Insurance Com'r of State of Md. v. Mutual Life Ins. Co. of New York, 1566

• Decision Date: 01 September 1995
• Docket Number: No. 1566,1566
• Citation: 111 Md.App. 156,680 A.2d 584
• Parties: INSURANCE COMMISSIONER OF the STATE OF MARYLAND v. The MUTUAL LIFE INSURANCE COMPANY OF NEW YORK. ,
• Court: Court of Special Appeals of Maryland

Page 156

111 Md.App. 156

680 A.2d 584

INSURANCE COMMISSIONER OF the STATE OF MARYLAND v. The MUTUAL LIFE INSURANCE COMPANY OF NEW YORK.

No. 1566, Sept. Term, 1995.

Court of Special Appeals of Maryland.

June 28, 1996.

Reconsideration Denied Aug. 29, 1996.

Christina Gerstung Beusch, Asst. Atty. Gen. (J. Joseph Curran, Jr., Atty. Gen., on the brief), Baltimore, for Appellant.

Barrett W. Freedlander (Weinberg & Green L.L.C., on the brief), Baltimore, for Appellee.

Argued before WENNER, DAVIS and HARRELL, JJ.

HARRELL, Judge.

This appeal requires us to determine if we shall recognize an "exist/manifest" distinction when interpreting the phrase "existed prior to" in a statutorily required incontestability clause contained in a disability insurance policy. The statute prohibits an insurer from turning down any claim for disability (as defined in the policy), starting after two years from the policy's inception, on the grounds that a disease or physical condition existed prior to the policy's inception. The provisions of the policy at issue here define "disability" in terms of the insured having a sickness or disease that first manifests itself while the policy is in force. Appellee (cross-appellant), the Mutual Life Insurance Company of New York ("MONY"), filed a cross- appeal challenging the Circuit Court for Baltimore City's affirmance of appellant's (cross-appellee), the Insurance Commissioner of the State of Maryland ("the Commissioner"), interpretation of Md. Ann.Code art. 48A § 441 (1957, 1994 Repl.Vol.) ¹ in a manner that refused to recognize an "exist/manifest" distinction. The Commissioner appeals from the portion of the circuit court's judgment that, based in part upon its finding that MONY did not violate the insurance code in maintaining its erroneous interpretation of the statute, reversed the Commissioner's order requiring MONY to pay its insured all benefits due under her disability insurance policy. As we shall explain, we conclude that the circuit court's interpretation of § 441, which did not recognize an "exist/manifest" distinction, was legally correct. Therefore, we shall affirm this portion of the lower court's judgment. As to MONY's obligation to pay benefits to its insured consonant with its statutory and contractual obligation, having interpreted § 441 against MONY's position, we conclude that by virtue of a stipulation entered below by MONY and the Maryland Insurance Administration ("MIA"), MONY cannot now refuse the claim of its insured/Mary L. Holland, on the ground that her condition manifested itself before the issuance of her policy. Because that was the only apparent ground revealed by the record in this case upon which MONY denied the claim, it must now pay Ms. Holland's claim in accordance with the terms of her policy.

ISSUES

MONY, as cross-appellant, raises the following issues, which have been rephrased:

I. Assuming that MONY was in full compliance with Article 48A, did the circuit court err in choosing to decide the merits of the underlying contractual issue?

II. Did the circuit court err in disagreeing with MONY's interpretation of the policy definitions at issue as they relate to the incontestability clause?

The Commissioner raises the following questions for our consideration, which we have slightly rephrased III. Did the Commissioner have the authority to order MONY to pay its insured's disability claim, where MONY denied the claim based on an erroneous interpretation of § 441?

IV. Assuming it is finally determined that MONY's interpretation and application of § 441 to its insured's claim was contrary to Maryland law, is MONY obligated to pay this claim pursuant to the stipulation agreed upon by the parties?

FACTS

The facts before us are essentially undisputed and are for the most part contained in a stipulation that was agreed upon by the MIA and MONY before the Commissioner for the express purpose of attaining a formal interpretation of § 441. ² On 27 November 1985, Ms. Holland (or "the insured") executed an application for a disability income insurance policy to be issued by MONY. In this application, Ms. Holland denied, among other illnesses, any previous history of mental or nervous disorder during the past ten years. She did indicate that she had been treated for an ulcer. Based on this application, MONY issued Ms. Holland a disability income insurance policy. MONY expressly agreed not to contest the accuracy of the answers provided in Ms. Holland's application.

