decided: March 9, 1981.
FRANCES KRAUSS, PLAINTIFF-APPELLEE,
MANHATTAN LIFE INSURANCE COMPANY OF NEW YORK, DEFENDANT-APPELLANT.
Appeal from an order of the Southern District of New York, John M. Cannella, J., granting plaintiff's motion for summary judgment on the ground that New York law, which was held to govern the dispute, did not permit the insurer to raise ineligibility as a defense. Reversed as to the district court's choice of law and remanded for determination of the insurer's liability.
Before Lumbard, Mansfield and Van Graafeiland, Circuit Judges.
Manhattan Life Insurance Company of New York appeals from an order of Judge Cannella of the Southern District of New York which granted summary judgment for plaintiff Frances Krauss. No relevant facts are in dispute, and the only issue is whether the law of New York or the law of Illinois governs the interpretation of the insurance contract at issue. Applying New York choice-of-law doctrines, Judge Cannella held that New York law governs the interpretation and accordingly granted summary judgment for the plaintiff under the $100,000 life insurance certificate. We hold that Illinois law governs, and accordingly we reverse and remand for further proceedings.
Frances Krauss is the beneficiary under a group life insurance policy held by her deceased husband, Hyman Krauss. At all times relevant to this action, the Krausses were Illinois domiciliaries. Hyman Krauss, an attorney and member of the Illinois bar, was a part-time officer of Lettercraft, Inc., an Illinois corporation based in Chicago which has since changed its name to Chicago Aligraphy and Lithography. Lettercraft was and is a member of the Master Printers Management Group Life Insurance Trust Fund (Trust Fund) which has its principal place of business in Buffalo, New York. The Trust Fund provides group life insurance to the employees of its members and has members in virtually every state. On December 21, 1960, Manhattan Life issued and delivered a group life insurance policy (the master policy) to the Trust Fund in Buffalo. Manhattan Life is a New York corporation, licensed to do business in every state, with its principal offices in New York City. The master policy contained no choice-of-law provision.
Manhattan Life issued certificate number 1196 to Hyman Krauss, effective September 14, 1966, for $50,000 coverage of term life insurance, which was increased to $100,000 on December 18, 1967. From 1966 until Hyman Krauss's death, Lettercraft paid Krauss's insurance premiums to the Trust Fund administrator in Los Angeles who collected all premium payments from members and forwarded a single check to Manhattan Life. Under the master policy, the premiums increased for each $1,000 of insurance coverage obtained, and thus Lettercraft paid four times as much for $100,000 coverage as it would have for $25,000 coverage.
The master policy, however, did not provide $100,000 coverage for part-time employees such as Hyman Krauss. Manhattan Life asserts that the group policy allowed only $25,000 for part-time employees, while Frances Krauss asserts $40,000 as the correct figure. In any event, due to his part-time status, Hyman Krauss was ineligible under the group policy for $100,000 in coverage. Neither on the application form nor at any time before Hyman Krauss's death did Manhattan Life inquire as to whether he was a full- or part-time employee of Lettercraft, how many hours a week he worked there, or whether that work constituted his primary business activity. On the other hand, Lettercraft paid the premiums even though the master policy clearly excluded part-time employees from that coverage; and, when Hyman Krauss applied for an increase in coverage from $50,000 to $100,000 on December 1, 1967, he stated that he had no other occupation although in fact he was practicing law in Chicago.
Hyman Krauss died of leukemia on April 18, 1977. Frances Krauss filed an application for payment of $100,000, plus interest, under her husband's certificate on May 18, 1977. Manhattan Life paid her $25,000, plus interest, which it stated was the maximum coverage under the policy for part-time employees.
Since the master policy was issued and delivered in New York State, section 161(1)(a) of the New York Insurance Law required the policy to include an incontestability clause. That clause provides that the "validity of this Policy shall not be contested, except for nonpayment of premiums, after it has been in force for two years from its date of issue." Illinois and New York differ regarding the effect of such an incontestability clause where, as here, an insurance company seeks to defend against liability on grounds that the insured was not eligible for insurance under the group policy. Under New York law, as established in Simpson v. Phoenix Mutual Life Insurance Co., 24 N.Y.2d 262, 299 N.Y.S.2d 835, 247 N.E.2d 655 (1969), Manhattan Life cannot raise Hyman Krauss's ineligibility as a defense and would hence be liable for the entire $100,000. Under Illinois law, as established in Crawford v. Equitable Life Assurance Society of the United States, 56 Ill.2d 41, 305 N.E.2d 144 (1973), Manhattan Life can raise Hyman Krauss's ineligibility as a defense. Contrary to the conclusions of the district court, we believe that, because Illinois is the only state with an enunciated interest in this dispute, Illinois law should apply. Accordingly, despite the incontestability clause, Manhattan Life can assert Hyman Krauss's ineligibility as a defense.
Under the principles of Erie Railroad Co. v. Tompkins, 304 U.S. 64, 58 S. Ct. 817, 82 L. Ed. 1188 (1938), a federal court in a diversity case must apply the substantive law of the forum state, including its choice-of-law rules. Klaxon Co. v. Stentor Electric Manufacturing Co., 313 U.S. 487, 61 S. Ct. 1020, 85 L. Ed. 1477 (1941). Thus, as recognized by the district court, New York choice-of-law rules govern this case. In Dym v. Gordon, 16 N.Y.2d 120, 124, 262 N.Y.S.2d 463, 466, 209 N.E.2d 792, 794 (1965), the Court of Appeals outlined those rules as a three-step analysis. First, the court must isolate the issue on which the laws conflict. Second, it must identify the purposes of the conflicting state laws to determine whether a genuine conflict exists. Third, it must examine the contacts of the interested jurisdictions to ascertain which has the closer connection with the facts of the case and thus has the superior interest in seeing its law applied. See Auten v. Auten, 308 N.Y. 155, 124 N.E.2d 99 (1954).
