Mutual Life v. Insurance Comm.

• Citation: 723 A.2d 891,352 Md. 561
• Decision Date: 09 February 1999
• Docket Number: No. 103,103
• Parties: The MUTUAL LIFE INSURANCE COMPANY OF NEW YORK v. INSURANCE COMMISSIONER FOR THE STATE OF MARYLAND.
• Court: Court of Appeals of Maryland

723 A.2d 891

352 Md. 561

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

No. 103, Sept. Term, 1996.

Court of Appeals of Maryland.

February 9, 1999.

Barrett W. Freedlander, Baltimore, for petitioner.

Dennis W. Carroll, Asst. Atty. Gen. (J. Joseph Curran, Jr., Atty. Gen., on brief), Baltimore, for respondent.

David M. Funk, Bryan D. Bolton, Steven Jared Troy, Funk and Bolton, P.A., Baltimore, for Amici Curiae Paul Revere Life Ins. Co., Provident Life and Acc. Ins. Co. and Union Central Life Ins. Co.

Phillip E. Stano, American Council of Life Ins., Washington, DC, Debra A. Cohn, Health Ins. Ass'n of America, Washington, DC, Rita M. Theisen, Rocco N. Covino, LeBoeuf, Lamb, Greene & MacRae, L.L.P., Washington, DC, for Amici Curiae American Council of Life Ins. and Health Ins. Ass'n of America.

Argued before BELL, C.J., and ELDRIDGE, RODOWSKY, CHASANOW, KARWACKI¹, RAKER and WILNER, JJ.

ELDRIDGE, Judge.

We issued a writ of certiorari in this case to decide whether an insurer may lawfully deny a disability claim, more than two years after the issuance of a disability insurance policy, on the ground that the disabling condition manifested itself prior to the effective date of the insurance policy, where the policy contains a statutorily required incontestability clause providing that no claim shall be denied on the ground that a disease or physical condition existed prior to the effective date of policy coverage.

I.

On November 27, 1985, Mary Holland submitted an application to the Mutual Life Insurance Company of New York for a disability insurance policy which would provide monthly income benefits in the event that Holland became disabled while the policy was in force. The policy application made several inquiries about Holland's health history. In response to a question as to whether she had any previous history of mental or nervous disorders, Holland answered "no." Pursuant to the application, the insurer issued a disability insurance policy to Holland. The policy contained a statutorily required incontestability provision which stated:

"We may not reduce or turn down any claim for loss incurred or Disability 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 description."

This provision was included pursuant to the Insurance Code, Maryland Code (1957, 1994 Repl.Vol.), Art. 48A, § 441(2), which requires an insurer to include the following provision as a time limit on certain defenses:

"No claim for loss incurred or disability (as defined in the policy) commencing after two years from the date of issue of this policy shall be reduced or denied on the ground that a disease or physical condition not excluded from coverage by name or specific description effective on the date of loss had existed prior to the effective date of coverage of this policy."²

In the policy issued to Holland, the insurer defined "disability" 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 as the insured not being able to work "because of injury or sickness." The policy defined "sickness" as a "sickness or disease which first manifests itself while this Policy is in force."

On June 6, 1989, almost four years after the policy's effective date, Holland filed a claim with the insurer for disability income benefits resulting from a condition diagnosed as "Acute and Chronic Anxiety with Panic Attacks." In a letter dated October 1, 1991, the insurer denied Holland's claim on the ground that Holland's disability was caused by a condition which first manifested itself prior to the effective date of the policy and that, therefore, the condition did not fall within the policy's definition of "sickness." The insurer reached this conclusion based on information provided by Holland's doctors that she had complained of "feelings of anxiousness" in 1985 and 1986. The insurer explained to Holland, in an October 18, 1991, letter reaffirming its position, that a "pre-existing condition would be one such as a congenital condition, which an individual could have without ever being aware of or, even have experienced symptoms of."

The parties in this case have stipulated that the sickness which caused Holland's disability, "Acute and Chronic Anxiety with Panic Attacks," manifested itself prior to the effective date of the policy and that the policy did not exclude this sickness from coverage by name or specific description. The parties also stipulated that Holland, when answering the questions on the insurance application, did not know that the sickness had manifested itself.

