Opinion
00 CIV. 9233 (DLC)
March 7, 2002
Lance A. Harke, Harke Clasby LLP, Miami, FL 33131 Attorney for the Plaintiff
Jay S. Blumenkopf, Susan H. Stern, Proskauer Rose LLP, Boca Raton, FL, Attorneys for the Defendant.
OPINION AND ORDER
Michael Ehrlich ("Ehrlich") has filed suit against Berkshire Life Insurance Company ("Berkshire") seeking payment of past due disability benefits. Ehrlich contends that, under a policy issued in 1995 by Berkshire, he became entitled to disability benefits when he was injured in 1999. Berkshire maintains that Ehrlich is not disabled, and that in any event, it is entitled to rescind its policy because Ehrlich fraudulently misrepresented his income on his insurance application. The parties have cross-moved for summary judgment on the issue of recission. Ehrlich has also moved for partial summary judgment on the issue of his disability. In addition, Berkshire has moved under Rule 37 to dismiss Ehrlich's complaint or for other sanctions for Ehrlich's alleged discovery abuses. For the following reasons, Berkshire's motion for recission is granted.
BACKGROUND
The following facts are undisputed unless otherwise indicated.
1. The Berkshire Policy
On December 18, 1994, Ehrlich, a resident of Staten Island, New York, applied for a disability insurance policy with Berkshire, a Massachusetts insurance corporation. Ehrlich was twenty-seven years old. Ehrlich, with the help of Richard Ehrlich, his brother and an insurance broker, applied for benefits in Occupational Class 2 for a monthly benefit level of $5,000. In the application, Ehrlich stated that he was a "Dairy Distributor" and that he had been the owner of "L M Dairy, Inc." for the past two years. Ehrlich described his exact duties as "[a]ccount executive" and "partial milk delivery — 1 day/week." He stated that his work involved 75% supervision and 25% travel.
Ehrlich explained at his deposition that L M Dairy "distributed milk and milk products." L M Dairy employed Ehrlich and a delivery person, and Ehrlich and his wife were the sole shareholders.
Ehrlich represented in Part 1 of his application for insurance that his "[e]arned [i]ncome after business expenses and before taxes" was $75,000. Ehrlich also represented in Part 1 that his net worth was $150,000. Ehrlich signed the application and affirmed that the answers he gave in Part 1 were "true and complete to the best of [his] knowledge and belief." He further affirmed that he understood that the policy would not take effect until the "conditions that affect[ed] insurability . . . are as described in this application." He did not submit any tax returns with his application and Berkshire did not request tax returns or other supplemental financial information. On December 6, 1994, only twelve days before filling out his application for insurance with Berkshire, Ehrlich had applied for life insurance with Northwestern Mutual Life Insurance Company ("Northwestern"). On that application form, Ehrlich represented that his annual earned income from his occupation was $50,000.
Ehrlich's income as reported on his federal income forms was far below the income described in December 1994 to either Berkshire or Northwestern. Ehrlich's 1994 tax returns reported wages of only $7,620. Indeed, Ehrlich's earnings for each of the years 1993 through 1997, which is apparently the last year he worked at L M Dairy, never exceeded $18,142.
Ehrlich's income in 1994 also included $18 in interest, $108 in dividends and $19,823 in capital gains for a net income of $27,569.
Ehrlich's social security statement of earnings for 1993 reported earnings of $18,142.69. His federal tax return for 1994 reported wages or salary of $7,620; for 1995, $4,821; for 1996, $0; and for 1997, $0.
At his deposition, Ehrlich was unable to recall the source of the income and net worth statements on the Berkshire application. He was also unable to recall his earned income in 1994 and 1995, even after being shown and acknowledging the accuracy of copies of his federal tax returns for those years. While Ehrlich had stated in his responses to the defendant's interrogatories and requests for admissions that his representations that his earned annual income was $75,000 and that his net worth was $150,000 were "based upon an estimation and discussions with a Berkshire representative [his brother Richard Ehrlich] at the time of completion of the policy application, as well as the advice rendered by [his] accountant," Ehrlich admitted in his deposition that his brother Richard was the only person with whom he spoke about the application, and that Richard did not provide him with information that would have allowed him to estimate his income at $75,000 in 1994. In addition, Richard Ehrlich was an agent of Northwestern, not Berkshire, at the time he helped Ehrlich with the Berkshire application.
Ehrlich was also unable to remember his income in 1993 or 1996, any income he had received by the time of his application, the most he had ever earned in a year, whether he had earned $75,000 in any year, or whether he owned a home in 1994.
At his deposition, Ehrlich's accountant, who is also his brother-in-law, stated that Ehrlich had never asked him to project his income for 1994 or 1995.
Berkshire's underwriting guidelines indicate that income is one of the factors Berkshire uses to evaluate an application and determine an appropriate benefit level. Berkshire's underwriting guidelines list the maximum monthly benefits available for different income levels between $12,000 and $440,000. The guidelines did not require supplemental financial information for Ehrlich's application.
Supplemental financial information is required in only three situations. First, individuals in California and Florida applying for all monthly benefit amounts must submit "the last two years' tax returns and the Financial Supplement." Second, individuals in all other states applying for monthly benefit amounts between $6,000 and $9,999 must submit "the most recent year's tax return and the Financial Supplement." Third, individuals in all other states applying for monthly benefit amounts of $10,000 or more must submit "three years' tax returns and the Financial Supplement."
