Story v. SAFECO LIFE INSURANCE COMPANY

• Decision Date: 27 February 2002
• Citation: 179 Or. App. 688,40 P.3d 1112
• Parties: Frances STORY, Appellant, v. SAFECO LIFE INSURANCE COMPANY, a Washington corporation, Respondent.
• Court: Oregon Court of Appeals

40 P.3d 1112

179 Or. App. 688

Frances STORY, Appellant, v. SAFECO LIFE INSURANCE COMPANY, a Washington corporation, Respondent.

98CV0984CC; A108156

Court of Appeals of Oregon.

Argued and Submitted May 18, 2001.

Decided February 27, 2002.

Mustafa T. Kasubhai argued the cause and filed the brief for appellant.

R. Daniel Lindahl, St. Paul, MN, argued the cause for respondent. With him on the brief were Robert B. Miller, Birmingham, AL, and Bullivant Houser Bailey, P.C., Sacramento, CA.

Before EDMONDS, Presiding Judge, and ARMSTRONG and LINDER, Judges.

ARMSTRONG, J.

Plaintiff is the beneficiary of a life insurance policy that her husband had with defendant. Defendant refused to pay plaintiff the amount owed under the policy when her husband died, on the ground that her husband had materially misrepresented his medical condition in his insurance application and that the misrepresentation relieved defendant of the obligation to pay the benefits that were otherwise due under the policy. Plaintiff sued defendant on the policy, and a jury returned a verdict in plaintiff's favor on it. The trial court granted defendant's motion for a judgment notwithstanding the verdict and entered judgment for defendant. Plaintiff appeals, assigning error to the trial court's grant of defendant's motion. We affirm.

We view the facts in the light most favorable to plaintiff, the party in whose favor the jury returned its verdict. Jacobs v. Tidewater Barge Lines, 277 Or. 809, 811, 562 P.2d 545 (1977). In June 1994, plaintiff's husband applied for a life insurance policy with defendant. The application for the policy contained various questions about the applicant's current health and prior medical history. On the application, the insured reported that he was 64 years old and 5' 8" tall and that he weighed approximately 250 pounds. He listed Dr. Fred Black of Roseburg as his personal physician. On question 9 on the application, the insured answered "yes" to whether he had been treated for or diagnosed with problems associated with the circulatory system, such as chest pain, high blood pressure, heart attack, or murmur. He elaborated on this question in the "details" portion of the application, explaining that he had been taking medication to control his high blood pressure since the 1970s and that the condition was under control. On question 10, the insured indicated that he had not "had any other impairment, sickness or diagnostic procedures such as X-ray, EKG, laboratory tests" in the previous ten years. He also denied having been treated for "heart disorder, stroke, cancer, AIDS or had such treatment recommended by a physician or other medical practitioner" in the previous two years.

On the second part of the application, which was prepared by a medical examiner, the insured indicated that he had never been diagnosed with or treated for "chest pain or discomfort from any cause" and had not, in the previous ten years, been diagnosed with or treated for coronary artery disease, heart attack, chest pain, abnormal heart rate or rhythm, or heart murmur. He again answered "yes" to whether he had high blood pressure or hypertension. Under the "details" section of the application, the insured explained that from 1989 through the summer of 1993 he had seen a physician, Dr. Green, at the Veterans' Administration Hospital in Roseburg twice a year for his high blood pressure. The insured also described the medication that he was taking to control his blood pressure and reported that he had had chest x-rays but no EKGs. He also listed Dr. Black as his personal physician on that part of the application. Finally, the insured reported that his mother had died at age 55 from a heart attack.¹

Before approving the application, defendant subjected the insured to an EKG and an analysis of his blood. The results of the EKG indicated a possible old myocardial infarction, and the examiner recommended an increase in the insured's premium rates if it was appropriate in light of the insured's other medical history. The blood analysis showed that the insured's cholesterol and triglyceride levels were higher than normal.

Defendant also requested and received the insured's medical records from Dr. Black, but it failed to request or obtain any records from Dr. Green at the VA hospital. Defendant eventually approved the life insurance policy at a 50 percent increased premium to account for the insured's health.

In March 1995, less than a year after defendant issued the policy, the insured died. Plaintiff sought payment of the policy benefits from defendant. After the insured's death, defendant obtained the insured's medical records from the VA hospital in Roseburg. Those records indicated that, before defendant issued the policy, the insured had complained to Dr. Green of chest pains, had had an EKG, and had been diagnosed with and treated for coronary artery disease. Defendant therefore denied plaintiff's claim, and plaintiff sued.

At trial, plaintiff's insurance expert testified that, based on the information that defendant had before issuing the policy, it was a virtual certainty that defendant knew, or at the very least should have known, that the insured had coronary artery disease. In response, the manager of defendant's individual new business department testified. He stated that the information that defendant had when it issued the policy indicated only that the insured had risk factors for coronary artery disease, not the disease itself. Defendant took those risk factors into account by increasing the premium by 50 percent but, had it known that the insured already had coronary artery disease, it would have increased the premium by 150 percent. Therefore, according to defendant, it relied on the insured's representations that he had never had chest pains and that he did not have coronary artery disease when it issued the life insurance policy.

At the close of the evidence, defendant moved for a directed verdict in its favor on plaintiff's claim on the ground that the evidence established as a matter of law that it had reasonably relied on the insured's representations about the condition of his heart when it issued its policy. The court denied the motion and submitted the case to the jury, which returned a verdict for plaintiff. Defendant subsequently filed a post-trial motion for a judgment notwithstanding the verdict (JNOV) or, in the alternative, for a new trial. The court granted the JNOV motion and entered judgment accordingly. Plaintiff appealed.

On appeal, plaintiff argues that the court erred in granting defendant's JNOV motion because there is evidence in the record from which a jury could find that, before issuing the life insurance policy, defendant either knew or could easily have discovered that the insured's statements on the application were false. Hence, defendant could not rely on those statements in issuing the policy to the insured.

The legislature has specified in ORS 742.013 requirements that must be met for an insurer to rescind an insurance policy for misrepresentations made in an insurance application.² We have explained that in order

"[t]o establish a right to rescind its insurance policy, [an insurer] must prove by a preponderance of the evidence that it issued the policy in reliance on [an insured's] false representations, which were material to the company's decision to accept the risk. * * * Scienter must be proven by evidence that [the insured] either knowingly made false representations, or recklessly made false representations without any knowledge as to whether they were true or false."

Progressive Specialty Ins. Co. v. Carter, 126 Or.App. 236, 241-42, 868 P.2d 32 (1994) (citations omitted). Here, the trial court ruled as a matter of law that the insured's misrepresentations were material to the risk assumed by defendant. Plaintiff does not challenge that ruling. Furthermore, the only possible conclusion from the evidence in the record is that the insured made those misrepresentations either knowingly or recklessly. The case turns, therefore, on whether the evidence compelled a finding that defendant issued the policy in reliance on the insured's misrepresentations.

In order to establish reliance, an insurer must show "reliance in fact; reliance that was justified in light of the facts known to the insurer at the time; and the insurer's right to rely on the representations." Crawford v. Standard Ins. Co., 49 Or.App. 731, 735, 621 P.2d 583 (1980), rev. den. 290 Or. 652 (1981). The first two requirements present factual issues, and the last requirement presents a legal issue. Id...