Opinion
CASE NO. 3:13CV00071 BSM
08-28-2014
CRYSTAL GANN PLAINTIFF v. HOUSEHOLD LIFE INSURANCE COMPANY DEFENDANT
ORDER
Defendant Household Life Insurance Company's renewed motion for summary judgment [Doc. No. 80] is granted and plaintiff Crystal Gann's cross-motion for summary judgment [Doc. No. 83] is denied.
I. FACTUAL BACKGROUND
The undisputed facts are as follows. On February 26, 2010, Alice Griffin applied for an insurance policy with defendant Household Life Insurance Company ("Household"). On the application, she answered "no" when asked whether she was receiving disability benefits. Griffin had been receiving disability benefits since September of 2004 for mood disorders and muscle, ligament, and fascia disorders. Because Household's underwriting process is automated, any application in which a question is answered "yes" results in an automatic denial of a policy. Because Griffin's answers to the application questions were all "no," Household issued the policy. On February 7, 2012, Griffin died of pneumonia.
Plaintiff Crystal Gann, the named beneficiary, requested the policy proceeds and Household began a claims investigation because Griffin's death fell within the policy's two-year contestability period. On October 17, 2012, Household informed Gann that it was denying coverage because the investigation revealed that Griffin had been receiving disability benefits when she completed the application. Household rescinded the policy and returned the premiums paid to Gann. Gann returned the check to Household and filed suit on March 4, 2013, alleging breach of contract, unjust enrichment, bad faith and outrage. On October 25, 2013, Gann's outrage claim was dismissed. See Doc. No. 31.
II. LEGAL STANDARD
Summary judgment is appropriate when there is no genuine dispute as to any material fact and the moving party is entitled to judgment as a matter of law. See Fed. R. Civ. P. 56(a); Celotex Corp. v. Catrett, 477 U.S. 317, 322-23 (1986); Anderson v. Liberty Lobby Inc., 477 U.S. 242, 249-50 (1986). Once the moving party demonstrates that there is no genuine dispute of material fact, the non-moving party may not rest upon the mere allegations or denials in his pleadings. Holden v. Hirner, 663 F.3d 336, 340 (8th Cir. 2011). Instead, the non-moving party must produce admissible evidence demonstrating a genuine factual dispute that must be resolved at trial. Id. Importantly, when considering a motion for summary judgment, all reasonable inferences must be drawn in the light most favorable to the nonmoving party. Holland v. Sam's Club, 487 F.3d 641, 643 (8th Cir. 2007). Additionally, the evidence is not weighed, and no credibility determinations are made. Jenkins v. Winter, 540 F.3d 742, 750 (8th Cir. 2008).
III. DISCUSSION
Household's motion for summary judgment is granted and this case is dismissed. A. Breach of Contract
It is undisputed that, on the application for insurance, Griffin stated that she was not receiving disability benefits, although she, in fact, was. It is also undisputed that, had she answered that question correctly, Household's automated underwriting process would have prevented the policy from being issued. The sole issue, therefore, is whether this allows Household to rescind the policy. Gann argues that Household cannot rescind unless it proves a causal connection between a misrepresentation made by Griffin and the loss under the policy. Household argues that no causal connection is required because it would not have issued the policy if the questions on the application were answered accurately.
This question involves interpretation of Ark. Code. Ann. § 23-79-107. Because this area of Arkansas law is less than clear, a brief look at the legislative and judicial history of the issue is helpful. Ark. Stat. Ann. § 66-3208, the precursor to Ark. Code. Ann. § 23-79-107, provided:
All statements in any application for a life or disability insurance policy or annuity contract, or in negotiations therefor, by or in behalf of the insured or annuitant, shall be deemed to be representations and not warranties. Misrepresentations, omissions, concealment of facts, and incorrect statements shall not prevent a recovery under the policy or contract unless either:In National Old Line Ins. Co. v. People, 506 S.W.2d 128 (Ark. 1974), the Arkansas Supreme Court interpreted Ark. Stat. Ann. § 66-3208 as requiring a causal relationship between the insured's misrepresentation and the eventual loss. Id. at 142. The court later overruled Old Line in Southern Farm Bureau Life Ins. v. Cowger, 748 S.W.2d 332 (Ark. 1988), holding that an insurer is not required to show a causal connection between the applicant's misrepresentation and the resulting loss.