Berkshire also retains General Information Services ("GIS") to evaluate insurance applications. GIS's review of Ehrlich's application noted that Ehrlich's annual earned income was $75,000, his net worth was $70,000, and that he was an "[e]xecutive." The GIS review stated that Ehrlich was the source of the income and net worth figures. The GIS indicated that Ehrlich and one of his references had been interviewed, and that at the interview with Ehrlich, Ehrlich "stated he is currently an Executive in Sales with L M Dairy. . . . The subject has been so employed for the past four years. His duties are entirely administrative in nature plus sales."
Berkshire approved an insurance policy for Ehrlich in Occupational Class 3 with a monthly benefit level of $4,000. A Berkshire underwriter noted in a memo that Berkshire was
approving coverage for [Ehrlich] with several modifications. . . . We have changed the occupational classification to Class 3, and this limits him to the Berkshire Series policy. The indemnity period is being reduced to 60 months, and we have reduced the amount of monthly indemnity to $4,000 per month. The $4,000 per month is based on his income and also the limit for Class 3 risks.
(Emphasis supplied.) In the memo, the underwriter stated further that
[w]e feel that he is a Class 3 risk rather than Class 2 because of his occupation and duties as indicated on the application. He does milk delivery, and this will make him a Class 3. This is also on a bit of an exceptional basis because we cannot determine whether he is in fact an owner or not, although Question No. 6(f) would seem to imply that he is an owner.
Donald Morgan, Vice-President of Underwriting of Berkshire, stated in an affidavit that "Berkshire would not have issued the Policy had [Ehrlich] disclosed his actual income on the Application." Morgan further stated that "[u]nder Berkshire's Underwriting Guidelines, [Ehrlich] would not have qualified for any level of benefit." William Ventola, Berkshire's previous Director of Underwriting, also stated that had the plaintiff's true income been disclosed to Berkshire, Berkshire would not have issued the policy.
Ehrlich's application for disability insurance was approved on January 23, 1995. Because Berkshire had approved a policy different from the policy for which he applied, Ehrlich was required to sign an amendment to the policy. In that amendment, Ehrlich affirmed that "the statements and answers in [his] application were complete and true when made and that no changes have occurred which would make [those] statements and answers incorrect or incomplete as of the present date." The policy became effective when Ehrlich signed this amendment on January 30, 1995.
Ehrlich's disability insurance policy, number NCH0327124, was issued on a form approved by the New York Insurance Department. The Policy defines "total disability" as
your inability to engage in your occupation, provided you are not actually engaged in any occupation in which you might reasonably be expected to engage. If this policy provides indemnity for more than 24 months, and indemnity has been paid for 24 months in any period of continuous disability, then the term `total disability' will have this meaning: your inability to engage in any gainful occupation in which you might reasonably be expected to engage, with due regard for your education, training, and experience.
(Emphasis supplied.)
The policy also provides that it "will be incontestable as to the statements, except fraudulent statements, contained in the application after it has been in force for a period of two years during your lifetime." The policy contains a "savings clause," which states that "[a]ny provision of this policy which, on its effective date, is in conflict with the statutes of the state in which you reside on such date is hereby amended to conform to the minimum requirements of such statutes."
2. 1995 Northwestern Life Insurance Policy
On November 28, 1995, Ehrlich applied for a conversion or term upgrade of his life insurance with Northwestern. On that application, he represented that his annual earned income was $75,000. In 1995, Ehrlich's adjusted gross income was $18,372.
In his 1995 federal tax return, Ehrlich reported $4,821 in wages and $13,524 in capital gains.
3. 1997 Northwestern Disability Policy
On September 16, 1997, Ehrlich applied for disability insurance with Northwestern. In that application, Ehrlich represented that his income for 1996 was $90,000, and that his estimated income for 1997 was $100,000. Ehrlich's adjusted gross income for 1996 was $15,895. His adjusted gross income in 1997 was $6,707. In 1996, Ehrlich reported $15,140 in business income and $1,495 in capital gains on his federal tax return. In 1997, Ehrlich reported $10,120 in business income and a $3,000 capital loss. In 1998, Ehrlich's adjusted gross income — composed of $28,885 in wage income, $18 in interest, and a $3,000 capital loss — was $25,903.
4. Ehrlich Begins Employment at Dependable in Late 1998
Ehrlich and his wife sold L M Dairy at some point in 1997 or 1998. Ehrlich was subsequently employed as a warehouse manager by S J Supply, a sheet metal and roofing supply company. He began working for Dependable Food Corporation ("Dependable") in the Fall of 1998,8 as a warehouse manager on the night shift. His duties included loading and unloading trucks and overseeing employees filling and loading orders. Ehrlich stated in his deposition that his work involved substantial manual labor, and that he had wanted to leave Dependable because he "wanted to manage, not do heavy lifting." Ehrlich stated that he talked to Sam Blau ("Blau"), his supervisor, about his dissatisfaction with the job: "I said [to Blau] I wasn't hired to do manual labor. [Blau] said that things will change, things will be changing." Ehrlich's monthly income at the warehouse was approximately $3,000.
