Phl Variable Ins. Co. v. Fulbright McNeill, Inc.

• Decision Date: 27 March 2008
• Docket Number: No. 07-1322.,07-1322.
• Parties: PHL VARIABLE INSURANCE COMPANY, Appellee, v. FULBRIGHT McNEILL, INC., Appellant.
• Court: U.S. Court of Appeals — Eighth Circuit

519 F.3d 825

PHL VARIABLE INSURANCE COMPANY, Appellee, v. FULBRIGHT McNEILL, INC., Appellant.

No. 07-1322.

United States Court of Appeals, Eighth Circuit.

Submitted: November 16, 2007.

Filed: March 27, 2008.

Timothy Oliver Dudley, argued, Little Rock, AR (Mark Riable, on the brief), for appellant.

Larry W. Burks, argued, Little Rock, AR, for appellee.

Before RILEY, TASHIMA,¹ and SMITH, Circuit Judges.

SMITH, Circuit Judge.

Fulbright McNeill, Inc. (FMI) appeals the district court's² grant of summary judgment in favor of PHL Variable Insurance Company ("PHL"). FMI was the beneficiary of a life insurance policy issued by PHL to Keith McNeill. After McNeill's death, PHL sued FMI seeking rescission and cancellation of the policy, arguing that McNeill misrepresented the state of his health when he applied for insurance. The district court found that McNeill made a material misrepresentation and granted summary judgment in favor of PHL. We affirm.

I. Background

In February 2003, after an annual physical exam, McNeill's personal physician pronounced McNeill healthy. On February 28, 2003, McNeill completed and signed an application for life insurance from PHL. The beneficiary of the policy was FMI, a rubber product manufacturing company located in Wynne, Arkansas in which McNeill owned a 50% interest. The dispute arises from the interpretation of two relevant policy clauses. First, under the heading "Limits on Our Rights to Contest This Policy," the policy stated:

We rely on all statements made by or for the Insured in the written application or in any supplemental application for reinstatement. These statements are considered to be representations and not warranties. We can contest the validity of this policy for any material representation of fact. However, the misrepresentation must be contained in the written application and a copy of the application must be attached to this policy when issued.

Second, policy modifications had to be approved by PHL. According to the policy terms, "[a]ny change in the provisions of this policy must be signed by one of [PHL's] executive officers to be in effect."

On March 17, 2003, McNeill underwent a paramedic examination and completed and signed Part II of the PHL life insurance policy application. Based on the examination, the paramedic examiner also considered McNeill to be in good health and without heart problems. PHL relied upon the information and answers to the questions in Part II of the application in issuing the McNeill policy.

On April 2, 2003, McNeill voluntarily submitted to a coronary test with a different physician. This test revealed McNeill's total coronary artery calcium score to be 431, placing him at a 90% likelihood of having a heart attack and a high risk of cardiovascular disease. McNeill was personally contacted by the doctor and informed of the results of his testing. Also, the hospital sent a letter with the results to McNeill on April 7, 2003.

On or shortly after June 15, 2003, PHL printed and issued the McNeill policy with an Issue Date of June 15, 2003. On July 11, 2003, the policy was delivered to McNeill. Craig Campbell, PHL's insurance agent, told McNeill that he need not read the acceptance form because the form merely confirmed delivery of the policy. Campbell, however, was wrong. The policy acceptance form actually contained an express affirmation that McNeill's representations regarding his health condition remained unchanged since he completed Part II of the application. The form also acknowledged that the policy acceptance had been incorporated into the policy application and the insurance contract. McNeill signed the acceptance form but did not disclose to PHL the results of the coronary test, which showed his high risk for cardiovascular disease.

McNeill died of a heart attack in January 2004. FMI filed a claim with PHL for payment of the $3,000,000 death benefits under the McNeill policy. After reviewing the claim, PHL refused to pay on the ground that McNeill had made a misrepresentation in his application for the insurance by not disclosing the results of his cardiac tests taken after submission of the insurance application.

PHL filed this declaratory judgment action seeking rescission and cancellation of the policy. Following discovery, both PHL and FMI filed for summary judgment. The district court granted summary judgment to PHL concluding that McNeill misrepresented a material fact in his application for insurance that prohibited recovery under the policy.

