Coolspring Stone Supply, Inc. v. American States Life Ins. Co.

Decision Date24 November 1993
Docket NumberNo. 93-3170,93-3170
PartiesCOOLSPRING STONE SUPPLY, INC., Appellant v. AMERICAN STATES LIFE INSURANCE COMPANY.
CourtU.S. Court of Appeals — Third Circuit

Gregg M. Rosen (argued), Robert G. Bello, Sable, Makoroff & Gusky, Pittsburgh, PA, for appellant.

Wendelynne J. Newton (argued), Anthony J. Guida, Jr., Buchanan Ingersoll Professional Corp., Pittsburgh, PA, for appellee.

Before: SLOVITER, Chief Judge, STAPLETON, Circuit Judge, and RESTANI *, Judge, United States Court of International Trade.

OPINION OF THE COURT

SLOVITER, Chief Judge.

Plaintiff Coolspring Stone Supply, Inc., the beneficiary of an insurance policy on the life of one of its principals, appeals from a grant of summary judgment in favor of the insurer, defendant American States Life Insurance Company. Our standard of review on an appeal from a grant of summary judgment is plenary. See Metro Transp. Co. v. North Star Reinsurance Co., 912 F.2d 672, 678 (3d Cir.1990). We review the facts in the light most favorable to the party against whom summary judgment was entered. See White v. Westinghouse Elec. Co., 862 F.2d 56, 59 (3d Cir.1988).

I.

Coolspring was a closely-held corporation with three shareholders who each owned one-third of the stock. App. at 192. Louis Hamo was one of those shareholders. App. at 190. Hamo applied 1 for a life insurance policy from American States in December 1989, App. at 169, naming Coolspring as the owner and beneficiary of the policy, App. at 166, which was issued in January, 1990. App. at 160. Coolspring also purchased similar policies for its two other shareholders, which would enable the corporation to fund its agreement to purchase the shareholders' stock from their families on the death of the shareholder. App. at 194, 461-62.

Hamo died in September, 1991. 2 American States refused to pay on the $1 million policy, asserting that Hamo had made material misrepresentations in the application.

Coolspring brought suit in a Pennsylvania state court in February 1992 to recover on the policy. American States removed the case to the United States District Court for the Western District of Pennsylvania and defended on the ground that Hamo had made fraudulent, material misrepresentations in the application and, therefore, the policy was void ab initio.

American States maintained that Hamo made three misrepresentations in his application. Hamo stated that he did not have a liver disease or disorder when allegedly he had cirrhosis or, at least, a fatty liver. 3 Additionally, he allegedly misrepresented the amount of alcohol he drank by denying that he drank excessively. 4 Finally, he denied having had some blood tests, when in fact those tests showed abnormal results related to alcohol and his liver. 5 App. at 279, 746.

Pretrial matters were assigned to a magistrate judge, and extensive discovery was pursued. Thereafter, both parties moved for summary judgment. Coolspring argued, inter alia, that Hamo had not made any misrepresentations or that, at least, he had not knowingly done so. The magistrate judge issued a report and recommendation recommending summary judgment in favor of American States. This was based on the magistrate judge's finding that Hamo "was aware of both an alcohol and a liver condition at the time he applied for the policy" and that Hamo's denials in the policy application were material and constituted fraudulent misrepresentations.

The district court adopted the magistrate judge's report in full without discussion. Coolspring appeals.

II.
A. De novo review

Coolspring argues that the district court did not do a proper de novo review of the magistrate judge's report as required by 28 U.S.C. Sec. 636(b)(1). 6 A de novo review requires, at least, reading the transcripts of the testimony that relates to the objected-to portions of the magistrate judge's report. See Hay v. Waldron, 834 F.2d 481, 487 (5th Cir.1987). Coolspring argues that we should hold that the district court did not do a de novo review because it would have been physically impossible to have done so in the less-than-24-hour period between receiving Coolspring's objections and issuing its order. 7 Because we dispose of this appeal on other grounds, we need not reach this argument.

B. Incontestability Clause

Coolspring also argues that American States has not proven that there was an incontestability clause in the policy covering Hamo, as required by Pennsylvania insurance law. 8 See Pa.Stat.Ann. tit. 40, Sec. 510 (1992). The statute requires that every life insurance policy include a provision that after a policy has been in effect for two or more years, the insurer can no longer challenge the validity of the policy on any ground other than non-payment of premiums. 9 In the alternative, the insurer can include a provision more favorable to policyholders.

Coolspring argues that because an insurer must include an incontestability clause in its policy, and because American States failed to do so, the policy must be construed as being more favorable to the policyholder by precluding American States from challenging the policy on misrepresentation grounds at any time.