The submissions do not indicate precisely when the business was sold, but Ehrlich's last year of reported business income was 1997, and in his deposition, he states that he may still have been working for L M Dairy in 1996 and 1997.
In his claim for benefits after his injury on March 21, 1999, Ehrlich stated that he had worked for Dependable for four months. In his deposition, he stated that he had worked for Dependable for six months prior to his injury.
In his claim for disability benefits, Ehrlich stated that he spent ten hours a week loading trucks, twenty hours picking up orders, and fifteen hours unloading trucks. He noted that he used pallet jacks and forklifts all night, that the maximum weight he had to lift was 100 pounds, and that the weight he most frequently carried was between fifty and 100 pounds. Blau confirmed that Ehrlich may have occasionally been required to lift a bag of flour.
5. Ehrlich Applies to Chubb Technical School in Late 1998
In late 1998, Ehrlich contacted the Chubb Institute ("Chubb"), a technical school specializing in information technology. On January 1, 1999, Chubb sent Ehrlich a standard letter addressed to prospective students about the financial aid application process. Ehrlich completed his application to Chubb to study network engineering and communications on January 5. On his application, Ehrlich indicated that he wanted to change and advance his career and had been thinking about furthering his education over the course of the past six months. Ehrlich completed his initial aptitude test on January 5, and his admissions test on February 3. On February 3, Ehrlich paid his registration fee, executed a student expectation checklist, and signed both the Institute's dress code policy and an acknowledgment that portions of his studies at the Institute may prepare him for the Microsoft Certified Systems Engineer and Novell's CNE exams. Ehrlich was informed that he had been admitted to the Institute on March 5. Ehrlich's enrollment agreement with Chubb Institute was signed on March 17. On March 20, 1999, Ehrlich sent Chubb a letter describing his financial difficulties in order to document his need for financial assistance.
Ehrlich stated in his deposition that he had not decided to attend the Chubb institute before he hurt his back on March 21, 1999. Later in the deposition, after being shown a copy of his enrollment certificate signed on March 17, 1999, he stated that he could not remember when he enrolled with Chubb.
6. Injury and the Start of Classes
According to Ehrlich, he was injured in the evening of March 21, 1999, while lifting a 100 pound bag of flour. Ehrlich stated that after the accident, he waited about an hour before leaving for home, told a co-worker he was going home that evening, and called Blau the next day.
Blau, however, stated in an affidavit to the State Insurance Fund on June 15, 1999, that he had no knowledge of Ehrlich's accident, that there were no witnesses, and that the accident had not been reported to his office.
On March 22, 1999, the day after his accident, Ehrlich filled out a list of references for Chubb's credit check, completed his financial aid certification, and completed his application for federal student aid. Ehrlich signed his student aid verification worksheet on March 24, 1999. He began classes on April 16, 1999.
Dr. Paul Gessman examined Ehrlich on March 22, 1999, and diagnosed him with sciatica. Ehrlich was treated by Dr. Christopher Szeles on March 22 or 23, 1999, and continued treatment with Dr. Szeles through June 1999. In evaluating an MRI of Ehrlich's spine on April 21, 1999, Dr. Szeles diagnosed Ehrlich with "Grade I spondylolisthesis of L5 on S1 with associated degenerative changes and spondylolysis of L5 on the right. This could be congenital or remote post traumatic change. There is no evidence of recent trauma."
During subsequent contact with Dr. Gessman's office on December 13, 1999, February 16, 2000, and February 20, 2000 to refill a prescription for Ritalin, Ehrlich did not mention back pain.
Ehrlich submitted a claim for disability benefits to Berkshire on June 10, 1998. In the notice of claim, Ehrlich described the accident, stated that he was unable to return to his duties, and noted that he had not suffered any other injuries during the past five years. Dr. Szeles completed the "Attending Physician's Statement" for Ehrlich's notice of claim for benefits under his Berkshire policy. In that statement, Dr. Szeles diagnosed Ehrlich's condition as spondylolisthesis and lumbar radiculopathy and stated that he might be able to return to light work in two months.
Berkshire maintains that it received the notice of claim on June 29, 1999, and plaintiff has acknowledged the truth of this fact.
In a letter to the workers' compensation board dated July 12, 1999, Dr. Szeles stated that he had examined Ehrlich on March 23, 1999, April 27, 1999, May 28, 1999, and June 8, 1999. Dr. Szeles explained that while "the radicular component [of Ehrlich's injury] is largely resolved," Ehrlich continued to have significant lower back pain. Dr. Szeles stated that Ehrlich was "unable to perform his regular duties" and was not likely to be able to return to his former employment. He concluded that Ehrlich was "totally disabled until he completes a vocational retraining program."
On August 5, 1999, Berkshire began paying Ehrlich $4,000 a month in disability benefits. Berkshire stated that it was "reserving all of our rights under the policy as we continue to gather information necessary to evaluate your claim for benefits."
7. Ehrlich Begins Working as Systems Engineer
Ehrlich completed his program of study at the Chubb Institute on October 12, 1999. He was hired as systems engineer for Netsys Institute one month later, in November 1999, and continued working for Netsys through February 2001. In his deposition, Ehrlich stated that there was nothing about his physical condition that had prevented him from performing the duties of his job as a systems engineer for Netsys Group..