(1) Fraudulent;
(2) Material either to the acceptance of the risk or to the hazard assumed by the insurer; or
(3) The insurer in good faith would not have issued the policy or contract or would not have issued a policy or contract in as large an amount or at the same premium or rate or would not have provided coverage with respect to the hazard resulting in the loss if the facts had been made known to the insurer as required by the application for the
policy or contract or otherwise.
One year after the Cowger decision, the Arkansas Legislature added subsection (c) to what is now Arkansas Code Annotated section 23-79-107(a) (Repl. 2004), which reads as follows:
(a) All statements in any application for a life or accident and health insurance policy or annuity contract, or in negotiations therefor, by or in behalf of the insured or annuitant, shall be deemed to be representations and not warranties. Misrepresentations, omissions, concealment of facts, and incorrect statements shall not prevent a recovery under the policy or contract unless either:Although this is the version of the statute that was in effect when this policy was issued, it is worth noting that the Arkansas Legislature has since amended the statute again to remove subsection (a)(3), the basis for rescission at issue here. See Ark. Code Ann. § 23-79-107 (Repl. 2011).
(c) In any action to rescind any policy or contract or to recover thereon, a misrepresentation is material if there is a causal relationship between the
(1) Fraudulent;
(2) Material either to the acceptance of the risk or to the hazard assumed by the insurer; or
(3) The insurer in good faith would not have issued the policy or contract or would not have issued a policy or contract in as large an amount or at the same premium or rate or would not have provided coverage with respect to the hazard resulting in the loss if the facts had been made known to the insurer as required by the application for the policy or contract or otherwise.
* * *
misrepresentation and the hazard resulting in a loss under the policy or contract.
The parties dispute whether the causal element contained in subsection (c) applies to each of the three bases for rescission listed in subsection (a). Simply put, the issue is whether a causal connection is always required for an insurer to rescind a policy, and it appears that this question has not been squarely decided. One apparent reason for much of the confusion is that the case law often does not distinguish between subsections (a)(1), (a)(2) and (a)(3), nor is it always clear which one is being held out as the basis for rescission.
When the language of a statute is plain and unambiguous and conveys a clear and definite meaning, the rules of statutory construction do not apply. Hartford Fire Ins. Co. v. Sauer, 86 S.W.3d 229, 234 (Ark. 2004). This is true here because the statute appears to be plain and unambiguous on its face. This statute is written in the disjunctive, providing three distinct bases for rescission: (1) a fraudulent misrepresentation; (2) or a material misrepresentation; (3) or if the insurer in good faith would not have issued the policy, or would not have issued the policy in as large an amount or at the same premium or rate, if the facts had been made known to the insurer as required by the application. See Ark. Code Ann. § 23-79-107(a) (Repl. 2004) (emphasis added). The statute then goes on to define a material misrepresentation in subsections (b) and (c). See Ark. Code Ann. § § 23-79-107(b), (c). Subsection (c) clearly narrows the definition of "material" by requiring a causal connection, thereby limiting the "material misrepresentation" basis for rescission set out in subsection (a)(2). The text of the statute sets out each of the three bases for rescission, separated from the others by the use of the word "or," and nothing in the plain language of the statute supports reading the materiality definition set out in subsection (c) to apply to all of the bases for rescission set out in subsection (a).
This reading is consistent with case law interpreting Ark. Code Ann. § 23-79-107. See Hall v. Modern Woodmen of America, 68 F.3d 1120, 1121 (8th Cir. 1995) (affirming judgment and stating that "[m]isrepresentations in a life insurance application may prevent recovery under the policy if, inter alia, the insurer in good faith would not have issued the policy if it had known the true facts"); Capitol Life and Acc. Ins. Co. v. Phelps, 66 S.W.3d 678, 681 (Ark. Ct. App. 2002) (holding that insurer bears the burden of proving that the facts not disclosed were material to the risk assumed by it or that, in good faith, it would not have issued the policy). As a result, Household is not required to prove a causal connection before it is entitled to rescind on the basis of subsection (a)(3).
