Occidental Life Ins. Co. of California v. Kielhorn, 1674.

CourtUnited States District Courts. 6th Circuit. United States District Court (Western District Michigan)
Citation98 F. Supp. 288
Docket NumberNo. 1674.,1674.
PartiesOCCIDENTAL LIFE INS. CO. OF CALIFORNIA v. KIELHORN.
Decision Date12 June 1951

Uhl, Bryant, Slawson & Wheeler and Gordon B. Wheeler, all of Grand Rapids, Mich., for plaintiff.

Linsey, Shivel, Phelps & Vander Wal and R. M. Shivel, all of Grand Rapids, Mich., for defendant.

STARR, District Judge.

On May 6, 1949, the plaintiff company issued two insurance policies on the life of Walter P. Kielhorn in which the insured's wife, Evelyn J. Kielhorn, defendant herein, was designated as beneficiary. The insured was killed May 5, 1950, in the crash of his private airplane, and the beneficiary filed death claims under the policies. The company denied liability and tendered the premiums that had been paid and interest thereon to the beneficiary, who refused the tender.

On November 24, 1950, the plaintiff company filed complaint in the present equity action, alleging in substance that the insured had procured these policies by making false and fraudulent representations in his application therefor. It asked that the policies be rescinded and canceled and that the defendant as beneficiary be enjoined from instituting any suit thereon. The defendant filed a motion to dismiss the complaint, but without prejudice to the plaintiff's right to assert its claim of fraud and misrepresentation in defense of any law action on the policies by the beneficiary as plaintiff. This motion is based on the following grounds: (1) That the sole issue between the parties is whether or not the plaintiff insurer is liable on the policies; (2) that the issue is basically legal in its nature; (3) that the plaintiff has a complete and adequate remedy at law in that it could assert its claim of fraud and misrepresentation in procuring the policies in defense of any law action by the beneficiary; and (4) that the plaintiff instituted the present suit to deprive the defendant of her right to have her case tried in an action at law and to deprive her of her right to a jury trial.

The precise question presented by the defendant's motion is whether the plaintiff is entitled to maintain the present equity action for cancellation of the policies, or whether the defendant is entitled to have it dismissed in order that she may institute an action at law on the policies and have a jury trial of the issues involved. In considering this question it is important to note the incontestable provision which appears in each of the policies, reading in part as follows: "This policy shall be incontestable after it has been in force during the lifetime of the Insured for a period of two years from its date of issue, except for non-payment of premiums."

The insured died May 5, 1950, which was less than one year after the issuance of the policies. Therefore, as the policies had not been in force for a period of two years "during the lifetime of the Insured," the incontestable clause never became or could become effective. Greenbaum v. Columbian Nat. Life Ins. Co. of Boston, Mass., 2 Cir., 62 F.2d 56; ?tna Life Ins. Co. v. Kennedy, 8 Cir., 31 F.2d 971; Sun Life Assurance Company of Canada v. Allen, 270 Mich. 272, 282, 283, 259 N.W. 281. The situation is the same as if there were no incontestable clause in the policies. The plaintiff company would always have the right to assert its claim of fraud and misrepresentation in the procurement of the policies in defense of any action at law by the beneficiary, regardless of how long she delayed bringing such an action.

The present case, and like cases, in which the incontestable clause could never become effective because the policy had not been in force for the specified period "during the lifetime of the Insured," must be distinguished from those involving a policy which will become incontestable upon the expiration of a specified period from its date of issue. The authorities recognize that under this latter form of incontestable clause the insurer could be deprived of its defense of misrepresentation and fraud in the procurement of the policy, by the beneficiary's delaying suit, or dismissing a suit already begun, or avoiding a trial on the merits, until the period creating incontestability had expired. Therefore, where a policy contained such a provision, it was necessary for the company to seek cancellation in an equity action in order to protect itself against the policy's becoming incontestable merely by lapse of time. American Life Insurance Co. v. Stewart, 300 U.S. 203, 57 S.Ct. 377, 81 L.Ed. 605; Ruhlin v. New York Life Ins. Co., 3 Cir., 93 F.2d 416; New York Life Ins. Co. v. Panagiotopoulos, 1 Cir., 80 F.2d 136; New York Life Ins. Co. v. Seymour, 6 Cir., 45 F.2d 47, 73 A.L.R. 1523; Lincoln Nat. Life Ins. Co. of Fort Wayne, Ind. v. Hammer, 8 Cir., 41 F.2d 12.

However, the situation which justified an equity action by the insurer for cancellation of the policies in the above-cited and similar cases, in order to protect itself against the policy's becoming incontestable by lapse of time, does not exist in the present case, in which the incontestable clause can never become effective. As the insured died within the specified two-year period, the insurer's obligation under the policies was thereby matured and became a debt due to the beneficiary, subject to whatever defense the insurer could interpose.