Occasionally, Ehrlich's employment with Netsys Group required him to move or lift hard drives and monitors, or bend down under desks.
On January 3, 2000, the New York State Unemployment Insurance Appeal Board found that Ehrlich "quit his job due to his medical condition," and that he "had already enrolled in school to learn computer system maintenance at the time that [Ehrlich] claimed that he requested light duty." Although the Board found credible Dependable's testimony that it would have reassigned Ehrlich to light duty on request, it concluded that Ehrlich "injured his back and was then physically unable to return to work as his job required lifting heavy items." Ehrlich was "not capable of working" and thus ineligible for unemployment insurance benefits, effective March 22, 1999.
On May 1, 2000, the New York State Workers' Compensation Board found that Ehrlich had suffered a work-related injury and ordered Dependable or its insurance carrier to pay Ehrlich workers' compensation benefits of $11,515 for the reduced earnings for the weeks of March 23, 1999 through October 20, 1999, plus $125 for medical and transportation expenses. The Board also authorized further medical treatment and care.
8. Berkshire Stops Payments
At some point Berkshire requested and received Ehrlich's Social Security earnings statement for the period of January 1993 through December 1998. This statement indicated that Ehrlich's social security earnings were $18,142.69 in 1993; $13,982 in 1996; $9,346 in 1997; and $28,885.26 in 1998. On June 7, 2000, Berkshire sent Ehrlich's attorney a letter that explained that the company relies on representations in insurance applications and that
[c]urrent information indicates that the information furnished on Mr. Ehrlich's application was not complete and accurate at the time it was completed. The correct information is such that had it been furnished as requested on the application, we would have been unable to issue the above-numbered policy.
(Emphasis supplied.) The letter continued, noting that in Ehrlich's application on December 17, 1994, Ehrlich
indicated that his annual earned income after business expenses and before taxes was $75,000. The information presented in connection with his claim, however, indicates that, in fact, his reported income for . . . 1994 . . . was $7,620.
Berkshire stated that it was rescinding the policy and enclosed a check for a "full refund of any and all premiums paid to the company, plus interest and consideration," amounting to $7,514.15. Berkshire requested the return of the $12,000 that had already been paid to Ehrlich.
Ehrlich filed suit in state court in Florida on April 20, 2000. Berkshire removed the case to the Southern District of Florida on May 19, 2000, based on diversity of citizenship. On May 30, 2000, Berkshire answered Ehrlich's complaint and counterclaimed for recission of the policy. Berkshire's motion to transfer venue to this district was granted on October 30, 2000.
The only apparent connection with Florida is the residence of the plaintiff's brother in Florida. Berkshire also argues that Ehrlich tried to obtain the benefit of Florida law.
In support of his opposition to the defendant's motion for summary judgment on the issue of recission and his cross-motion for summary judgment on the issue of recission, the plaintiff's evidentiary submissions consist of: (1) a memo from one of Berkshire's underwriters noting that Ehrlich's application had been approved with modifications; (2) an opinion by an underwriting expert about the adequacy of Berkshire's investigation of Ehrlich's application; (3) a page from Berkshire's Underwriting Guidelines; and (4) GIS's review of Ehrlich's application. In support of his motion for summary judgment on the issue of disability, Ehrlich submitted his application, Berkshire's policy, his claim for benefits, and Berkshire's letter denying his claim. He submitted evidence of his condition in the form of letters from Dr. Szeles and the transcript of Dr. Lester Lieberman's deposition. Ehrlich also submitted documents regarding his subpoena of Dr. Raymond Koval.
He submitted no documents in opposition to the defendant's motion to dismiss under Rule 37. Ehrlich did not submit his own affidavit or any financial records in connection with any motion.
DISCUSSION
Summary judgment may not be granted unless the submissions of the parties, taken together, "show that there is no genuine issue as to any material fact and that the moving party is entitled to judgment as a matter of law." Fed.R.Civ.P. 56(c).
The substantive law governing the case will identify those issues that are material, and "only disputes over facts that might affect the outcome of the suit under the governing law will properly preclude the entry of summary judgment." Anderson v. Liberty Lobby, Inc., 477 U.S. 242, 248 (1987). "A dispute regarding a material fact is genuine `if the evidence is such that a reasonable jury could return a verdict for the nonmoving party.'" Mount Vernon Fire Ins. Co., 277 F.3d 232, 236 (2d Cir. 2002) (quoting Anderson, 477 U.S. at 248). The moving party bears the burden of demonstrating the absence of a material factual question, and in making this determination, the Court must view all facts in the light most favorable to the nonmoving party. Id. When the moving party has asserted facts showing that the nonmovant's claims cannot be sustained, the opposing party must "set forth specific facts showing that there is a genuine issue for trial," and cannot rest on the "mere allegations or denials" of his pleadings. Fed.R.Civ.P. 56(e); see also Goenaga v. March of Dimes Birth Defects Found., 51 F.3d 14, 18 (2d Cir. 1995). In deciding whether to grant summary judgment, this Court must, therefore, determine (1) whether a genuine factual dispute exists based on the evidence in the record, and (2) whether the facts in dispute are material based on the substantive law at issue.
