Northwestern Mutual Life Insurance Co. v. Babayan

Full title: THE NORTHWESTERN MUTUAL LIFE INSURANCE COMPANY, Plaintiff, v. KATHLEEN L…

Court: United States District Court, E.D. Pennsylvania

Date published: Aug 25, 2004

Civil Action Nos. 03-717, (Consolidated Cases), 03-1622, (Consolidated Cases) (E.D. Pa. Aug. 25, 2004)

Opinion

Civil Action Nos. 03-717, (Consolidated Cases), 03-1622, (Consolidated Cases).

August 25, 2004

MEMORANDUM

MICHAEL BAYLSON, District Judge

I. Procedural History and Jurisdiction

The Northwestern Mutual Life Insurance Company ("Northwestern") filed the two-count Complaint on February 4, 2003, Civil Action No. 03-717, against Kathleen L. Babayan ("Babayan"), alleging misrepresentation (Count I) and fraud and deceit (Count II). As explained in more detail below, Northwestern issued to Babayan Disability Policy No. D1408128 ("the Policy") on February 13, 2001. In its Complaint, Northwestern seeks to have the Policy declared void ab initio, ¹ to compel Babayan to return the Policy, and to receive costs, fees, and all other relief deemed necessary.

1 Ab initio means "from the beginning". BLACK'S LAW DICTIONARY 5 (8th Ed. 2004).

In a separate civil action (No. 03-1622), on March 17, 2003, Babayan filed her original complaint against Northwestern and Joseph M. Savino. On May 6, 2003, Babayan, Northwestern, and Joseph M. Savino stipulated to consolidate the two actions for all purposes. On December 16, 2003, the parties stipulated that Babayan could file an amended complaint within twenty days. On December 17, 2003, pursuant to stipulation, Babayan voluntarily dismissed defendant Joseph M. Savino with prejudice.

Babayan then filed a five-count Amended Complaint against Northwestern and Thomas Gallina ("Gallina") on December 24, 2003. Regarding Northwestern, Babayan alleges Bad Faith Denial of Insurance Benefits (Count I) and Breach of Contract (Count IV). Babayan also seeks a Declaratory Judgment (Count V) against Northwestern, declaring, inter alia, that Northwestern shall provide insurance coverage and benefits to Babayan pursuant to the Policy. Babayan alleges Breach of Fiduciary Duty (Count II) and Negligence (Count III) against Gallina.²

2 In her Amended Complaint, Babayan originally had alleged Breach of Fiduciary Duty (Count II) and Negligence (Count III) against both Northwestern and Gallina. However, on January 7, 2004, pursuant to stipulation, Babayan voluntarily dismissed with prejudice those particular claims against Northwestern.

Presently before the Court are two Motions for Summary Judgment. Northwestern filed its Motion for Summary Judgment on June 8, 2004. (C.A. No. 03-717, Docket No. 38.) Babayan responded to Northwestern's Motion on June 30, 2004. Northwestern filed its reply on July 8, 2003. Babayan filed a Motion to File a Surreply on July 13, 2004 and a Motion to File a Supplemental Memorandum of Law in Opposition on July 23, 2004. The Court has not yet ruled on these July Motions.

Gallina filed his Motion for Summary Judgment on June 9, 2004. (C.A. No. 03-1622, Docket No. 36.) Babayan responded to Gallina's Motion on June 30, 2004.

Oral argument on both Motions for Summary Judgment was held on August 3, 2004.

The Court has jurisdiction over this case pursuant to 28 U.S.C. § 1332. The parties are all citizens of different states (Babayan: Pennsylvania; Northwestern: Wisconsin; Gallina: New Jersey), and the amount in controversy exceeds $75,000, exclusive of interest and costs. Also, as to Babayan's claim for declaratory relief, the Court has jurisdiction pursuant to 28 U.S.C. §§ 2201 and 2202. Venue is appropriate under 28 U.S.C. § 1391(b).

