Cutler v. Hartford Life Ins. Co.

Citation22 N.Y.2d 245,239 N.E.2d 361,292 N.Y.S.2d 430
Parties, 239 N.E.2d 361 Anne CUTLER, Individually and as Administratrix of the Estate of Julius Cutler, Deceased, Appellant, v. HARTFORD LIFE INSURANCE CO. et al., Respondents.
Decision Date05 June 1968
CourtNew York Court of Appeals

Harry Simon, New York City, for appellant.

William P. Hindman, Jr., and Richard R. Lutz, New York City, for respondents.

Morris Aarons, New York City, amicus curiae, pro se, and Sheila L. Birnbaum, and Joan L. Ellenbogen, New York City, amicus curiae.


Arising on cross motion for summary judgment, the issue is whether a purchaser of mutual fund shares on the installment plan, who optionally purchased diminishing term life insurance under a group policy, was entitled to receive a copy of his fraudulent insurance application statements in order that they be available to the insurers as a defense. The Supreme Court, Kings County, denied plaintiff's motion and granted defendant insurers' motion. The Appellate Division affirmed in a Per Curiam opinion, two Justices dissenting in part.

Plaintiff, the widow of the deceased purchaser of mutual fund shares, sues individually and as his administratrix. Deceased was a lawyer who had retired because of cardiac illness and, after his retirement, had been engaged as a sales representative with a registered dealer for Crosby Plans Corporation, the seller of the mutual fund shares on the installment plan. In December, 1964 he sold himself the plan, subscribing for shares aggregating $18,000. Under the plan he had the option to purchase diminishing term life insurance to cover the decreasing balance of payments due from him in purchase of the shares. He so elected, and made out the insurance application and statements, in which he falsely denied that he had had any heart disease or disorder, or that he had missed work due to illness for any 10-day period during the past five years. In fact, he had had a series of heart attacks since 1958, had been hospitalized, had been confined to his home for months, and was evidently a cardiac disease sufferer at the time of his application. He also understated his age by one year, which avoided a medical examination otherwise required by the insurers' practice. Deceased died April 7, 1965, some four months after the insurance was issued, leaving an unpaid balance of the fund purchase plan (and, therefore, the balance payable under the insurance contract) of $16,700.

Despite the alleged fraud in the application, plaintiff contends that the insurers are liable on the insurance contract because, contrary to the relevant statutes, no copy of the insurance application and statements was ever attached to the certificate of insurance or delivered to the insured. The insurers, on the other hand, contend that they complied with the statutes by returning a copy of the insurance application to Crosby, the group policyholder and asserted creditor beneficiary of the insurance contract.

The issue is one of first impression in this court although it has arisen recently in other cases involving identical, or similar, plans (Robins v. John Hancock Mut. Life Ins. Co., 27 A.D.2d 188, 189, 277 N.Y.S.2d 706, 708, app. withdrawn 20 N.Y.2d 772, 284 N.Y.S.2d 79, 230 N.E.2d 724; Helfaer v. John Hancock Mut. Life Ins. Co., 30 A.D.2d 102, 290 N.Y.S.2d 40, revg. 51 Misc.2d 869, 274 N.Y.S.2d 494). For the reasons to be discussed, the order insofar as it granted defendant insurers summary judgment should be reversed, but the denial of summary judgment to plaintiff should be affirmed. There are issues of fact relating to whether deceased received or retained a copy of his insurance application or statements, and whether, because of his status as a sales representative for a registered dealer in the sale of the instant insurance, an estoppel or defense of fraud may bar the claim.

Deceased had subscribed to purchase shares in Fidelity Trend Fund, Inc., a mutual fund, and agreed to pay $18,000. He elected to purchase insurance under the investment plan and on the basis of his application was found eligible. Under the plan, the insurers, pursuant to jointly prepared group life insurance policies issued to Crosby as policyholder, undertook that in the event any planholder (like deceased) died before fulfilling his payments, the insurers would pay the balance due. As already noted, deceased died owing $16,700 on account of the mutual fund shares purchased. Deceased, through a registered securities dealer (North American Planning Corporation, of which he was also a sales representative), had submitted his application and life insurance statements to Crosby. These were forwarded to the insurers who agreed to insure deceased's life. A joint certificate of insurance was thereupon sent to Crosby for transmittal to deceased, and copies of deceased's application and statements were returned to Crosby's custodian-bank under the plan. The certificate forwarded to Crosby and by it to deceased was evidence of the insurance coverage but did not purport to set forth the terms of the protection (Insurance Law, Consol.Laws, c. 28, § 204, subd. 1).

