COMMERCIAL INSURANCE CO. OF NEWARK, NEW JERSEY v. Smith

• Decision Date: 14 November 1969
• Docket Number: No. 60-69.,60-69.
• Citation: 417 F.2d 1330
• Parties: COMMERCIAL INSURANCE COMPANY OF NEWARK, NEW JERSEY, a corporation, Plaintiff-Appellant, v. Robert T. SMITH, Defendant-Appellee.
• Court: U.S. Court of Appeals — Tenth Circuit

417 F.2d 1330 (1969)

COMMERCIAL INSURANCE COMPANY OF NEWARK, NEW JERSEY, a corporation, Plaintiff-Appellant, v. Robert T. SMITH, Defendant-Appellee.

No. 60-69.

United States Court of Appeals Tenth Circuit.

November 14, 1969.

COPYRIGHT MATERIAL OMITTED

Raymond J. Turner, Denver, Colo., for appellant.

Benjamin E. Sweet, Denver, Colo. (Howard J. Swenson, Denver, Colo., on the brief), for appellee.

Before PHILLIPS, BREITENSTEIN and HICKEY, Circuit Judges.

HICKEY, Circuit Judge.

This is a civil diversity action from the District Court for the District of Colorado in which the appellant Commercial Insurance Company originally brought suit to cancel and annul a disability insurance contract on the grounds that certain misstatements were made in both the original application for insurance and a subsequent application increasing the benefits. Appellee, a dentist, hereafter referred to as "Dr. Smith", originally filed only an answer, but subsequently counterclaimed for benefits under the policy.

At pre-trial conference the original complaint was technically dismissed and the matters averred therein were treated as an affirmative defense to the counterclaim. Trial to a jury resulted in a verdict and subsequent judgment in favor of Dr. Smith.

In February, 1963, and for many years prior thereto, Dr. Smith was a dentist practicing in Ft. Collins, Colorado. On February 13, he executed an application for a disability policy to be issued by the appellant insurance company. The policy provided for the payment of $50.00 per week if Dr. Smith became disabled by sickness from performing his duties as a practicing dentist. The policy was issued on February 20. On June 11, 1963, Dr. Smith signed an application for an increase of the weekly benefits to $250, and this extended coverage became effective on July 20, 1963, by way of a rider to the original policy. The rider contains the following language:

"Attached to and forming a part of Policy No. BX 29002 dated 2-20-63 issued by the COMMERCIAL Insurance Company of NEWARK, N. J. to ROBERT T. SMITH."

In April, 1965, Dr. Smith filed a claim with the insurance company alleging that he was totally disabled from practicing dentistry due to a disease of his eyes and claiming benefits under the policy.

At the trial the evidence was undisputed that on March 19, 1965, Dr. Smith was totally disabled from practicing dentistry and that he was entitled to receive disability benefits under the policy unless, as the insurance company contended, the policy was obtained by fraudulent representations made by Dr. Smith in his applications for the policy and increased benefits.

The complaint of the insurance company, converted to a defense by virtue of the pre-trial order, claimed that Dr. Smith perpetrated a fraud on the insurance company by giving false answers to certain questions of the applications. Those questions are as follows:

"Q. Any other sickness, disease, or disability?

A. No.

Q. Have you been disabled by either accident or illness or received medical attention or advice during the past five years?

A. No.

Q. Are you now, to the best of your knowledge and belief in sound condition physically and mentally free of any physical deformity?

A. Yes."

and on the application for the increase:

"Q. Have you been disabled by either accident or illness or received medical attention during the past five years?

A. No.

Q. Are you now to the best of your knowledge, in good condition physically and mentally?

A. Yes."

The insurance company's main contention in the case was that Dr. Smith knew, at the time he so answered the above questions, of the serious nature of his eye condition and therefore the company was entitled to rescind the insurance contract.

It appears that this contention cannot be discussed without a consideration of the clause required by Colorado statute, Colo.Rev.Stats. § 72-10-4(3), (1963) in the policy:

"`Time limit on certain defenses: (a) After two years from the date of issue of this policy no misstatements, except fraudulent misstatements, made by the applicant in the application for such policy shall be used to void the policy or to deny a claim for loss incurred or disability, * * *, commencing after the expiration of such two year period.