For the reasons which follow, Northwestern's Motion for Summary Judgment will be granted. Gallina's Motion for Summary Judgment will be granted.

II. Factual Background

A. Application Process

Babayan telephoned Gallina's insurance agency in January 2001 to inquire about purchasing disability income insurance. (Babayan Dep., Babayan's Ex. A, at 76-77.)³ Some time later, but also in January 2001, Gallina met Babayan at her New Jersey office, at which time Gallina collected general, personal information about the applicant. (Gallina Dep., Babayan's Ex. B., at 68-69, 77-78.) From this preliminary information, Gallina then prepared an insurance presentation for Babayan, which Gallina presented to Babayan at a February 11, 2001 meeting. (Id. at 78-79.)

3 As there are two Motions for Summary Judgment in the above-captioned cases, Babayan has filed two briefs in opposition, both with numerous exhibits. Babayan's exhibits are not identically ordered, nor are all exhibits attached to both opposing briefs; notwithstanding, there is great overlap between the submissions. Therefore, for ease of reference, when the Court cites one of Babayan's specific, lettered exhibits, the Court refers to those exhibits Babayan submitted in opposition to Northwestern's Motion. (C.A. No. 03-717; Docket No. 41.)

At the February 11, 2001 meeting, Babayan completed a disability insurance application (Babayan's Ex. D) and a nonmedical questionnaire (Babayan's Ex. E). During this meeting, Gallina asked question 14.K.2 from the disability insurance application, which reads:

In the past 5 years, has the Insured been in a motor vehicle accident, has the Insured been charged with a moving violation of any motor vehicle law, or has the Insured's driver's license been restricted, suspended or revoked?

(Disability Insurance Application, Babayan's Ex. D.) Babayan answered "no" to this question. (Id.)

Gallina asked question 33.k from the nonmedical questionnaire, which reads, "In the last 10 years, have you had, been told you had or been treated for: Arthritis, sciatica, gout, or any disorder of the muscles, bones, joints, spine, back or neck?" (Nonmedical Questionnaire, Babayan's Ex. E.) Babayan answered "no" to this question. (Id.)

Gallina also asked question 36 from the nonmedical questionnaire. Question 36 is a fivepart question, seeking "yes" or "no" responses, and reads as follows:

36. Other than as previously stated on this application, in the last five years have you:

a. Consulted any other health care providers (medical doctor, psychiatrist, psychologist, chiropractor, counselor, therapist or other)?

b. Been a patient in a hospital, clinic or medical facility?

c. Had any diagnostic studies (EKG, x-ray, blood tests or any other)?

d. Had surgery?

e. Been advised to have any test, consultation, hospitalization or surgery which was not completed?

(Nonmedical Questionnaire, Babayan's Ex. E.) Babayan answered "no" to all five subsections on the nonmedical questionnaire. (Id.)

Gallina also asked question 37 from the nonmedical questionnaire. Question 37 is a twopart question, seeking "yes" or "no" responses, and reads as follows:

37. a. During the last 6 months have you worked in your regular occupation less than your usual number of hours per week because of any sickness or injury?

b. Have you requested or received payments, benefits, or a pension because of any injury, accident, sickness or disability?

(Id.) Babayan answered "no" to both subsections on the nonmedical questionnaire. (Id.)

Babayan testified that, in response to these questions, she informed Gallina that she had previously been involved in a motor vehicle accident and a slip-and-fall accident in 1995 or 1996. (Babayan Dep., Babayan's Ex. A, at 108-09, 112-13.) Babayan testified that Gallina advised Babayan not to disclose those accidents, as they were far enough in the past not to merit mention. (Id. at 112-13.) As Ms. Babayan testified, "[Gallina] said, that's far enough away. I don't think it will be a problem, but when you sign the medical waiver, [Northwestern] get[s] your records from your doctors and they'll find out that stuff." (Id.)⁴

4 Babayan authorized the release of her medical records to Northwestern, and provided the name of her family physician, Joseph Kipp, M.D., from whom the relevant records could be obtained. (Disability Insurance Application, Babayan's Ex. D.) Northwestern did not elect to obtain Babayan's records prior to the issuance of the insurance policy. (Guss Dep., Babayan's Ex. H, at 43.)

