Equitable Life Assur. Soc. of U.S. v. New Horizons, Inc.

• Decision Date: 01 December 1958
• Docket Number: No. A--30,A--30
• Citation: 28 N.J. 307,146 A.2d 466
• Parties: The EQUITABLE LIFE ASSURANCE SOCIETY OF THE UNITED STATES, Plaintiff-Respondent, v. NEW HORIZONS, Inc., a corporation, Defendant-Appellant.
• Court: New Jersey Supreme Court

Page 307

28 N.J. 307

146 A.2d 466

The EQUITABLE LIFE ASSURANCE SOCIETY OF THE UNITED STATES Plaintiff-Respondent, v. NEW HORIZONS, Inc., a corporation, Defendant-Appellant.

No. A--30.

Supreme Court of New Jersey.

Argued Oct. 21, 1958.

Decided Dec. 1, 1958.

Herbert M. Gannet, Newark, for appellant (Gannet, Widmark & Goldberg, Newark, attorneys; Theodore Sager Meth, Newark, of counsel).

James J. Langan, Jersey City, for respondent (Emory, Langan, Lamb & Blake, Jersey City, attorneys; Eugene T. O'Neill, of the New York Bar, on the brief).

The opinion of the court was delivered by

WACHENFELD, J.

This is an action for rescission and cancellation of a policy of insurance issued on the life of one Stephen Yafchak by the plaintiff, the Equitable Life Assurance Society of the United States. Defendant, New Horizons, Inc., is the assignee of the policy and counterclaimed to recover its full amount. The material facts are undisputed and in the trial court both parties moved for summary judgment. Judgment was granted in plaintiff's favor, and the defendant appealed. We granted certification of the appeal to the Appellate Division on our own motion.

The policy in question is sometimes referred to as 'key man' insurance. This type of insurance is usually taken out by an employer upon the life of an essential employee. Although the employee is the 'insured,' the employer is the applicant for, and owner and beneficiary of, the policy. The purpose of the insurance is to compensate the employer for the economic detriment occasioned by the loss, through death, of the important services of its employee.

In 1955 Stephen Yafchak was the general manager of Linden Tool Company, Inc. He supervised sales, production, design and general operations and was, without doubt, the key employee of the enterprise. When New Horizons, Inc., purchased Linden Tool, it insisted that the contract of sale be conditioned upon Yafchak's agreeing to remain as general manager.

The subject policy, in the face amount of $20,000, was issued to Linden Tool on June 10, 1955 and contained a clause providing for a two-year contestability period. The application for the policy was signed by both Yafchak and Linden Tool Co., Inc., through its president, Herman Nathanson, and consisted of two parts. The second part relates to the medical history of the insured and the information contained therein was supplied by Yafchak, who affixed his signature immediately beneath a stipulation reading:

'I have read the foregoing answers which are true, full and complete, and agree that such answers shall be part of the application, which shall consist of both Part I and Part II, and that such answers shall also become part of any policy contract that may be issued on the strength thereof.'

The first part of the application was signed by Nathanson, in his capacity as president of Linden Tool, as well as by Yafchak. It contained in the body the assertion that:

'It is hereby agreed that any policy issued hereon shall not take effect until the first premium thereunder has been paid during the good health of the person whose life is proposed for insurance; * * *. All of the foregoing statements and all those contained in Part II hereof are true, and are offered to the Society as an inducement to issue the policy or policies for which application is hereby made.'

Additionally, above the signature of Nathanson appears a clause providing:

'The undersigned hereby applies for the insurance herein specified and certifies that the statements herein contained are correct.'

And over Yafchak's signature on Part I is found the agreement:

'I hereby consent to the insurance herein specified and certify that all the representations and statements made herein are true.'

Defendant concedes that Yafchak gave false negative answers to all of the following questions, which are found in Part II of the application:

'6. Have you ever had or been treated for any disease or disorder of: (Answer each separately.)

'c. the heart, blood vessels or blood?'

'7. Have you ever:

'b. consulted a physician about a pain in the chest or shortness of breath?

