Protective Life Insurance v. Sullivan

UNITED STATES COURT OF APPEALS
UNITED STATES COURT OF APPEALS
FOR THE FIRST CIRCUIT
FOR THE FIRST CIRCUIT

No. 96-1080

PROTECTIVE LIFE INSURANCE COMPANY,

Plaintiff, Appellee,

v.

DENNIS J. SULLIVAN,

Defendant,

and

DIGNITY VIATICAL SETTLEMENT PARTNERS, L.P.,
and DIGNITY PARTNERS, INC.

Defendants, Appellants.

APPEAL FROM THE UNITED STATES DISTRICT COURT

FOR THE DISTRICT OF MASSACHUSETTS

[Hon. Robert E. Keeton, U.S. District Judge]

Before

Selya, Circuit Judge,

Campbell, Senior Circuit Judge,

and Boudin, Circuit Judge.

Luke DeGrand with whom Clark & DeGrand, Wayne S. Henderson, and

Heidlage & Reece, P.C. were on briefs for appellants.

Elliott M. Kroll, Mark S. Fragner, Lori M. Meyers and Kroll &

Tract on brief for Cancer Care, Inc., The Viatical Association of

America, Affording Care, and the National Association of People With
Aids, Amici Curiae.

John A. Shope with whom John H. Henn and Foley, Hoag & Eliot were

on briefs for appellee.
Rita M. Theisen, Andrea J. Hageman, LeBoeuf, Lamb, Greene &

MacRae, L.L.P. and Phillip E. Stano on brief for American Council of

Life Insurance, Amicus Curiae.

July 15, 1996

Per Curiam. Dignity Viatical Settlement Partners, L.P.

and Dignity Partners, Inc. (collectively, "Dignity") appeal

from a judgment in favor of Protective Life Insurance Company

in the insurance company's action for rescission of a life

insurance policy. The district court held that the

Massachusetts incontestability statute, Mass. Gen. L. ch.

175, 132, does not bar an action for rescission of a life

insurance policy for fraud, even though the action was

commenced more than two years after the policy was issued.

After careful deliberation, we certify, on our own motion,

two questions concerning the contestability of life insurance

policies under Massachusetts law to the Supreme Judicial

Court of Massachusetts.

On September 24, 1991, Dennis J. Sullivan applied to

Protective Life for a life insurance policy in the amount of

$100,000 with an annual premium of $175. Although Sullivan

had been diagnosed a month earlier as HIV positive and had

begun a course of treatment, he falsely stated that his

health was "excellent", omitted the names of those doctors

who knew of his affliction, and said he was not taking

medication (when in fact he was using AZT). He authorized

Protective Life to conduct medical tests, including a test

for HIV infection, but on November 8, 1991, the insurance

company issued a policy to Sullivan without having ordered an

HIV test. The policy included an optional provision which,

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for an increase in the annual premium, gave Sullivan the

right to waive the premium in the event he became disabled.

In 1992, Sullivan's health worsened and by June 1992 his

HIV infection had progressed to AIDS. He stopped working

around this time and applied in October 1992 for disability

benefits from another insurance company. But he did not

apply to Protective Life for a waiver of his life insurance

premiums on account of disability until about November 8,

1993, exactly two years after the policy was issued.

In October 1993, Sullivan contacted National Viator

Representatives, Inc., a broker of viatical settlements,

agreements under which an insured sells a life insurance

policy for an immediate payment approximating the discounted

face value of the policy. The broker informed Protective

Life that Sullivan wished to assign ownership of his policy.

Sullivan agreed to assign his policy to Dignity, a firm

engaged in making viatical settlements. On December 14,

1993, Dignity submitted the assignment forms to Protective

Life. Protective Life approved the assignment on December

22, 1993, and on the same day Dignity paid Sullivan $73,000.

Massachusetts law requires life insurance policies to

include a provision stating that the policy shall not be

contestable after it has been in effect for two years from

its date of issue,

except for non-payment of premiums or violation of the
conditions of the policy relating to military or naval

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service in time of war and except, if the company so
elects, for the purpose of contesting claims for total
and permanent disability benefits or additional benefits
specifically granted in case of death by accident.

Mass. Gen. L. ch. 175, 132. Sullivan's insurance policy

contained the following incontestability provision: "We

cannot bring any legal action to contest the validity of this

policy after it has been in force two years except for

failure to pay premiums unless fraud is involved." (emphasis

added). Protective Life had submitted the policy form

containing this provision to the Massachusetts Commissioner

of Insurance, and the Commissioner had approved the form on

September 18, 1988, saying that it "appear[ed] to conform" to

Massachusetts insurance law.