Babayan signed the insurance application and nonmedical questionnaire at this meeting. By signing the application, Babayan represented as follows:

The Insured consents to this application and declares that the answers and statements made on this application are correctly recorded, complete and true to the best of the Insured's knowledge and belief. Answers and statements brought to the attention of the agent, medical examiner, or paramedical examiner are not considered information brought to the attention of the Company unless stated in the application. Statements in this application are representations and not warranties.

(Disability Insurance Application, Babayan's Ex. D) (emphasis added). By signing the nonmedical questionnaire, Babayan represented as follows:

I declare that my answers and statements are correctly recorded, complete and true to the best of my knowledge and belief. Statements in this application are representations and not warranties.

(Nonmedical Questionnaire, Babayan's Ex. E.) Babayan testified that she did not read either the application or the nonmedical questionnaire before signing, and that had she read those documents, she would have realized that her answers to questions 14.K.2, 33K, and 36 were incomplete and inaccurate. (Babayan Dep., Babayan's Ex. A, at 103, 109, 148-50, 163-67.)

B. Paramedical Examination

On February 13, 2001, Babayan met with a paramedical examiner, Louise Schardt, at the request of Northwestern. Northwestern requested the examination by a nurse paramedic given the amount of benefit requested by Babayan. (Guss Dep., Babayan's Ex. H, at 32-33.) Ms. Schardt asked Babayan questions about her medical history and completed a paramedical questionnaire. (Paramedical Questionnaire, Babayan's Ex. F.) Babayan testified that during the paramedical examination, Schardt took her blood pressure, but did not weigh her. (Babayan Dep., Babayan's Ex. A, at 106.) Babayan does not recall whether Schardt asked the questions in the questionnaire, although Babayan believes that Schardt must have asked "some" of them. (Id.)

The parties agree that questions 31 through 42 on the paramedical questionnaire are identical to questions 31 through 42 on the nonmedical questionnaire completed by Gallina. (Babayan's Exs. E F.)

Schardt asked question 33.k from the paramedical questionnaire, which reads, "In the last 10 years, have you had, been told you had or been treated for: Arthritis, sciatica, gout, or any disorder of the muscles, bones, joints, spine, back or neck?" (Paramedical Questionnaire, Babayan's Ex. F.) Babayan answered "no" to this question.

Schardt also asked Question 36 on the paramedical questionnaire. Question 36 is a fivepart question, seeking "yes" or "no" responses, and reads as follows:

36. Other than as previously stated on this application, in the last five years have you:

a. Consulted any other health care providers (medical doctor, psychiatrist, psychologist, chiropractor, counselor, therapist or other)?

b. Been a patient in a hospital, clinic or medical facility?

c. Had any diagnostic studies (EKG, x-ray, blood tests or any other)?

d. Had surgery?

e. Been advised to have any test, consultation, hospitalization or surgery which was not completed?

(Id.) Though Babayan answered "no" to all five subsections on the nonmedical questionnaire, she answered "yes" to questions "a", "b", and "c" on the paramedical questionnaire. It is obvious that some of these answers are inconsistent.

Schardt also asked question 37 from the paramedical questionnaire. Question 37 is a two-part question, seeking "yes" or "no" responses, and reads as follows:

37. a. During the last 6 months have you worked in your regular occupation less than your usual number of hours per week because of any sickness or injury?

b. Have you requested or received payments, benefits, or a pension because of any injury, accident, sickness or disability?

(Id.) Babayan answered "no" to both subsections on the nonmedical questionnaire, but answered "yes" to question "a" on the paramedical questionnaire. This also is an inconsistency.

By signing the paramedical questionnaire, Babayan represented as follows:

I declare that my answers and statements are correctly recorded, complete and true to the best of my knowledge and belief. Statements in this application are representations and not warranties.

