AMEX LIFE ASSURANCE COMPANY v. SLOME CAPITAL CORP (1996)

Amex Life Assurance Company and Life Investors Insurance Company of America, defendants in an insurance “bad faith” action, seek a writ of mandate directing respondent court to grant their motion for summary judgment.   We grant the petition as to plaintiff's bad faith cause of action but deny it in all other respects.

FACTS AND PROCEDURAL HISTORY

This matter is before us on a writ petition seeking to overturn the trial court order denying the summary judgment motion brought by defendant and petitioner Amex Life Assurance Company (“Amex”).¹  Amex issued a life insurance policy to Jose Morales (“Morales”) effective May 1, 1991.   Morales learned he was HIV positive in late 1990 and applied for the insurance in January 1991.   He lied on the application form and denied having the AIDS virus.

On March 20, 1991, a paramedic engaged by Amex met a man claiming to be Morales and took blood and urine samples.   Morales's application showed that he was 5–feet, 6–inches tall and weighed 142 pounds.   The man who gave these samples was listed by the examiner as standing 5–feet, 10–inches and weighing 172 pounds.   He produced no identification, a fact which the examiner noted.   While Morales claimed he was a non-smoker, the urine sample tested positive for traces of nicotine.   For purposes of these proceedings, it is undisputed that an impostor appeared for the medical exam and provided the urine and blood samples.   The blood sample taken tested HIV negative and the policy was issued.

Morales died June 11, 1993.   In the weeks before his death, Morales sold his policy to plaintiff and real party in interest Slome Capital Corp. (“Slome”), a viatical company engaged in the business of buying life insurance policies at a discount rate from insureds before their deaths.   After Slome entered the agreement with Morales, but before paying Morales any money, Slome contacted Amex and was told that the statutorily-mandated, two-year incontestability period (Ins.Code, § 10113.5) had passed.²

After Slome filed its claim for the policy proceeds, Amex was tipped off that an impostor had taken the medical exam for Morales.   Amex conducted an investigation, including a handwriting analysis.   Based on the handwriting analysis, the height and weight discrepancies and the presence of nicotine in the urine sample, Amex concluded that the tip was correct and denied Slome's claim on that basis.   Slome sued Amex for breach of contract, bad faith and equitable estoppel.   At issue is whether section 10113.5 bars Amex's policy challenge, or whether that statute is obviated based on the so-called “impostor defense” which several other states, but not California, have adopted.

STANDARD OF REVIEW

 A party whose summary judgment motion was denied may petition this court for a writ of mandate seeking to reverse the lower court's order.  (Code Civ.Proc., § 437c, subd. (l ).)  Summary judgment is granted when a moving party establishes the right to the entry of judgment as a matter of law.  (Code Civ.Proc., § 437c, subd. (c).)  In reviewing an order granting summary judgment, we must assume the role of the trial court and redetermine the merits of the motion.   In doing so, we must strictly scrutinize the moving party's papers.  (Chevron U.S.A., Inc. v. Superior Court (1992) 4 Cal.App.4th 544, 549, 5 Cal.Rptr.2d 674.)   The declarations of the party opposing summary judgment, however, are liberally construed to determine the existence of triable issues of fact.  (Sosinsky v. Grant (1992) 6 Cal.App.4th 1548, 1556, 8 Cal.Rptr.2d 552.)   All doubts as to whether any material, triable, issues of fact exist are to be resolved in favor of the party opposing summary judgment.  (Ibid.)

 While the appellate court must review a summary judgment motion by the same standards as the trial court, it must independently determine as a matter of law the construction and effect of the facts presented.  (Saldana v. Globe–Weis Systems Co. (1991) 233 Cal.App.3d 1505, 1510–1511, 1513–1515, 285 Cal.Rptr. 385.)

Recent amendments to the summary judgment statute have changed the burden of proof.   A defendant moving for summary judgment meets his burden of proof of showing that a cause of action has no merit if that party shows that one or more elements of the cause of action, even if not separately pleaded, cannot be established, or that there is a complete defense to the action.  (Code Civ.Proc., § 437c, subd. (o)(2).)   Once the defendant does so, the burden shifts back to the plaintiff to show that a triable issue of one or more material facts exists as to that cause of action or defense.   In doing so, the plaintiff cannot rely on the mere allegations or denial of his pleadings, “but, instead, shall set forth the specific facts showing that a triable issue of material fact exists․”  (Ibid.;   see Union Bank v. Superior Court (1995) 31 Cal.App.4th 573, 590, 37 Cal.Rptr.2d 653.)

