Old Life Ins. Co. of America v. Garcia, 04-1481.

• Decision Date: 02 June 2005
• Docket Number: No. 04-1481.,04-1481.
• Parties: OLD LINE LIFE INSURANCE COMPANY OF AMERICA, Plaintiff-Appellee, v. David K. GARCIA, Defendant-Appellant.
• Court: U.S. Court of Appeals — Sixth Circuit

411 F.3d 605

OLD LINE LIFE INSURANCE COMPANY OF AMERICA, Plaintiff-Appellee, v. David K. GARCIA, Defendant-Appellant.

No. 04-1481.

United States Court of Appeals, Sixth Circuit.

Argued: March 9, 2005.

Decided and Filed: June 2, 2005.

John P. Nicolucci, Foster, Swift, Collins & Smith, Lansing, Michigan, for Appellant.

K. Scott Hamilton, Dickinson, Wright, PLLC, Detroit, Michigan, for Appellee.

John P. Nicolucci, Stephen O. Schultz, Foster, Swift, Collins & Smith, Lansing, Michigan, for Appellant.

Before: MOORE and SUTTON, Circuit Judges, CARMAN, Judge.^*

OPINION

CARMAN, Judge.

Defendant/Appellant, David Garcia ("Garcia"), appeals from the Opinion and Order Granting Summary Judgment for Plaintiff entered by the United States District Court for the Eastern District of Michigan, Southern Division. The District Court voided and rescinded a life insurance policy between Garcia's mother ("the insured") and Plaintiff/Appellee Old Line Life Insurance Company of America ("Old Line"). In addition, the judgment ordered that Garcia's counterclaim for coverage under the policy be dismissed with prejudice. Garcia filed a timely appeal. For the reasons set forth herein, Garcia's appeal is granted and the case remanded to the District Court for entry of judgment in Garcia's favor.

BACKGROUND

On January 12, 2001, Patricia Garcia, Garcia's mother and the insured, applied for a $2 million life insurance policy from Old Line. (J.A. at 198.) The insured filed the application for insurance four days before her sixty-ninth birthday. (J.A. at 198-202.) The insured named Garcia as the sole beneficiary of the policy. (J.A. at 200.)

At the time of the application, the insured had three existing life insurance policies that totaled $2 million. (J.A. at 200.) The existing policies were term policies with end dates between 2003 and 2009. (J.A. at 93-94.) The Old Line application for insurance requested a "yes" or "no" as to whether the policy applied for was "replacement." (J.A. at 200.) The application defined "replacement" as "that the insurance being applied for may replace, change, or use any monetary value of any existing or pending life insurance policy or annuity. If replacement may be involved, complete and submit replacement-related forms." (J.A. at 200 (emphasis added).) The application does not state that existing coverage must be replaced in order to acquire a policy from Old Line.

The insured also completed and submitted Old Line's Notice Regarding Replacement ("Replacement Notice"). (J.A. at 305.) The Replacement Notice is required "in all cases where a replacement is involved or suspected by the distributor." (J.A. at 309 (emphasis added).) The Replacement Notice states, "[t]he life insurance I intend to purchase from the insurer named above may replace or alter existing life insurance." (J.A. at 305 (emphasis added).) The form provides lines for the applicant to list the policies that "may be replaced." (J.A. at 305 (emphasis added).) The Replacement Notice neither requires the applicant to replace existing policies nor makes securing a policy from Old Line contingent upon cancellation of existing insurance.

Old Line reviewed the application (J.A. at 229), had the insured undergo a medical examination (J.A. at 223-27, 229), and had an independent, third party company ("SBSI") interview her (J.A. at 229). During the interview, SBSI apparently asked the insured whether the Old Line policy would replace existing insurance; to which, the insured apparently responded, "yes." (J.A. at 108.)

The insured's agent, John Dobben ("Dobben"), who was also an authorized agent of Old Line, had his wife, Joan, complete the application on the insured's behalf. (J.A. at 204.) Dobben acknowledged that the three existing policies had been identified as "replacement" on the application because they "would have been replaced at the end — when they reached the end of the ten year period of time." (J.A. at 94.) The plan with regard to the existing policies was also consistent with Old Line's guidelines on replacement, which contemplated the lapse¹ of an existing policy as an acceptable means of replacement. (J.A. at 210, 308.) The Garcias also were aware of Dobben's plan to allow the existing policies to lapse. (J.A. at 95.) According to Dobben, Old Line never indicated to the Garcias that the existing policies had to be canceled before Old Line would issue or upon issuance of the Old Line policy. (J.A. at 207.)