Protective Life filed suit on April 15, 1994 to rescind

the policy because Sullivan had obtained it through

fraudulent misrepresentations. It is undisputed that

Sullivan knew he was HIV positive when he applied for the

life insurance policy, that he failed to disclose that he was

seeing a physician for treatment of this condition despite

questions calling for this information, and that Protective

Life would not have issued the policy had it known Sullivan's

true medical condition.

Dignity and Sullivan moved to dismiss the action on the

ground that the provision allowing the company to contest the

policy for fraud more than two years from its date of issue

was inconsistent with Mass. Gen. L. ch. 175, 132. The

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district court denied the motion on January 12, 1995 and

similarly denied the subsequent motion for reconsideration on

June 9, 1995. After a two-day bench trial, the court ruled

from the bench that state law did not bar the action and

entered judgment for Protective Life against Dignity on

November 17, 1995. Sullivan died of complications associated

with AIDS on April 4, 1995, and the claims against him were

dismissed.

The district court found no clear precedent on the

question whether section 132 permits a fraud exception to the

two-year limitations period for contesting life insurance

policies. The court held that the Commissioner's

interpretation of the statute, implicit in the approval of

the policy form, was entitled to deference. Finding the

statute silent on the precise issue, the court held that the

Commissioner's decision to approve a policy form containing a

fraud exception was reasonable, and therefore that Protective

Life could challenge the policy. The court found by clear

and convincing evidence that Sullivan committed fraud and

rescinded the policy.

On appeal, Dignity argues that section 132 should not be

read to include a fraud exception. Dignity further contends

that the Commissioner's approval of the policy form was not

entitled to deference because it did not constitute a

meaningful interpretation of the statute. Protective Life,

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in response, asserts that the Commissioner's interpretation

of section 132 is reasonable and entitled to deference.

Protective Life also argues as an alternative ground for

affirmance that the incontestability period was equitably

tolled because Sullivan concealed his misrepresentations

through his delay in applying for a waiver of premiums for

disability.

There is a plausible plain-language argument that

section 132 should not be read to include a fraud exception.

The statute expressly enumerates three exceptions to the two-

year limitations period, and fraud is not among them. The

statute governing health insurance policies, in contrast,

states that the validity of a policy may be challenged for

fraudulent misstatements in the application beyond the

ordinary incontestability period. Mass. Gen. L. ch.175,

108(3)(a)(2). Section 132 also states that a policy

provision that "is stated in terms more favorable to the

insured or his beneficiary than are herein set forth" is

acceptable; Dignity argues that a negative inference should

be drawn from this that a provision less favorable to the

insured violates the statute--and that Protective Life's

inclusion of the fraud exception in its contestability

provision makes the policy less favorable.

The interpretation of section 132 is complicated,

however, by its relationship to another provision of

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Massachusetts insurance law, Mass Gen. L. ch. 175, 124.

Section 124 provides that in claims arising under a life

insurance policy issued without a medical examination or

without knowledge and consent of the insured,

the statements made in the application as to the age,
physical condition and family history of the insured
shall be held to be valid and binding on the company;
but the company shall not be debarred from proving as a
defense to such claim that said statements were wilfully
false, fraudulent or misleading.

On Dignity's reading, section 124 operates only during the

two- year period for contesting the policy under section 132,

and makes it more difficult to rescind certain types of

policies (those issued without an examination or without

knowledge and consent) during that time. Section 124

requires proof of fraud, while policies outside the scope of

section 124 may be rescinded on a showing of material factual

inaccuracy, see Mass. Gen. L. ch. 175, 186. Protective

Life argues to the contrary that section 124 contains no

express time limitation and creates an exception to the

ordinary two-year time limit for policies issued without

examination or consent, allowing insurance companies to

contest such policies for fraud at any time.

This case presents a question of first impression in

Massachusetts. In Bonitz v. Travelers Ins. Co., 372 N.E.2d

254 (Mass. 1978), the court observed that section 132 "is

designed to require the insurer to investigate and act with

reasonable promptness if it wishes to deny liability on the

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ground of false representation or warranty by the insured."

Id. at 256 (quoting Metropolitan Life Ins. Co. v. De Nicola,

58 N.E.2d 841, 842 (Mass. 1944)). But Bonitz did not concern

the validity of an exception for fraud and so does not

control here. Decisions in other jurisdictions on fraud

exceptions to incontestability statutes have been mixed,

compare Amex Life Ins. Co. v. Slome Capital Corp., 43 Cal.