DISCUSSION

1. Meaning And Effect Of The Incontestability Provision

 Morales's policy included the following provision:  “We will not contest coverage under the Certificate [of insurance] after it has been in force during the life of the Covered Person for two years from the Certificate Effective Date, if all premiums have been paid.”   This was in accord with section 10113.5, which requires that every individual life insurance policy delivered or issued for delivery in this state contain a provision that it shall be incontestable after it has been in force for a period not more than two years from its date of issue.³

No reported decisions have construed section 10113.5.   While the legislative history of the provision is also scant, it does provide a compass for our search into its meaning.  Section 10113.5 was enacted in 1972 as Senate Bill 844.   Before its enactment, only group life insurance policies were required to include an incontestability provision.  (§ 10206.)   Both an author's statement and a legislative analysis provided by the Legislative Intent Service show that section 10113.5 was patterned after section 10206 in order to fill that gap.⁴

 Section 10206 contains wording similar to that of section 10113.5:  “The policy shall provide that the validity of the policy shall not be contested, except for nonpayment of premiums, after it has been in force for two years from its date of issue;  and that no statement made by any employee insured under the policy relating to his insurability shall be used in contesting the validity of the insurance with respect to which such statement was made after such insurance has been in force prior to the contest for a period of two years during such employee's lifetime nor unless it is contained in a written application signed by him.”  (§ 10206.)   Since these two provisions use similar wording to achieve similar goals relating to the same subject matter, and since section 10113.5 was patterned after section 10206, cases construing the latter are properly considered in construing the former.  (People v. Caudillo (1978) 21 Cal.3d 562, 585, 146 Cal.Rptr. 859, 580 P.2d 274;  Dubins v. Regents of University of California (1994) 25 Cal.App.4th 77, 86–87, 30 Cal.Rptr.2d 336;  Pacific Bell v. California State & Consumer Services Agency (1990) 225 Cal.App.3d 107, 115–116, 275 Cal.Rptr. 62;  Estate of Hoertkorn (1979) 88 Cal.App.3d 461, 465–466, 151 Cal.Rptr. 806.)

As with section 10113.5, however, few cases directly interpret section 10206.   Those that do looked to case law which considered the effect of incontestability clauses which were included in policies before they were statutorily required.  (See, e.g., Metzinger v. Manhattan Life Ins. Co. (1969) 71 Cal.2d 423, 428–429, 78 Cal.Rptr. 463, 455 P.2d 391, citing Dibble v. Reliance Life Ins. Co. (1915) 170 Cal. 199, 149 P. 171, hereafter “Dibble.”)

Dibble is the first reported California decision to examine the effect of an insured's fraud during the application process when the policy contained an incontestability clause.   The named insured had lied about the state of his health on his life insurance application.   The policy contained a one-year incontestability provision, which the insurer argued did not apply to such fraud.   The Supreme Court rejected this argument.  (Dibble, supra, 170 Cal. at pp. 208–209, 149 P. 171.)

Numerous decisions since Dibble have held that even gross fraud by an insured who lied about his health in applying for life insurance falls within the terms of an incontestability provision.  (Metzinger v. Manhattan Life Ins. Co., supra, 71 Cal.2d at pp. 428–429, 78 Cal.Rptr. 463, 455 P.2d 391 [relying on Dibble's holding that fraud as to insured's health condition fell within an incontestability clause when construing section 10206];  New York Life Ins. Co. v. Hollender (1951) 38 Cal.2d 73, 77–79, 237 P.2d 510 [after the prescribed lapse of time, the incontestability clause “prevents nullification of the insurance contract for any cause not excepted in the clause”];  Coodley v. New York Life Ins. Co. (1937) 9 Cal.2d 269, 272, 274, 70 P.2d 602 [incontestability clause prevents policy contest on grounds the policy was procured by fraud];  Schaefer v. California–Western States Life Ins. Co. (1968) 262 Cal.App.2d 840, 845, 69 Cal.Rptr. 183 [same];  John Hancock etc. Ins. Co. v. Markowitz (1944) 62 Cal.App.2d 388, 396–397, 144 P.2d 899 [incontestability clause binding on insurance company even in the face of gross fraud];  Trousdell v. Equitable Life Assur. Soc. (1942) 55 Cal.App.2d 74, 77–81, 130 P.2d 173, 990;  Braun v. New York Life Ins. Co. (1941) 46 Cal.App.2d 335, 346, 115 P.2d 880;  Blair v. New York Life Ins. Co. (1940) 40 Cal.App.2d 494, 501, 104 P.2d 1075;  Mutual Life Ins. Co. v. Margolis (1936) 11 Cal.App.2d 382, 384–385, 53 P.2d 1017.)