Under the share purchase plan, but not as to the insurance, deceased's wife by his option was designated as the beneficiary to receive the shares upon his death. The group policies and the joint certificate of insurance, on the other hand, did not in express terms nominate any beneficiary. Instead they provided that Crosby, through its custodian-bank, was to receive the proceeds of the insurance in accordance with the balance due under the schedule of payments.

In considering the relevant statutes, distinctions must be drawn between certificates of insurance and policies of insurance, as well as between individual and group policies of insurance. Moreover, creditor beneficiary insurance and other group life insurance must be distinguished, as must insurance obtained primarily to benefit the creditor rather than the debtor. The respective positions taken by the litigants turn to some extent on these distinctions, and in them lies the root of whatever difficulty there is in resolving the issue here.

Defendant insurers take a literal position. The insurance, they argue, is in the creditor beneficiary class, set up under a group policy. Hence, Crosby, as the recipient under the terms of the policy of the insurance proceeds, is the beneficiary, even though not so termed. Delivery of the insurance application and statements to Crosby through its agent-custodian is the delivery required by the statute. While deceased was the insured he was not the policyholder, rather Crosby was. His wife was the beneficiary of the purchased shares but a stranger to the insurance contract. She, therefore, had no legal interest in the insurance or even any standing to sue with respect to any claim for the proceeds.

Plaintiff widow, on the other hand, relies on the economic purposes and effects of the transaction. Unlike some creditor insurance, the insurance here was obtainable only on the debtor's expressed option, at his additional expense. He would exercise his option only if he was interested in creating a debt-free and fully paid fund of assets for his wife. Crosby was a seller of shares and insurance interested only in commissions on the sales of each. The 'creditor' Crosby carried no risk of loss on the sales contract except for the slight loss of commissions, because the shares would not be delivered unless they were fully paid. Indeed, the mutual fund shares were still in another corporation (Fidelity Trend Fund). Thus, Crosby had no substantial interest in the existence or validity of the insurance. Hence, the return of copies of the insurance application and statements to Crosby, and then only through its banking custodian, would never serve to induce a verification of the answers to questions in the application. In ultimate fact, plaintiff argues, deceased was the insured and his wife the beneficiary of the insurance, just as he was expressly the plan subscriber and she was the beneficiary of the shares on his death.

For many years now the Insurance Law has required that copies of applications for life insurance be attached to and returned with the policy if the insurer, during the limited period of contestability, is to be entitled to use application misstatements, even fraudulent ones, in defending against any claim or in seeking to cancel the policy (§ 142). The purpose of the statute is to protect insureds from loss of their insurance after many years of premium payment without knowledge of infirmities in the contract, especially when the applications are filled out by avid salesmen of insurance, or even if the insurance is procured by their own fraud (Archer v. Equitable Life Assur. Soc. of United States, 218 N.Y. 18, 22--25, 112 N.E. 433, 434--436, discussing the predecessor section, § 58).

Of course, with respect to group life policies the situation is complicated by the fact that the insured does not receive a copy of the policy. Hence, as to such insureds the law requires that they or their beneficiaries receive copies of the individual applications for coverage under the group policy (Insurance Law § 161, subd. 1, par. (a)). Such a provision, or a provision 'more favorable to certificate holders, if any, or not less favorable to certificate holders and more favorable to policyholders', must be contained in all policies of group life insurance.

The filed approved policy form in this case contained an additional provision, as follows: 'Statements made by the Creditor or by the individual Debtors shall be deemed representations and not warranties, and no statement made by the Creditor or by any Debtor on their behalf shall be used in defense to a claim under this Policy, unless it is contained in a written application, or in an Individual Statement signed by the Debtor, or in a Statement to Medical Examiner signed by the Debtor, or in the Life Insurance...

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