1. Berkshire's Incontestability Clause
Berkshire maintains that it is entitled to rescind the policy because Ehrlich fraudulently misstated his income on his application for disability insurance. The Berkshire policy clearly provides that after the policy has been in effect for two years, Berkshire is prevented from contesting a claim on the basis of the insured's misstatements in the application unless these misstatements were fraudulent. The plaintiff argues, however, that the incontestability clause contained in Berkshire's policy is void because it does not conform to the requirements of New York Insurance Law § 3216.
By statute, every accident or health insurance policy issued in New York must contain an incontestability clause. An incontestability clause is "something akin to a contractual statute of repose. It limits the period of time that the carrier has to investigate the veracity of the policyholder's statements, after which it may not contest the policy except on certain stated grounds." New England Mut. Life Ins. Co. v. Doe, 93 N.Y.2d 122, 128 (1999). Section 3216 of New York's Insurance Law provides an example of an acceptable incontestability clause:
Federal District Judge for the Southern District of Florida Alan S. Gold held that New York law governed the interpretation of Ehrlich's policy with Berkshire. That decision should ordinarily continue to govern this case under the law of the case doctrine. Aramony v. United Way of Am., 254 F.3d 403, 410 (2d Cir. 2001) (citation omitted). No party has asked this Court to revisit that decision.
After two years from the date of issue of this policy no misstatements, except fraudulent misstatements, made by the applicant in the application for such policy shall be used to void the policy or to deny a claim for loss incurred or disability (as defined in the policy) commencing after the expiration of such two year period.
N Y Ins. Law § 3216(d)(1)(B)(i) (McKinney 2001) (emphasis supplied). Thus, New York law allows an insurer to reserve the right to contest a claim for fraudulent misstatements. See, e.g., Carden v. First Unum Life Ins. Co., 46 F. Supp.2d 240, 242 (S.D.N.Y. 1999); Burke v. First Unum Life Ins. Co., 975 F. Supp. 310, 315 (S.D.N.Y. 1997); Berkshire Life Ins. Co. v. Owens, 910 F. Supp. 132, 134 (S.D.N.Y. 1996); New England Mut., 93 N.Y.2d at 131. Should the insurer wish to reserve this right, however, it must do so explicitly. See, e.g., Monarch Life Ins. Co. v. Brown, 512 N.Y.S.2d 99, 103 (1st Dep't 1987).
An insurer's incontestability clause may differ from the example provided in Section 3216 as long as it is not "less favorable" to the insured: "[T]he insurer may, at its option, substitute for one or more of such provisions corresponding provisions of different wording approved by the superintendent which are not less favorable in any respect to the insured or the beneficiary." N.Y. Ins. Law § 3216(d) (McKinney 2001) (emphasis supplied).
Ehrlich argues that because Berkshire's clause fails to state specifically that fraudulent misstatements could be used "to void" the policy or deny a claim, the policy is less favorable to the insured than the statutory provision and must be read out of the policy. Berkshire's policy provides: "This policy will be incontestable as to the statements, except fraudulent statements, contained in the application after it has been in force for a period of two years during your lifetime."
Berkshire's incontestability clause is equally as favorable to insureds as is the example set forth in Section 3216. Both the statutory clause and Berkshire's clause provide insureds with, inter alia, the right to prevent the defendant from voiding the policy based on misstatements — unless those statements were fraudulent. Since Berkshire's clause provides insureds with the same protection they would receive under the statute, it is not "less favorable" than the statutory language set out in Section 3216. Ehrlich has identified no discernable difference between informing an insured that the policy may be "contested" as to fraudulent statements and that fraudulent statements may be used to "void" the policy. The language used by Berkshire sufficiently put the insured on notice that Berkshire could challenge the policy based on Ehrlich's misstatements even after two years had passed if those misstatements were fraudulent. See Carden, 46 F. Supp.2d at 242 (upholding similar incontestability clause); see also Burke, 975 F. Supp. at 315-16 (holding that insurer's preservation of defense of innocent misrepresentation more than two years after policy issued was less favorable to insured).
2. Fraudulent Misstatements
No genuine factual disputes exist with regard to whether Ehrlich's misstatements on his application for disability insurance with Berkshire were fraudulent. Under New York law, a party alleging fraud must prove: "(1) a material misrepresentation or omission of fact, (2) made with knowledge of its falsity, (3) with an intent to defraud, and (4) reasonable reliance on the part of the [party seeking to establish fraud], (5) that causes damage to [that party]." Baker v. Dorfman, 239 F.3d 415, 423 (2d Cir. 2000) (citation omitted). Thus, "[t]o establish the affirmative defense of fraud, the insurer must show that the insured intentionally made material misrepresentations to the insurer." Varda, Inc. v. Ins. Co. of N. Am., 45 F.3d 634, 639 (2d Cir. 1995). "Each element [of fraud] must be proven by clear and convincing evidence." Cofacredit, S.A. v. Windsor Plumbing Supply Co. Inc., 187 F.3d 229, 239 (2d Cir. 1999).