(Id.) Babayan testified that she did not read the paramedical questionnaire before signing, and that had she read the paramedical questionnaire, she would have realized that her answers to questions 33K and 36 were incomplete and inaccurate. (Babayan Dep., Babayan's Ex. A, at 167-68.)

According to Babayan, there are only three possible explanations for these discrepancies: (1) Babayan answered untruthfully to either Gallina or the paramedical examiner; (2) Babayan was confused by the questions; or (3) Gallina and/or the paramedical examiner did not accurately record Babayan's answers.

Babayan contends that the most likely explanation for these discrepancies was that Babayan simply was confused or did not fully understand the questions as explained by the particular examiner. Babayan testified that she did not understand the meaning of some of the words on the application because they were not defined by the application itself. (Babayan Dep., Babayan's Ex. A, at 222-24.) Babayan also testified that she did not intend to provide any false answers. (Id. at 224-25.)

C. Babayan's Subsequent Illnesses

In and around March and April 2001, Babayan began feeling ill and suffering from multiple symptoms, including, but not limited to fatigue, pain, headaches, and an inability to concentrate. Upon receiving treatment from her family physician, Joseph Kipp, M.D., Babayan was advised that she might be suffering from fibromyalgia. (Babayan's Am. Compl. ¶ 18.)

From March or April 2001 until February 2002, Babayan received treatment from Dr. Kipp and other physicians for her symptoms. In February 2002, Babayan applied and received short-term disability income payments from the State of New Jersey, to which Babayan was entitled as she was employed in New Jersey. (Id. ¶ 19.) On or about March 23, 2002, with her symptoms not abating, Babayan applied for disability benefits pursuant to the Policy. (Id. ¶ 20.)

Shortly after applying for disability benefits, Northwestern requested certain information, including but not limited to an "Attending Physician's Statement." Plaintiff forwarded all of the requested information, including the Attending Physician's Statement, to Northwestern. (Id. ¶ 21.) Dr. Kipp completed the Attending Physician's Statement, and identified a diagnosis of fibromyalgia, depression, chronic pain, and cognitive dysfunction. The treatment plan authored by Dr. Kipp included pain management and "work-up" by specialists. (Id. ¶ 22.)

On or about May 3, 2002, Northwestern sent Jim Porter (its agent, servant, employee, and/or other representative) to interview Babayan at her home. During this interview, Babayan learned that her full and complete medical history — i.e., the motor vehicle accident and the slipand-fall accident — which she had reported to Gallina and the paramedical examiner, during the initial application process, allegedly had not been reported to Northwestern. Babayan contends that despite Gallina's and the paramedical examiner's failure to report her complete medical history to Northwestern, Northwestern nonetheless was aware of her medical history, primarily because Babayan had executed a release and authorization allowing Northwestern to obtain her medical records at the time of her application. (Id. ¶ 23; Babayan Dep., Babayan's Ex. A, at 112-13.)

Later in 2002, as a result of her continued symptoms and continued treatment with specialists, Babayan was diagnosed with Sjogren's Syndrome, an autoimmune disorder. Babayan additionally was diagnosed with Stage I primary biliary cirrhosis. (Babayan's Am. Compl. ¶ 24.) After being diagnosed with Sjogren's Syndrome and primary biliary cirrhosis, Babayan advised Northwestern of her new diagnosis and that she might not be suffering from fibromyalgia as originally diagnosed. (Id. ¶ 25.)

By letter dated August 21, 2002, Northwestern notified Babayan that it was denying her claim for disability benefits, that it was rescinding her disability insurance, and that it was returning the premium she had paid. (Id. ¶ 26; Letter from Duller to Babayan of 8/21/02, Babayan's Ex. R.) The basis for the denial of Babayan's disability claim, as a result of her Sjogren's Syndrom and primary biliary cirrhosis, was Babayan's alleged failure to report her full medical history, including past injuries and medical treatments, to Northwestern during the application. (Babayan's Am. Compl. ¶ 27.)