The first step in the New York choice-of-law analysis is determining the issue in dispute: here, the issue on which Illinois and New York law differ is the interpretation of the incontestability clause, not the requirement that it be included in the policy.*fn1 The statutes of both New York, N.Y.Ins.L. § 161(1)(a), and Illinois, Ill.Ins.Code § 231, require that an incontestability clause be placed in any group insurance policy issued or delivered in the respective state. The two states differ, however, on whether the clause precludes challenges to the insured's eligibility.*fn2
We next identify the policies of New York and Illinois that are promoted by the conflicting state rules, the second step in the New York choice-of-law analysis.*fn3 As discussed, Illinois law would allow Manhattan Life to raise Hyman Krauss's ineligibility as a defense while New York law would not. The district court determined that Illinois's interest in that approach was the protection of Illinois insurance companies, and it therefore held that Illinois had no interest in the application of its law to this case because a New York insurer was involved. We disagree. The Illinois Supreme Court in Crawford, supra, expressly based its decision on a policy of protecting Illinois residents who held group insurance certificates against a rate increase that would occur if insurance companies had to investigate each insured's eligibility. 56 Ill.2d at 52, 305 N.E.2d at 151. Moreover, Crawford, like this case, involved an Illinois insured suing a New York insurance company. There can be no doubt that the Illinois Supreme Court intended to benefit Illinois certificate-holders who are fully eligible at the expense of those who, like Hyman Krauss, are ineligible; the location of the insurance company is irrelevant. Thus, were the courts of Illinois to address this case, they would advance Illinois's interest in keeping group insurance rates lower by permitting Manhattan Life to contest eligibility.
New York, on the other hand, would allow Frances Krauss to recover if she were a New York domiciliary, but it has expressed no interest in allowing recovery by nondomiciliaries. As aptly summarized by the district court, the New York Court of Appeals' motivation in Simpson, supra, was to allow New York residents greater security in planning their estates by freeing them from the risks of posthumous life insurance disputes. 24 N.Y.2d at 266, 299 N.Y.S.2d at 839, 247 N.E.2d at 657. Nothing in Simpson suggests that the court was concerned with making New York a more desirable place to obtain insurance or that any altruistic concern for citizens of other states was involved.
Thus, the interests of only one state, Illinois, would be advanced by applying its law to the facts of this case. New York has expressed no interest in protecting nondomiciliaries with its restriction on insurance companies' available defenses, but Illinois's concern for Illinois group insurance holders would be advanced precisely as it was in Crawford by allowing Manhattan Life to raise the eligibility defense.*fn4
The choice of Illinois law is also buttressed by the third consideration of the New York choice-of-law analysis evaluating the grouping of contacts between the competing jurisdictions on the facts of the case. The district court, relying on its interpretation of Illinois's and New York's interests in the dispute, held that New York was the "center of gravity" of the transaction. We disagree. We have found no New York choice-of-law case that has applied New York law upon such limited contacts with the state. Lettercraft was a Chicago-based, Illinois corporation. All of its employees, including Hyman Krauss, worked in that state. The Krausses were Illinois domiciliaries. The certificate of insurance evidencing Hyman Krauss's coverage was delivered in Illinois. Manhattan Life was licensed to do business in Illinois. The only New York contacts were the issuance and delivery of the master policy. In light of Illinois being the only jurisdiction with an interest in having its law applied, those two events in New York are insufficient to establish that New York has superior contacts with this case.
The plaintiff relies, as did the district court, on § 192, comment h, of the Restatement (Second) of Conflict of Laws (1971). Comment h provides that, under group insurance contracts, "the rights against the insurer are usually governed by the law which governs the master policy," and the parties agree that New York law would govern the master policy here. Mrs. Krauss argues that New York courts have adopted comment h as law. Although several New York holdings are consistent with the outcomes comment h would dictate, no New York court has wholly adopted the comment as law.*fn5 For example, in Tormey v. Travelers Insurance Co., 6 A.D.2d 13, 174 N.Y.S.2d 496 (1958), the court applied New York law to a New York master policy, but stressed two reasons for doing so which are absent here: the insured's employment began in New York while a resident there and the first insurance certificate was issued and delivered in New York. In Kahn v. Great-West Life Assurance Co., 61 Misc.2d 918, 307 N.Y.S.2d 238 (1970), and Reger v. National Association of Bedding Manufacturers Group Life Insurance Trust Fund, 83 Misc.2d 527, 372 N.Y.S.2d 97 (1975), the master policy had express choice-of-law clauses selecting Illinois law. Moreover, footnote 10 in Reger suggests in dictum that delivery and issuance in a state would be insufficient contacts to justify the application of that state's law.
Because certificate holders in other states under the same master policy are apt to be governed by other states' laws, we recognize that the rule formulated by the Second Restatement might offer greater uniformity than the interest-analysis and center-of-gravity approach used by the New York courts. This does not, however, compel a different result. Uniformity and predictability were undeniably compromised when the classical territorial approach to choice-of-law problems was abandoned in Auten v. Auten and Dym v. Gordon. The compromise was performed, however, to obtain a less rigid, more rational system. See generally, B. Currie, Selected Essays on the Conflicts of Law (1963). Under the principles of Erie, supra, it is not our role to question the policy choices of states whose law we apply. Moreover, this outcome retains substantial uniformity as to Lettercraft, all of whose employees are in Illinois.
Illinois law, therefore, should govern the interpretation of the incontestability clause. We accordingly reverse and remand for further proceedings consistent with this opinion.