We find no support for this argument. Apparently there is no Pennsylvania precedent directly on point. In another context involving the failure to include a clause meant to benefit the insureds that was required by the Pennsylvania insurance law, the Pennsylvania Superior Court interpreted the policy as incorporating the missing clause. See Neel v. Williams, 158 Pa.Super. 478, 45 A.2d 375, 377 (1946) ("statutory requirements, whether imposed specifically or by necessary implication, become part of the assumed contractual liability"); see also Santos v. Insurance Placement Facility, 426 Pa.Super. 226, 626 A.2d 1177, 1179 (1993) ("pertinent statutory provisions of Pennsylvania insurance law are deemed incorporated into insurance policies"); cf. Boyce v. St. Paul Fire & Marine Ins. Co., No. 92-6525, 1993 WL 229961 at * 1-2, 1993 U.S.Dist. Lexis 8602 at * 3 (E.D.Pa.) ("Statutory law in effect at the time of issuance of an insurance policy becomes a part to the insurance contract as though it were expressly written therein."). Thus, even if the policy did not contain the required incontestability clause, we would follow the Pennsylvania Superior Court's lead and interpret the policy as if it contained that clause. Inasmuch as Hamo died within two years of the issuance of the policy, we conclude that American States is not precluded from defending the claim on the ground of Hamo's alleged fraudulent misrepresentations.

C. Material Misrepresentations

Summary judgment is only appropriate where there is no genuine issue of material fact for the jury to decide. Fed.R.Civ.P. 56(c). For an issue to be genuine, the nonmovant needs to supply more than a scintilla of evidence in support of its position--there must be sufficient evidence (not mere allegations) for a reasonable jury to find for the nonmovant. See Celotex Corp. v. Catrett, 477 U.S. 317, 327, 106 S.Ct. 2548, 2554, 91 L.Ed.2d 265 (1986); Anderson v. Liberty Lobby, Inc., 477 U.S. 242, 248-49, 106 S.Ct. 2505, 2510-11, 91 L.Ed.2d 202 (1986); Matsushita Elec. Indus. Co. v. Zenith Radio Corp., 475 U.S. 574, 587, 106 S.Ct. 1348, 1356, 89 L.Ed.2d 538 (1986).

Summary judgment is inappropriate when a case will turn on credibility determinations, see Liberty Lobby, 477 U.S. at 255, 106 S.Ct. at 2513, and, as we have previously noted, on state of mind, see Riehl v. Travelers Ins. Co., 772 F.2d 19, 24 (3d Cir.1985) ("issues of knowledge and intent are particularly inappropriate for resolution by summary judgment, since such issues must often be resolved on the basis of inferences drawn from the conduct of the parties.").

For American States to prove the insurance policy void under Pennsylvania law, it must show that (1) Hamo's representations were false; (2) that Hamo knew they were false or made them in bad faith; and (3) that the representations were material to the risk being insured. See Shafer v. John Hancock Mut. Life Ins. Co., 410 Pa. 394, 189 A.2d 234, 236 (1963). Fraud is presumed in these cases from knowledge of the falsity. See id.

In concluding that Hamo had made material misrepresentations as a matter of law, the magistrate judge referred to Dr. Honorio Pineda's 1985 hospital admission notes and post-surgical notes taken in connection with Hamo's gall bladder surgery, Dr. Pineda's 1991 statement and 1992 deposition with respect to his 1985 hospital notes and discussions with Hamo, and the 1985 examination notes of Dr. Richard A. Tiberio, who was consulted on the gall bladder surgery. Dr. Pineda had apparently treated Hamo with some regularity. App. at 570. Because the evidence relied on by the magistrate judge is crucial to our disposition, we discuss it in detail.

With respect to Hamo's denial of being told that he had any liver disease or disorder, the magistrate judge noted that in hospital notes dated November 9th, Dr. Pineda stated, "[d]iscussed problems re: liver cirrhosis with patient [Hamo] including entire ramifications and alcohol abstinence." App. at 184. Additionally, the hospital notes written by Dr. Pineda following the gall bladder surgery on November 6, 1985 state "liver cirrhosis" under "postoperative diagnosis" and "liver cirrhosis prominent" under "findings." App. at 181. There was also a progress note dated November 6th that stated, "[l]iver--cirrhotic, grossly." App. at 183. Finally, Dr. Pineda's office notes in connection with an examination on November 18, 1985 state he had "[d]iscussed re: liver problem." App. at 156.

It is possible that a jury could find from the above that Hamo was told he had a liver disorder or disease. The evidence however is not conclusive. Knowledge of a "liver problem" is not necessarily knowledge of a liver "disorder" or "disease." In evidence given in connection with this lawsuit, Dr. Pineda gave a...

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