Martin v. Pate

• Citation: 749 F. Supp. 242
• Decision Date: 30 September 1990
• Docket Number: Civ. A. No. CV-89-0363-B.
• Parties: William Robert MARTIN, Plaintiff, v. Buford H. PATE, Continental Investors Life Insurance Co., Inc., and American Lifestyles Protection and Security Trust a/k/a ALPS, Defendants.
• Court: U.S. District Court — Southern District of Alabama

749 F. Supp. 242

William Robert MARTIN, Plaintiff, v. Buford H. PATE, Continental Investors Life Insurance Co., Inc., and American Lifestyles Protection and Security Trust a/k/a ALPS, Defendants.

Civ. A. No. CV-89-0363-B.

United States District Court, S.D. Alabama, S.D.

September 30, 1990.

J. Garrison Thompson, Pitts, Pitts & Thompson, Selma, Ala., for plaintiff.

Robert B. Roden, Roden & Hayes, P.C., Birmingham, Ala., Stephen L. Poer, Haskell, Slaughter & Young, Birmingham, Ala., for defendants.

MEMORANDUM OPINION AND ORDER

BUTLER, District Judge.

BACKGROUND

This action was initiated in the Circuit Court of Dallas County, Alabama, with plaintiff seeking recovery of benefits under an employee benefit plan and also asserting claims for bad faith refusal to pay and fraud. Because plaintiff claimed benefits under an "employee benefit plan" as defined in ERISA, 29 U.S.C. § 1002(3), defendants invoked the jurisdiction of this Court under ERISA, 29 U.S.C. § 1132, and removed the action pursuant to 28 U.S.C. § 1441. A nonjury trial was conducted on August 27, 1990.

FINDINGS OF FACT

On September 30, 1986, plaintiff, William Robert Martin ("Martin"), underwent a heart catheterization which disclosed triple vessel coronary disease (partial blockage). Plaintiff was treated with medication which included procardia and nitroglycerin.

Some time prior to August 28, 1987, Martin, as secretary and treasurer for Martin Trucking, Inc., contacted Mr. Jay Woodruff, then the agent for Martin Trucking's benefits carrier, in an effort to obtain coverage at a lower premium. Although he was unable to assist Martin directly, Woodruff did provide the lead to defendant-Buford Pate ("Pate"), an independent agent maintaining contacts with several potential carriers. A meeting was arranged for August 28, 1987, between Martin and Pate which Woodruff also attended. At all relevant times Pate was acting as an agent for defendants Continental Investors Life Insurance Company ("Continental") and American Lifestyles Protection and Security Trust ("ALPS"). ALPS is underwritten and insured by Continental. The connection between Continental and ALPS is such that all references in this memorandum opinion and order to Continental shall be deemed to include ALPS.

Pate and Woodruff traveled together by car to the August 28 meeting. During the course of the trip Woodruff related to Pate that plaintiff had recently undergone a "check-up regarding his heart" for which there had been a $600 overpayment to the attending physician. The evidence is in dispute as to whether Woodruff told Pate the specifics of plaintiff's heart condition which necessitated the check-up; however, as will be seen below, a resolution of this dispute is not necessary to the determination of this action.

In applying for insurance with defendants Martin misrepresented his condition in two respects. First, Martin failed to disclose his condition to Pate at the August 28 meeting. Additionally, in completing the "Employee Information — Adoption Agreement and Application" form submitted to Continental, Martin responded in the negative to the question — "Are any employees or dependents known to have had a serious disease or disorder (i.e., diabetes, cancer, heart disease, etc.)?" Triple vessel coronary disease is clearly a "serious disease or disorder."

As a result of this application, a policy of group insurance providing medical expense benefits was issued by Continental to cover the employees of Martin Trucking, including plaintiff. In the period of February 10, 1988, to May 31, 1988, Martin incurred medical expenses in connection with heart bypass surgery in the amount of $39,254.20. The policy issued by Continental provided coverage for Martin's condition and was in effect at the time plaintiff incurred these expenses. This action was initiated when defendants refused to pay plaintiff's claims. Defendants based their refusal on Martin's negative response to the question quoted above and failure to otherwise disclose his heart condition. Defendants viewed this conduct as fraud in the application justifying avoidance of the policy.

APPLICABLE LAW

1. The Claim for Benefits

As already noted, a contract of insurance providing coverage for Martin's condition was in effect at the time plaintiff incurred the medical expenses for which he now seeks to recover. The defendants argue, however, that due to Martin's fraud in the application the policy may be rescinded under Ala.Code § 27-14-7 (1986).