Dobben also indicated that a number of other factors might impact whether existing policies were replaced:

There are possibilities that those things were going to be replaced and that's why we fill out the replacement forms, but that would apply to whether you were going to borrow money out of an existing cash value or change dividends or reduce coverage or do any number of things you're going to fill in that replacement part of the policies.

(J.A. at 205.) To Dobben, whether an existing policy is replaced would depend on the "product" that the insurance company issues. (J.A. at 441.)

On April 5, 2001, Old Line approved the insured's application. (J.A. at 230.) On the same day, Old Line sent the insured a letter ("notification letter") notifying her that the application had been approved and that a policy was forthcoming. (J.A. at 236.) The letter did not specify that the Old Line policy was contingent upon the insured replacing her existing coverage. The notification letter also did not state that Old Line was issuing the policy in reliance upon the insured's representation that she may replace the existing policies.

Old Line issued the insured a $2 million ten-year term life policy with an effective date of April 10, 2001. (J.A. at 234, 239.) The policy does not contain a requirement that the insured replace her existing life insurance for the Old Line coverage to be effective. Coverage went into force upon the insured's payment of the first premium, which was approximately May 16, 2001. (J.A. at 151.)

In May 2001, the insured was diagnosed with lung cancer. (J.A. at 216.) The insured died from lung cancer on January 24, 2002. (J.A. at 154.)

On February 5, 2002, Garcia filed a claim for benefits with Old Line. (J.A. at 259.) Old Line conducted an extensive investigation because the insured's death occurred within the two-year contestability period contained in the policy. (J.A. at 265-66.) In May 2003, Old Line still had not made a determination as to whether the claim was payable (J.A. at 266) and has never denied the claim for life insurance benefits.

John Rugel ("Rugel"), Director of Underwriting for Old Line, reviewed the insured's file after the investigation concerning coverage began. Rugel stated during his deposition in preparation for this case that nothing on the insured's application appeared to have been answered incorrectly or incompletely. (J.A. at 271.) Further, Rugel admitted that the Old Line application does not require replacement but states that existing policies "may" be replaced. (J.A. at 277.) Rugel stated that the "box marked on the application under replacement had been marked yes for each policy since at the end of the initial term each of the policies would have been replaced." (J.A. at 272 (emphasis added).) In Rugel's review of Garcia's claim, he found no indication that Old Line informed the insured or her insurance agent that the existing policies must be cancelled or replaced within a certain period to preserve coverage under the Old Line Policy. (J.A. at 277.) Rugel also stated that he was not aware of any Old Line requirement that an existing policy that is being replaced by an Old Line policy must be "cancelled as opposed to lapsing or coming to the end" of its term. (J.A. at 278.)²

Old Line's own Customer Service and Compliance Manual for Producers and Employees ("Old Line Manual") has a section entitled "Replacement Guidelines." (J.A. at 307.) The Old Line Manual defines "replacement" as follows:

Subject to any more restrictive state law requirements, the Company defines a replacement to be any transaction in which new life insurance or a new annuity is to be purchased, and it is known or should be known to the proposing distributor that by reason of such transaction, an existing life insurance policy or annuity contract has been or is to be:

1. Lapsed, forfeited, surrendered, or otherwise terminated....

(J.A. at 307-08.) Old Line's Manual states that "as a general rule replacement is not in a client's best interest." (J.A. at 308.) Additionally, Old Line's Manual is silent with regard to a period within which replacement must or should occur.

PROCEDURAL HISTORY

On June 27, 2002, Old Line filed a complaint in the U.S. District Court for the Eastern District of Michigan seeking declaratory judgment and rescission of the insured's policy. In response, Garcia filed a cross-claim for breach of contract seeking to force Old Line to honor the insurance policy it issued to the insured and pay Garcia's claim. (J.A. at 52.) Old Line and Garcia then filed cross-motions for summary judgment. (J.A. at 60, 168.)

In its motion, Old Line claimed that the insured misrepresented that the Old Line policy would replace her existing policies. (J.A. at 61-62.) Further, the misrepresentation — as viewed by Old Line — was material to Old Line's decision to issue the insured policy. (Id.) Old Line also argued that the insured's failure to cancel the existing policies constituted a failure of a condition of the insurance contract and was grounds for rescinding the policy. (J.A. at 62.)

In his motion for summary judgment, Garcia submitted that Old Line's allegations were without merit as there was no misrepresentation concerning replacing the existing policies. (J.A. at 169.) In his supporting brief, Garcia noted that the application and Replacement Notice use the permissive term "may" — rather than an obligatory term such as "must" or "shall" — when referring to replacement. (J.A. at 187.) In...