Ms. Holland's policy, by its terms, generally covered disabilities that "start[ed] while th[e] Policy ... [was] in force." "Disability" was defined as "either a Total Disability or a Partial Disability, provided that in either case the Disability starts while this Policy is in force." Both total and partial disability were defined in terms of the insured not being able to work "because of injury[ ³] or sickness." "Sickness" was defined as a "sickness or disease which first manifests itself while this Policy is in force." In conformance with § 441, ⁴ the policy also contained the following provisions, under the heading "Incontestable":

After this policy has been in force for 2 years during your lifetime, we may not contest any statements in the application. (We will not count as part of the 2 years any period when you are disabled.)[ ⁵

* * * * * *

We may not reduce or turn down any claim for loss incurred [or] Disability [as defined in the policy] starting after two years from the Policy Date on the grounds that a disease or physical condition existed prior to the Policy Date, unless that disease or physical condition is excluded from coverage by name or specific condition.

The policy also included a rider that expressly excluded loss for gastro-intestinal disease. It is undisputed that the form and content of Ms. Holland's policy were filed with the MIA, where the policy received approval prior to MONY's use of it in Maryland.

Almost four years after the issuance of this policy, on 6 June 1989, Ms. Holland filed a claim for disability resulting from a condition diagnosed as acute and chronic anxiety with panic attacks. ⁶ The parties have stipulated that "Ms. Holland's claim for a loss incurred or disability commenced after two years" from the policy's inception. The parties have agreed further that the policy did not contain a rider excluding this disease or physical condition from coverage by name or specific description. On 1 October 1991, MONY denied Ms. Holland's claim ⁷ on the ground that her condition first manifested itself prior to the effective date of her policy and thereby did not meet the policy's definition of sickness. ⁸ The parties have stipulated that the sickness which caused Ms. Holland's disability, in fact, manifested itself prior to the effective date of the policy. ⁹ In denying Ms. Holland's claim, MONY relied in part upon Massachusetts Casualty Ins. Co. v. Forman, 516 F.2d 425 (5th Cir.1975), cert. denied, 424 U.S. 914, 96 S.Ct. 1114, 47 L.Ed.2d 319 (1976), in which a similarly worded incontestability clause and definition of sickness were at issue. There, an insurer filed suit in part for the return of benefits paid pursuant to a disability insurance policy, on the ground that the insured had a pre-manifested, but undisclosed, condition of diabetes. The Fifth Circuit, finding for the insurer, held:

[Where] the condition for which [the insured] claimed benefits had 'first manifested' itself almost a year before the policy became effective ... [the] disability ... was never within the scope of coverage, and [the insured] cannot now [relying on the incontestability clause] claim ... disability benefits [because] ... the incontestability provisions of the policy [do not cause] ... this prior existing illness to be covered.

Id. at 428. MONY's reliance was based further on other cases that also interpreted incontestability clauses containing language similar to § 441 in a manner such that the clause did "not cut off defenses to coverage, and that a condition that actually manifests itself prior to the issuance of coverage falls outside of the policy's coverage because of the policy's definition of 'sickness.' "

Ms. Holland apparently filed a complaint with the MIA, where her claim was investigated. On 14 December 1993, the MIA issued a notice and order, stating: 1. MONY [is ordered to] refrain from denying Ms. Holland's claim on the ground that the disease or physical condition of Acute and Chronic Anxiety with Panic Attacks may have manifested or did manifest itself prior to the effective date of the Policy; and

2. MONY [is ordered to] pay the claim of Ms. Holland that is the subject of this Notice and Order.

In support, the MIA reasoned that the plain meaning of § 441, which prohibited MONY from denying a disability claim commencing two years after the date of the issuance of the policy, on the ground that a disease or physical condition, not excluded from coverage by name or specific description, existed prior to the policy's effective date, "include[d] both those [pre-existing diseases and conditions] ... which have and have not manifested themselves." Accordingly, the MIA reasoned that MONY's denial of Ms. Holland's claim on the ground that her condition first manifested itself prior to the effective date of the policy was in violation of § 441. The MIA found further that MONY's denial of Ms. Holland's claim was "in contravention of State law ... [and] prohibited by Md.Code Ann. Art. 48A, §§ 55(2)(i) and (iv),[ ¹⁰] and 230A(c)(2)[. ¹¹]"

MONY appealed the MIA's order to the Maryland Insurance Commissioner where, in lieu of an evidentiary hearing, the parties agreed to a stipulation of facts for the purpose of the hearing before the Commissioner and any further "appeal by either Party arising therefrom." In addition to stating the facts that we have set forth, ¹² this stipulation indicated that the parties "desire[d] a statutory interpretation of MD. ANN. CODE...