At this point it must be noted that the beneficiary, Evelyn J. Kielhorn, defendant in the present case, since filing her motion to dismiss, has begun a law action in this court against the insurer on the two policies in question, being Civil Action No. 1744. It is obvious that her purpose in moving to dismiss the present suit and in beginning her action at law is to obtain a jury trial of the issues involved.

It has been held that an insurance company may maintain an equity action in the State courts of Michigan for cancellation or rescission of an insurance policy on the ground of fraud in its procurement. Sun Life Assurance Company of Canada v. Allen, 270 Mich. 272, 259 N.W. 281; National Fire Insurance Co. v. York, 251 Mich. 83, 231 N.W. 91; Mactavish v. Kent Circuit Judge, 122 Mich. 242, 80 N.W. 1086. Therefore, the plaintiff contends that it is entitled to maintain its present equity action because, under the holding in Erie Railroad Co. v. Tompkins, 304 U.S. 64, 58 S.Ct. 817, 82 L.Ed. 1188, the rule established by these Michigan decisions must be recognized and applied in this Federal court suit. On the other hand, the defendant, while recognizing that under the Erie Case a Federal court should follow the substantive law of the State in determining the rights and duties of the parties, nevertheless, contends that the method or means for determining the rights and duties is procedural or adjective law and that a Federal court is not bound by the State procedural or adjective law.

In construing section 34 of the Federal Judiciary Act of 1789, 28 U.S.C., 1940 Ed. ß 725,1 the Supreme Court held in the Erie Railroad Case that in a Federal court diversity-of-citizenship action, the question of the railroad's liability for injury to a pedestrian caused by the alleged negligent operation of its train should be determined in accordance with the established substantive law of the State of Pennsylvania. There was no holding, or even an intimation, that the Federal court was required to follow the procedural or adjective law of Pennsylvania in determining the rights of the parties.

Both parties in the present case cite and rely upon the majority opinion in Guaranty Trust Co. v. York, 326 U.S. 99, 65 S.Ct. 1464, 89 L.Ed. 2079, which held that the Federal court in a diversity action was required to apply the State statute of limitations which would govern in a similar suit in the State court — that is, the Federal court should determine the rights of the parties and the result of the litigation in accordance with the substantive law of the State. In considering the extent to which a Federal court is bound by State law, Justice Frankfurter, writing the majority opinion, said at 326 U.S. at pages 105-112, 65 S.Ct. at pages 1468-1471, 89 L.Ed. 2079.

"In giving federal courts `cognizance' of equity suits in cases of diversity jurisdiction, Congress never gave, nor did the federal courts ever claim, the power to deny substantive rights created by State law or to create substantive rights denied by State law.

"This does not mean that whatever equitable remedy is available in a State court must be available in a diversity suit in a federal court, or conversely, that a federal court may not afford an equitable remedy not available in a State court. Equitable relief in a federal court is of course subject to restrictions: the suit must be within the traditional scope of equity as historically evolved in the English Court of Chancery, * * * a plain, adequate and complete remedy at law must be wanting, * * * explicit Congressional curtailment of equity powers must be respected, * * * the constitutional right to trial by jury cannot be evaded, * * *. State law cannot define the remedies which a federal court must give simply because a federal court in diversity jurisdiction is available as an alternative tribunal to the State's courts. * * * Whatever contradiction or confusion may be produced by a medley of judicial phrases severed from their environment, the body of adjudications concerning equitable relief in diversity cases leaves no doubt that the federal courts enforced Statecreated substantive rights if the mode of proceeding and remedy were consonant with the traditional body of equitable remedies, practice and procedure * * *.

"Here we are dealing with a right to recover derived not from the United States but from one of the States. When, because the plaintiff happens to be a non-resident, such a right is enforceable in a federal as well as in a State court, the forms and mode of enforcing the right may at times, naturally enough, vary because the...

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  • Rensing v. Turner Aviation Corporation
    • United States
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    ...the substantive rights of the parties are controlled by Federal law. Guaranty Trust Co. v. York, supra; Occidental Life Ins. Co. of California v. Kielhorn, D.C., 98 F.Supp. 288; Brookshire v. Pennsylvania R. Co., D.C., 14 F.R.D. 154; Cyclopedia of Federal Procedure, Sec. Title 28 U.S.C.A. §......
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    ...dismiss the present declaratory-judgment action, No. 2706, were considered and determined by this court in Occidental Life Ins. Co. of California v. Kielhorn, D.C., 98 F.Supp. 288. In that case the insurance company had issued two policies on the life of Walter P. Kielhorn in which his wife......
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