Ehrlich admits that his description of his income was "inaccurate." There are no disputed material issues of fact as to the materiality of his misstatements. Under New York's Insurance Law, a misstatement is not material "unless knowledge by the insurer of the facts misrepresented would have led to a refusal by the insurer to make such contract." N.Y. Ins. Law § 3105(b) (McKinney 2000) (emphasis supplied). The Second Circuit, interpreting New York law, has held that a fact is material "if, had it been revealed, the insurer . . . would either not have issued the policy or would have only at a higher premium." Christiania Gen. Ins. Corp. v. Great Am. Ins. Co., 979 F.2d 268, 278 (2d Cir. 1992) (emphasis supplied); see also First Fin. Ins. Co. v. Allstate Interior Demolition Corp., 193 F.3d 109, 118 (2d Cir. 1999); Mut. Benefit Life Ins. Co. V. JMR Elec. Corp., 848 F.2d 30, 32 (2d Cir. 1988) (per curiam). Although materiality is normally a question of fact, "where the evidence concerning the materiality is clear and substantially uncontradicted, the matter is one of law for the court to determine." Mut. Benefit, 848 F.2d at 32 (citation omitted); see also Carpinone v. Mut. Ins. Co., 697 N.Y.S.2d 381, 383 (3d Dep't 1999). In order to establish materiality, the insurer must "present documentation concerning its underwriting practices such as its underwriting manuals, rules or bulletins which pertain to insuring similar risks." Carpinone, 697 N.Y.S.2d at 383; see also First Fin., 193 F.3d at 119.
The evidence submitted by both Berkshire and Ehrlich establishes that Berkshire would not have issued the same policy had Ehrlich not misrepresented his income. Under Berkshire's underwriting guidelines, income is considered in determining whether a policy can be issued and at what level. Berkshire reduced Ehrlich's monthly benefit to $4,000 per month because of his represented income. Ehrlich has submitted no evidence to contradict the fact that Berkshire links benefit level to income.
Ehrlich argues only that Berkshire's guidelines do not rule out the possibility that Berkshire would have issued the policy even had it known the truth about his income. Such speculation does not raise an issue of fact. In any event, as noted above, even if the policy would have been issued, a misstatement is still material if the insurer would have issued the policy at a different benefit level. "The purpose of the materiality inquiry is . . . to make certain that the risk insured was the risk covered by the policy agreed upon." Mut. Benefit, 848 F.2d at 34.
No genuine questions of fact exist as to Ehrlich's knowledge of the falsity of his statements. In order to establish this element, Berkshire must show that Ehrlich either knew his statements to be untrue or made them recklessly. Banque Franco-Hellenique de Commerce Int'l et Maritime, S.A. v. Christophides, 106 F.3d 22, 25 (2d Cir. 1997); see also Suez Equity Investors, L.P. v. Toronto-Dominion Bank, 250 F.3d 87, 104 (2d Cir. 2001); Bronx Sav. Bank v. Weigandt, 1 N.Y.2d 545, 550 (1956); Newcourt Small Bus. Lending Corp. v. Grillers Casual Dining Group Inc., 727 N.Y.S.2d 699, 701 (3d Dep't 2001); Klembczyk v. DiNardo, 705 N.Y.S.2d 743, 744 (4th Dep't 1999).
Berkshire has submitted evidence sufficient to meet its burden under Rule 56 of showing that Ehrlich's representation of his income was made knowingly and with reckless disregard as to its truth. On December 18, 1994, thirteen days before the end of 1994, Ehrlich affirmed that his annual earned income was $75,000. Ehrlich reaffirmed this fact on January 30, 1995. In 1994, Ehrlich earned $7,620, and in 1995, his income was $18,372 ($4,821 in wages and $13,524 in capital gains). Ehrlich did not ask his accountant or anyone else for assistance in projecting his income. Ehrlich's attorney argues that Ehrlich's business was so new that his statement of his income was a good faith projection. Ehrlich, however, has offered no evidence to support this argument or to explain at all how he arrived at the figure he used. He has not submitted any affidavit in opposition to this motion justifying his calculation on any ground. The evidence actually submitted flatly contradicts his attorney's argument. Ehrlich was not newly self-employed, with no idea of the earnings his company could expect. Ehrlich represented on his Berkshire application that he had owned L M Dairy for two years. Although Ehrlich was self-employed, he had income of only $18,142 in 1993, and $7,620 in 1994. Finally, his representation was made with fewer than two weeks remaining in the year.
Further, Berkshire has shown that Ehrlich misrepresented his income on other applications for insurance, and none of the representations were consistent with each other. Twelve days before telling Berkshire that his earned income was $75,000, Ehrlich stated on an application for insurance with Northwestern that his annual earned income was $50,000. In an application for disability insurance with Northwestern in 1997, Ehlrich stated that his earned income for 1996 had been $90,000 (his adjusted gross income for that year had been $15,895) and that he projected that his income for 1997 would be $100,000 (his adjusted gross income for that year was only $6,707).
There is also no material issue of fact in dispute regarding Ehrlich's intent to defraud Berkshire when he misstated his income. Absent direct evidence, intent "may be proven by circumstantial evidence." Cofacredit, 187 F.3d at 241; see also Hutt v. Lumbermens Mut. Cas. Co., 515 N.Y.S.2d 280, 280 (2d Dep't 1987); Miller v. Miller, 715 N.Y.S.2d 70, 71 (2d Dep't 2000); Corines v. State Bd. for Prof'l Med. Conduct (In re Corines), 700 N.Y.S.2d 303, 307 (3d Dep't 1999).