II. Discussion

FMI appeals the grant of summary judgment in favor of PHL and argues that there was no material misrepresentation in the policy application. First, FMI argues that McNeill had no duty, either by operation of Arkansas law or under the language of the policy, to inform PHL of the results of his second medical examination; therefore, his failure to do so cannot be a basis to deny FMI benefits. Second, FMI asserts three reasons why PHL cannot rely on McNeill's statements in the policy application to avoid paying FMI's claim for benefits. These include: (1) McNeill's signature was procured by fraud; (2) the acceptance form is not a part of the policy application as it was not properly incorporated under the terms of the contract; and (3) the application was not attached to the policy when it was issued. Upon review, we conclude that McNeill had a duty to inform PHL of the substantial change in his health condition assessment that occurred after he completed the March application. Furthermore, we hold that McNeill's failure to inform PHL of the results of the new coronary test resulted in a material misrepresentation of fact in the written application at the time the policy was issued; therefore, the district court properly granted PHL's motion for summary judgment.

A district court's grant of summary judgment is reviewed de novo. Palmer v. Arkansas Council on Econ. Educ., 154 F.3d 892, 895 (8th Cir.1998). Summary judgment is appropriate when the moving party can demonstrate that there is no genuine issue of material fact and that the moving party is entitled to judgment as a matter of law. JN Exploration & Prod. v. Western Gas Res., Inc., 153 F.3d 906, 909 (8th Cir.1998). "When reviewing a grant or denial of summary judgment, this Court considers the evidence in the light most favorable to the nonmoving party and draws all reasonable inferences in that party's favor." Mettler v. Whitledge, 165 F.3d 1197, 1200 (8th Cir.1999).

"Federal district courts sitting in diversity, as the district court in this case, must apply the forum state's substantive law. . . ." Guardian Fiberglass, Inc. v. Whit Davis Lumber Co., 509 F.3d 512, 515 (8th Cir.2007) (citing Nesladek v. Ford Motor Co., 46 F.3d 734, 736 (8th Cir.1995)). The United States District Court for the Eastern District of Arkansas correctly chose to apply Arkansas substantive law.

"We begin our analysis by stating the basic principle that an insurance company may retroactively rescind a policy because of fraud or misrepresentation of the insured." Neill v. Nationwide Mut. Fire Ins. Co., 355 Ark. 474, 139 S.W.3d 484, 487 (Ark.2003). Parties, however, may, by contractual agreement, limit the grounds on which an insurance company may challenge the validity of the contract. See Ark.Code. Ann. § 23-81-115 (outlawing certain defenses but permitting "any provision which . . . is more favorable to the policyholder than a provision permitted by this section").

Under Arkansas law, when interpreting the language of an insurance policy, "provisions contained in a policy of insurance must be construed most strongly against the insurance company which prepared it, and if a reasonable construction may be given to the contract which would justify recovery, it would be the duty of the court to do so." U.S. Fidelity & Guar Co. v. Continental Cas. Co., 353 Ark. 834, 120 S.W.3d 556, 560 (Ark.2003).

The policy issued to McNeill authorizes PHL to "contest the validity of this policy for any material representation of fact" as long as it is "contained in the written application." It is undisputed that McNeill did not inform PHL of the substantial change in the assessment of his heart condition. Nor is it disputed that PHL's willingness to insure McNeill's life relied on medical opinion that McNeill had no heart condition. McNeill's failure to inform PHL of the results of his April heart exam constituted a material representation in the policy application and is a sufficient ground on which to affirm the district court's grant of summary judgment.

Arkansas recognizes the common law doctrine of uberrimae fidei—which states that, as a matter of utmost good faith and fair dealing, if an applicant for insurance discovers facts that make portions of his application no longer true while the company deliberates, he must make full disclosure of the newly discovered facts. See Dodds v. Hanover Ins. Co., 317 Ark. 563, 880 S.W.2d 311, 314 (Ark.1994) (recognizing the doctrine as a "generally accepted rule . . . which requires an insurance applicant to use due and reasonable diligence to disclose all facts affecting the risk which arise subsequent to the application and prior to the completion of the contract"); see also Stipcich v. Metropolitan Life Ins. Co., 277 U.S. 311, 316, 48 S.Ct. 512, 72 L.Ed. 895 (1928) (stating that "[i]nsurance policies are traditionally contracts uberrimae fidei and a failure by the insured to disclose conditions affecting the risk, of which he is aware, makes the contract voidable at the insurer's option"). Under this utmost good faith doctrine "a statement in the application is a continuing representation or is made as of the time of the delivery of the policy." Stipcich, 277 U.S. at 318 n. 1, 48 S.Ct. 512; see also 6 Couch on Insurance § 87:2 (3d ed. 1995) ("[M]aterial representations as to health made in the application for a life policy are continuing, and, if the applicant learns[,]while his . . ....