New York Life Ins. Co. v. Waterman

• Decision Date: 21 July 1939
• Docket Number: No. 8972.,8972.
• Parties: NEW YORK LIFE INS. CO. v. WATERMAN.
• Court: U.S. Court of Appeals — Ninth Circuit

104 F.2d 990 (1939)

NEW YORK LIFE INS. CO. v. WATERMAN.

No. 8972.

Circuit Court of Appeals, Ninth Circuit.

June 13, 1939.

Petition for Rehearing Denied July 21, 1939.

Meserve, Mumper, Hughes & Robertson, of Los Angeles, Cal. (E. Avery Crary, of Los Angeles, Cal., of counsel) for appellant.

Arthur Rosenblum, of Los Angeles, Cal., for appellee.

Before WILBUR, DENMAN, and HEALY, Circuit Judges.

DENMAN, Circuit Judge.

This action was brought by the New York Life Insurance Company of New York to cancel a reinstatement after lapsation of two insurance policies of life and health, issued to Samuel L. Waterman, the appellee, upon the ground that such reinstatement was procured by fraudulent representation concerning his condition of health and insurability.

The trial court sustained a motion to dismiss upon the ground that the period of two years fixed in the insurance policy for contest had expired long before the reinstatement occurred and that the policy became incontestable for past or future fraud when that period expired. The Insurance Company has appealed from the judgment of dismissal.

The fraud alleged in the bill for cancellation of the reinstatement is in knowingly and untruthfully answering questions in the petition for reinstatement received by the Insurance Company on April 30, 1937. It consisted in an affirmative answer to the question, "Are you now, to the best of your knowledge and belief, in the same condition of health as you were when this Policy was issued? (If not, give details).", and a negative answer to the question, "Within the past two years have you had any illnesses, diseases or bodily injuries or have you consulted, or been examined or treated by any physicians or practitioners? (If so give full details, including nature, date, and duration of each illness, disease or injury, the name of each physician or practitioner, and the dates of and reasons for consultation or treatment)."

The bill alleges that insured knew he was in a much poorer condition of health on April 30, 1937, than when the policy was issued on March 17, 1926, some 11 years before, and that he had had within two years an acute attack of infectious arthritis and a heart ailment for which he had consulted and was treated by physicians and sufficiently severe to require hospitalization.

Rescission of the reinstatement was promptly sought by the insurer and the allegations warrant a rescission unless prevented by a two year incontestable clause of the policy. The clause provides: "Incontestability. — This Policy shall be incontestable after two years from its date of issue except for nonpayment of premium and except as to provisions and conditions relating to Disability and Double Indemnity Benefits." As shown, the alleged fraud occurred 9 years after the expiration of the two years from date of issuance of the policy.

The district court held, and the insured contends here, that the law determining the right to contest the fraudulent procurement of the reinstatement, as affected by the incontestability clause, is that of California, the place of the making of the contract, and that under the California law the Insurance Company was precluded by the expiration of the two years of the incontestability clause from securing, in equity, the rescission of the restoration of the policy even though it was procured by fraud. That is to say, the district court in effect construed the incontestability clause to read, "If the insured's policy lapse by nonpayment of premiums, he may secure its reinstatement by fraudulent representations to the insurer, if made when two years have elapsed from the execution of the policy. If he succeeds in deceiving the insurer, the reinstatement so procured is incontestable by the latter, even though it promptly attempts rescission on discovery of the fraud".

Such an objective of the contract for incontestability, as the court's decision necessarily requires the instant provision to be construed, is not for a "repose" analogous to statutes of limitation. It does not refer to a past transaction, the "security" of which may be destroyed because the witness may have died or disappeared. California decisions holding the incontestable clause precludes a contest for fraud in the application for the policy are not relevant to the subsequent fraud here.¹

Unless the incontestability agreement has the objective to exempt the insured from responsibility for his own fraud, committed after the execution of the policy, it gives no support to the insured's contention that he may commit with impunity the fraud charged. If that is the objective of the agreement, it is not only repugnant to common decency and a violation of the principle of uberrima fides governing the insured's disclosures of known conditions affecting the risk,² but an agreement having such an objective is specifically declared unlawful by the California Civil Code. That provision is:

"§ 1668. Certain contracts unlawful. All contracts which have for their object, directly or indirectly, to exempt anyone from responsibility for his own fraud, or willful injury to the person or property of another, or violation of law, whether willful or negligent, are against the policy of the law."

