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Lauer v. American Family Life Insurance Co.

April 04, 2002

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



The opinion of the court was delivered by: Justice Thomas

UNPUBLISHED

Docket No. 91804-Agenda 25-January 2002.

At issue is whether an insurance company can validly make the two-year contestability period in a life insurance policy begin on the policy's issue date rather than on the date it issues a conditional receipt to the insured. We hold that it can.

BACKGROUND

The facts are undisputed. On March 23, 1997, Albert Lauer applied for life insurance with defendant, American Family Life Insurance Company. In his application, Lauer failed to disclose that he had been diagnosed with terminal lung cancer in May 1996 and had received multiple regimens of chemotherapy during 1996 and 1997. On March 26, 1997, Lauer paid his first premium and defendant issued a conditional receipt. The conditional receipt provided temporary life insurance that would end on the earlier of 120 days or the date insurance took effect under the policy. Defendant subsequently issued Lauer a 20-year decreasing term life insurance policy with an "issue date" of April 12, 1997. Lauer's wife, plaintiff Marilyn Lauer, was the named beneficiary.

Lauer died of lung cancer on March 28, 1999, and plaintiff submitted a claim for benefits under the policy. Defendant initiated an investigation and received medical records showing that plaintiff had been diagnosed with lung cancer in 1996 and had received chemotherapy in 1996 and 1997. Defendant informed plaintiff that it would not honor the policy because Lauer had materially misrepresented his health and had failed to answer questions truthfully in his application. Defendant asserted that it considered Lauer's lung cancer material to the risk it assumed and that it would not have issued the policy if Lauer had disclosed that he had cancer. Accordingly, defendant refunded the premiums Lauer had paid.

Plaintiff filed a two-count complaint against defendant. In count I, she sought a declaratory judgment that the policy was incontestable when her husband died. In count II, she alleged that defendant breached the contract by failing to pay benefits. Defendant moved to dismiss both counts. Defendant argued that count I should be dismissed pursuant to section 2-615 of the Code of Civil Procedure (735 ILCS 5/2-615 (West 2000)) because the two-year contestability period began on the policy's issue date rather than on the date it issued the conditional receipt. Thus, the policy was still contestable when Lauer died. Defendant argued that count II should be dismissed pursuant to section 2-619 of the Code of Civil Procedure (735 ILCS 5/2-619 (West 2000)) because Lauer had made material misrepresentations in his application. Thus, defendant was entitled to rescind the policy. The circuit court of Cook County granted the motion, and plaintiff appealed.

The appellate court reversed and remanded. 321 Ill. App. 3d 890. The court held that the contestability period began to run on March 26, 1997, the day defendant issued a conditional receipt to Lauer. Citing section 224(c) of the Illinois Insurance Code (Insurance Code) (215 ILCS 5/224(c) (West 2000)), the court stated that the application was part of the insurance contract and thus the contestability period began when plaintiff's coverage began with defendant. The court believed that section 224(c) evinced a legislative intent to make the contestability period run from payment of the first premium, not from an arbitrary issue date selected by the insurance company. 321 Ill. App. 3d at 894-95. We granted defendant's petition for leave to appeal.

ANALYSIS

Defendant first argues that the appellate court erred in holding that the two-year contestability period began to run on the date defendant issued a conditional receipt, rather than on the policy's issue date. We agree.

We begin by analyzing the relevant policy language. The incontestability clause provides, in relevant part:

"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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