Provident Life & Casualty Insurance v. Fein

Citations: 310 N.J. Super. 110; 708 A.2d 419; 1998 N.J. Super. LEXIS 161

Court: New Jersey Superior Court Appellate Division; April 13, 1998; New Jersey; State Appellate Court

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Provident Life and Casualty Insurance Company filed a lawsuit against Bruce A. Fein in the Chancery Division, seeking to rescind a disability insurance policy or, alternatively, to declare that Fein was not disabled under the policy terms. Fein counterclaimed for breach of contract, asserting his right to benefits under the policy. Both parties requested summary judgment regarding the rescission issue, with Provident initially prevailing. However, the appellate court found that Provident was not entitled to rescind the policy, reversing the decision and remanding for trial on the disability issue.

Fein, a commodities trader, purchased the disability insurance policy in 1982 and later increased his benefits from $1,800 to $2,800 in 1986, reporting an annual income of $175,000 on the application. The application did not require disclosure of other disability policies. After missing a premium payment in June 1988, Fein promptly paid the overdue premiums, and the policy remained in force without issues until he again missed a payment in December 1993. After realizing the oversight, he sent a check covering the missed premiums in March 1994.

Fein's agent later instructed him to submit a reinstatement application, during which Fein reaffirmed his income as $175,000. He also disclosed a separate disability policy providing $4,000 in monthly benefits. Although Fein mailed the reinstatement application on May 2, 1994, it was date-stamped as received by Provident on June 2, 1994. On that day, Provident acknowledged receipt of the payment and application but stated that reinstatement was conditional upon approval of the application. On June 6, 1994, Provident confirmed the reinstatement of Fein's policy, noting that coverage for injuries would only apply if sustained after the reinstatement date and that losses from sickness would be covered if they began more than ten days post-reinstatement.

On February 20, 1996, Fein filed a disability claim citing physical and emotional ailments that began in February 1995, claiming he could no longer perform his job as a commodities trader. He reported a year-to-date income of $47,000 and disclosed having disability policies with National Life and CNA, the latter being a group policy that provided monthly benefits of $6,000, purchased by his employer, the New York Mercantile Exchange, on December 31, 1993. However, Fein failed to mention the CNA policy in his reinstatement application dated May 2, 1994, which listed only the National Life policy with benefits of $4,000.

Provident rejected Fein's claim based on two grounds: the omission of the CNA policy and the inflated income claim. Provident argued that it would not have reinstated the policy had it known about the CNA policy and Fein's actual income, which was less than the required $175,000 to support a higher benefit level. The Chancery Division found that Fein's omission constituted equitable fraud, justifying rescission of the policy.

The court assumed that Fein was unaware of the CNA policy when he submitted the application. It also ruled against Fein's arguments that the reinstatement application was inadmissible, that the policy had automatically reinstated by law, and that the suit was barred by the “incontestability clause” due to being filed more than two years after reinstatement. While the court agreed with the rejection of the first argument, it concluded that the Chancery Division erred in its rulings on the second and third arguments, indicating that Fein was entitled to prevail on his cross-motion for partial summary judgment dismissing the rescission claim.

The primary issue is whether Fein's insurance policy was reinstated according to its terms and New Jersey law (N.J.S.A. 17B:26-7) prior to his acquiescence to Provident's request to submit a reinstatement application. Under the statute, if a renewal premium is not paid on time, an insurer may reinstate the policy upon accepting a premium without requiring an application. However, if an application is required and a conditional receipt is issued, reinstatement occurs upon approval or, if not approved, after 45 days unless the insurer has previously notified the insured of disapproval. The reinstated policy only covers losses due to accidental injuries after the reinstatement date and illnesses starting more than 10 days after. Any premium accepted applies to unpaid periods, up to 60 days prior to reinstatement.

