Massachusetts Mut. Life Ins. Co. v. Manzo

• Decision Date: 16 January 1991
• Citation: 122 N.J. 104,584 A.2d 190
• Parties: MASSACHUSETTS MUTUAL LIFE INSURANCE COMPANY, Plaintiff-Appellant, v. Anna Marie MANZO a/k/a Nina Manzo and the Estate of Albert Manzo, Jr., Defendants and Third-Party Plaintiffs-Respondents, and Equifax Services, Inc., a corporation of the State of Georgia; 20th Century Consultants, Inc., a corporation of the State of New Jersey; Jack Larocca, Hooshang Kipiani and Bruce Berberian, Third-Party Defendants.
• Court: New Jersey Supreme Court

Page 104

122 N.J. 104

584 A.2d 190

MASSACHUSETTS MUTUAL LIFE INSURANCE COMPANY, Plaintiff-Appellant, v. Anna Marie MANZO a/k/a Nina Manzo and the Estate of Albert Manzo, Jr., Defendants and Third-Party Plaintiffs-Respondents and Equifax Services, Inc., a corporation of the State of Georgia; 20th Century Consultants, Inc., a corporation of the State of New Jersey; Jack Larocca, Hooshang Kipiani and Bruce Berberian, Third-Party Defendants.

Supreme Court of New Jersey.

Argued Oct. 9, 1990.

Decided Jan. 16, 1991.

Eugene M. Haring, for plaintiff-appellant (McCarter & English; Eugene M. Haring and David R. Kott, of counsel; Eugene M. Haring, David R. Kott, B. John Pendleton, Jr., and Penelope M. Taylor, Newark, on the briefs).

Michael F. Chazkel, for defendants and third-party-plaintiffs-respondents (Chazkel & Bergenfield, attorneys; Michael F. Chazkel, East Brunswick, and Richard A. Epstein, Newark, on the brief).

William R. Holzapfel submitted a brief on behalf of amici curiae American Council of Life Ins. and Health Ins. Ass'n of America (LeBoeuf, Lamb, Leiby & MacRae, Newark, attorneys).

Burtis W. Horner submitted a brief on behalf of amicus curiae Prudential Ins. Co. of America (Stryker, Tams & Dill, attorneys; Burtis W. Horner and Wilma M. Kenny, Newark, on the brief).

The opinion of the Court was delivered by

POLLOCK, J.

The primary issue is whether within the period of contestability an insurer may rescind the life insurance policy of an insured whose false representations in his insurance application affected the insurer's estimate of the risk and the calculation of the premium. After a non-jury trial, the Chancery Division held that the false statements of the decedent, Albert Manzo, Jr., in his application constituted equitable fraud warranting rescission of the policy. The Appellate Division reversed, holding that the false statements did not materially affect either the insurance company's acceptance of the risk or the hazard assumed. 234 N.J.Super. 266, 560 A.2d 1215 (1989). One judge dissented, and the defendant-insurer, Massachusetts Mutual Life Insurance Company (Mass.Mutual), appealed as of right. R. 2:2-1(a)(2). We now reverse the judgment of the Appellate Division and reinstate the Chancery Division's judgment of rescission.

-I-

In June 1983, Manzo, a forty-six-year old resident of Wayne, New Jersey, signed Part I of a two-part application to purchase a $500,000 life insurance policy from Mass.Mutual. The conclusion of Part I states that the policy will not take effect unless "at the time of payment * * * all statements in the application are complete and true as though they were made at that time."

On June 28, 1983, in the course of a medical examination by Mass. Mutual's doctor, Manzo falsely answered "no" to the following questions in Part II of the application:

4. Have you ever been advised of, treated for, or had any known indication of:

* * * * * *

F. Sugar, albumen, blood or pus in urine * * *?

G. Diabetes, thyroid or other endocrine * * * disorder?

Manzo also falsely denied consulting a physician other than for a routine check-up in the five years prior to the application. In fact, during that time Manzo had been hospitalized twice.

The conclusion of Part II contained the following clause immediately above the space reserved for the applicant's signature:

To the best of my knowledge and belief all answers and statements are full, complete and true and were correctly recorded before I signed my name below.

Manzo signed the completed Part II of the application on June 28, 1983, the day of the examination.

Mass. Mutual obtained a statement from Dr. Hooshang Kipiani, Manzo's personal physician, that at his last physical check-up, in July 1983, Manzo had been in "good physical condition." On July 29, 1983, Manzo paid Mass. Mutual $200 and signed a "conditional receipt," which stated that the insurance would not take effect unless "all answers and statements in any part of the application having an earlier date are complete and true as though given on the date of this receipt."

On August 22, 1983, Manzo was found in the trunk of his car, shot to death. Mass. Mutual issued Manzo's policy on August 31, 1983, effective June 13, 1983, at standard rates, with an annual premium of $1,345. The policy contained a rider providing that Mass. Mutual would waive Manzo's premiums if he were to become disabled.