This interpretation does not condone fraud.   It merely establishes a shorter period for its discovery by the insurer.   In that sense, it is no different than a statute of limitations.  “ ‘It is not a stipulation absolutely to waive all defenses and condone fraud.   On the contrary, it recognizes fraud and all other defenses but it provides ample time and opportunity within which they may be, but beyond which they may not be, established.   It is in the nature of and serves a similar purpose as statutes of limitations and repose, the wisdom of which is apparent to all reasonable minds.’ ”  (Dibble, supra, 170 Cal. at p. 209, 149 P. 171, quoting Wright v. Mutual Benefit Association (1890) 118 N.Y. 237, 23 N.E. 186;  Mutual Life Ins. Co. v. Margolis, supra, 11 Cal.App.2d at pp. 384–385, 53 P.2d 1017.)

Sound public policy considerations lie at the heart of this rule.   The Dibble court adopted in part the Court of Appeal's earlier decision, which stated:  “ ‘․ It has often been held that a provision of that kind is valid because it is in the nature of a limitation of the time within which the defendant [insurer] may avoid the policy for this cause.   Such a provision is reasonable and proper, as it gives the insured a guaranty against possible expensive litigation to defeat his claim after the lapse of many years, and at the same time gives the company time and opportunity for investigation, to ascertain whether the contract should remain in force.   It is not against public policy, as tending to put fraud on a par with honesty.’ ”  (Dibble, supra, 170 Cal. at p. 202, 149 P. 171, quoting Reagan v. Union Mutual Life Ins. Co. (1905) 189 Mass. 555, 76 N.E. 217.)   “The incontestable clauses are enforced with particularity by the courts because of the desirable purpose which they have.   It is their purpose to put a checkmate upon litigation;  to prevent, after the lapse of a certain period of time, an expensive resort to the courts—expensive both from the point of view of the litigants and that of the citizens of the state.   In that way, it is a statute of limitations upon the right to maintain certain actions or certain defenses․”  (1A Appleman, Insurance Law and Practice (rev. ed. 1981), § 311, p. 311, fns. omitted.)

The need for such protection becomes especially clear for life insurance policies, where the contest is usually made after the named insured has died, robbing the beneficiaries of their most potent witness.  “An incontestable clause in an insurance policy is intended to free the beneficiary from delay, annoyance and expense in acquiring the amount which had been carefully provided.   Premiums on life insurance policies are often paid at a great sacrifice, and one of the most disturbing and unsatisfactory features of the insurance contract is the fact that, after these sacrifices and payments have been made for a number of years, and the insured has died, so that his testimony and perhaps that of others has been rendered unavailable by the lapse of time and the occurrence of death, instead of receiving the promised reward, the beneficiary will be met with a contest and a lawsuit to determine whether the insurance ever had any validity or force․”  (New York Life Ins. Co. v. Hollender, supra, 38 Cal.2d at p. 87, 237 P.2d 510 (dis. opn. of Carter, J.).)

 An incontestability clause therefore bars “a contest against the terms of the policy for the purpose of destroying its validity․”  (New York Life Ins. Co. v. Hollender, supra, 38 Cal.2d at p. 77, 237 P.2d 510.)   Such a clause means that, within the limits of the coverage, “ ‘․ the policy shall stand, unaffected by any defense that it was invalid in its inception, or thereafter became invalid by reason of a condition broken.’  [Citations.]”   (Id. at p. 79, 237 P.2d 510.) ⁵  “[E]ven though dishonest people are given advantages under incontestability clauses which any right-minded man is loath to see them get, still the sense of security given to the great majority of honest policyholders by the presence of the clause in their policies makes it worth the cost.   The time allowed to the insurance company after issuance of the policy to investigate the case and uncover any fraud is deemed a fair check against trickery or deception by the insured․”  (Maslin v. Columbian Nat. Life Ins. Co. (S.D.N.Y.1932) 3 F.Supp. 368, 369, hereafter “Maslin.”)

2. The Impostor Defense Is Not Applicable Here, Thus Precluding Summary Judgment For Breach of Contract

 Absent mutual assent as to the identity of the named insured, no valid insurance contract is formed.  (K.C. Working C. Co. v. Eureka–Sec. Ins. Co. (1947) 82 Cal.App.2d 120, 131, 185 P.2d 832.)

 Several decisions from sister states (or federal courts applying the law of sister states) have fashioned the so-called “impostor defense” to avoid the incontestability clause when a person applies for insurance using another's name.   The premise underlying these decisions is a lack of mutual assent as to the identity of the insured, thus precluding the formation of a contract in the first instance.   Absent a contract between the insurer and the person claiming benefits under the policy, the incontestability clause cannot be used to fill the gap created by this lack of mutual assent.