The critical timeline includes Fein's payment to Provident on March 15, following notification of policy lapse. Provident informed Fein's agent at the end of April that a reinstatement application was necessary. Fein sent the application on May 2, which Provident acknowledged receiving on June 2, issuing a conditional receipt on the same day and a reinstatement letter on June 6. This timeline indicates that Provident took nearly 1.5 months to request the application and over 2.5 months to issue a conditional receipt after receiving Fein's payment. Provident asserts compliance with N.J.S.A. 17B:26-7 by requiring an application and issuing a conditional receipt, implying that the insurer has unlimited time to decide on reinstatement terms. However, this interpretation is contested.

Courts in other jurisdictions have established that when an insurance company receives a late premium, it is required to request a reinstatement application and issue a conditional receipt within a reasonable timeframe. Failure to do so results in automatic reinstatement of the policy. This principle was reinforced in Bousquet v. Transportation Ins. Co., where the Massachusetts Supreme Judicial Court interpreted a statute similar to New Jersey's, ruling that an insured whose policy lapsed due to nonpayment was protected because the insurer did not issue a conditional receipt upon receiving a late payment. In this case, the insured presented a check and application for reinstatement, but the insurer delayed issuing a reinstatement letter for twenty-two days. The court noted that the statute requires insurers to meet specific conditions, including issuing a conditional receipt, to avoid waiver of lapse. Since the insurer failed to issue the receipt, the policy was automatically reinstated. The court emphasized that the application alone could not override the statutory reinstatement provisions, highlighting the necessity of issuing a conditional receipt as a safeguard for the insured. The issue arose not from any ambiguity in the statute but from the insurer's non-compliance with its requirements.

Possession of a conditional receipt by the insured indicates that they are not yet insured, prompting them to seek temporary coverage or expedite reinstatement actions. Legal precedents affirm that insurance companies may be held liable for not issuing a conditional receipt when late premiums are submitted. In Illinois, a court ruled that an insurance company must act upon receiving a late premium and is entitled only to a reasonable time to decide on reinstatement without requiring a new application. The company’s prompt return of the premium was deemed a nonacceptance. Retaining overdue checks for extended periods has been viewed as unreasonable, leading to automatic acceptance and policy reinstatement. A California Supreme Court case mirrored these principles, ruling that a policy was reinstated upon the acceptance of a late premium check, emphasizing that the insurer's practice of delaying notification or requiring a new application contradicted the terms of the policy which did not permit retention of payments while deciding on reinstatement. The court rejected the notion that insurers could retain payments for a reasonable time based on operational realities, highlighting that the policy did not allow for such delays.

Insurance companies voluntarily expand their operations and specialized departments for their own benefit. When an insurer cannot identify a late payment and issue a conditional receipt before retaining a premium, the insured should not be held responsible for the consequences of that failure. Legal principles advise against interpreting policy terms in a way that increases the risk of forfeiture for the insured, as forfeitures in insurance contracts are generally disfavored. Courts often strive to avoid finding a forfeiture or to establish a waiver or estoppel when possible.

In relevant case law, Louisiana's appellate court ruled that an insurance company has a reasonable timeframe to request reapplication and issue a conditional receipt to avoid automatic policy reinstatement due to overdue premiums. A thirteen-day delay was deemed unreasonable. Similarly, a Texas court highlighted that "reasonable time" is relative and should not involve unnecessary delays, suggesting that such determinations should typically be evaluated by the trier of fact.

In the case involving Mrs. Price, her policy had lapsed when her late payment was received. Horace Mann could either accept the payment for reinstatement or require an application. Without a specified timeframe in the policy, Horace Mann was obligated to choose its course of action within a reasonable time. After thirteen days, Horace Mann solicited a reinstatement application, raising the question of whether this request occurred within a reasonable timeframe. The evidence indicated that Horace Mann deposited the payment in a suspense account and then solicited the application, but this did not conclusively resolve the reasonable time issue.

