A Massachusetts court recently ruled that a “good health” requirement in a life insurance policy must be interpreted based upon what the contracting parties knew at the time the policy was issued (a subjective test), not based upon what in fact turned out to be true based on discoveries made at a later date (an objective test). Hills v. Saving Bank Life Ins. Co. of Massachusetts, C.A. No. 04-1590 (Mass. Super. Ct. June 19, 2007). As a result, the court found that a policyholder is in “good health” at the time a life insurance policy incepts if the parties believe he is in good health, even if later medical events make clear that the policyholder was in fact suffering from a deadly disease at policy inception.

In the case, the policy applicant had agreed that the life insurance policy would only become effective if he was in “good health” at the time of the policy’s inception. At policy inception, the applicant believed he was in good health and the insurer’s medical exams did not indicate any problems. Fourteen days after inception, the policyholder was diagnosed with advanced pancreatic cancer that had clearly existed prior to the policy’s inception. He died soon after.

The policyholder’s widow sought death benefits, and the insurer denied coverage and returned all premiums received on the basis that the policyholder could not have been in “good health” at the time of policy inception, a condition precedent to coverage. The policyholder’s widow brought suit for breach of contract and bad faith.

On summary judgment, the policyholder’s widow argued that “good health” should be interpreted based upon what the parties knew at the time of inception, while the insurer argued that “good health” should be interpreted objectively. Acknowledging that significant Massachusetts precedent favored the defendant insurer’s argument, and noting that state courts appear to be evenly divided on the issue, the court still ruled that it believed that the Massachusetts Supreme Judicial Court would find such a clause to be properly interpreted based upon the subjective knowledge of the parties. On that basis, the court entered summary judgment in favor of the plaintiff on her breach of contract claim, but denied her bad faith claim on the basis that bad faith cannot be supported where interpretation of particular policy language is an issue of first impression.

In addition to evident concern for the plaintiff’s situation if coverage were not found, the court also noted three significant factors in its decision: (1) the term “good health” was not defined in the policy, much less sufficiently clearly to make evident whether the term referred to an objective or subjective standard; (2) the insurer conducted certain medical exams of the policy applicant and could have performed more rigorous medical examination had it so chosen; and (3) a finding in favor of the insurer would potentially permit insurance companies to rescind life insurance coverage many years after it had been granted based upon facts discovered well after policy inception.