Phillips Nizer LLP Articles

Firm Defeats Unusual 'Vanishing Premium' Claim on Lapsed Termination Policy

     The appellate Division, Second Department, unanimously affirmed the grant of summary judgment to an independent broker and our client, the insurer in a vanishing premium case, offering important teaching on applicable statutes of limitation. Cappelli v. Berkshire Life Insurance Company and R.B. Lewis Associates, Inc., Dkt. Nos. 1999-05090, 02579 (2nd Dep't October 2, 2000).

     Unlike many claims where premiums did not vanish when projected owing to lower interest yields with the result that the policyholder continued to pay premiums to cover the shortfall, the policyholder here had stopped paying premiums. The automatic premium loan feature took over; when the remaining loan value dropped below the premium cost, the policy reverted to extended term and ultimately lapsed for non-payment of premium. It was not reinstated and terminated.

     The policyholder brought suit two years later, claiming breach of contract, fraud and negligence against his broker and the insurer. He did not claim a violation of Section 349 of the New York General Business Law, which prohibits consumer-directed fraudulent acts and practices. The lower court granted summary judgment dismissing the claims both on the merits and because the applicable statutes of limitations had run out. On appeal, the Appellate Division dealt with the policyholder's substantive claims in one sentence, finding them "without merit," probably because the Court of Appeals had recently rejected similar claims in the combined Gaidon and Goshen cases.

     The Court gave more attention to the statute of limitations issues, with important ramifications for virtually all market conduct litigation among policyholders, brokers and insurers. Three separate statutes of limitations are involved. The first, for breach of a contract (in this case the policy itself), is six years from the date of breach. The second, for fraud (in this case the claimed misrepresentation as to when the premiums would vanish), is six years from the date the fraud was committed or two years from the date that the fraud either was or should have been discovered with the exercise of reasonable diligence. The third, for negligence (for allegedly failing to supervise or train the broker properly in selling the particular policy), is a three-year statute with no discovery period.

     The Policyholder in Cappelli argued that all three statutes did not begin to run until his policy was terminated because up to that time he had his $1,000,000 coverage in force. He thereby reasoned that he could not have sued before that date because he was not damaged until the policy was terminated.

     The insurer and the broker argued that the time to sue on all the claims ran from delivery of the policy. The Appellate Division agreed. If there was a breach of contract because the policy did not match up with what the policyholder claims he was promised, that occurred when the policy was delivered and his right to sue existed then. If the insurer was negligent in not training the broker properly, that act of negligence also was completed when the policy was delivered. The defendants urged that the fact that policy terminated many years later for non-payment of premiums did not revive claims that already were time-barred just because the policyholder could now also ask for reinstatement of the policy. Finally, with respect to the fraud statute of limitations, the policyholder should have learned that an alleged misrepresentation had taken place when the premiums did not vanish at the time he claimed had been promised to him by the broker.