Federal Kemper Life Assur. Co. v. First Nat. Bank of Birmingham

• Decision Date: 15 August 1983
• Docket Number: No. 82-7091,82-7091
• Citation: 712 F.2d 459
• Parties: FEDERAL KEMPER LIFE ASSURANCE COMPANY, Plaintiff-Appellant, v. The FIRST NATIONAL BANK OF BIRMINGHAM, et al., Defendants-Appellees.
• Court: U.S. Court of Appeals — Eleventh Circuit

Page 459

712 F.2d 459

FEDERAL KEMPER LIFE ASSURANCE COMPANY, Plaintiff-Appellant, v. The FIRST NATIONAL BANK OF BIRMINGHAM, et al., Defendants-Appellees.

No. 82-7091.

United States Court of Appeals Eleventh Circuit.

Aug. 15, 1983.

Ollie L. Blan, Jr., Birmingham, Ala., for plaintiff-appellant.

Alva C. Caine and James O. Haley, Birmingham, Ala., for defendants-appellees.

Appeals from the United States District Court for the Northern District of Alabama.

Before TJOFLAT and VANCE, Circuit Judges, and MORGAN, Senior Circuit Judge.

VANCE, Circuit Judge:

Federal Kemper Life Assurance Company appeals from a jury verdict in favor of the First National Bank of Birmingham and Louise Ray, as executors of the estate of decedent-insured, John Ray. Alabama law governs this diversity case. We affirm.

In October 1979 John Ray applied for life insurance with Federal Kemper in the amount of one million dollars. Ray disclosed in the application that five years previously he had undergone an ileostomy, a surgical procedure disrupting the colon and allowing the intestinal contents to drain into a plastic bag carried outside of the body. If a portion of the colon remains intact, as it did in Ray's case, it is often medically possible to reverse the ileostomy by reconnecting the small intestine with the colon so that bowel contents pass normally through the rectum.

Pursuant to the terms of the policy, Ray scheduled a medical examination with a physician approved by the company. At the examination, Ray fully informed the doctor of his ileostomy. The company's physician did not ask, and Ray did not volunteer, whether Ray was contemplating undergoing the reversal procedure.

Kemper declined to issue the policy in the amount of $1,000,000, but made a counter offer to insure Ray for the amount of $500,000. Ray, through his secretary, accepted the counter offer, but requested that two policies be issued to him, each in the amount of $250,000. On December 13 Kemper's agent collected from Ray's secretary the payment of premiums on the two policies. The agent informed Kemper of the collection of the premiums, and the company issued two policies dated December 17. Kemper's agent received the policies, lacking only Ray's signature, from Kemper on December 21 and delivered them to Ray's secretary. Ray's secretary arranged to have the forms forwarded to Ray, who at that time was in the hospital.

Unbeknown to Kemper, Ray had entered the hospital on December 9 and had undergone the surgical ileostomy reversal on December 11. After Kemper's agent left the amended policies with Ray's secretary on December 21, one of Ray's business associates took the forms to the hospital and Ray signed them on that day. The forms were subsequently collected by Kemper's agent and sent to the company.

Ray developed peritonitis as a result of the December 11 operation. His treating physician performed a second operation on January 2, 1980, but it was unsuccessful in abating the infection. Ray died on January 16, never having left the hospital after his admission on December 9.

The applications for the policies issued to Ray provided that "the Company shall incur no liability under this application until it has been received and approved, a policy issued and delivered, and the full first premium specified in the policy has actually been paid to and accepted by the Company, all while the health, habits and any other condition relating to each person proposed for insurance are as described in this application." (emphasis added). Kemper contends that the policies never took effect prior to Ray's death because his health and condition changed between the time of application and the time of delivery of the policies. The company contends that Ray breached a duty imposed upon him by Alabama law to advise Kemper of the change in health and that such failure to notify constituted fraud which vitiated the policies. Kemper does not dispute that under Alabama law misrepresentations or failure to notify about changes in medical condition do not void an insurance policy unless they increase the risk of loss assumed by the company or they were made with an actual intent to deceive. The company conceded at oral argument before this court that Ray had no duty to notify Kemper of changes in his condition that did not materially increase

                the company's risk of loss. 1  We understand Kemper to argue that it was entitled to a directed verdict because the surgical procedure undertaken by Ray increased the company's risk as a matter of law.   Kemper asserts in the alternative that even assuming the risk of loss issue was not subject to resolution as a matter of law, the evidence was insufficient to support the jury verdict for the executors of Ray's estate
                