The statutory construction of N.J.S.A. 17B:26-7 clarifies that when an insurance company receives an overdue renewal premium, it constitutes acceptance and reinstates the policy as of the receipt date, unless the premium is promptly returned or the company simultaneously requests a reinstatement application and issues a conditional receipt. If the company issues the conditional receipt in a timely manner, it has forty-five days to notify the insured of its decision to accept or reject the reinstatement; failure to do so results in automatic reinstatement on the forty-fifth day. The phrase "in connection therewith" emphasizes the need for timely coordination between the receipt of the overdue premium and the issuance of the conditional receipt. While the company is not required to act instantaneously, it must not delay the issuance of the conditional receipt beyond what is reasonable in relation to the necessary paperwork, independent of any internal procedures. Case law supports that delays in communication about reinstatement must be considered reasonable; examples include a six-day delay deemed unreasonable and a five-day delay considered reasonable. Previous rulings indicate that unconditional acceptance of a premium can waive a default, but whether a waiver exists may depend on the specific facts, such as the duration the company retains the premium.

The court does not need to determine the minimum time an insurance company must act to prevent automatic reinstatement. A delay of over two and a half months in issuing a conditional receipt after receiving an overdue premium is deemed unreasonable. Provident Insurance Company claimed it mailed the conditional receipt on the same day it received the reinstatement application, followed by a reinstatement letter four days later. This swift action undermines Provident's argument for the lengthy delay in processing the late premium payment. New Jersey law (N.J.S.A 17B:26-7) indicates that an insurance company must act within forty-five days on a reinstatement application, implying that a two and a half month delay is excessive. Since Provident accepted the premium, it waived the right to require a new application for reinstatement. Legal precedents support that insurers can waive provisions for their benefit, including those related to premium payments and reinstatement, which may result in liability for losses incurred during periods when they would otherwise be exempt. Courts generally resist enforcing forfeitures, allowing insured parties to demonstrate waiver of policy provisions if insurer actions reasonably lead them to believe a forfeiture would not occur.

Fein's agreement to file for reinstatement did not prevent him from demonstrating that the insurance policy was reinstated by law. Citing N.J.S.A. 17B:26-7, the court determined that the policy automatically reinstated when Fein's payment was received on or around March 18, 1994. Additionally, the court concurred with Fein's argument that Provident's rescission action, initiated on May 31, 1996, was barred by a two-year incontestability clause, as the policy had already been reinstated. This clause, compliant with N.J.S.A. 17B:26-5a(2), states that a policy becomes incontestable after being in force for two years. Although the statute incorporates a provision regarding reinstatement, which may create ambiguity regarding the two forms of incontestability clauses, the court emphasized that the statute's focus is on the start of the two-year period rather than the differences between the clauses. The court referenced Johnson v. Metro. Life Ins. Co. to illustrate that ambiguities should be resolved to protect policyholders’ security while maintaining fairness for insurers. Overall, the court found that allowing the concluding phrase to dictate the provision would undermine the purpose of the incontestability clause.

Provident's assertion that the insurance policy was not reinstated until a letter dated June 6, 1994, was rejected. The court determined that reinstatement occurred when a late premium payment was received around March 18, 1994, in accordance with N.J.S.A. 17B:26-7. The statute allows reinstatement due to either the insurance company's action or inaction. Consequently, since Provident's complaint was filed on May 31, 1996—over two years post-reinstatement—the rescission action is barred by the two-year statutory limitation. The ruling emphasizes that after two years from the policy's issue date, misstatements in the application, except for fraudulent ones, cannot be used to void the policy or deny claims for losses or disabilities that occur after this period. Furthermore, policies may include an "INCONTESTABLE" clause, indicating that after two years of being in force, they cannot be contested based on application statements, excluding periods of disability. Claims for losses or disabilities that begin after the two-year mark cannot be denied based on pre-existing conditions not specifically excluded from coverage. The case is reversed and remanded for further proceedings.