Of course, generally speaking, federal substantive law, and not state law, governs a claim for benefits under ERISA. See Peckham v. Board of Trustees, 653 F.2d 424, 426 (10th Cir.1981). However, this Court is unaware of any provision of ERISA or federal decisional law addressing the specific issue under consideration.¹ Consequently, the Court will look to state law in order to reach a resolution.²

Under Alabama law "the most innocent misrepresentation will afford a reason to rescind if the truth is either material to the risk or, even if immaterial, would have caused the particular insurer acting in good faith to have declined coverage." Stephens v. Guardian Life Ins. Co., 742 F.2d 1329, 1333 (11th Cir.1984) (construing Ala.Code § 27-14-7 (1986)). Additionally, an intentional misrepresentation of material fact by an applicant for insurance which is relied upon by the insurer to its prejudice provides an adequate ground for avoidance of a policy. Reliance Ins. Co. v. Substation Prods. Corp., 404 So.2d 598, 604 (Ala. 1981). There is no doubt in this Court's mind that plaintiff's representations regarding his condition were false, material to the risk, and had a bearing on Continental's issuance of the policy. Thus, at first blush, it appears that Continental was justified in refusing to pay plaintiff's claims.

However, Continental had no right to rely on plaintiff's misrepresentation. It is well settled that a policy cannot be avoided "if the insurer knows the true facts, or the falsity of the statements, or has sufficient indications that would put a prudent person on notice so as to induce an inquiry which, if done with reasonable thoroughness, would reveal the truth." Bankers Life & Casualty Co. v. Long, 345 So.2d 1321, 1323 (Ala.1977) (emphasis added); Guardian Life, 742 F.2d at 1333; Substation Prods., 404 So.2d at 604. When Pate learned of plaintiff having recently received a heart check-up he had a "sufficient indication" that further inquiry was warranted. In addition, had Pate directed such inquiry towards Woodruff, Martin, or the attending physician, he could easily have ascertained plaintiff's heart condition. As a result of Pate's knowledge of Martin's heart check-up and his failure to conduct further inquiry, the element of reliance required for avoidance of the policy cannot be established.

"It is well recognized that the knowledge of an agent of an insurance company as to matters within the general scope of his authority is knowledge to the company." Pacific Mutual Life Ins. Co. v. Edmonson, 235 Ala. 365, 179 So. 185, 188-89 (1938). See also Alabama Farm Bureau Mutual Casualty Ins. Co. v. Moore, 435 So.2d 712, 714 (Ala.1983). These authorities make it clear that Pate's knowledge of plaintiff's heart check-up is imputed to Continental as a matter of law. Accordingly, this Court holds that plaintiff is entitled to recover $39,254.20 on his claim for benefits under the policy.

2. The Bad Faith Claim

Plaintiff is not entitled to recover on his bad faith claim because such claims are preempted by ERISA, 29 U.S.C. § 1144. Under § 1144, a state law claim is preempted if it "relates to" an employee benefit plan. It appears well settled that claims for bad faith refusal to pay benefits are within ERISA's preemptive sweep. See Belasco v. W.K.P. Wilson & Sons, Inc., 833 F.2d 277, 281 (11th Cir.1987) (citing Pilot Life Ins. Co. v. Dedeaux, 481 U.S. 41, 107 S.Ct. 1549, 95 L.Ed.2d 39 (1987)). See also Hood v. Prudential Ins. Co., 522 So.2d 265 (Ala.1988).

In addition, even assuming the preemption doctrine inapplicable, the denial of recovery under plaintiff's bad faith claim is still required. The evidence presented does not establish the absence of any legitimate or arguable reason for Continental's refusal to pay, or Continental's actual knowledge of the absence of an arguable reason. Under Alabama law these elements must be established to prevail on a bad faith claim. See State Farm Fire & Casualty Co. v. Balmer, 891 F.2d 874 (11th Cir. 1990); Continental Elec. Co. v. American Employers' Ins. Co., 518 So.2d 83 (Ala. 1987), cert. denied, 486 U.S. 1023, 108 S.Ct. 1997, 100 L.Ed.2d 228 (1988).

3. The Fraud Claim

In "Count Three" of plaintiff's complaint it is alleged that defendants knew or should have known of plaintiff's pre-existing condition and that despite such knowledge defendants represented that the "policy issued by Continental would insure plaintiff for such pre-existing condition." When taken together with assertions made by plaintiff in the pretrial order it is apparent that count three constitutes a claim of fraud in the inducement to enroll in the plan.³

The question of whether claims of fraud in the inducement are preempted by ERISA is a difficult one, and this Court has taken notice of the division of authority it has caused. Compare e.g., Farlow v. Union Central Life Ins. Co., 874 F.2d 791 (11th Cir.1989) (claim of fraud in the inducement held preempted) with Perry v. P*I*E Nationwide, Inc., 872 F.2d 157 (6th Cir.1989) (claim of fraud in the inducement held not preempted), cert. denied, ___ U.S. ___, 110 S.Ct. 1166, 107 L.Ed.2d 1068 (1990) and HealthAmerica v. Menton, 551 So.2d 235 (Ala.1989) (claim of fraud in the inducement held not preempted), cert. denied, ___ U.S. ___, 110 S.Ct. 1166, 107 L.Ed.2d 1069 (1990).

In the oft-cited Pilot Life case, the Supreme Court determined that plaintiff's state law claims, which included one of "fraud in the...