Northwestern seeks to perfect the rescission of the Policy due to Babayan's (alleged) multiple material misrepresentations in the application and in the non-medical and paramedical questionnaire portions of the application. Babayan allegedly concealed that she had been diagnosed with and treated by numerous physicians for knee, back, and leg disorders prior to February 2001. Northwestern also alleges that Babayan falsely denied that she had been hospitalized other than one brief overnight stay; falsely denied that she had been treated by any medical provider other than Dr. Joseph Kipp; falsely denied any diagnostic testing other than one blood test; and falsely denied that she had been involved in any motor vehicle accident in the five-year period preceding the date of the application.

III. Standard

Summary judgment is appropriate "if the pleadings, depositions, answers to interrogatories, and admissions on file, together with the affidavits, if any, show that there is no genuine issue as to any material fact and that the moving party is entitled to a judgment as a matter of law." FED. R. CIV. P. 56(c). An issue is "genuine" if the evidence is such that a reasonable jury could return a verdict for the non-moving party. Anderson v. Liberty Lobby, Inc., 477 U.S. 242, 248, 106 S. Ct. 2505, 91 L. Ed. 2d 202 (1986). A factual dispute is "material" if it might affect the outcome of the case under governing law. Id.

A party seeking summary judgment always bears the initial responsibility for informing the district court of the basis for its motion and identifying those portions of the record that it believes demonstrate the absence of a genuine issue of material fact. Celotex Corp. v. Catrett, 477 U.S. 317, 322, 106 S. Ct. 2548, 91 L. Ed. 2d 265 (1986). Where the non-moving party bears the burden of proof on a particular issue at trial, the moving party's initial burden can be met simply by "pointing out to the district court that there is an absence of evidence to support the non-moving party's case." Id. at 325. After the moving party has met its initial burden, "the adverse party's response, by affidavits or as otherwise provided in this rule, must set forth specific facts showing that there is a genuine issue for trial." FED. R. CIV. P. 56(e). Summary judgment is appropriate if the non-moving party fails to rebut by making a factual showing "sufficient to establish the existence of an element essential to that party's case, and on which that party will bear the burden of proof at trial." Celotex, 477 U.S. at 322. Under Rule 56, the Court must view the evidence presented on the motion in the light most favorable to the opposing party. Anderson, 477 U.S. at 255.

IV. Northwestern's Motion for Summary Judgment ⁵

5 Northwestern's legal argument begins with a detailed choice of law analysis, concluding that, with regard to the rescission and breach of contract counts, it does not matter whether the Court applies New Jersey or Pennsylvania law, as the legal requirements for these counts in Pennsylvania and New Jersey do not differ. With regard to the bad faith count, Northwestern concludes that Pennsylvania law applies, especially as New Jersey does not have a bad faith statute.
Babayan agrees that there is no conflict between states as to the rescission and breach of contract claims and that Pennsylvania law applies to the statutory bad faith count.

Northwestern contends that it is entitled to summary judgment for three reasons: One, the summary judgment record demonstrates that Babayan made material misrepresentations regarding her medical conditions and treatment that she knew were false; two, the summary judgment record establishes that Northwestern breached no contractual obligation to Babayan; and three, the summary judgment record establishes that Babayan cannot prove the elements of bad faith.

A. Whether Babayan Knowingly Made Material Misrepresentations

Under Pennsylvania law, Northwestern may rescind Babayan's disability income insurance policy if it can establish three elements: (1) that Babayan's representations were false; (2) that Babayan knew the representations were false when made or made them in bad faith; and (3) that the representations were material to the risk being insured. E.g., N.Y. Life Ins. Co. v. Johnson, 923 F.2d 279, 281 (3d Cir. 1991). As explained below, the Court concludes, as a matter of law, that Babayan has not introduced sufficient evidence to establish a genuine issue of material fact regarding the existence of these three elements, and that Northwestern is entitled to rescind Babayan's disability income insurance policy.

