New York Life Ins. Co. v. Johnson, 90-1406

• Decision Date: 15 January 1991
• Docket Number: No. 90-1406,90-1406
• Parties: NEW YORK LIFE INSURANCE COMPANY, Appellant, v. Lawrence T. JOHNSON, Sr., Executor of the Estate of Kirk Johnson; Lawrence T. Johnson, Sr., In His Own Right, Appellees.
• Court: U.S. Court of Appeals — Third Circuit

Page 279

923 F.2d 279

NEW YORK LIFE INSURANCE COMPANY, Appellant, v. Lawrence T. JOHNSON, Sr., Executor of the Estate of Kirk Johnson; Lawrence T. Johnson, Sr., In His Own Right, Appellees.

No. 90-1406.

United States Court of Appeals Third Circuit.

Argued Dec. 10, 1990.

Decided Jan. 15, 1991.

Alan K. Cotler (argued), Christopher M. Arfaa, Pepper, Hamilton & Scheetz, Philadelphia, Pa., for appellant.

Wallace L. Walker (argued), Eileen Epley, Philadelphia, Pa., for appellees.

Before SLOVITER, MANSMANN, Circuit Judges, and DEBEVOISE, District Judge ^*.

OPINION OF THE COURT

DEBEVOISE, District Judge.

This is an appeal from the district court's dismissal of the complaint of plaintiff/appellant New York Life Insurance Company ("New York Life"). Pursuant to 28 U.S.C. Sec. 2201, New York Life had sought a judgment declaring that a $50,000 insurance policy it had issued on the life of Kirk Johnson, the deceased son of defendant/appellant Lawrence T. Johnson, Sr. ("Mr. Johnson"), was void ab initio because it had been induced by fraud.

At a hearing on cross-motions for summary judgment and at the trial before the district court it was undisputed that: (i) Kirk Johnson stated in his application for the insurance policy that he had not smoked in the previous twelve months and that he had never smoked cigarettes. (ii) Those statements were false, and in fact Kirk Johnson had smoked since 1973 and during the month he applied for the policy he was smoking approximately 10 cigarettes per day. (iii) Both Kirk Johnson and Mr. Johnson, who was present when the application was completed, knew that the statements were false. (iv) Kirk Johnson's smoking practices were material to the risk which was assumed by New York Life when it issued the policy, because it relied upon his statements when it established the premiums to be paid. After the trial the district court found that had New York Life been informed of the true facts it would have issued a $50,000 life insurance policy on the life of Kirk Johnson but that the premium rate would have been in a higher amount readily ascertainable from an exhibit in evidence.

This is a diversity of citizenship case requiring application of Pennsylvania law. The district court concluded, and the parties agreed, that under Pennsylvania's conflict of laws rule Pennsylvania substantive law is applicable. The decided Pennsylvania cases have held that an insurance policy obtained by means of a material misrepresentation will, if challenged within the period of contestability, be declared void ab initio. ¹ No Pennsylvania court has applied this rule in the context of a misrepresentation of smoking habits.

The district court predicted that in a smoking misrepresentation case where the insurance carrier would have issued a life insurance policy at an ascertainable higher premium if supplied with the correct smoking information, the Pennsylvania courts would not apply the "Draconian" remedy of voiding the policy ab initio. Rather, the district court concluded, in the present case either the Pennsylvania courts would reduce the proceeds of the policy by the amount by which the premium would have been enlarged had New York Life known of Kirk Johnson's smoking history or else the Pennsylvania courts would reduce the face amount of the policy to that amount of insurance that would have been purchased by the amount of premiums that were in fact paid. The district court recognized "that [this] rule that seems to me a proper and equitable one has no support in any of the decided jurisprudence" and that "[t]he smoking cases, albeit not Pennsylvania cases, are exactly to the contrary of my view." (Bench Op. at A-377).

A district judge's prediction of state law is a determination of law as to which our review is plenary. Campagnie Des Bauxites De Guinee v. Insurance Co. of N. Am., 724 F.2d 369 (3d Cir.1983). An examination of the pertinent Pennsylvania cases and cases from other jurisdictions leads us to conclude that the district court did not predict correctly what the Pennsylvania courts would do in the circumstance of this case. We conclude that Pennsylvania law requires that the policy in question be declared void ab initio.

I.

The facts are undisputed. They were established by a comprehensive stipulation by the parties, documentary evidence and the testimony of the only witness, Mr. Johnson's expert David T. Warner, a retired insurance company executive.