* * * * * *

"`(b) No claim for loss incurred or disability, * * *, commencing after two years from the date of issue of this policy shall be reduced or denied on the ground that a disease or physical condition not excluded from coverage by name or a specific description effective on the date of loss had existed prior to the effective date of coverage of this policy.\'"

Thus it can be seen that the contention concerns a construction of the meaning of the statutory phrase "except fraudulent misstatements." We now undertake that task.

Initially Commercial Insurance urges that the trial court was in error in submitting the case to the jury on instructions that the appellant must establish the legal elements of common law fraud which includes scienter or intent to defraud, instead of instructions setting out the equitable defense of fraud, as to which scienter or intent to defraud is not a necessary element.

Citing S. E. C. v. Capital Gains Research Bureau, 375 U.S. 180, 84 S.Ct. 275, 11 L.Ed.2d 237 (1963), the company takes the position that "it is not necessary in a suit for equitable or prophylactic relief to establish all the elements required in a suit for monetary damages." supra at 193, 84 S.Ct. at 283. Thus they argue since this suit is for rescission of the contract, it was not necessary for the company to show that Dr. Smith intended to defraud with knowledge of the falsity of his statements.

The pre-trial order formulating the issues for trial controls the subsequent course of the action unless modified at the trial to prevent manifest injustice. Fed.R.Civ.P. 16; Case v. Abrams, 352 F.2d 193 (10th Cir. 1965); Owen v. Schwartz, 85 U.S.App.D.C. 302, 177 F.2d 641, 14 A.L.R.2d 1337 (1949). The pre-trial order converted the fraud charged in the equitable complaint for rescission into a fraud defense answering the legal action for recovery filed as a counterclaim by Dr. Smith. This was stipulated in order to avoid problems concerning the question of the right to trial by jury.

Fed.R.Civ.P. 9(b) provides: "In all averments of fraud or mistake, the circumstances constituting fraud or mistake shall be stated with particularity. Malice, intent, knowledge, and other condition of mind of a person may be averred generally." The original and amended complaint, converted to an answer by the pre-trial order, avers the above mentioned questions from the applications and then alleges that by virtue of the answers given, Dr. Smith perpetrated a fraud upon the insurance company. Thereafter, the complaint contains allegations of the doctor's knowledge of the falsity of the answers, together with the general language, "these answers were willfully, knowingly, and fraudulently false and were intentionally made for the purpose of misleading plaintiff company and inducing it to issue a policy of insurance applied for and which is involved in this litigation."

The pre-trial order sets out the issues which control this litigation and establishes the theory of the lawsuit in these words:

"2. Were the answers given to the questions set forth in paragraphs 3 and 4 in the section of the Pre-Trial Order entitled `Agreed Facts\' true or false?

"3. If the questions were answered falsely, did the defendant know or have reason to believe that his answers to the questions were false when made?

"4. Did the defendant answer the questions with the intention of deceiving the insurance company and inducing it to issue the policy of insurance?"

This court has said:

"It is of course true, despite the simplicity of pleading requirements under Rule 8(c), that defense by avoidance must be affirmatively pleaded. See Zeligson v. Hartman-Blair, Inc., 10 Cir., 135 F.2d 874. The purpose of this requirement is to give fair notice of defensive matter in order to avoid surprise. But even so, the pre-trial conference, after utilization of discovery, is the proper time and place for settling the triable issues in the case. It is the appropriate time and place for the parties to state the grounds upon which they expect to prevail in the lawsuit. And, once triable issues are thus agreed upon, they ought not be altered or modified except to prevent manifest injustice." Taylor v. Reo Motors, Inc., 275 F.2d 699, 704 (10th Cir. 1960).

The foregoing, together with the posture declared by Fed.R.Civ.P. 38(a),¹ sustain the trial court's tender of the theory by the instruction including the common law elements of fraud objected to by the appellant. See J. F. White Engineering Corp. v. General Ins. Co. of America, 351 F.2d 231 (10th Cir. 1965). S. E. C. v. Capital Gains Research Bureau, supra, is inapposite in that it was an equitable action and stated the proper rule for that type of action. The pre-trial order in this case dismissed the equitable claim of appellant and gave appellee control of the claim which his counterclaim set forth. Thus construed, the pleadings required the company's response with fraud particularly averred and scienter generally stated.

A case completely in point, construing an almost identical policy provision, Johnson v. Metropolitan Life Ins. Co., 53 N.J. 423, 251 A.2d 257 (1969), agrees completely with this result. The court there stated that the question whether there must be an intent to deceive turns upon the statute which is like the Colorado statute except it permits a three year contest period. There, as here, after innocent...