1. Whether Babayan's representations were false

"To be 'false' a statement must be untrue and known to the applicant to be so." Provident Life Accident Ins. Co. v. Charles, No. 90-7584, 1993 U.S. Dist. LEXIS 5030, at *12-13 (E.D. Pa. Apr. 14, 1993). Under Pennsylvania law, the omission of an insured's medical information qualifies as a false representation. See Justofin v. Metro. Life Ins. Co., 372 F.3d 517, No. 02-4264, 2004 U.S. App. LEXIS 12853 (3d Cir. 2004) (hereinafter "Justofin IV");⁶ Grimes v. Prudential Ins. Co. of Am., 585 A.2d 29, 31-32 (Pa.Super.Ct. 1991). Though Babayan contends that she omitted information regarding her motor vehicle and slip-and-fall accidents purely at the advice and instruction of Gallina, Babayan does not dispute that some of her answers to questions on both the nonmedical and paramedical questionnaires were incorrect. (Babayan's Opp'n Br., at 21; Babayan Dep., Babayan's Ex. A, at 103, 109, 113-14 148-50, 163-68.)

6 See infra note 7.

2. Whether Babayan knew the representations were false when made, or whether Babayan made the representations in bad faith

a. Northwestern's contentions

Juries generally decide whether the insured's representations in her application were false and whether the insured knew that the representations were false, "because evaluating state of mind often requires the drawing of inferences from the conduct of parties about which reasonable people might differ." Justofin IV, 372 F.3d at ___, 2004 U.S. App. LEXIS 12853, at *15 (quotingRiehl v. Travelers Ins. Co., 772 F.2d 19, 24 (3d Cir. 1985)). Notwithstanding, under Pennsylvania law, a court may determine an insured's state of mind for purposes of summary judgment where

the circumstances preceding and attending the making of the statements may be such that the insured may be said to have been aware of their falsity at the time, or that an inference of fraud is otherwise irresistible, as for instance where an unreported illness or disability of the injured was so serious and so recent that he could not have forgotten it.

Provident Life, 1993 U.S. Dist. LEXIS 5030, at *18 (quotingEvans v. Penn Mutual Life Ins. Co., 186 A. 133, 138 (Pa. 1937)).

Northwestern contends that the uncontradicted testimony shows that Babayan was treated by at least six doctors for her back and knee disorders (Babayan Dep., Babayan's Ex. A, at 128-46) (referring to Drs. Kipp, Simscak, Javian, Sennett, Ford, Gaul, Purse, Lavovich, and Mino); that she underwent numerous tests therefor (Id. at 115-25); and that thirteen months before Babayan signed the application, the nonmedical questionnaire, and the paramedical questionnaire, she testified to the constant pain and disability the disorders had caused (Babayan Dep. of 1/7/00, Northwestern's Ex. Q). Babayan has testified that the undisclosed medical treatment and knee and back injuries, on which Northwestern relies for its rescission claim, were related either to the slip-and-fall accident or to the motor vehicle accident. (Babayan Dep., Babayan's Ex. A, at 221.)

b. Babayan's response

Babayan responds that while a jury could find her omissions suspicious, she contends that this would not be the only reasonable inference from this evidence. Babayan has testified that during the application process, she fully detailed the motor vehicle accident and slip-and-fall accident to Gallina, who advised her not to disclose those facts to Northwestern. According to Babayan's testimony, "[Gallina] said, that's far enough away. I don't think it will be a problem, but when you sign the medical waiver, [Northwestern] get[s] your records from your doctors and they'll find out that stuff." (Id. at 112-13.) Babayan argues that a reasonable jury could consider Gallina's alleged instructions not to report the particulars of the two accidents and his alleged reassurances that Northwestern would learn about those accidents anyway pursuant to Babayan's medical records waiver, and that a reasonable jury could conclude that Babayan did not believe that she answered the questions falsely at the time she completed the application.

