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Court considers insurance coverage

By: dmc-admin//December 23, 2002//

Court considers insurance coverage

By: dmc-admin//December 23, 2002//

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Pytlik

“The timing of these events is significant as upon completion of the medical studies, the coverage under the conditional insurance agreement would have come into effect subject only to the condition of insurability.”

Paul J. Pytlik,
Hills Legal Group Ltd.
Waukesha

The Wisconsin Supreme Court will decide whether a conditional agreement for life insurance requires the insurance company to pay even though the applicant failed to complete one of the conditions prior to his death.

The case involves a question of whether Patrick Fox’s application for life insurance served as a contract obligating Catholic Knights Insurance Society (CKIS) to pay when Fox was killed in a car accident. Fox was killed before he completed a blood test, which CKIS had established as a condition of insurance.

A Matter of Timing

The accident occurred June 6, 1997, the same day that Fox was scheduled to have his blood test. Sixteen days earlier, Fox had applied for $150,000 worth of life insurance through CKIS. The agreement named his son Austin, who was 2 years old at the time, as the beneficiary. At that point, Fox made the first premium payment of $31.94.

The application was stipulated to take effect once Fox completed all necessary medical examinations. Fox was told that a blood test was required, so he scheduled one for May 30. However, he rescheduled the exam for the afternoon of June 6. On the morning of June 6, he was killed in a car accident.

CKIS refused to pay any death benefit. A letter sent to Fox’s father explained that the failure to obtain a blood sample meant that the insurance policy never took effect. An attorney representing Fox’s father asked CKIS to accept a blood sample that was drawn shortly after Patrick’s death, but the company refused.

Austin sued Catholic Knights for breach of contract. Milwaukee Circuit Court Judge Timothy G. Dugan dismissed the action, noting the policy language that indicated coverage would only begin when the required medical studies were complete.

Wisconsin State
Statute 631.11(3)

Effect of failure of condition or breach of promissory warranty. No failure of a condition prior to a loss and no breach of a promissory warranty constitutes grounds for rescission of, or affects an insurer’s obligations under, an insurance policy unless it exists at the time of the loss and either increases the risk at the time of the loss or contributes to the loss. This subsection does not apply to failure to tender payment of premium.

Austin appealed, and the District 1 Court of Appeals, in a 2-1 decision, reversed the circuit court, finding that Wisconsin Statutes Section 631.11 trumped the language in the insurance policy.

Writing for the majority court, Judge Charles B. Schudson stated, “We conclude that under the unusual circumstances of this case, and by operation of Wis. Stat. § 631.11(3) (1999-2000), Patrick’s policy was in effect at the time of his death even if a blood test was a condition precedent to the activation of the policy, even though Patrick died before having that test, and even though a blood test could only have been performed on the blood that had been drawn from Patrick following his fatal accident.”

The court of appeals interpreted sec. 631.11(3) to mean that CKIS would have to pay unless the postmortem blood sample indicated that Fox would have been uninsurable. Given that CKIS declined to utilize the sample, the court determined that the insurance company relinquished the opportunity to make that determination regarding Fox’s insurability.

Judge Ted E. Wedemeyer, Jr., dissented. Wedemeyer argued that the majority decision placed insurance companies in the position of insuring applicants, even if they repeatedly put off required medical testing. Wedemeyer also disagreed with the majority’s conclusion that CKIS should have utilized the postmortem blood sample, when it was Fox’s obligation to provide a blood sample prior to activation of the policy.

Oral Arguments

Paul
J. Pytlik, of the Hills Legal Group Ltd. in Waukesha, represented CKIS at oral arguments. He described the case as “an important issue of the corresponding rights and responsibilities of the life insurance applicant and insurance carrier when entering into a conditional life insurance agreement.”

Pytlik noted that Fox’s failure to complete the blood test was a “critical condition precedent to his coverage coming into effect under the Catholic Knights insurance agreement”

Throughout the discussion, Pytlik was careful to use the term “agreement” rather than contract, binder or policy when discussing the relationship between Fox and CKIS.

“The conditional insurance agreement is not a binder of insurance,” Pytlik said. “The binder is a temporary policy that is in effect until the real policy can be developed and delivered by the insurance company.”

At the same time, George P. Kersten, of Kersten & McKinnon in Milwaukee, reinforced the notion that Fox and CKIS were bound by a contract and that the insurance company had an obligation to Fox resulting from that contract.

“We believe there indisputably was a contractual relationship between the insured and the insurance company,” Kersten told the court.

Since a contractual relationship existed, Kersten said, sec. 631.11(3) applied to the situation.

“The statute only excuses a condition where the condition really has nothing to do with the loss,” Kersten told the court. If Fox had died of a blood disease, then the testing would have been relevant; however, since he died in an accident the condition was excused.

Burden of Proof

Kersten also noted that the Legislature had placed a burden of proof on the insurance company to show that Fox was uninsurable.

Pytlik maintained that the clear language of the agreement made it clear that no policy existed until Fox met the conditions precedent to coverage. As a result, the burden of proof prior to coverage was on Fox rather than CKIS.

“The timing of these events is significant as upon completion of the medical studies, the coverage under the conditional insurance agreement would have come into effect subject only to the condition of insurability,” Pytlik said. “The burden at that point would then shift to Catholic Knights … to complete a good faith investigation into the issue of whether Mr. Fox was insurable.”

Pytlik told the court that nothing in 631.11 required interim insurance coverage under a conditional insurance agreement when the required conditions had not been met. Placing the burden on the insurer would remove the incentive for the applicant to complete testing, he said.

“That’s one of the absurdities created by the court of appeals decision,” Pytlik said. “If the court of appeals decision is taken to its extreme, once he fills out the application and submits his premium, he never has to submit to the medical studies at all.”

Pytlik also referred the Eastern District of Wisconsin decision in LaBonte v. Connecticut Gen. Life Ins. Co., 723 F. Supp. 392, 395 (E.D. Wis. 1989). In that case, a Wisconsin federal court faced with this issue concluded that this statute does not apply to the situation where a policy is not yet in effect due to failure of a condition precedent.

Links

Wisconsin Supreme Court

Related Resource

Oral Argument in RealAudio format

In that case, LaBonte misrepresented his status as an employee covered under an employee insurance package. Therefore, being an employee would have been a condition precedent to coverage. Applying the Fox family’s reasoning to LaBonte, Pytlik said, LaBonte would have been rewarded for his deceit.

Kersten argued that the significant difference between t
he Fox case and the LaBonte case was the existence of a contractual agreement. He maintained that Fox and CKIS had a contractual agreement, whereas, no such relationship existed between LaBonte and Connecticut General Life.

“In LaBonte, the supposed insured was not a member of the group,” Kersten said. “Not being a member of the group, there was no contractual relationship between that person and the insurance company. That’s what LaBonte was addressing. Here, we do have a contract, indisputably.”

The case is # 01-1469, Fox v. Catholic Knights Insurance Society.

Tony Anderson can be reached by email.

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