No reported California decision has directly considered whether the impostor defense applies to incontestability provisions.   We need not decide this question, however, since our review of the sister-state decisions which Amex cites, and the public policy considerations embodied in section 10113.5, leads us to hold that the impostor defense does not apply to the facts of this case.⁶  Where the named policyholder and the person who filled out the application and paid the premiums are one and the same, but another person was used by the applicant to take his medical exam, the impostor defense cases themselves make clear that there is mutual assent as to the insured's identity.

Maslin, supra, 3 F.Supp. 368, is the seminal case for the impostor defense.   The plaintiff in Maslin was the father of Samuel Maslin and had been named as beneficiary on his son's life insurance policy.   The son died after the policy's one-year incontestability period ended, but the father's claim was denied when it was learned that an impostor both made the application and took the medical exam.   The insurer argued and the court agreed that the insurer “never insured the life of the plaintiff's son at all and never had any contract or contractual dealings with him;  that the man it insured was another person altogether, a healthy man whom the defendant's medical examiner saw and accepted as a risk and who chose to call himself Samuel Maslin;  ․ If the facts pleaded are borne out by the proof, the defendant is under no liability to the plaintiff.   There cannot be the slightest doubt that the person whom an insurance company intends to make a contract with and intends to insure is the person who presents himself for physical examination.”  (Maslin, supra, 3 F.Supp. at pp. 369–370.)

Amex relies on the last quoted portion of Maslin to argue that the impostor defense applies here.   The Maslin court made clear, however, that there was no mutual assent because the insurer never had any contractual dealings with the named insured, not simply because an impostor appeared for the medical exam.  (Maslin, supra, 3 F.Supp. at pp. 369–370.)   Elsewhere, the court stated:  “The defendant's only contract was with the man who made the application and took the examination.”  (Id. at p. 370, italics added.)   This is underscored by the decisions relied on by the Maslin court, which found their genesis in the rule “applicable to contracts generally that where a man, pretending to be some one else, goes in person to another and induces him to make a contract, the resulting contract is with the person actually seen and dealt with and not with the person whose name was used.  [Citations.]”  (Maslin, supra, 3 F.Supp. at p. 370.)

In support of its holding, the Maslin court cited three decisions:  (1) where a man bought jewelry under a false name, then sold to a third party.   When the original seller tried to regain possession through a replevin action, the court ruled for the current owner of the goods, holding that title had passed even though the first owner sold to a person using a false name since his intention was to sell to the person he was negotiating with.  (Phelps v. McQuade (1917) 220 N.Y. 232, 115 N.E. 441.)  (2) Where the defendant used his brother's name to induce the plaintiff to take a mortgage on defendant's home, then resisted a foreclosure attempt on the ground that there was no contract with him.   This defense was rejected since the plaintiff's intent was to contract with the defendant regardless of the name he used.  (Gotthelf v. Shapiro (1909) 136 A.D. 1, 120 N.Y.S. 210.)   And (3) where a bank opened an account for a man using a false name and that man forged checks on the other person's account.   The rightful owner of the checks was deemed not to be a depositor in the bank simply because his checks were cashed there since the bank intended to open an account for the man who actually applied, regardless of the name he used.  (Eastern Exchange Bank v. Fidelity & Deposit Co. of Maryland (1927) 245 N.Y. 340, 157 N.E. 260.)   In each case, unlike here, the true bearer of the name used by the impostor took no part in the contract negotiations.

The inapplicability of the impostor defense on the facts now before us is made explicit by Ludwinska v. John Hancock Mut. Life Ins. Co. (1935) 317 Pa. 577, 178 A. 28, hereafter “Ludwinska,” another seminal impostor defense case relied on by Amex.   In Ludwinska, the Pennsylvania Supreme Court adopted Maslin and applied the impostor defense to avoid the incontestability rule.   The plaintiff in Ludwinska, using her sister's name, applied and took a medical examination for life insurance, naming their mother as beneficiary.   The sister listed as the named insured was in fact mentally ill and confined to an asylum.   The Ludwinska court cited Maslin and other decisions as holding “that if the insured never made any application for insurance and the policy was procured by impersonation, no contract existed between the parties which would make the incontestable clause applicable.  [Citations.]”   (Ludwinska, supra, 317 Pa. at pp. 579–581, 178 A. 28.)