App. 4th 1588, 1605-07 (Cal. App. 1996), with Fioretti v.

Massachusetts General Life Ins. Co., 53 F.3d 1228, 1236-37

(11th Cir. 1995), cert. denied, 116 S. Ct. 708 (1996)

(construing New Jersey law), and none has dealt with the

interaction between two provisions analogous to sections 124

and 132.

Protective Life offers the canon of construction that

the specific controls the general, but that rule does not

help in this case because both statutory provisions are

specific in different ways. Section 132 states clearly that

there is a two-year time limit on contesting the validity of

life insurance policies. Section 124 says, equally clearly,

that particular types of policies--those issued without a

medical examination or knowledge and consent of the insured--

may be contested for fraud, without specifying a time limit.

As a matter of policy, Protective Life claims that section

124 was enacted to encourage the issuance of life insurance

policies cheaply and quickly, without a medical examination.

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Dignity asserts to the contrary that the provision disfavors

such policies by making it more difficult for insurance

companies to contest them during the two-year contestability

period. Neither party has presented persuasive legislative

history on the point.

The subsidiary question of the weight to be accorded to

the Commissioner's action in clearing the policy form also

appears to be open to dispute. The Commissioner's

interpretation of Massachusetts insurance law may be entitled

to deference even when the interpretation is evidenced only

by approval of a policy form. See Colby v. Metropolitan

Property and Cas. Ins. Co., 652 N.E.2d 128, 131 (Mass. 1995).

The district court found that the Commissioner has determined

that there is an implicit exception to the incontestability

clause for actual, willful fraud and has routinely approved

life insurance policies with such an exception. If, however,

the Commissioner's interpretation is contrary to the language

and policy of the statute, it will not be deemed persuasive.

Cardin v. Royal Ins. Co. of America, 476 N.E.2d 200, 205

(Mass. 1985).

Protective Life further argues that the two-year time

limit should be equitably tolled because Sullivan not only

committed fraud in his application, but also concealed the

fraud by deliberately waiting to apply for the disability

waiver of his premium until the incontestability period

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expired. This argument also raises a difficult question of

Massachusetts law. There is no clear precedent on the

question whether the time limit in section 132 is subject to

equitable tolling.

Even if in some cases the time limit could be tolled,

the facts in this case present a further question: the only

act of concealment asserted as a ground for equitable tolling

is Sullivan's delay in applying for his disability waiver.

The district court found that this delay amounted to an

ongoing course of fraudulent conduct designed to conceal the

fraud in the application. Dignity denies that Sullivan

deliberately delayed his application and denies that such

inaction, even if deliberate, could give rise to equitable

tolling.

On our own motion, we certify to the Supreme Judicial

Court of Massachusetts, pursuant to its Rule 1:03, the

questions set forth in the attached certificate, and we

retain jurisdiction over this case pending their

determination.

It is so ordered.

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UNITED STATES COURT OF APPEALS
FOR THE FIRST CIRCUIT

No. 96-1080

PROTECTIVE LIFE INSURANCE COMPANY,

Plaintiff, Appellee,

v.

DENNIS J. SULLIVAN,

Defendant,

and

DIGNITY VIATICAL SETTLEMENT PARTNERS, L.P.,
and DIGNITY PARTNERS, INC.

Defendants, Appellants.

CERTIFICATION

For the reasons discussed in our opinion in this case, we certify

to the Supreme Judicial Court of Massachusetts, pursuant to its Rule

1:03, the following questions:

1. Does Mass. Gen. L. ch. 175, 132, taken together with 124,

bar an insurance company from contesting the validity of a life

insurance policy more than two years after its date of issue on

the ground that the insured made fraudulent misrepresentations in

applying for the policy, where the policy provided that it was

contestable for fraud at any time and where the Massachusetts

Commissioner of Insurance approved the policy form?

2. If the incontestability statute bars such an action, is the

contestability period nonetheless equitably tolled under the

circumstances of this case by Sullivan's failure to apply for the

disability waiver to which he was entitled until two years after

the policy was issued?

Although we have framed the questions for the Supreme Judicial

Court, we would welcome discussion by that court on any other issue of

Massachusetts law material to the case. The Clerk of this court will

transmit, under the official seal of this court, the certified

questions and our opinion in this case, along with copies of the

briefs and appendix filed by the parties in this case, to the Supreme

Judicial Court of Massachusetts.

United States Court of Appeals
for the First Circuit

By:
Bruce M. Selya
Circuit Judge