Following Manzo's death, Mass. Mutual conducted a further investigation, which revealed Manzo's long history of diabetes and related problems. Based on this information, Mass. Mutual filed suit against Manzo's primary beneficiary, Anna Marie Manzo, a/k/a Nina Manzo, and the Estate of Albert Manzo, Jr., seeking rescission because of equitable fraud.

Manzo's medical records showed that in 1968, he was hospitalized and diagnosed by Dr. Kipiani as having diabetes mellitus. As Dr. Kipiani testified, diabetes may be controlled with medicine and diet, but is incurable. Manzo thus suffered from the disease when he filled out the insurance application. Furthermore, Manzo's medical records indicate that his diabetes was not "well controlled." Blood tests performed during Manzo's two 1979 hospitalizations revealed an extremely high glucose level in his blood, evidencing his inability to control his diabetes.

Manzo unquestionably knew of his diabetic condition. Dr. Kipiani had discussed Manzo's diabetes with him and had warned him of the necessity of controlling the disease. Additionally, Dr. Kipiani had prescribed medication for Manzo's diabetes and put him on a low-calorie diet. Furthermore, on June 18, 1982, just one year before completing the Mass. Mutual insurance application, Manzo signed an application for life insurance from General Life Insurance Company of Wisconsin. In Part II of that application, he had answered affirmatively when asked whether he had ever been treated or had any known indication of diabetes or sugar in his urine.

After reviewing Manzo's medical records, Dr. William Coons, medical director for Mass. Mutual, concluded that if he had known of Manzo's condition before the issuance of the policy, he would have recommended that Mass. Mutual issue a "rated policy" with moderate-to-high premiums, instead of a policy with standard rates. John Behan, the underwriter who had authorized the issuance of Manzo's policy, testified that knowledge of Manzo's diabetes would have affected his judgment in approving the application, estimating the risk, and fixing the premium. Specifically, Behan testified that he would not have issued the policy at standard rates but would have set the premium at two and one-half times those rates. Further, he would not have authorized the rider waiving the premium in the event of disability. Finally, he would have required Manzo to undergo additional tests and would have requested Dr. Kipiani to complete a "diabetes questionnaire" before issuing any policy.

The trial court found that Manzo knew he had diabetes when he signed the application, a finding that the Appellate Division concluded "is supported by adequate and credible evidence." 234 N.J.Super. at 285, 560 A.2d 1215. The trial court further found that Mass. Mutual had relied on Manzo's false statements in issuing the policy, setting the premium, and providing for a waiver of premium. Concluding that Manzo had committed equitable fraud, the court ordered rescission of the policy.

The Appellate Division reversed. 234 N.J.Super. at 296, 560 A.2d 1215. Doubting the appropriateness of granting rescission based on equitable fraud after Manzo's death, id. at 283-85, 560 A.2d 1215, the court held that Manzo's misrepresentations did not warrant rescission. It said that Mass. Mutual had failed to prove that Manzo's diabetes either rendered him uninsurable or caused his death. Id. at 294-95, 560 A.2d 1215. The court ordered reformation of the policy, thereby entitling defendants to the $500,000 proceeds, less the premiums that Manzo would have paid had Mass. Mutual known of his disease. Id. at 296, 560 A.2d 1215.

In dissent, Judge Landau disagreed with the majority that the Life and Health Insurance Code, N.J.S.A. 17B:17-1 to :26A-8, permits rescission only if an insurer proves that the misrepresented facts either would have rendered the applicant uninsurable or that they were causally related to the loss. 234 N.J.Super. at 296, 560 A.2d 1215. In Judge Landau's view, the trial court properly granted rescission based on Mass. Mutual's showing that the misrepresented facts influenced its judgment when estimating the degree and character of the risk and when fixing the premium. Id. at 297-98, 560 A.2d 1215.

We conclude that the dissenting opinion represents the better view. In sum, we hold that equitable fraud should be available as a grounds for post-loss rescission and that within the period of contestability an insurer may rescind a policy if the insured knowingly misrepresented facts that would have affected the estimate of the risk and the premium charged.

II

Initially, the Appellate Division questioned the fairness of allowing a life insurer to invoke equitable fraud after the death of the insured. 234 N.J.Super. at 289, 560 A.2d 1215. The principle that equitable fraud, like legal fraud, is available to rescind a life insurance policy even after the death of the insured is, however, "firmly embedded in the jurisprudence of this State." Formosa v. Equitable Life Assurance Soc'y, 166 N.J.Super. 8, 13, 398 A.2d 1301 (App.Div.), certif. denied, 81 N.J. 53, 404 A.2d 1153 (1979) (citations omitted). Purporting to rely on Johnson v. Metropolitan Life Insurance Co., 53 N.J. 423, 251 A.2d 257 (1969), the Appellate Division concluded that rescission based on equitable fraud would be unduly harsh because the parties could not be restored to their position before Manzo's death. 234 N.J.Super. at 282-83, 560 A.2d 1215. The Johnson opinion, however, did not undermine the fundamental...