Berkshire's evidence supports an inference that Ehrlich had a motive to misstate his income. Ehrlich was self-employed, his income was not substantial, and his false statements gave him the ability to receive monthly income higher than he would otherwise have been able to obtain. Berkshire has also submitted substantial circumstantial evidence to establish that Ehrlich's actions were at least reckless if not consciously fraudulent. Because income was so obviously material to benefit level, Berkshire was certain to rely on Ehrlich's income statements in evaluating his policy, and he could only have intended that Berkshire rely on these statements.
It is important to note again that Ehrlich has submitted no evidence to show that his misstatement of his income was not made with fraudulent intent. Although a nonmoving party is not required to defend against a motion for summary judgment if the moving party has not met its burden of production, Amaker v. Foley, 274 F.3d 677, 681 (2d Cir. 2001), "a party opposing a properly supported motion for summary judgment is not entitled to rely solely on the allegations of her pleading, but must show that there is admissible evidence sufficient to support a finding in her favor on the issue that is the basis for the motion," Fitzgerald v. Henderson, 251 F.3d 345, 360-61 (2d Cir. 2001) (emphasis supplied); see also Rexnord Holdings, Inc. v. Bidermann, 21 F.3d 522, 525 (2d Cir. 1994). Indeed, at his deposition, when asked to explain the discrepancy between his income figures on his tax return(s) and insurance application, he responded: "I don't know."
The only testimony from Ehrlich submitted in connection with this motion, are the excerpts of Ehrlich's deposition offered by the defendant. Ehrlich could not, of course, offer his own deposition at trial. In any event, his brief deposition testimony regarding intent is entirely conclusory, and even if admissible would not create an issue of fact regarding his fraudulent intent. In these excerpts, Ehrlich says no more than that he was estimating that his business "would do $75,000" and believed that would be an accurate figure. Ehrlich has provided no evidence to show how he arrived at this estimate or on what it was based.
Nor does Ehrlich identify factual disputes regarding his knowledge or intent in his Rule 56.1 statement or his memorandum of law. To the extent that Ehrlich takes issue with any of the paragraphs in the defendant's Rule 56.1 statement regarding his knowledge or intent, he makes no reference to any part of the evidentiary record to show that contrary evidence exists. Local Civil Rule 56.1 specifically requires such citations.
Ehrlich references his deposition testimony only once, in a footnote in his memorandum of law, in which he states:
It is absolutely absurd for Berkshire to assert that Plaintiff must proffer some tangible evidence, presumably beyond his sworn testimony, that he made an "honest estimate" of his income. This is a credibility determination to be made by the jury.
D. Mot. at 20 n. 12.
There are no disputed questions of fact as to the reasonableness of Berkshire's reliance on Ehrlich's statements in his application. "The law in New York is that the insurer has a right to rely on the representations in the written application if the application is signed by the insured and attached to the policy." N.W. Mut. Life Ins. Co. v. Cupo, No. 90 Civ. 4468 (TPG), 1995 WL 117892, at *3 (S.D.N.Y. Mar. 20, 1995); see also Kantor v. Nationwide Life Ins. Co., 227 N.Y.S.2d 703, 704 (2d Dep't 1962); Cherkes v. Postal Life Ins. Co., 138 N.Y.S.2d 788, 790 (1st Dep't 1955). The fact that the insurer did not seek out truthful information, even if that information was publicly available, is not enough to charge the defendant with knowledge. See, e.g., Chicago Ins. Co. v. Kreitzer Vogelman, No. 97 Civ. 8619 (RWS), 2000 WL 16949, at *8 (S.D.N.Y. Jan. 10, 2000); Saint Calle v. Prudential Ins. Co of Am., 815 F. Supp. 679, 687 (S.D.N.Y. 1993); Schondorf v. SMA Life Assurance Co., 745 F. Supp. 866, 871 (S.D.N.Y. 1990); see also Republic Ins. Co. v. Masters, Mates Pilots Pension Plan, 77 F.3d 48, 53 (2d Cir. 1996). Thus, "an insurer is entitled to rely on the representations of the insured and (with qualifications) . . . the [insurance] company is under no duty to investigate the truthfulness of the representations." Variety Homes, Inc. v. Postal Life Ins. Co., 287 F.2d 320, 323 (2d Cir. 1961). At the same time, however, these "principles cannot be applied in the abstract. The extent of the reliance must be reasonable. The company cannot close its eyes to the obvious." Id.; see also Kroski v. Long Is. Sav. Bank FSB, 689 N.Y.S.2d 92, 93 (1st Dep't 1999).
