Court of Appeals Addresses Ambiguity in $1M Life Insurance Policy

Panel Splits on Which of Two Plausible Interpretations Prevails

It is Contract Law 101 that ambiguities in a contract should be resolved against the party that drafted the agreement. And that is especially the rule with respect to insurance policies that are drafted solely by the carrier. But, as a recent case decided by the New York Court of Appeals arising from denial of a claim under a one-million-dollar life insurance policy illustrates, a different and difficult question arises where both the insured and the carrier agree that a clause is ambiguous—and both present plausible interpretations.

Michael Dzialo purchased a one-million-dollar life insurance policy from William Penn Life Insurance Company of New York. The policy provided that “[t]he due date for the first premium is the Date of Issue,” identified as January 14, 2002. And the due date for subsequent premiums is “the day after the end of the period for which the previous premium was paid.” The policy further provided that premiums were payable as shown in a policy schedule, which also identified the “premium due date” as January 14th. According to the terms of the policy, premiums were required to be paid by the due date of January 14th or the end of a 31-day grace period following that date, after which policy coverage lapsed. For 15 years, the parties abided by that premium date. Despite notice advising decedent that the premium was due January 14th, 2018, he failed to pay by that date or within the next 31 days. Bonem died on February 26, 2018 without having remitted payment. And William Penn subsequently denied his estate’s claim for benefits on the basis that the policy had lapsed prior to his death.

Julia Bonem, his wife, sued William Penn. The trial court awarded the estate the policy amount. The Appellate Division reversed. And the widow appealed to the Court of Appeals.

The majority on the Court of Appeals summarily affirmed– holding that the estate was not entitled to benefits under the policy. The terms of the policy clearly and unambiguously tied the due date of the annual premium to the date of issue, January 14, 2002. And expressly stated that January 14 was the premium due date. That the insurance policy used the term “annual” but the premium payment period—which ran from January 14th, the “Date of Issue” and “premium due date”—may not cover a full year created no ambiguity in light of the clear policy language identifying January 14th as the “premium due date. Furthermore, any claimed ambiguity in the definition of “policy date” was irrelevant because the policy did not tie the premium due date to the “policy date” but, rather, the date of issue, which was January 14th. Because the insured failed to pay the 2018 premium by January 14, 2018 or within the 31-day grace period, the policy lapsed prior to his death.

But Judge Wilson dissented in a far more detailed and thoughtful opinion:

Verba chartarum fortuis accipiuntur contra proferentem. The words of a contract will be construed strongly against the party who offered it. Not only does that legal maxim date back a few millennia, but it is a longstanding fixture of New York law: if there is a reasonable doubt as to the meaning or application of a clause, it should be construed most favorably to the insured, because the insurer prepared and executed the contract and was responsible for the language used. And contracts must be interpreted with any ambiguities construed against the insurer and in favor of the insured that doctrine is recognized by every state of the Union, the District of Columbia, and courts in the U.S. territories; it is also well established around the world. Where large companies engage teams of lawyers to draft lengthy, impenetrable take-it-or-leave-it contracts presented to consumers, the doctrine promotes an essential legal concept: fairness.

In January 2002, Dzialo, then 39 years old and married with two children, purchased a $1 million life insurance policy for their security from William Penn. When applying for coverage, the sole reason he gave for deciding to purchase life insurance was “family protection”. He dutifully paid the premiums. Sixteen years later, he died. Upon his death, his wife, sought to collect on the policy. The insurance company rejected her claim on the ground that Dzialo missed the payment due shortly before his death, resulting in the policy’s automatic termination.

Entitlement to recover under the insurance policy depended entirely on the proper interpretation of its terms. Under William Penn’s interpretation, Dzialo’s payment was due 12 days before his death; and when he failed to make that payment, the policy lapsed. Under his wife’s interpretation, Dzialo’s final payment was not yet due, keeping the policy intact. Both interpretations were plausible, which meant the life insurance contract was ambiguous. Because the policy was ambiguous, the widow wins. The insurer can protect itself going forward by improving its form contract. That is how the doctrine of contra proferentem advances both fairness and efficiency.

The parties agreed to the following: (1) the life insurance contract stated that the entire policy lapsed after the due date of an unpaid premium, but also provided a 31-day grace period beyond the due date for premium payments, during which the contract remained in full force; (2)  Dzialo made his first premium payment on January 31, 2002, the date the policy was executed; (3) the policy provided that it would “not take effect until it has been delivered and the first premium has been paid”; and (4) Dzialo died on February 26, 2018.

The insurer interpreted the policy as requiring payment on January 14 of each year, with a grace period that allowed payment through February 14. Its interpretation relied on a provision on a page entitled, “Schedule of Benefits and Premiums,” which listed “01/14” as the “Premium Due Date.” That interpretation was plausible. Were that all the policy said, the insurer should prevail.

However, the policy contained terms that supported Bonem’s interpretation. The section of the policy entitled “Premium Payment” stated:

The due date for the first premium is the Date of Issue. The first premium must be paid to the agent with the application or upon delivery of the contract. The due date for each premium after the first is the day after the end of the period for which the previous premium was paid.

The contract thus made a clear distinction between the date for the first premium (the Date of Issue—a defined term), and the date for subsequent payments. It would have been simple to say that the due date for each premium after the first was the yearly anniversary of the Date of Issue, but that was not what the policy said. Instead, it said that the due date for subsequent premiums was the “day after the end of the period for which the previous premium was paid.”

The policy coverage was plainly for a year at a time: it was repeatedly described as “annual.” The policy stated: “This contract will not take effect until it has been delivered and the first premium has been paid.” The application, which by its terms “shall be attached to and made a part of any policy to be issued,” stated in bold type: “no insurance shall take effect until the policy has been physically delivered and the first full premium paid”. There was no dispute that the policy did not go into effect until January 31, 2002, when Dzialo met with the agent, signed the policy, and delivered the first payment. Bonem’s argument was also plausible: when, on January 31, 2002, her husband signed the policy and paid the first premium, he purchased a year of coverage, ending January 30, 2003. By the terms of the policy, his next payment, and all subsequent payments, were due on “the day after the end of the period for which the previous premium was paid”—that was, January 31. Tacking on the 31-day grace period, the policy had not expired on the date Dzialo passed away. The insurer did not dispute that, if Bonem’s interpretation was correct, she was entitled to recover under the policy.

Judge Wilson, in dissent, argued that Bonem’s interpretation of the policy was the better of the two–but that did not matter because both parties offered reasonable interpretations of the life insurance contract. So the contract must be interpreted in favor of the insured—in this case, in favor of Bonem. Noting that the Court had repeatedly emphasized that insurance policies were written by the insurer and any ambiguity was to be resolved against the issuer. In such cases, the ambiguity must be construed in favor of the insured.

The doctrine of contra proferentem derived from the idea that the party drafting a contract knows that ambiguities will be resolved against the drafter, giving it an incentive to write as clear a contract as possible. Next time, the insurer will fix the ambiguity in the contract, so that future purchasers of its insurance will better understand what they have purchased.

For a business issuing hundreds of thousands of policies of insurance, the cost of paying on an ambiguous contract term was modest when compared to the overall efficiency in rewriting the contract to remove that ambiguity from all future contracts. The doctrine of contra proferentem enjoyed such longstanding and universal adherence because it served twin purposes: fairness and efficiency. According to the dissent, the Court’s majority decision served neither.

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