In Justofin IV, supra, the Third Circuit reversed summary judgment granted in favor of the insurer, concluding that an insured's omissions, regarding her medical treatment, did not incontrovertibly establish her bad faith. 372 F.3d at ___, 2004 U.S. App. LEXIS 12853, at *15.⁷ In Justofin IV, the insured had seen her doctor (also her son) on a weekly basis over several years; her son prescribed Prednisone for her over this period. Id. When the insured applied for a policy in 1994, she disclosed her son's treatment. However, when the insured applied for a policy in 1999, the policy at issue in Justofin IV, she failed to disclose her son's treatment, an omission that the district court concluded was performed in bad faith. 372 F.3d at ___, 2004 U.S. App. LEXIS 12853, at *15-16. The insured's failure to disclose her prescription to Prednisone also seemed relevant to the district court, especially considering that the insured disclosed that she had been taking self-medicated Prednisone from many years before. 372 F.3d at ___, 2004 U.S. App. LEXIS 12853, at *16.

7 Babayan refers frequently in her opposition brief toJustofin v. Metropolitan Life Insurance Co., No. 01-6266, 2002 U.S. Dist. LEXIS 14154 (E.D. Pa. July 30, 2002) (hereinafter "Justofin I"). The Court instead refers to the Third Circuit's more recent holding in that case, Justofin IV, supra, which the Third Circuit issued after Northwestern's Moving Brief and five days prior to Babayan's response.
Before the Third Circuit issued its holding, the district court had issued three opinions: Justofin I, which Babayan cites in her opposition brief; 2002 U.S. Dist. LEXIS 20145 (E.D. Pa. July 29, 2002) (hereinafter "Justofin II"); and 2002 U.S. Dist. LEXIS 22465 (E.D. Pa. Oct. 22, 2002) (hereinafter "Justofin III"), which Northwestern cites in its moving brief, regarding whether Babayan can demonstrate Northwestern's bad faith (see infra Part IV.C), and which opinion the Third Circuit vacated and remanded in Justofin IV.
Northwestern refers to Justofin IV in its Reply Brief, filed July 8, 2004. As mentioned above, Babayan filed a Motion for Leave of Court to File a Supplemental Memorandum in Opposition; this supplemental memorandum discusses, inter alia, the Third Circuit's opinion.

In determining that the insured's state of mind could not so easily be determined as a matter of law, the Third Circuit hypothesized which other inferences a jury might reasonably draw from the evidence. The court wrote:

A jury might conclude that [the insured] did not think her son's casual visits were so important to report in her new application in great detail, especially when she had already disclosed that he was her personal physician and treating her for arthritis in her initial application, and when he had discontinued his weekly visits a year or two before the time of her new application. Furthermore, a jury might determine that [the insured] not only was unaware of the type of the arthritis she was suffering but also believed that further detail on the application, such as taking a particular drug, was unnecessary when she already stated that she had arthritis that was treated, inter alia, by a surgery. 372 F.3d at ___, 2004 U.S. App. LEXIS 12853, at *16-17. Even though the insured in Justofin IV had provided enough general information about her treatment and diagnosis such that a jury might reasonably forgive her for omitting certain specifics, Babayan contends that a reasonable jury still could rule in her favor, considering that she had allegedly disclosed the information to Gallina, withheld the information from Northwestern pursuant to Gallina's instructions, disclosed other medical information to Northwestern (e.g., the identity of her family doctor, her Bell's Palsy), and executed a medical waiver enabling Northwestern to learn her full medical history anyway. Considering how forgivingly the Third Circuit reviewed the record in Justofin IV, Babayan argues that her decision to omit medical background might not incontrovertibly indicate, as a matter of law, bad faith either.