CONTROLLING ALABAMA LAW

The insurance company had the burden of proving that Ray's alleged withholding of material information was done fraudulently with intent to deceive or that it was a material withholding that increased the risk of loss incurred by the company in issuing the policy. Title 28, § 6 of the 1940 Code of Alabama was the statute formerly applicable. It provided that "[n]o written or oral misrepresentation, or warranty therein made, in the negotiation of a contract or policy of insurance, or in the application therefor or proof of loss thereunder, shall defeat or void the policy, or prevent its attaching, unless such misrepresentation is made with actual intent to deceive, or unless the matter misrepresented increase the risk of loss." Alabama courts construing this statutory provision have consistently held that the "rule in Alabama is that to defeat an insurance policy on the ground of misrepresentations in the application it must appear: (1) the misrepresentations were false, (2) made with actual intent to deceive or the matter misrepresented increased the risk of loss and (3) the insurer relied on them to its prejudice." Bankers Life & Casualty Co. v. Long, 345 So.2d 1321, 1322-23 (Ala.1977). Kemper contends that a "reasonable assumption can be derived from the evidence in this case [that] Mr. Ray set out to actively conceal from the company" his hospitalization and surgery (emphasis added). The evidence adduced at trial, discussed in more detail below, does not, however, compel the conclusion that Ray acted with a deliberate intent to deceive, and Kemper appears not to argue to the contrary. Thus, to avoid the policy, Ray's allegedly unsound health must have increased Kemper's risk of loss. See National Life & Accident Insurance Co. v. Mixon, 291 Ala. 467, 282 So.2d 308, 312 (1973); General Mutual Insurance Co. v. Ginn, 283 Ala. 470, 218 So.2d 680, 684 (1969); Liberty National Insurance Co. v. Trammell, 255 Ala. 1, 51 So.2d 174, 176 (1949); Sovereign Camp, W.O.W. v. Moore, 237 Ala. 156, 186 So. 123, 125 (1938); Life Insurance Co. v. Newell, 223 Ala. 401, 137 So. 16, 18 (1931); National Security Insurance Co. v. Tellis, 39 Ala.App. 455, 104 So.2d 483, 486, cert. denied, 267 Ala. 696, 104 So.2d 488 (1958).

Under Title 28 § 6, it is clear that the central inquiry was not whether there was a failure to disclose a material fact; the important inquiry was whether the failure to disclose materially increased the risk of loss assumed by the company, a question for the jury according to Alabama law. This statutory requirement cannot be overridden even by express contractual terms. General Accident, Fire and Life Assurance Corp. v. Jordan, 230 Ala. 407, 161 So. 240, 241 (1935).

The Alabama Legislature rewrote Title 28, § 6 in 1971. The relevant section, now codified at § 27-14-7(a) of the 1975 Code, provides:

All statements and descriptions in any application for an insurance policy or annuity contract, or in negotiations therefor, by, or in behalf of, the insured or annuitant shall be deemed to be representations and not warranties. Misrepresentations, omissions, concealment of facts and incorrect statements shall not prevent a recovery under the policy or contract unless either:

(1) Fraudulent;

(2) Material either to the acceptance of the risk or to the hazard assumed by the insurer; or

(3) The insurer in good faith would either not have issued the policy or contract, or would not have issued a policy or contract at the premium rate as applied for, or would not have issued a policy or contract in as large an amount or would not have provided coverage with respect to the hazard resulting in the loss if the true facts had been made known to the insurer as required either by the application for the policy or contract or otherwise.

(Emphasis added).

Though the Alabama Supreme Court has not yet addressed the issue in detail, it appears that the increased risk of loss requirement remains intact. In Unionmutual Stock Life Insurance Co. v. Wilkerson, 367 So.2d 964, 969 (Ala.Civ.App.1978), cert. denied, 367 So.2d 971 (Ala.1979), the Alabama Court of Civil Appeals held that "the statute as currently worded embodies [the] same principles" as did its predecessor, Title 28 § 6. The court then proceeded to apply a risk of loss analysis, citing and discussing cases decided under Title 28 § 6 of the 1940 Alabama Code. In its denial of certiorari in Wilkerson, the Alabama Supreme Court expressly stated that it agreed with the lower court's opinion. 367 So.2d at 971. See also American Fire & Casualty Company v. Archie, 409 So.2d 854, 856 (Ala.Civ.App.1982). We thus conclude that Alabama has not jettisoned its requirement that before misrepresentations may void an insurance policy, those misrepresentations must increase the insurance company's risk of loss. ²

Kemper contends that Ray's hospitalization and surgery was a condition which as a matter of law increased its risk of loss. We cannot agree. It is true that Alabama courts recognize that there are "some diseases which are commonly known to be of such serious consequences that the court will declare that they increase the risk of loss, without making a jury...