Protective Life v. Dignity Viatical

• Court: Court of Appeals for the First Circuit
• Decided: July 15, 1996
• Docket: 96-1080
• Status: Published

Opinion

USCA1 Opinion

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,


-3-
                                         -3-



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


-4-
                                         -4-



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


-5-
                                         -5-



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,


-6-
                                         -6-



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


-7-
                                         -7-



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


-8-
                                         -8-



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.


-9-
                                         -9-



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


-10-
                                         -10-



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.
                 ________________


-11-
                                         -11-



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