After the denial of her claim, Holland filed a complaint with the Maryland Insurance Administration. Following an investigation, the Administration issued an order deciding in favor of Holland. The Administration, by an Associate Commissioner, ordered the insurer to refrain from denying Holland's claim on the ground that the condition which caused her disability first manifested itself prior to the effective date of the policy and ordered the insurer to pay Holland's claim. The Associate Commissioner reasoned that the plain meaning of the pertinent incontestability statute, Article 48A, § 441(2), includes "both those [pre-existing diseases and conditions] which have and have not manifested themselves." Consequently, the Associate Commissioner found that the insurer violated § 441(2) when it denied Holland's claim on the ground that the sickness first manifested itself prior to the effective date of the policy. Finally, the Associate Commissioner found that the Insurer's denial of Holland's claim violated Art. 48A, §§ 55(2)(i), 55(2)(iv), and 230A(c)(2).³

Pursuant to Art. 48A, § 35, the insurer sought review of the Associate Commissioner's order and a hearing before the Insurance Commissioner. By agreement of the parties, the Commissioner heard the case upon the parties' stipulation of facts and briefs. Thereafter, the Commissioner issued a Memorandum and Order enforcing the Associate Commissioner's order and requiring the insurer to pay Holland "all benefits due her under the policy." The Commissioner held that under § 441(2), incontestability extends to a pre-existing condition regardless of whether the condition manifested itself prior to the policy's effective date. The Commissioner stated that the insurer was seeking to avoid the "common sense result" of the incontestability clause by "defining disability as including only a sickness or disease which `manifests itself' after the policy was issued." The Commissioner reasoned that a disease or condition clearly exists "whether it manifests itself or not." The Commissioner stated that the purpose of incontestability clauses is to achieve certainty as to coverage and to avoid litigation. He pointed out that an insurance company can seek medical information before issuing the policy, can exclude specific illnesses, and can conduct such further investigation as it deems appropriate. Nevertheless, the Commissioner concluded, once the policy has been issued and has been in effect for two years, "the two year bar contained in § 441 prohibits [the insurer] from now denying the claim." The Commissioner decided that the insurer's refusal to pay benefits in this circumstance violated § 441(2) and also violated §§ 55(2)(i) and 55(2)(iv).

The insurer filed an action in the Circuit Court for Baltimore City for judicial review of the Insurance Commissioner's decision. Although stating that it agreed with the Insurance Commissioner's interpretation of Art. 48 A, § 441(2), the circuit court reversed the Insurance Commissioner's order that the insurer pay the claim. The circuit court apparently was of the view that the Insurance Commissioner had no authority to order payment of the claim.

Both parties appealed to the Court of Special Appeals. While upholding the circuit court's and Insurance Commissioner's interpretation of Art. 48A, § 441(2), the Court of Special Appeals reversed the circuit court's judgment with regard to payment of the claim. The Court of Special Appeals, in agreement with the Insurance Commissioner, held that the insurer "must pay Ms. Holland's claim." Insurance Commissioner v. Mutual Life, 111 Md.App. 156, 193, 680 A.2d 584, 602 (1996).

The insurer filed a petition for a writ of certiorari which this Court granted. Mutual Life Insurance Co. of New York v. Insurance Commissioner, 344 Md. 115, 685 A.2d 450 (1996). Essentially two questions are presented for our review. The first is whether an insurer is entitled to deny a disability claim on the ground that the condition first "manifested" itself prior to the effective date of the insurance policy despite the statutorily prescribed incontestability clause contained in § 441(2) which provides that no claim "shall be reduced or denied on the ground that a disease or physical condition not excluded from coverage by name or specific description ... had existed prior to the effective date of coverage." The second question is whether the Insurance Commissioner has the authority to order the payment of the claim.

II.

A.

In the nineteenth century, some United States insurance companies began to offer incontestability clauses in their life insurance policies as an inducement to the purchase of life insurance. An early opinion, Plotner v. Northwestern Nat. Life Ins. Co., 48 N.D. 295, 304, 183 N.W. 1000, 1003 (1921), observed:

"The incontestability clause is one, no doubt, used by the defendant as an inducement to those desiring to purchase insurance. It, no doubt, points out to them, by its agents, that by the terms of the policy after the expiration of the year there can be no defense of any kind or character interposed

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