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Docket No. 91804-Agenda 25-January 2002.

MARILYN LAUER, Appellee, v. AMERICAN FAMILY LIFE 
INSURANCE COMPANY, Appellant.

Opinion filed April 4, 2002.

JUSTICE THOMAS delivered the opinion of the court:

At issue is whether an insurance company can validly makethe two-year contestability period in a life insurance policy beginon the policy's issue date rather than on the date it issues aconditional receipt to the insured. We hold that it can.

BACKGROUND

The facts are undisputed. On March 23, 1997, Albert Lauerapplied for life insurance with defendant, American Family LifeInsurance Company. In his application, Lauer failed to disclosethat he had been diagnosed with terminal lung cancer in May 1996and had received multiple regimens of chemotherapy during 1996and 1997. On March 26, 1997, Lauer paid his first premium anddefendant issued a conditional receipt. The conditional receiptprovided temporary life insurance that would end on the earlier of120 days or the date insurance took effect under the policy.Defendant subsequently issued Lauer a 20-year decreasing termlife insurance policy with an "issue date" of April 12, 1997.Lauer's wife, plaintiff Marilyn Lauer, was the named beneficiary.

Lauer died of lung cancer on March 28, 1999, and plaintiffsubmitted a claim for benefits under the policy. Defendantinitiated an investigation and received medical records showingthat plaintiff had been diagnosed with lung cancer in 1996 and hadreceived chemotherapy in 1996 and 1997. Defendant informedplaintiff that it would not honor the policy because Lauer hadmaterially misrepresented his health and had failed to answerquestions truthfully in his application. Defendant asserted that itconsidered Lauer's lung cancer material to the risk it assumed andthat it would not have issued the policy if Lauer had disclosed thathe had cancer. Accordingly, defendant refunded the premiumsLauer had paid.

Plaintiff filed a two-count complaint against defendant. Incount I, she sought a declaratory judgment that the policy wasincontestable when her husband died. In count II, she alleged thatdefendant breached the contract by failing to pay benefits.Defendant moved to dismiss both counts. Defendant argued thatcount I should be dismissed pursuant to section 2-615 of the Codeof Civil Procedure (735 ILCS 5/2-615 (West 2000)) because thetwo-year contestability period began on the policy's issue daterather than on the date it issued the conditional receipt. Thus, thepolicy was still contestable when Lauer died. Defendant arguedthat count II should be dismissed pursuant to section 2-619 of theCode of Civil Procedure (735 ILCS 5/2-619 (West 2000)) becauseLauer had made material misrepresentations in his application.Thus, defendant was entitled to rescind the policy. The circuitcourt of Cook County granted the motion, and plaintiff appealed.

The appellate court reversed and remanded. 321 Ill. App. 3d890. The court held that the contestability period began to run onMarch 26, 1997, the day defendant issued a conditional receipt toLauer. Citing section 224(c) of the Illinois Insurance Code(Insurance Code) (215 ILCS 5/224(c) (West 2000)), the courtstated that the application was part of the insurance contract andthus the contestability period began when plaintiff's coveragebegan with defendant. The court believed that section 224(c)evinced a legislative intent to make the contestability period runfrom payment of the first premium, not from an arbitrary issuedate selected by the insurance company. 321 Ill. App. 3d at 894-95. We granted defendant's petition for leave to appeal.

ANALYSIS

Defendant first argues that the appellate court erred in holdingthat the two-year contestability period began to run on the datedefendant issued a conditional receipt, rather than on the policy'sissue date. We agree.

We begin by analyzing the relevant policy language. Theincontestability clause provides, in relevant part:

"We will not contest the validity of this Policy except fornonpayment of Premium after it has been in force duringthe Primary Insured's lifetime for two years from the laterof:

1. the Issue Date; or

2. the date We approve any ReinstatementApplication."

"Issue Date" is defined as "[t]he date this Policy was issued asshown in the Schedule." The schedule lists the issue date as April12, 1997. Thus, the policy clearly provides that the contestabilityperiod began to run on April 12, 1997, and the only question iswhether the policy language was contrary to the Insurance Code.

The primary goal of statutory interpretation is to ascertain andgive effect to the legislature's intent. Kraft, Inc. v. Edgar, 138 Ill.2d 178, 189 (1990). The best indication of legislative intent is thestatutory language, given its plain and ordinary meaning. IllinoisGraphics Co. v. Nickum, 159 Ill. 2d 469, 479 (1994). Moreover,courts afford considerable deference to the interpretation placed ona statute by the agency charged with its administration. Denton v.Civil Service Comm'n, 176 Ill. 2d 144, 148 (1997); City ofDecatur v. American Federation of State, County, & MunicipalEmployees, Local 268, 122 Ill. 2d 353, 361 (1988).

Section 224 of the Insurance Code (215 ILCS 5/224 (West2000)) sets forth the standard provisions required in life insurancepolicies issued in Illinois. The relevant portion is subsection (c),which contains the requirements for the contestability period:

"(c) A provision that the policy, together with theapplication therefor, a copy of which shall be endorsedupon or attached to the policy and made a part thereof,shall constitute the entire contract between the parties andthat after it has been in force during the lifetime of theinsured a specified time, not later than 2 years from itsdate, it shall be incontestable except for nonpayment ofpremiums ***; provided that the application therefor neednot be attached to or made a part of any policy containinga clause making the policy incontestable from date ofissue." 215 ILCS 5/224(c) (West 2000).

The appellate court read the "it" in the clause "after it hasbeen in force during the lifetime of the insured a specified time,not later than 2 years from its date" as referring to the "entirecontract between the parties" rather than to the "policy." Thus,according to the appellate court, the legislature unequivocallyshowed an intent to have the two-year period run from the firstdate at which the parties entered into any part of the contract, notfrom the policy's "issue date." 321 Ill. App. 3d at 894. The court,however, analyzed this section as if the final clause did not exist.The final clause-"provided that the application therefor need notbe attached to or made a part of any policy containing a clausemaking the policy incontestable from date of issue"-demonstratesthe error of the appellate court's analysis in two respects. First,when this section is read as a whole, it is clear that the "it" in thefirst clause refers to the policy, not to "the entire contract betweenthe parties." Following the language to the end of the sectionshows that the same "it" is the object of the last clause, whichbegins "provided that the application therefor." A person appliesfor a policy, not "the entire contract between the parties." Thus,"it" must refer to the policy, and the reference to "its date" refersto the policy's date, not the date the parties first entered into thecontract.

Much more importantly, however, the final clause specificallyauthorizes the insurance company to include a provision that thecontestability period begins on the policy's issue date. Althoughthe appellate court was correct that the statute makes theapplication and the policy the entire contract between the parties,the statute just as clearly provides that "the application thereforneed not be attached to or made a part of any policy containing aclause making the policy incontestable from date of issue."

Additionally, section 401(a) of the Insurance Code (215 ILCS5/401(a) (West 2000)) gives the Director of Insurance the powerto make reasonable rules and regulations to make the insurancelaws effective. The provision of the Illinois Administrative Codeapplicable to section 224(c) provides that "[t]he period ofcontestablility shall be determinable from the policy, i.e., byreference to a specified issue date, policy date or effective date***." 50 Ill. Adm. Code