Pongetti v. First Continental Life and Acc. Co., EC87-188-S-D.

• Decision Date: 30 June 1988
• Docket Number: No. EC87-188-S-D.,EC87-188-S-D.
• Citation: 688 F. Supp. 245
• Parties: Jacob PONGETTI, Bankruptcy Trustee, Plaintiff, v. FIRST CONTINENTAL LIFE AND ACCIDENT COMPANY, Defendant.
• Court: U.S. District Court — Northern District of Mississippi

688 F. Supp. 245

Jacob PONGETTI, Bankruptcy Trustee, Plaintiff, v. FIRST CONTINENTAL LIFE AND ACCIDENT COMPANY, Defendant.

No. EC87-188-S-D.

United States District Court, N.D. Mississippi, E.D.

June 30, 1988.

Jacob Pongetti, Bankruptcy Trustee, Columbus, Miss., W. Howard Gunn, Aberdeen, Miss., for plaintiff.

John L. Low, IV, Watkins & Eager, Jackson, Miss., for defendant.

OPINION

SENTER, Chief Judge.

This is another in the seemingly unending line of suits before this court against insurance companies for bad faith refusal to pay a claim which involves the dual defenses of material misrepresentation on the application and preexisting condition.

Having duly considered the evidence presented by the parties during a bench trial together with argument of counsel, the court makes its findings of fact and conclusions of law pursuant to Rule 52 of the Federal Rules of Civil Procedure.

FACTS

On July 9, 1985, Mike and Lois Kennedy applied for an insurance policy which was designed to pay their home mortgage payments in the event that either of them became disabled for any period of time in excess of one month and to pay off their mortgage in the event either died. The application form was actually completed by John Earhart, a soliciting agent for First Continental Life and Accident Insurance Company. This is in keeping with the practice in the industry and with the training which Earhart received. The policy was issued on August 20, 1985. The application form requires the applicant to provide information on all causes for which a physician has been consulted in the last five years. The plaintiff's application reflects only one visit to a physician, Dr. Chauvin, for a checkup during this period. It is undisputed that Mrs. Kennedy had actually seen at least two other doctors on several occasions. She had been treated by Dr. Holman, of Amory, a gynecologist, for "female trouble" beginning in March of 1985. She had also been treated by Dr. McDonald, a neurosurgeon, for back problems which had led to her hospitalization in January of 1985. The factual dispute revolves around whether Mrs. Kennedy told Earhart about these problems and her treatment by these physicians. Mrs. Kennedy says that she told Earhart about her medical history and that he responded by telling her that so long as the company kept her check and did not direct her to get a physical, she would be covered. Earhart, of course, denies that he was told anything about Mrs. Kennedy's previous medical problems. He also denies that he told Mrs. Kennedy that she would be covered for disabilities arising from these preexisting conditions. For reasons stated herein, the court need not resolve the factual dispute.

The policy states that it covers any total disability caused by injury or sickness which is contracted or first manifests itself while the policy is in force.

In early September, 1985, less than one month after the policy became effective, Mrs. Kennedy again consulted Dr. Holman, complaining of pain in the pelvic region. Dr. Holman admitted her to the hospital and performed a hysterectomy on September 10, 1985. The plaintiff was unable to work from September 10 through October 30, 1985. She filed a claim with First Continental seeking disability payments for this period. The proof of disability form showed on its face that she had been treated for this same condition on March 15, 1985, some five months before the effective date of the policy. First Continental's claims department notified Mrs. Kennedy by letter dated November 5, 1985, that her claim was denied because the sickness which led to the disability had started before the policy date.

In August, 1986, the plaintiff hurt her back while on vacation in Gatlinburg, Tennessee. Upon returning to Mississippi, she sought medical treatment from Dr. McDonald in Tupelo, Mississippi. She was hospitalized from August 27 to September 4, 1986, for a series of tests, including a bone scan, myelogram, and CT Scan. She was again hospitalized from October 20 to October 24, 1986, during which time surgery was performed to correct a disc bulge. Mrs. Kennedy was unable to work from August 24, 1986, and filed a claim on or about November 14, 1986, which listed the termination date of the disability as undetermined. This claim was not immediately denied because the proof of disability form left unclear exactly when the back problem had first arisen. First Continental's claims people requested further medical records concerning the claim from the plaintiff's doctors and notified the plaintiff that this was the reason for delay by letter dated November 25, 1986. After receiving and reviewing the medical records, the company's claims personnel determined that this condition had also existed at the time the policy was issued and notified Mrs. Kennedy that coverage was denied on that basis by letter dated December 30, 1986.

Mr. and Mrs. Kennedy had purchased this policy as protection against default on their mortgage payments in the event either of them became disabled. The medical bills incurred in connection with three hospital stays and two surgical operations, coupled with Mrs. Kennedy's inability to work and subsequent loss of income, left the Kennedys in terrible financial condition. They eventually were forced to file a bankruptcy petition under Chapter 7 of Title 11 in order to save their home. Mrs. Kennedy suffered some emotional upset as a result of these financial problems.

Mrs. Kennedy filed this lawsuit in the Circuit Court of Monroe County, Mississippi, seeking compensatory and punitive damages. First Continental promptly removed to this court. Upon motion by Mrs. Kennedy, the Honorable Jacob Pongetti, bankruptcy trustee, was substituted as the real party in interest.

LAW

First Continental raises two different theories in defense of its refusal to pay these claims. The first of these is material misrepresentation. Under Mississippi law, a misrepresentation on the application for an insurance policy, if it is material to the risk assumed, makes the contract voidable at the instance of the insurer. Fidelity Mutual Life Insurance Co. v. Miazza, 93 Miss. 18, 46 So. 817 (1908). This is so even if the applicant believes the statement to be true. Id. However, where the insurer gives correct information to the company's agent who, in turn, fills out the application, leaving out or altering certain information, there has been no misrepresentation. World Insurance Co. v. Bethea, 230 Miss. 765, 93 So.2d 624 (1957). The fact that the applicant signs the application without reading it does not bar her from attempting to prove that the answers contained therein do not accurately reflect the information she gave to the agent. Home Insurance Company of New York v. Thornhill, 165 Miss. 787, 144 So. 861 (1932). The interplay of these two rules — that a material misstatement of fact by the applicant makes the policy voidable, but the company is bound by the information given to its agent regardless of what he writes in the application — leads to the sort of swearing match the court is asked to resolve as finder of fact in this nonjury case. The applicant swears that full disclosure was made and the agent swears that he was never told the information that would have made the applicant an unacceptable risk. Neither is a disinterested witness. The plaintiff has filed a claim, the denial of which is legitimate if she misrepresented her medical history. Because the agent is paid on a commission basis — here 55% of the premiums paid — there is always a motive for him to fail to report to the company information which would cause the company to refuse to issue the policy. An admission at trial that he had acted on that motive would certainly cost the agent his job.

However, as stated earlier, the court need not decide this factual dispute in this case. The company has raised a second reason why its failure to pay should be excused in this case — the preexisting condition or first manifest provision of the policy specifically excludes from coverage the disabilities for which Mrs. Kennedy filed these two claims. It is well established in Mississippi law that clauses in disability and hospitalization policies excluding or limiting liability for sickness or injury that arises before a certain time are valid. Mutual of Omaha Insurance Co. v. Walley, ...