Vlado v. CMFG Life Insurance Company

Background

Nickie Vlado sued CMFG Life Insurance Company to recover death benefits under a $300,000 term life-insurance policy issued on the life of Sally Green, Vlado’s mother. Vlado was the policy’s sole beneficiary. Green died more than four years after the policy was issued, and all premiums had been paid through her death.

After investigating Vlado’s claim, CMFG alleged that Green was not connected to the phone number or email address listed in the application, did not live at the listed address, and did not complete or consent to the application. CMFG also alleged that the application falsely stated that Green had not used tobacco or nicotine products during the prior twelve months, even though she appeared to have been a lifelong smoker. CMFG denied the claim, and Vlado brought claims for breach of contract, declaratory relief, and an order requiring payment of the death benefit.

CMFG answered and asserted nine affirmative defenses—legal reasons why the plaintiff should not prevail even if the complaint’s allegations were accepted—as well as a counterclaim under New Jersey’s Insurance Fraud Prevention Act. CMFG sought compensatory damages and a declaration that the policy was void. Vlado moved to dismiss the counterclaim and to strike CMFG’s first, second, third, fourth, and ninth affirmative defenses.

Applicable law

The parties agreed that New Jersey law governed the motion. The policy contained an incontestability clause stating that, after two years during the insured’s lifetime, the policy generally could not be challenged, subject to stated exceptions. The court concluded that New Jersey law likely permits an insurer to assert legal-fraud defenses after the two-year period when the insurance application contained material misrepresentations. Legal fraud, as described by the court, involves a material false statement about an existing or past fact, knowledge of its falsity, an intent that the other party rely on it, actual reliance, and resulting harm.

The court relied particularly on a statement by the Supreme Court of New Jersey that an insurer may deny a claim after the contestability period if the insured committed fraud in the application. The court also considered New Jersey’s Insurance Fraud Prevention Act and decisions recognizing limited exceptions to incontestability provisions. The court did not decide whether New Jersey separately recognizes the “imposter defense,” because it found that the fraud principles discussed in the opinion were enough to resolve Vlado’s motion.

Rulings on the affirmative defenses

The court denied Vlado’s motion to strike the first, second, third, and ninth affirmative defenses. Those defenses alleged, among other things, that someone other than Green completed the application without her knowledge or consent and that the application contained material, intentional misrepresentations. Accepting CMFG’s allegations at this stage, the court found that the defenses were sufficiently pleaded and that New Jersey’s incontestability rule did not bar them.

The court treated the fourth affirmative defense—unclean hands—differently. Unclean hands is an equitable doctrine that can prevent a claimant from obtaining equitable relief because of misconduct connected to the requested relief. The court held that unclean hands is not a valid defense to a claim for monetary relief, so it struck the defense as to Count I, Vlado’s breach-of-contract claim. The court denied the motion to strike that defense as to Count II, which sought declaratory and equitable relief, because the court could not conclude at this stage that the defense could not succeed.

Ruling on the counterclaim

The court denied Vlado’s motion to dismiss CMFG’s Insurance Fraud Prevention Act counterclaim. The court explained that the Act allows an insurer damaged by a violation to seek compensatory damages and generally requires proof of knowledge, falsity, and materiality. Vlado argued only that CMFG could not repackage barred affirmative defenses as a counterclaim. Because the court concluded that New Jersey law likely allowed the fraud defenses despite the incontestability period, it rejected that argument and allowed the counterclaim to proceed.

Disposition

Vlado’s motion was granted in part and denied in part. The court struck the fourth affirmative defense only as to Count I. It denied the motion to strike that defense as to Count II, denied the motion to strike the first, second, third, and ninth affirmative defenses in their entirety, and denied the motion to dismiss CMFG’s counterclaim in its entirety. The Clerk was directed to terminate the motion on the docket.