Gann cites to Osborne v. Farmers New World Life Ins., Case No. 4:08CV000250 BSM, 2009 WL 1098943 (E.D. Ark. 2009) to support her argument that the causal element is required for each of the three bases for rescission set forth in the statute. That case is distinguishable, however, from the present case. This is true because the insurer in Osborne sought rescission based on a misrepresentation by the insured; therefore, a causal connection was required between the misrepresentation and the hazard resulting loss. The insurer in Osborne did not, however, seek rescission under subsection (a)(3), which is the basis for rescission in this case. Moreover, it is undisputed that Household's automated underwriting process would not have issued the policy to Griffin, had she been truthful on the application, while there was no evidence in Osborne that the insurer would not have issued the policy but for the decedent's false statement.
Although Gann also argues that the question Griffin answered incorrectly was ambiguous, this argument fails. Language is ambiguous if there is doubt or uncertainty as to its meaning and it may fairly be susceptible to more than one reasonable interpretation. Elam v. First Unum Life Ins. Co., 57 S.W.3d 165, 169 (Ark. 2001). Here, the question at issue read as follows:
"Are you currently a patient in a hospital (other than for childbirth), or resident in a nursing home, assisted living facility or other long-term care facility? Or are you currently receiving in-home care by a healthcare professional? Or are you currently receiving disability income benefits or have you submitted a claim for disability income benefits within the past 5 years? Or have you been advised to have or are you awaiting results of non-routine medical tests or procedures?"Although Gann points out that this is a compound question, it is also a straightforward "yes or no" question. There does not appear to be any doubt or uncertainty as to its meaning, and it is not open to more than one reasonable interpretation. It, therefore, is not ambiguous. As a result, Household was entitled to rescind the policy and summary judgment is granted on Gann's breach of contract claim. B. Bad Faith
Summary judgment is also granted on Gann's bad faith claim.
Bad faith occurs when an insurance company "affirmatively engages in dishonest, malicious, or oppressive conduct in order to avoid a just obligation to its insured." Columbia Nat. Ins. Co. v. Freeman, 64 S.W.3d 720, 723 (Ark. 2002). Because this standard is rigorous and difficult to satisfy, bad faith requires affirmative misconduct and cannot be based on mere denial of a claim. Id.; Unum Life Ins. Co. Of America v. Edwards, 210 S.W.3d 84, 87 (Ark. 2002). Negligence or bad judgment is also insufficient if the insurer is acting in good faith. Id. at 88.
Gann's bad faith claim fails because she has offered no evidence of any affirmative misconduct by Household. She appears to base her bad faith claim on Household's denial of the insurance claim, arguing that Household should have investigated to determine whether a causal connection existed between Griffin's death and her misrepresentation. For reasons already stated, Household's denial of the claim was based on a good faith dispute as to whether the policy was valid; this denial, absent any affirmative misconduct, does not support a bad faith claim. Id. at 89. Accordingly, summary judgment is granted. C. Unjust Enrichment
Household has requested that it be ordered to issue a check to Gann in the amount of $2,191.20 for the value of the premiums paid, and Gann appears to agree that she is entitled to this refund if Household is allowed to rescind the policy. Household is directed to issue a check to Gann representing the value of the premiums paid, and summary judgment is granted on her unjust enrichment claim.
IV. CONCLUSION
For these reasons, Household's motion for summary judgment [Doc. No. 80] is granted and plaintiff Crystal Gann's cross-motion for summary judgment [Doc. No. 83] is denied.
An appropriate judgment shall accompany this order.
IT IS SO ORDERED this 28th day of August 2014.
/s/_________
UNITED STATES DISTRICT JUDGE