The Ludwinska court found the mutual assent argument persuasive, since in all contracts, there must be a point at which the parties' minds meet in contractual relation.  “There must be identified parties to the contract or, at least, identified parties to take place in the negotiations leading to the contract.   When the parties have been identified and their minds have at least met on the question of whom they are respectively dealing with, then whatever fraud, misrepresentation, substitution, or impersonation may occur in the negotiations leading to the formation of the contract itself are matters of defense.   The contract may be induced by fraud or by active misrepresentation of material facts by one of the parties;  but before such fraud or misrepresentation comes into play, there must be a relationship, at least in a tentative form, between two or more identified parties who are negotiating the terms of the contract.”  (Ludwinska, supra, 317 Pa. at pp. 579–580, 178 A. 28, italics added.)  “The name affixed to the application does not govern unless the name identifies the human being it purports to.”  (Id. at pp. 581–582, 178 A. 28, italics added.)

In this same vein (and most significantly for purposes of our analysis), the court stated:  “Had Victoria [the sister in the asylum] of sound mind signed or authorized Bertha [the actual applicant] to sign the application, and a policy had [been] subsequently issued to her, then the substitution of Bertha for Victoria in the medical examination would have been an affirmative defense to be proven by the company [citation], just as false representations as to prior sickness or health, and the many other assertions deemed representations that may be found to be false in the application would be affirmative defenses.”  (Id. at p. 583, 178 A. 28, italics added.)

The undisputed facts of this case fit the precise scenario described in Ludwinska which would fall outside the impostor defense and within the policy's incontestability provision.   Morales himself applied for the insurance, then sent another to take the medical exam in his place.   As Ludwinska makes clear, the name on Morales's application governs because it identified the human being it purported to.   Once Morales actually applied, his use of an impostor for the blood and urine tests did not alter the fact that he and Amex both intended to deal with each other.   Instead, his misconduct was grounds for an affirmative defense based on fraud, but did not preclude the existence of mutual assent, which was necessary to invoke the impostor defense.  (Ludwinska, supra, 317 Pa. at pp. 581–583, 178 A. 28.) ⁷  Our interpretation of Ludwinska and the inapplicability of the impostor defense to these facts is confirmed by the author of a respected treatise on insurance law.  (Couch on Insurance 2d (rev. ed. 1983) § 72:73, p. 339 [“If one ․ applies for life insurance, the impersonation of him by another in the medical examination is a matter of defense to which an incontestable clause applies․”].) ⁸

The other decisions relied on by Amex either concern applications made under false names or are otherwise inapplicable.

In Obartuch v. Security Mut. Life Ins. Co. (7th Cir.1940) 114 F.2d 873 (hereafter “Obartuch ”), Illinois law was applied to avoid a policy's incontestability clause where the named insured had no knowledge that an application had been submitted in his name, did not intend to do so and did not appear for the medical examination.   Focusing on the state of mind of the person named in the policy, the court applied Maslin and Ludwinska to hold that there was no meeting of the minds which would lead to the formation of a contract and the concomitant application of the incontestability clause.   (Obartuch, supra, 114 F.2d at pp. 877–879;  accord Petaccio v. New York Life Ins. Co. (1937) 125 Pa.Super. 15, 189 A. 697 [Pennsylvania court applying Ludwinska and finding no mutual assent where an impostor both signed the application and took the medical exam.)

Amex relies heavily on the recent decision in Fioretti v. Massachusetts General Life Ins. Company (11th Cir.1995) 53 F.3d 1228 (hereafter “Fioretti ”), which applied New Jersey law on facts similar to those here.   The person who applied for life insurance used the name C. Tony Fioretti with a birthdate of March 6, 1947.   His real name was Anthony C. Fioretti with a birthdate of September 6, 1948.   He did provide his correct Social Security number.   Fioretti lied on the application, stating that he was HIV negative when he knew he was in fact HIV positive.   He sent an impostor to take a blood test for him and that person's blood tested negative for the AIDS virus.

After determining that New Jersey law governed, the Eleventh Circuit noted a recent New Jersey decision which interpreted that state's incontestability clause provision as inapplicable when the insurer seeks to rescind based on fraud or negligent misrepresentation in connection with the application process.   Because even a negligent misrepresentation is sufficient to avoid the bar of the incontestability clause under New Jersey law, it seemed obvious to the Fioretti court that New Jersey would also recognize the impostor defense.   The court chose not to resolve that issue, however.   Instead of holding that the impostor defense applied on those facts, the Fioretti court held that the applicant's misstatements about his health condition were enough to permit rescission under New Jersey's relatively lax incontestability statute.  (Fioretti, supra, 53 F.3d at pp. 1236–1237.)

