Sweatman v. DEPARTMENT OF VET. AFFAIRS

• Court: California Supreme Court
• Writing for the Court: MOSK, J.
• Citation: Sweatman v. DEPARTMENT OF VET. AFFAIRS, 104 Cal.Rptr.2d 602, 25 Cal.4th 62, 18 P.3d 29 (Cal. 2001)
• Decision Date: 08 March 2001
• Docket Number: No. S086696.,S086696.
• Parties: Bruce SWEATMAN III, Plaintiff and Appellant, v. DEPARTMENT OF VETERANS AFFAIRS, Defendant and Respondent.

104 Cal.Rptr.2d 602

25 Cal.4th 62

18 P.3d 29

Bruce SWEATMAN III, Plaintiff and Appellant, v. DEPARTMENT OF VETERANS AFFAIRS, Defendant and Respondent.

No. S086696.

Supreme Court of California.

March 8, 2001.

Law Office of Robert K. Scott and D. Scott Mohney, for Plaintiff and Appellant.

Arnulfo Hernandez, Jr., Elizabeth C. Wied, Frank Perez Tays, Bruce A. Crane, Sacramento, Patrick Ramirez S. Bupara, San Francisco, Chian He, Charles A. DeCuir, Folsom, and Valla Hoffman, Sacramento, for Defendant and Respondent.

Clifford Hirsch for GAB Robins North America, Inc., as Amicus Curiae on behalf of Defendant and Respondent.

MOSK, J.

This case concerns a claim for disability benefits under the "Home Protection Plan of Life and Disability Coverage for Cal-Vet Purchasers" (hereafter the Cal-Vet home protection plan) established by respondent Department of Veterans Affairs of the State of California (hereafter the Department) under the Veterans' Farm and Home Purchase Act of 1974 (Mil. & Vet.Code, § 987.50 et seq., hereafter sometimes the Act), commonly called the Cal-Vet program. We granted review to address the question whether disability coverage under the Cal-Vet home protection plan is insurance that is subject to mandatory provisions of the Insurance Code. For the reasons stated below, we conclude that the answer is negative. Accordingly, we affirm the judgment of the Court of Appeal.

I

This matter involves a dispute concerning whether the Insurance Code governs the terms of disability coverage under the Cal-Vet home protection plan.

The Cal-Vet program has been described as follows. "The Veterans' Farm and Home Purchase Act of 1974 ... was enacted `to provide veterans with the opportunity to acquire farms and homes.' (Mil. & Vet.Code, § 987.51.) Under the Act, the Department is empowered to buy farms and homes from their owners and sell the properties back to eligible veterans under long-term installment contracts at a low rate of interest. Since the sale is by installments (§§ 987.69, 987.71), the Department retains legal title to a property until the price has been paid in full. [Citation.] Funds for the Department's purchases are provided by the public through general obligation bonds." (Department of Veterans Affairs v. Duerksen (1982) 138 Cal.App.3d 149, 151,187 Cal.Rptr. 832, fns. omitted.) The Act is a "carefully controlled program designed to assist veterans in acquiring residences." (Duerksen, at p. 155,187 Cal.Rptr. 832.)

As part of the Cal-Vet program, the Department requires loan applicants to submit an application for the Cal-Vet home protection plan, which provides coverage for loss of life and for permanent total disability. To be eligible for life coverage, applicants must agree to submit satisfactory evidence of insurability and pay monthly premiums. To be eligible for disability coverage, they must qualify for life coverage and, in addition, must be under 62 years of age, be regularly employed outside the home for at least 30 hours a week, and show satisfactory evidence of insurability.

The Cal-Vet home protection plan is administered under a master agreement with the Department by Pacific Mutual Group Life Insurance Company (hereafter Pacific Mutual), which reviews, approves, and monitors applications for coverage. Pacific Mutual provides administrative services only; it neither insures nor underwrites any liability of the Department or any obligation under the Cal-Vet home protection plan. Coverages under the plan are "a form of self-funded benefits as between the Department and each Participant."

Pacific Mutual annually calculates the contribution necessary to fund the Cal-Vet home protection plan and the Department deposits that amount into one of two bank accounts constituting the fund. Participants' premiums are also deposited into the accounts. The funds are invested by Pacific Mutual. If the accounts become insufficient, the Department may make an additional contribution to the account. Pacific Mutual investigates and approves claims, and pays approved claims to the Department from the funds in the account. Specifically, under the disability coverage, if a participant is totally disabled for more than three months, Pacific Mutual pays an amount equal to the monthly loan installment to the Department from the account.