The cases cited by Ehrlich for the proposition that Berkshire waived its right to contest the policy because it did not fully investigate his application are inapposite. In White v. Mass. Cas. Ins. Co., 465 N.Y.S.2d 345, 345-46 (4th Dep't 1983), the court simply applied the incontestability clause to prevent denial of coverage on the ground that the illness at issue had not manifested itself prior to the policy's effective date. Thal v. Berkshire Life Ins. Co., No. 98 Civ. 11 (AHN), 1999 WL 200697, at *3 n. 3 (D.Conn. Mar. 24, 1999), was decided under Connecticut law and expressly recognized the New York exemption for fraudulent statements. In Raifman v. Berkshire Life Ins. Co., 81 F. Supp.2d 412, 416, 419 (E.D.N.Y. 2000), the case was "essentially one of contract interpretation," and did not address the insurer's duty to uncover fraud through an investigation. In Equitable Life Assurance Soc'y of the United States v. Bell, 27 F.3d 1274, 1278 (7th Cir. 1994), the insurer had "[n]otably . . . opted for the section version [of Indiana's incontestability clause], which lacks the exception for fraudulent misstatements." The Seventh Circuit observed that "Indiana has given the insurer the option to include . . . an exception for fraudulent statements. . . . [H]ad [the insurer] opted to include that exception, it could have claimed that the policy issued to [the insured] was invalid." Id. at 1279 (citations omitted) (emphasis supplied).
Berkshire has submitted evidence sufficient to meet its burden of showing that it reasonably relied on Ehrlich's statements in his application. Ehrlich represented on his application that he was an executive who owned his own business, and that his duties were primarily managerial. Ehrlich represented to GIS, the company hired to investigate his application, that he was an executive in sales with the company and that his duties were entirely administrative and sales. Ehrlich has submitted no evidence that would tend to show that it would have been unreasonable for Berkshire to rely on the representations in his application and to GIS. Ehrlich has not indicated any statement that he made in his application or during the subsequent investigation that should have put Berkshire on notice that further investigation was required.
To support his argument that Berkshire had a duty to conduct more of an investigation than it did into the veracity of his statements, Ehrlich has submitted one document: a report by underwriting expert Lawton Swan III ("Swan"). Swan asserts that Berkshire did not request additional information to clarify "questions and irregularities" in Ehrlich's application relating to "classification of risk category and business ownership status." Swan does not, however, identify either the "questions" or the "irregularities" that he believes were evident from Ehrlich's application. Secondly, Swan asserts, for reasons that he does not explain, that Berkshire should not have reclassified the risk and that it should have requested tax returns at the time it accepted the risk. Swan does not explain his reasoning behind these assertions — whether it is his opinion that these procedures were, for example, required by Berkshire's underwriting guidelines, or whether they were common practice in the industry. As noted above, Berkshire's underwriting guidelines require it to obtain tax returns in three situations, none of which applied to Ehrlich's application. Finally, Swan asserts that Berkshire did not investigate further "in accordance with their Underwriting Guidelines." Swan does not, however, identify any guideline that Berkshire failed to follow. An unexplained, conclusory affidavit from an expert is insufficient to raise a question of fact regarding the reasonableness of Berkshire's reliance on Ehrlich's statements.
When an insurer has reserved the right to challenge a policy for fraudulent misstatements, that reservation is not extinguished by a failure to investigate. See, e.g., Friedman v. Prudential Life Ins. Co. of America, 589 F. Supp. 1017, 1024 (S.D.N.Y. 1984). A contrary conclusion would vitiate Section 3216's provision allowing insurers to reserve the right to contest fraudulent statements without regard to the otherwise-applicable two-year limitations period.
Finally, there are no disputed questions of fact as to the damage suffered by Berkshire as a result of Ehrlich's statements. Ehrlich's income was material to the benefit level of the policy issued. Had Ehrlich not misrepresented his income, Berkshire would not have issued a policy paying $4,000 a month in benefits.
3. Remaining Issues
Because Berkshire's motion for summary judgment on the issue of recission is granted, it is unnecessary to consider whether Ehrlich is entitled to summary judgment on the issue of disability. Further, it is unnecessary to consider Berkshire's motion for sanctions under Rule 37. The Court notes, however, that had it not granted summary judgment on the issue of recission, it would have ordered Ehrlich to cure any discovery deficiencies promptly and warned him that failure to cure would result in sanctions that could include dismissal.
After amending his interrogatory responses three times, Ehrlich has disclosed the names of nine doctors he visited since 1990. Thus far, Berkshire has identified at least twenty-eight doctors who have treated Ehrlich since 1990. Some of the names Ehrlich did not disclose were of doctors he had seen on at least nineteen occasions. Similarly, after three amendments, Ehrlich disclosed seven of approximately ten insurance policies for which he has applied since 1990.
Finally, Ehrlich's motion to quash the subpoena Berkshire served on Dr. A. Lawrence Rubin on the ground of psychologist-client privilege is denied as moot. Dr. Rubin is Ehrlich's treating psychiatrist. Ehrlich apparently informed Dr. Rubin on March 18, 1999, that he wanted to return to school in order to change his career. Because Berkshire's motion has been granted on the evidence submitted, it is unnecessary to address the motion to quash.
CONCLUSION
For the reasons stated above, the defendant's motion for summary judgment on the issue of recission is granted. The plaintiff's motion for summary judgment on the issue of recission is denied. Ehrlich's motion for partial summary judgment on the issue of disability, Berkshire's motion to dismiss or for other sanctions under Rule 37, and Ehrlich's motion to quash are dismissed as moot. The Clerk of Court shall enter judgment for the defendant and close the case.