Kirk Johnson applied for life insurance with New York Life on October 7, 1986. Question 12 of the application required him to provide information as to his past and present smoking habits. In answer to the question he represented that he had not smoked in the past twelve months and that he had never smoked cigarettes. Just above Kirk Johnson's signature at the end of the application is the statement that "[a]ll of the statements which are part of the application ... are complete and true to the best of the knowledge and belief of those persons who made them."

The true facts were that Kirk Johnson had smoked for thirteen years and that during the month that he applied for the policy he was smoking approximately 10 cigarettes per day. Both Kirk Johnson and his father, Mr. Johnson, were aware of the facts. Had New York Life known these facts it would have offered a life insurance policy to Kirk Johnson, but the premium it would have demanded would have been substantially higher.

Kirk Johnson died on July 17, 1988, within two years of the application for insurance, for reasons unrelated to smoking. Mr. Johnson, the beneficiary, filed a claim for the proceeds of the policy. New York Life investigated and learned of the misrepresentations. It denied the claim and sought to effect rescission by tendering to Mr. Johnson a check for the premiums paid under the policy. The tender was refused and New York Life commenced this declaratory judgment action.

II.

Under Pennsylvania law an insurance policy is void for misrepresentation when the insurer establishes three elements: (1) that the representation was false; (2) that the insured knew that the representation was false when made or made it in bad faith; and (3) that the representation was material to the risk being insured. E.g., Lotman v. Security Mut. Life Ins. Co., 478 F.2d 868, 870 (3d Cir.1973); Shafer v. John Hancock Mut. Life Ins. Co., 410 Pa. 394, 398, 189 A.2d 234, 236 (1963); A.G. Allebach, Inc. v. Hurley, 373 Pa.Super. 41, 52, 540 A.2d 289, 294 (1988).

The district court recognized this well-established statement of Pennsylvania law. Further, the court concluded that "[t]here is no question on this record that the smoking habits of the decedent are material to the risk assumed by the insurer." New York Life Ins. Co. v. Johnson, 731 F.Supp. 704 (E.D.Pa.1990) (opinion on parties' cross-motions for summary judgment, both of which were denied). A misrepresented fact is material if being disclosed to the insurer it would have caused it to refuse the risk altogether or to demand a higher premium. McCaffrey v. Knights & Ladies of Columbia, 213 Pa. 609, 63 A. 189 (1906). In the present case disclosure of the true facts about Kirk Johnson's smoking practices would have caused New York Life to have demanded higher premiums and thus the misrepresentations were material.

One would have expected that application of this well recognized Pennsylvania law to the undisputed facts would have required a declaration that the policy was void ab initio. However, the district court noted that in Pennsylvania this law typically had been applied in the context of misrepresentations about the state of one's medical condition or health background and had never been applied in the context of a misrepresentation about smoking habits. The additional question was posed, therefore, whether under Pennsylvania law a material misrepresentation in the smoking context called for the severe remedy of voiding the policy or whether some lesser remedy would be appropriate.

The district court distinguished between medical condition or health background misrepresentations (where voiding the policy would be required) and smoking practices misrepresentations. In the former case, according to the district court, the consequences of the misrepresentations are conjectural because one could not know with any assurance at what rate (if any) insurance would have issued had the proper information been supplied. In the smoking misrepresentation situation, on the other hand, one can simply refer to the insurance carrier's underwriting book to determine with precision the premium which would be charged had the proper information been supplied.

Based upon perceived equitable considerations and upon the distinction between health and smoking misrepresentations, the district court reached its determination that Pennsylvania courts would not apply the void ab initio rule in the smoking context.

We do not believe that these reasons support the district court's prediction of Pennsylvania law.

The distinction between the two categories of misrepresentations is not clear cut. Mr. Johnson called an expert witness to testify--David T. Warner. Before his retirement in 1989 Mr. Warner had been vice president of underwriting of Provident Mutual Life Insurance Company and had had 34 years of actuarial work. He testified that life insurance companies develop and maintain bulky underwriting manuals in which all the various risks and corresponding premium rates are set forth.

Mr. Warner confirmed that life insurance companies typically maintain in their underwriting manuals tables from which it can be ascertained with precision what premium will be charged for smokers and what premium will be charged for non-smokers. But he also testified that with respect to many medical and health background conditions the underwriting manuals contain tables from which it can be ascertained with equal precision what premium will be charged for persons having a...