Riddle v. Southern Farm Bureau Life Ins.

• Citation: 421 F.3d 400
• Decision Date: 26 August 2005
• Docket Number: No. 02-6461.,No. 03-5083.,02-6461.,03-5083.
• Parties: ESTATE OF KENNETH STEWART RIDDLE, by and through its Co-Administrators, Saskia Jolene Riddle and Kenneth Stewart Riddle, Jr., Saskia Jolene Riddle and Kenneth Stewart Riddle, Jr., Individually, Plaintiffs-Appellees/Cross-Appellants, v. SOUTHERN FARM BUREAU LIFE INSURANCE COMPANY, Defendant-Appellant/Cross-Appellee.
• Court: United States Courts of Appeals. United States Court of Appeals (6th Circuit)

421 F.3d 400

ESTATE OF KENNETH STEWART RIDDLE, by and through its Co-Administrators, Saskia Jolene Riddle and Kenneth Stewart Riddle, Jr., Saskia Jolene Riddle and Kenneth Stewart Riddle, Jr., Individually, Plaintiffs-Appellees/Cross-Appellants, v. SOUTHERN FARM BUREAU LIFE INSURANCE COMPANY, Defendant-Appellant/Cross-Appellee.

No. 02-6461.

No. 03-5083.

United States Court of Appeals, Sixth Circuit.

Argued: April 21, 2004.

Decided and Filed: August 26, 2005.

ARGUED:

Wayne J. Carroll, Mackenzie & Peden, Louisville, Kentucky, for

Appellant. Michael L. Harris, Harris & Harris, Columbia, Kentucky, for Appellees.

ON BRIEF:

Wayne J. Carroll, Mackenzie & Peden, Louisville, Kentucky, for Appellant. Michael L. Harris, Harris & Harris, Columbia, Kentucky, for Appellees.

Before: RYAN, DAUGHTREY, and CLAY, Circuit Judges.

RYAN, J., delivered the opinion of the court, in which CLAY, J., joined.

DAUGHTREY, J. (pp. 410-417), delivered a separate dissenting opinion.

OPINION

RYAN, Circuit Judge.

This is a diversity action under Kentucky law in which the district court entered judgment in favor of the plaintiffs after a jury found that the defendant had reviewed the decedent's life insurance application in bad faith. The defendant, Southern Farm Bureau Life Insurance Company, offers two reasons why we should reverse the judgment of the district court. It argues, first, that the district court erred as a matter of law in holding that a finding of bad faith on the part of the defendant, without more, is sufficient to support a verdict in favor of the plaintiffs; and second, that the plaintiffs failed to offer sufficient evidence from which a reasonable jury could have found that Southern Farm reviewed the decedent's application in bad faith. Although the plaintiffs are generally of the opinion that the judgment of the district court should be affirmed, they raise two arguments on cross-appeal: (1) that the district court should have applied Kentucky law, rather than federal law, in computing post-judgment interest; and (2) that they were entitled to seek punitive damages. For the following reasons, the judgment of the district court will be affirmed in part and reversed in part.

I.

A.

The parties do not dispute the material facts of the case; instead, they dispute whether these facts are sufficient to show that the defendant acted in bad faith in reviewing the life insurance application submitted by the decedent, Kenneth Stewart Riddle.

On August 12, 1998, Riddle completed an application for life insurance, with the assistance of the defendant's agent, Richie Estes. The application was for $200,000 in life insurance coverage. Riddle paid the first month's premium, as calculated by Estes based on the health and medical information disclosed by Riddle, and was given a conditional receipt. This receipt contained certain conditions precedent to coverage, including the requirement that the defendant "be satisfied that each person proposed for insurance ... is a risk insurable by the Company under its rules, limits, and standards for the plan and the amount applied for." The application was received at the defendant's home office on August 18, 1998, and was given to an underwriter named Jeff Lewis.

On September 9, 1998, the defendant learned that Riddle had been killed in a motor vehicle accident. Sometime later, the defendant's Regional Underwriting Manager, Bobbie Jo Myers, informed Lewis that Riddle was deceased; she then took over the Riddle file. The file was then reviewed "by Myers, by... her boss, Chief Underwriter Danny Collins ..., and by his boss, Vice President of Underwriting Denny Blaylock." The defendant claims that this procedure is always followed when the company learns of the death of an applicant during the underwriting process, but it could produce no written policy or other documentation to support this claim. The district court noted that although the defendant claimed that each of these persons "expressed grave concerns over the same medical conditions," each, in fact, "had strikingly different underwriting `concerns.'" "As the review proceeded up the chain of command from Myers to Collins to Blaylock, the number of medical `concerns' increased." Strangely, the first concern Collins noted in the underwriting form about Riddle's "medical problems" was: "1 month prem. paid." Blaylock testified that "the fact that [Riddle] was deceased was not a factor in our action," but he admitted that Riddle's medical records had been scrutinized more closely than in the average case, and, at one point, he admitted that he went through the file with a "fine-tooth comb."

