An Insurance Rescission Anniversary

On January 16, 1991, the Supreme Court decided Mass. Mut. Life Ins. Co. v. Manzo, 122 N.J. 104 (1991). The decision, a unanimous one written by Justice Pollock, addressed “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.” In his insurance application on June 28, 1983, Manzo had falsely stated that he had never been advised of, treated for, or had any known indication of diabetes. And, although he had been hospitalized twice in the five years preceding his insurance application, Manzo denied on that application consulting a doctor for other than a routine checkup during that period.

Thirty-one days after the date of the application, Manzo paid the insurer $200 and received a conditional receipt that stated that .overage would not become effective 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.” Twenty-four days after that, Manzo was found in the trunk of his car, having been shot to death. Nine days later, on August 31, 1983, the insurer issued the policy, effective as of June 13, 1983, at standard rates. Thereafter, the insurer investigated further, learned of Manzo’s intentional misrepresentations, and sued Manzo’s beneficiary and his estate, seeking rescission of the policy based on equitable fraud. The insurer asserted that it would have required of 250% of the standard rate had it known the truth about Manzo’s medical condition.

The Chancery Division granted rescission, but the Appellate Division reversed in a 2-1 ruling. On the insurer’s appeal as of right, the Supreme Court agreed with the Appellate Division dissenter, reversed, and reinstated the Chancery Division’s order of rescission.

Justice Pollock addressed the multiple respects in which the Court differed from the Appellate Division majority. First, the Appellate Division had questioned the fairness of allowing the insurer to rescind the policy after Manzo’s death. But Justice Pollock said that “[t]he 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,'” citing a number of cases. The insurer could seek to rescind after the insured’s death if that challenge were brought within the period of incontestability set by statute, which was two years from the date of issuance of the policy.

Next, Justice Pollock discussed the question of whether Manzo’s misrepresentations were material. The Appellate Division majority held that materiality required intent to defraud “and that the misrepresented disability either rendered the insured uninsurable or was causally related to his or her death.” The Supreme Court disagreed on both counts.

Traditionally, equitable fraud has not required intent. And the relevant statute not only was silent about intent, it replaced a prior version that contained an express intent requirement.

As to the Appellate Division’s requirement that a misrepresentation make an applicant uninsurable in order to justify rescission, Justice Pollock found it “too restrictive” and “an incentive for dishonesty.” He also noted that Kerpchak v. John Hancock Mut. Co., 97 N.J.L. 196 (E. & A. 1922), had found misrepresentations material if they “naturally and reasonably influence[d] the judgment of the underwriter in making the contract at all, or in estimating the degree or character of the risk, or in fixing the rate of premium.” The Appellate Division believed that the statute had overruled that case, but Justice Pollock observed that New Jersey courts had continued to follow Kerpchak. That case also represented the view of insurance treatises and of courts in other jurisdictions.

The Court rebuffed the remainder of the Appellate Division majority’s rationales. Accordingly, the Chancery Division’s order of rescission was reinstated.