It is clear that Fioretti has no application here for two reasons:  (1) it did not decide whether those facts fell within the boundaries of the impostor defense;  and (2) it was decided under a New Jersey statute completely at odds with its California counterpart, where even intentional fraud in the application process is protected by the incontestability clause.⁹

Our decision is based on more than the presence of mutual assent, which thereby precludes application of the impostor defense.   It is also compelled by the public policy which section 10113.5 serves.   Distilling the numerous authorities cited earlier, we view this statute as a legislatively-mandated balancing act between an insurer's right to avoid a policy obtained by fraud and the rights of policyholders and beneficiaries to receive their policy benefits without contest after premiums have been paid for a number of years.   To achieve this balance, the Legislature has imposed on insurance companies a two-year statute of limitations in which to discover any grounds for avoiding the policy.   This places a certain burden of diligence on the insurer, a burden which Amex never met.  (Dibble, supra, 170 Cal. at p. 202, 149 P. 171 [incontestability provisions give insureds protection from attempts to avoid the policy after the lapse of time but gives the insurer time and opportunity for investigation to determine whether the policy should remain in force].)

Amex contends it did not investigate Morales's application until receiving a tip after Morales's death that an impostor took his medical examination.   Morales's application listed his height as 5–feet, 6–inches and his weight at 142 pounds.   He stated that he did not smoke.   The person who appeared for the exam did not produce any identification.   He was 5–feet, 10–inches tall and weighed 172 pounds.   His urine sample showed traces of nicotine.   Based on these discrepancies and the result of its handwriting analysis, Amex concluded and Slome does not dispute that someone other than Morales appeared for the examination.¹⁰

Amex does not dispute that it possessed this information from the time it issued Morales's policy.   It was clearly possible for Amex to have discovered Morales's deception by following up on the information contained in its own files, but it failed to do so.¹¹  More importantly, the deception could well have been discovered at the start had Amex simply required all applicants to produce photographic identification before conducting a medical exam and issuing a policy.   Given the relatively light burden of such a requirement, combined with the burden of diligence which section 10113.5 places on the insurer, application of the incontestability clause to bar Amex's challenge is proper.

To hold otherwise might lead to no end of mischief as insurance companies who have taken no steps to verify the identity of their applicants or medical examinees then comb their files after the incontestability period expires, looking for some basis to contend that someone other than the named insured took part in the application or examination process.

Both the courts and the Legislature have recognized the occasional inequity which the incontestability clause may allow.   The inequity here was no different.   While Morales's fraud was abhorrent, he did nothing more than adopt another means of supplying false information to further his own application.   Amex was deceived by this, but always intended to contract with Morales.

When deciding cases based on public policy, we often walk the tightrope caused by individual inequity in the name of the greater good.   The Legislature does the same by statute.   Unlicensed contractors can be refused payment even though they properly provided expensive improvements to an owner's property.  (Bus. & Prof.Code, § 7031, subd. (a).)  Persons with valid fraud claims are barred by the statute of limitations should they wait too long to bring suit.   The incontestability clause required by section 10113.5 fills the same role.   The policy reasons behind this rule have been amply discussed ante.   Amex could have prevented this matter by adopting the simple expedience of refusing to provide medical examinations to those who did not produce proper photographic identification.   Instead, Amex gave the exam and issued the policy despite its knowledge that the person examined did not produce identification, appeared either unhealthy or older than his stated age, and was physically quite dissimilar in height and weight from Morales.

In short, our refusal to adopt the impostor defense on these facts will place a minimal burden on insurance companies:  before providing a medical exam and issuing a policy, they must at least take reasonable steps to ensure the person being examined is the person he claims to be.   A contrary ruling will undermine the public policy of requiring diligence by the insurer and instead place a potentially heavy burden on policyholders and the courts as a result of litigation arising from the additional policy contests which are sure to ensue.¹²  Accordingly, we deny Amex's petition in regard to Slome's cause of action for breach of contract.

3. Triable Issues Exist As To Whether Amex Is Estopped To Assert Morales's Fraud

 While each party to an insurance contract is under a duty of good faith to disclose all material facts to the other which are material to the contract (§ 332), the right to information of material facts may be waived by either the terms of the insurance itself or by “neglect to make inquiries as to such facts, where they are distinctly implied in other facts of which information is communicated.”  (§ 336.)   Thus, the insurer's right to disclosure of material facts, and its concomitant right of rescission, may be waived “by its own failure to follow up obvious leads.”  (Old Line Life Ins. Co. v. Superior Court (1991) 229 Cal.App.3d 1600, 1606, 281 Cal.Rptr. 15.)   If the insurance company “has actual knowledge sufficient to lead a reasonably prudent person to inquire further relative to representations made by a proposed insured, this may constitute notice of whatever the inquiry would have disclosed.  [Citation.]”  (Anaheim Bldrs. Supply, Inc. v. Lincoln Nat. Life Ins. Co. (1965) 233 Cal.App.2d 400, 411, 43 Cal.Rptr. 494.)   An insurer may be put on notice by facts contained in its own files.  (Rutherford v. Prudential Ins. Co. (1965) 234 Cal.App.2d 719, 734–735, 44 Cal.Rptr. 697.)   Each such case must be decided based on its own facts.  (Benton v. Aetna Casualty & Surety Co. (1966) 241 Cal.App.2d 768, 774, 50 Cal.Rptr. 824.)