As provided in the master agreement, basic death coverage "shall be incontestable" after it has been in force during the lifetime of the participant for two years. There is no similar limit on contestability of disability claims; the master agreement states that "[n]o benefits shall be payable for permanent and total disability if such disability resulted from ... a condition pre-existing the date of loan approval" by the Department.

The Department of Insurance has taken the position that the Cal-Vet home protection plan is not insurance subject to the provisions of the Insurance Code. If a participant in the Cal-Vet program submits a complaint or inquiry to the Department of Insurance regarding disability coverage under the Cal-Vet home protection plan, it refers the matter to the Department and issues a form letter sent to the participant, and copied to the Department stating that such "inquiry does not relate to a matter within the jurisdiction of this Department."

In 1988, appellant Bruce Sweatman III, a veteran, obtained a loan to purchase a home in Riverside County under the Cal-Vet program. Under the loan contract, he agreed, "as required by the Department," to maintain various forms of insurance, including disability insurance payable to the Department, "as added security for performance" of the contract. He applied for disability coverage under the Cal-Vet home protection plan, submitting an application including information concerning his medical history.

In his application, Sweatman answered affirmatively the question whether he had been examined in the past five years by a doctor, physician, psychiatrist, or chiropractor. He provided the following details: in May 1986, he had been tested for HIV before being married; in March 1988, he had been treated for a pulled muscle in his left shoulder; his personal physician was Dr. Ron Pepitone. He answered negatively the question whether he had been in a hospital, sanitarium, or other institution for observation, rest, diagnosis, or treatment in the last 10 years. He also answered negatively questions as to whether he had ever had symptoms of, or been examined or treated for, any of a variety of conditions, including "nervous/mental disorder."

The application included a signed declaration by Sweatman to the effect that all of the statements contained in the application were true and correct "and that no material information has been withheld or omitted concerning the past and present state of my health," and acknowledging that "any willful misstatements shall make any coverage based on this application void at the option of the administrator."

In fact, Sweatman had been hospitalized for two weeks in July 1986 with a diagnosis of "major depression." He was treated by a psychiatrist, H. Edmond Whiteley, M.D., until early 1987 for that condition, "with a consideration of a diagnosis of Bipolar Disease" and posttraumatic stress disorder.

Sweatman's application for life and disability coverage was approved, subject to a rider excluding coverage for injury to or disease of the left shoulder. The rider stated that it "form[s] part of the Supplemental Disability Benefit Documents under the Cal-Vet Homeowners Plan funded by the Department of Veteran Affairs." He received a pamphlet entitled Home Protection Plan of Life and Disability Coverage for Cal-Vet Purchasers, describing coverage under the plan. The pamphlet summarized the policy provisions concerning claims limitations, including the limitation that total disability was not covered if it was "the direct result of a condition, bodily injury or disease which existed at the date of the underwriting decision." He did not receive a certificate of coverage, nor was his application endorsed upon or attached to the policy.

In 1993, Sweatman submitted a claim for disability benefits. He described the illness-causing disability as "manic-depression bipolar II." He listed a hospital confinement at Oceanside Hospital for treatment in July 1986. After an investigation, which included review of medical records, Pacific Mutual declined the claim and rescinded the life and disability coverage on the ground that Sweatman had misrepresented his medical history; his loan contract would be credited for premiums paid for the coverage. It subsequently reinstated the life coverage "due to the contract language which states that the coverage cannot be rescinded after it has been in force for two years"; disability premiums charged before the denial of coverage for disability were credited to his account and his monthly installment for life coverage, and interest was adjusted accordingly.

Sweatman brought this action against the Department and Pacific Mutual for breach of contract. He contended, as pertinent herein, that the disability coverage constituted insurance, and hence was incontestable under Insurance Code section 10350.2. Summary judgment was granted in favor of Pacific Mutual on the ground that it was only the administrative agent for the Department.

Trial commenced in February 1998. The superior court denied the Department's motions in limine for a ruling that the Cal-Vet home protection plan was not insurance. It subsequently denied a motion for a directed verdict in which Sweatman contended that the Cal-Vet home protection plan was insurance and that it was therefore regulated by the Insurance Code.

The jury returned a special verdict, finding that the Department did not breach its contract with Sweatman under the Cal-Vet home protection plan by rescinding his disability benefits. Sweatman moved for a judgment notwithstanding the verdict, contending that...