The California Supreme Court has had occasion to consider the applicability of this code provision to insurance policies. In Dibble v. Reliance Life Ins. Co., 170 Cal. 199, 149 P. 171, Ann.Cas.1917E, 34, the court recognized that § 1668 of the Civil Code of California applied to insurance as well as all other contracts, and that it prohibited a clause in an insurance policy which would permit the insured to exempt himself from such a gross fraud as here alleged. It permits the application of the incontestability clause only on the ground that it is the equivalent of a statute of repose. It holds, (170 Cal. 199, 149 P. at page 173, Ann.Cas.1917E, 34) "`A more serious question is presented by the consideration of section 1668 of the Civil Code, providing as follows: "All contracts which have for their object, directly or indirectly, to exempt any one from responsibility for his own fraud * * * are against the policy of the law." It is not disputed that it is within the province of the Legislature to declare such principle of public policy, and that it should be enforced. It is claimed, however, that the section has no application to insurance policies, but I find no warrant for this contention. "All contracts" certainly include contracts of insurance, but I am inclined to the view that, properly speaking, it was not the object of the parties to said insurance policy to exempt the insured from the consequences of his fraud, but the object and effect of said incontestable clause was simply to provide a shorter term for maintaining said claim than is prescribed by the statute of limitations. In other words, in my opinion, by said section the Legislature did not intend to condemn a contract that in the interest of repose and security would fix a reasonable limit for the time in which such defense might be successfully urged, but the intention was to preclude a contract that would altogether relieve either party of the consequences of his own fraud.'"

Here, within a time as short as proper investigation would warrant, the fraud was discovered and the necessary steps for rescission taken. If the incontestable clause, whose two years had expired before the fraud was committed, is permitted to govern the fraudulent transaction, it "would altogether relieve * * * the insured of the consequences of his own fraud". We hold that the district court erred in its interpretation of the California law and that under § 1668 of the Civil Code of California a rescission of a reinstatement procured by fraud is not here prevented by the incontestable clause of the policy.

The appellant contends that the New York law controls the interpretation of the incontestability clause because the reinstatement covenant of the policy provides that the presentation of the statements necessary to procure reinstatement must be at the home office in New York and some other provisions are to be performed there. Appellant relies on § 1646 of the Civil Code of California, providing: "Law of place. A contract is to be interpreted according to the law and usage of the place where it is to be performed; or, if it does not indicate a place of performance, according to the law and usage of the place where it is made."

Not all the covenants of the policy necessarily must be performed in New York. Payment of premiums is ordinarily the performance most often occurring during the existence of a life insurance policy. The policy provides concerning the payment of premiums that: "All premiums are payable on or before their due date at the Home Office of the Company or to an authorized agent of the Company but only in exchange for the Company's official premium receipt signed by the President, a Vice-President, a Second Vice-President, a Secretary or the Treasurer of the Company, and countersigned by the person receiving the premium. No person has any authority to collect a premium unless he then holds said official premium receipt. * * *". (Emphasis supplied)

We cannot shut our eyes to the general practice of the great life insurance companies, such as is the appellant, to appointed accredited agents for the receipt of premiums in the states other than New York, in which vast numbers of their business transactions are conducted. Hence the contract may be shown to be contemplated by the parties to be performed as to the payment of premiums in the state of the delivery of the life policy and as to other covenants in New York. Cf. Ostroff v. New York Life Ins. Co., 9 Cir., 104 F. 2d 986, this day filed. A question arises whether the incontestable clause, which we have shown is in the nature of a statute of limitations, is to be construed under the law of the state of performance of the acts contended to...