 We believe this theory was raised, albeit imperfectly, by Slome's pleadings and opposition to Amex's summary judgment motion.   Slome's third cause of action for equitable estoppel alleged that Amex was in possession of the information which Amex was using to contest Morales's policy.   Despite that knowledge, Slome alleged that Amex did not disclose either that it possessed the information or that it failed to properly verify the identity of the person who appeared for Morales's medical examination.   When Amex told Slome that the policy's incontestability period had expired, Amex was estopped from contesting the policy on the basis of the information which Amex possessed.

Amex did not address the estoppel cause of action in its summary judgment motion.   In opposition, Slome argued that it justifiably relied on Amex's representations and that Amex's superior knowledge of the true facts equitably estopped Amex from contesting the policy.   As part of its argument, Slome relied on Old Line Life Ins. Co. v. Superior Court, supra, 229 Cal.App.3d at p. 1606, 281 Cal.Rptr. 15, for the proposition that Amex's negligence in failing to ascertain the existence of an impostor at the medical exam precluded Amex from challenging the policy on that basis.

Because Amex never addressed this issue in its motion, and in light of the evidence which suggests Amex might indeed be estopped from raising Morales's fraud as a defense to the policy, triable issues of fact clearly remain for resolution and Amex's petition is denied in regard to Slome's cause of action for equitable estoppel.

4. Summary Adjudication Of Issues Was Proper As To Slome's Cause Of Action For Bad Faith **

DISPOSITION

Let a peremptory writ of mandate issue directing respondent court to vacate its order of September 27, 1995, denying defendant's motion for summary judgment or, in the alternative, summary adjudication of issues, and enter a new order granting the motion for summary adjudication of plaintiff's second cause of action for bad faith, and denying the motion as to the remaining causes of action.   Real party in interest to recover its costs in opposing this writ petition.

I concur in my colleagues' well-stated and accurate analysis of the current state of the law concerning the application of an incontestability clause when a person other than the insured fraudulently takes a medical examination required for an insurance policy.   My colleagues have faithfully applied the decisions of the California Supreme Court to the facts in the present case.

I write separately to urge the Legislature to consider narrow changes in the law relating to incontestability clauses.   The sound public policy considerations which my colleagues have quite accurately emphasized in their opinion can intelligently be the subject of narrow legislatively delineated exceptions.   One narrow exception to the broad rule relating to incontestability clauses ought to exist when a person other than the insured takes a physical examination which has been required as a condition of securing coverage under an insurance policy.   Such a narrow rule would protect insurers and insureds alike.   The insurer would be protected from fraudulent conduct such as occurred in this case.   Insureds would be protected because they pay the policy premiums which go to fund the costs of not only this litigation but the payment of benefits in cases where fraud has occurred such as here.   More critically, the essential moral, social, and political goal of all law is to be that fraud ought not to overwhelm honesty.   When the fraud is readily indentifiable, such as in the present case, the important public policy considerations which support the broad enforceability of incontestability clauses will not be materially adversely affected by adoption of a rule which permits an insurer to contest a policy when a person other than the insured has taken a required physical examination.   Such a narrowly drawn statute will emphatically serve the public interest.   I urge the Legislature to take immediate action in this regard.   Otherwise, I concur in my colleagues' principled analysis and the judgment.

FOOTNOTES

1.   Defendant and petitioner Life Investors Insurance Company of America assumed all of Amex's liabilities by virtue of a certificate issued in February 1993.   For ease of reference, we will refer to both entities as Amex, unless otherwise indicated.

2.   All further statutory references are to the Insurance Code, unless otherwise indicated.

3.   This section states, in relevant part:  “An individual life insurance policy delivered or issued for delivery in this state shall contain a provision that it is incontestable after it has been in force, during the lifetime of the insured, for a period of not more than two years after its date of issue․   An individual life insurance policy, upon reinstatement, may be contested on account of fraud or misrepresentation of facts material to the reinstatement only for the same period following reinstatement, and with the same conditions and exceptions, as the policy provides with respect to contestability after original issuance.   This section shall not be construed to preclude at any time the assertion of defenses based upon policy provisions which exclude or restrict coverage.”  (§ 10113.5.)