'g. had any other illness or injury?' '8. a. Have you ever had an electrocardiogram made?'

'9. Have you consulted or been treated by any physician, practitioner or specialist during the past five years?'

In actuality, the insured had been treated for an acute cardiac decompensation on August 12 or 13, 1954 after he had complained of shortness of breath and a pain in his chest. He had remained under a physician's care for some time thereafter, and in the latter part of 1954 two electrocardiograms had been taken which showed that his heart was functioning abnormally. The doctor who had first treated Yafchak diagnosed the insured's ailment as coronary sclerosis accompanied by dyspnea and peripheral edema. In addition, the insured had suffered from a mild condition of hyperthyroidism.

The 'Proofs of Death--Physician's Statement' submitted to the plaintiff by one of Yafchak's physicians listed the immediate cause of death, which had occurred on April 20, 1957, as 'coronary occlusion' and the antecedent causes, giving rise to the direct cause of death, as 'coronary sclerosis (insufficiency)' and 'generalized arteriosclerosis.'

In the trial court plaintiff and defendant reached certain important accommodations respecting the facts of the case. Defendant not only stipulated that the answers to the questions quoted above were false, but it also conceded that the plaintiff insurance company had relied on such answers in issuing the policy and that the answers were material to the risk. Plaintiff, on the other hand, stipulated that neither defendant nor its assignor, Linden Tool Co., Inc., had had knowledge of the falsity of Yafchak's representations.

The two grounds asserted by plaintiff as justifying a judgment of rescission were: (1) that it had been induced by material misrepresentations to issue the policy; and (2) that the first premium on the policy had not been paid during the good health of the insured.

The trial judge ruled in plaintiff's favor on the first ground and, since this was sufficient for the decision of the case, declined to express an opinion as to the legal effect of the second.

The plaintiff insurer would clearly be entitled to rescind and to have the subject policy cancelled if Yafchak himself had applied for its issuance and paid the premiums thereunder. See, e.g., Gallagher v. New England Mut. Life Ins. Co. of Boston, 19 N.J. 14, 114 A.2d 857 (1955). Defendant urges that a different rule should apply, however, since its assignor, Linden Tool Co., Ins., was the applicant for and owner of the policy, not Yafchak.

It is urged that Linden Tool's certification to the truth of all of the statements contained in the insurance application cannot be taken literally since the company did not have, and could not have obtained except at great inconvenience, the facts pertaining to Yafchak's physical condition. Defendant maintains that the insurer as well as Linden Tool recognized this fact and that under these circumstances Linden Tool's certification should be regarded as a mere statement of opinion concerning Yafchak's state of health. It contends that with respect to 'key man' insurance the onus should be placed entirely upon the insurer to ascertain through a physical examination whether the prospective insured is an acceptable risk. Defendant concludes that the employer who procures such insurance should be held responsible for its employee's misrepresentations only when the employer actively encourages their making or actually knows of their falsity.

Plaintiff and defendant are both innocent parties, but they do not stand on the some footing with respect to the issues presented.

An insurance contract is preeminently one of the utmost good faith. Gallagher v. New England Mut. Life Ins. Co. of Boston, supra; Stipcich v. Metropolitan Life Ins. Co., 277 U.S. 311, 48 S.Ct. 512, 72 L.Ed. 895 (1928); Atlantic Casualty Ins. Co. v. Interstate Ins. Co., 28 N.J.Super. 81, 100 A.2d 192 (App.Div.1953). The insurance company customarily relies on the truthfulness of the insured's rendition of his medical history. It is physically and economically impossible for an insurer to give every potential insured an elaborate medical examination which will disclose the less obvious defects in his health. Indeed, it is common knowledge that many insurance policies of certain types and under certain amounts are issued without any prior examination by an insurance company doctor.

With this background in mind, we must interpret the terms of the insurance contract in controversy as holding Linden Tool Co., Inc., bound by Yafchak's misrepresentations. Of course, any rights which the plaintiff insurer has against Linden Tool are equally applicable against the defendant, the assignee of the policy.

The...