On October 6, 1998, the defendant sent a notice to Riddle's children that their father was "uninsurable"; that coverage was denied; and that premium paid would be refunded. The notice informed the family that Riddle "was uninsurable when the application was completed" because "your father's medical history ... includes rheumatoid arthritis, chronic obstructive lung disease with continued smoking, high blood pressure being treated by medication and other underwriting concerns." The defendant did not disclose what these "other underwriting concerns" were, and the district court noted that such vague references could support an inference that the defendant was simply "attempt[ing] to avoid be[ing] pinned down to specific reasons for the denial."

Despite the fact that underwriters Myers, Collins, and Blaylock had "strikingly different underwriting `concerns,'" the defendant's investigation of Riddle's file did reveal that Riddle suffered from a number of serious ailments. Furthermore, it would appear that Riddle was not entirely forthcoming in describing, in his life insurance application, either the severity or nature of his medical condition. Nevertheless, in denying the defendant's motion for summary judgment, the district court noted that although the plaintiffs' evidence of bad faith was circumstantial, there was "considerable additional evidence that suggests that the Defendant may have been looking for ways to avoid coverage."

B.

The plaintiffs had initially filed suit in Adair Circuit Court in the Commonwealth of Kentucky, alleging that the "Defendant's actions in finding that ... Riddle was not insurable at the time that the application was made, was [sic] not made in good faith." They sought to recover the full value of the policy for which Riddle applied, with interest, as well as "punitive damages according to proof." The case was then removed to the United States District Court for the Western District of Kentucky, on the basis of diversity.

The district court denied the parties' cross-motions for summary judgment, and in an Order and Opinion issued on August 26, 2002, the court denied the defendant's motion to bifurcate the trial and held that punitive damages were not available to the plaintiffs because theirs was a contract claim for which punitive damages are unavailable under Kentucky law. The case proceeded to trial by jury. The defendant moved for judgment as a matter of law at the end of the plaintiffs' case-in-chief and again at the close of all evidence. The district court denied both motions, and a verdict was subsequently rendered in the plaintiffs' favor for $200,000, the full amount of the insurance policy. Shortly thereafter, the district court granted the plaintiffs' motion for pre-judgment and post-judgment interest, but held that post-judgment interest was to be determined at the federal rate of interest, and not in accordance with Kentucky law.

The defendant appealed, challenging "the final Judgment entered in this action on the 7th day of November, 2002." The plaintiffs also appealed, challenging "the Opinion and Order entered on the 26th day of August, 2002, the Final Judgment entered on the 7th day of November, 2002, and the Memorandum Opinion and Order entered on the 7th day of November, 2002."

II.

A.

The defendant argues that the judgment of the district court must be reversed because it is based on an erroneous understanding of Kentucky law. We disagree.

1.

The district court instructed the jury as follows: "You will find for the Plaintiffs if you are satisfied from the evidence that the Defendant did not act in good faith in determining whether Mr. Riddle was insurable at the rate applied for; otherwise you will find for the Defendant." The court stated that it would follow the rationale expressed in Rohde v. Massachusetts Mutual Life Insurance Co., 632 F.2d 667 (6th Cir.1980), where it was held that, under Ohio law, "if the insurer breaches the duty of good faith in undertaking the contractual obligation of determining insurability, a contract of insurance exists; and the question of insurability, had a good faith inquiry been made, is irrelevant." The court found that there was "nothing novel in Rohde's application of traditional contract law" and stated that "if the Kentucky Supreme Court were to address this issue, it would agree with that reasoning and apply it to cases brought pursuant to [Kentucky caselaw]" holding that insurers have a duty to determine an applicant's insurability in good faith.

Southern Farm contends that the district court erred as a matter of law in applying the rationale of Rohde, because, it argues, under Kentucky law, a conditional receipt will be enforced according to its plain and unambiguous terms. If coverage under a conditional receipt is subject to a condition precedent, an applicant is bound by that condition, and courts may not rewrite the contract to eliminate this condition. Thus, as coverage under the conditional receipt was subject to the condition precedent that Riddle had to "be insurable under the company's standards for the plan applied for," and as the plaintiffs failed to prove that Riddle satisfied the condition precedent, Riddle was not covered by the conditional receipt, regardless of whether Southern Farm reviewed his application in bad faith.

2.

It...