4.   Senator Clark Bradley, the author of section 10113.5, wrote:  “The California Insurance Code requires that group life insurance policies must contain an [i]ncontestable provision with a two year time limitation.   However, there is no similar requirement with respect to individual life policies.  [¶] Senate Bill No. 844 will add a section to the Insurance Code which will require an individual life insurance policy delivered or issued for delivery in California to contain a provision that it is incontestable after it has been in force, during the lifetime of the insured, for a period of not more than two years from the date of issue.  [¶] Enactment of this bill will make it impossible for a life insurer to rescind a policy of life insurance for misstatements made by the insured after two years have elapsed.”   An accompanying legislative analysis is virtually identical.

5.   In contrast, an insurer's suit to reform a disability insurance contract pursuant to the policy's age adjustment clause when it was learned the insured had understated his age was held not to be a policy contest since the insurer sought to enforce the policy according to its terms.  (New York Life Ins. Co. v. Hollender, supra, 38 Cal.2d at pp. 78–79, 83–84, 237 P.2d 510.)   A suit for reformation based on a scrivener's error is also not a policy contest within the meaning of an incontestability clause.  (Schaefer v. California–Western States Life Ins. Co., supra, 262 Cal.App.2d at p. 845, 69 Cal.Rptr. 183.)

6.   As noted earlier, no reported California decision has addressed the applicability of the impostor defense.   Neither have we found a decision based on facts similar to these, where an insurer seeks to avoid an incontestability provision because the named insured used another in his stead to pass the insurer's medical exam.   One decision, however, inferentially supports the proposition that the incontestability clause would preempt a challenge on these facts.The court in Meyer v. Johnson (1935) 7 Cal.App.2d 604, 46 P.2d 822, considered an insurer's challenge to a life insurance policy as void when the named insured never personally filled out the application.   Instead, the application was filled out by her husband as part of a plan to kill the wife/insured and collect the insurance proceeds.   The court first held that the wife's signature was not necessary to make the contract valid when there was evidence that she knew she was applying for insurance and intended that her husband act as her agent in signing for her.   Alternatively, however, the court held that the insurer's challenge on this ground was barred by the policy's incontestability clause.  (Id. at p. 614, 46 P.2d 822.)   If the incontestability clause prevents an insurer's challenge to a policy's validity where the named insured did not fill out the application, then the same result should obtain when the named insured in fact filled out the application but sent another in his place to take the medical exam.

7.   The following analogy may prove helpful in understanding this distinction:  X applies with a law firm for a job as an associate.   His interview goes well and he is asked to send writing samples.   X sends writing samples prepared by A and the firm hires X after finding those samples satisfactory.   While the law firm has good grounds to avoid the contract, it seems clear that the firm in fact intended to hire X, providing the required mutual assent as to the identity of the contracting party.

8.   The court in Crump v. Northwestern Nat. Life Ins. Co. (1965) 236 Cal.App.2d 149, 157, 45 Cal.Rptr. 814, cited Ludwinska among several other sister-state decisions for the proposition that there must first be a valid contract before an incontestability clause can be invoked.   The court in K.C. Working C. Co. v. Eureka–Sec. Ins. Co., supra, 82 Cal.App.2d at p. 131, 185 P.2d 832, cited only Ludwinska for the proposition that the minds of the parties to an insurance contract must have met on the identity of the person they are dealing with before a valid contract is formed.   These decisions, by their reliance on Ludwinska, also lend indirect support for our conclusion that Ludwinska's mutual assent formula is applicable here.

9.   In contrast, Florida law does not recognize the impostor defense at all.  (Bankers Sec. Life Ins. Soc. v. Kane (S.D.Fla.1988) 689 F.Supp. 1164, 1169, affd. (11th Cir.1989) 885 F.2d 820 [life insurance policyholder applied under new name provided by federal witness relocation program and insurer sought to void the policy under the impostor defense;  contest barred by strong public policy embodied by Florida's incontestability statute].)

10.   One other matter apparently not noticed by either party is the medical examiner's affirmative check mark in a box which asked whether the person examined appeared either unhealthy or older than his stated age.

11.   The effect of this neglect is discussed post, in connection with Slome's estoppel claim.

12.   Even though we decline to apply the impostor defense on these facts, we wish to make clear that this result is compelled by section 10113.5 and we are not condoning Morales's conduct in any way.

FOOTNOTE.   See footnote *, ante.

GODOY PEREZ, Associate Justice.

ARMSTRONG, J., concurs.