II pursuant to section 2-619 of the Code of Civil Procedure (725 ILCS 5/2-619 (West 1998)), explaining that Albert Lauer had made a material misrepresentation in his insurance application. Plaintiff appeals.

On March 23, 1997, Albert Lauer applied for a life insurance policy with defendant. On March 26, 1997, Albert Lauer paid his first premium and the defendant issued a conditional receipt (the Conditional Receipt). On April 12, 1997, defendant issued the 20-year decreasing term life insurance policy for which Albert Lauer had applied (the Policy). By its terms, the Policy took effect retroactively on April 2, 1997, and terminated April 1, 2017. Albert Lauer died from lung cancer on March 28, 1999.

His beneficiary, Marilyn Lauer, submitted the Policy, along with Albert Lauer's death certificate, to defendant for payment. Defendant initiated a routine contestable investigation during which it received medical records from, inter alia, Dr. Patel, indicating that Albert Lauer had been diagnosed with lung cancer in May of 1996 and had received multiple regimens of chemotherapy during 1996 and 1997. Defendant refused to pay benefits under the Policy because Albert Lauer's death occurred within the two-year contestability period and because Albert Lauer's answers to questions on his application for life insurance about his medical condition were incomplete in that they failed to disclose his diagnosis and treatment for lung cancer. Defendant asserted that, had it known of the condition, it would not have issued the Policy.

On appeal, plaintiff argues that the Policy became incontestable on March 26, 1999, the two-year anniversary of the date upon which Albert Lauer paid his first premium and the defendant issued its Conditional Receipt. Plaintiff relies primarily upon Holtze v. Equitable Life Assurance Society of the United States, 548 F.2d 1037 (D.C. Cir. 1976), and upon the public policy expressed by the Illinois legislature in section 224(c) of the Illinois Insurance Code (215 ILCS 5/224(c) (West 1998)), in support of her argument.

In Holtze, the decedent completed an application for life insurance on October 24, 1969, paid the first premium, and received a conditional receipt. The insurance company conducted its examinations and issued a formal policy on November 28, 1969, which contained a standard two-year incontestability clause. Holtze died on November 19, 1971. The United States Court of Appeals for the District of Columbia certified two questions to the Maryland Court of Appeals asking it to define whether the definition of "Policy" under Maryland law would call the conditional receipt a "written instrument" as used in the policy definition, and what was the date of issue of the policy. The Maryland court found that the conditional receipt together with the application are part of the "written instrument" in which the contract was set forth on October 24, 1969, and the two-year inconstestability period started that day. Applying this ruling, the federal court reasoned that because the insurance company had accepted the first premium, issued, and delivered the formal policy, it was in no position to raise the point that coverage did not exist prior to November 26, 1969. Accordingly, the federal court ruled that under Maryland law, where the conditional receipt was issued on October 24, 1969, and the formal policy was issued on November 23, 1969, the policy became incontestable on October 24, 1971.

Section 224(c) of the Illinois Insurance Code provides, in relevant part:

"A provision that the policy, together with the application therefor, a copy of which shall be endorsed upon or attached to the policy and made a part thereof, shall constitute the entire contract between the parties and that after it has been in force during the lifetime of the insured a specified time, not later than 2 years from its date, it shall be incontestable except for nonpayment of premiums ***; provided that the application therefor need not be attached to or made a part of any policy containing a clause making the policy incontestable from the date of issue." (Emphasis added.) 215 ILCS 5/224(c) (West 1998).

Defendant counters that the Policy became incontestable on April 12, 1997, the two-year anniversary of the date upon which defendant issued the Policy. Defendant relies primarily upon Malone v. North Atlantic Life Insurance Co., 256 A.D. 2d 1077, 1078, 682 N.Y.S.2d 760, 761 (1998), and the language of the Conditional Receipt and of the Policy, in support of its argument.

In Malone, the plaintiff obtained a life insurance policy with a two-year incontestability provision, and died more than two years after the issuance of the conditional receipt, but less than two years after the issue date of the policy. Upon plaintiff's death, the insurer contested the policy, claiming that the decedent had concealed the fact that he had cancer. The Malone court held the two-year incontestability period did not begin to run until the issue of the date of the policy, not on the date the insured received the conditional receipt. The insurance policy was, therefore, contestable. According to the Malone court, "[a] conditional receipt is simply a binder that provides for temporary or preliminary insurance, covering the applicant until the insurance company's investigation of insurability is completed." Malone, 256 A.D. 2d at 1078, 682 N.Y.S.2d at 761. Accord Loyda v. New England Life Insurance Co., 409 F. Supp. 754 (D.P.R. 1976).

The Policy contains a standard two-year incontestability provision which provides:

"INCONTESTABILITY. We will not contest the validity of this Policy except for nonpayment of Premium after it has been in force during the Primary Insured's lifetime for two years from the later of:

1. the Issue Date; or

2. the date We approve any Reinstatement ...


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