In Justofin I, ⁸ the insured claimed that her failure to disclose that she believed she had Lupus was excusable and not indicative of bad faith, as she contended that she informed the insurance agent of her beliefs, and that the agent told her that the insurer already knew about the disease, thus rendering the information unnecessary to disclose. 2002 U.S. Dist. LEXIS 14154, at *8 n. 4. The district court considered the insured's statement to the agent with respect to the issue of the insured's intent, holding that the agent's suggestion not to disclose might be relevant to the issue of how the insured had interpreted the application, and whether the insured understood the application to require her, in order to answer truthfully, to disclose her belief that she had Lupus and was taking Prednisone. Id. at *17. Babayan has testified that her answers on her nonmedical and paramedical questionnaires were colored by Gallina's recommendations (Babayan Dep., Babayan's Ex. A, at 112-13), and that she did not believe that she was answering the questions falsely, in light of Gallina's instructions, at the time she completed the application (Id. at 224-25). But see Monarch Life Ins. Co. v. Donahue, 708 F. Supp. 674, 676 (E.D. Pa. 1989) (Katz, J.) ("By certifying the veracity of the representations made in the application by his signature, an insured is estopped not only from claiming that he was induced into making misrepresentations . . . but also from asserting that questions were not asked or that the answers given were not recorded properly."); Van Riper v. Equitable Life Assurance Soc., 561 F. Supp. 26, 33 (E.D. Pa. 1982) ("Under Pennsylvania law, plaintiff's failure to read his answers to the questions before certifying to their accuracy constitutes 'bad faith' and is fatal to his case.")

8 See supra note 7.

c. Northwestern's Response to the Third Circuit's Decision in Justofin

During oral argument, counsel were informed that the Third Circuit's recent decision in Justofin IV gives this Court pause, considering that in that case, as described above, the Third Circuit reversed a district court's entry of summary judgment for an insurer in the rescission context. To assuage the Court, counsel for Northwestern cited three grounds for distinguishing this matter from Justofin IV.

One, counsel argued that a different standard applies to matters involving life insurance policies, such as Justofin IV, than to matters involving disability income policies, such as this case. In particular, regarding the second element of the test for rescission, counsel contended that in the life insurance policy context, the insurer must demonstrate either the insured's knowledge that his answers were false or that the insured completed the application in bad faith, whereas in the disability income policy context, whether the insured completed the application in bad faith is immaterial. The Court is not convinced that this distinction need be made, and other courts within this district have not consistently recognized separate tests for the rescission of disability benefits insurance policies. Compare Am. Franklin Life Ins. Co. v. Gallati, 776 F. Supp. 1054, 1059 (E.D. Pa. 1991) (Pollak, J.) (second prong of test to rescind disability income policy allows demonstration of bad faith), with Friel v. Unum Life Ins. Co. of Am., No. 97-1062, 1998 U.S. Dist. LEXIS 18578, at *7-8 (E.D. Pa. Nov. 16, 1998) (Hutton, J.) (standard does not call for demonstration of insured's bad faith). Furthermore, as explained below, the Court concludes that Justofin IV can be factually distinguished from the instant matter such that the disability income/life insurance issue is not crucial to disposition of the pending Motion.

Counsel's other arguments for distinguishing this case were both factually based, namely that Babayan has admitted her failure to read the policies before signing and that Babayan has been deposed. The Court agrees that Justofin IV can be factually distinguished, but on grounds different than those cited by counsel for Northwestern.

The insured in Justofin IV had provided enough general information about her treatment and diagnosis such that a jury might reasonably forgive her for omitting certain specifics. Having considered these partial answers and the reasonable inferences possibly drawn therefrom, the Third Circuit concluded that the insured's state of mind had not been "incontrovertibly established," such that summary judgment would be appropriate. 372 F.3d at ___; 2004 U.S. App. LEXIS 12853, at *15-17. By contrast, in this case, Babayan flatly denied (through questions 14 and 33) having consulted any physicians or doctors for the accidents. The only reasonable inference possibly drawn from Babayan's answers to questions 14 and 33 is that Babayan in bad faith concealed her medical history from Northwestern by omitting information regarding both her motor vehicle accident (question 14) and her arthritis, sciatica, gout, or any disorder of the muscles, bones, joints, spine, back or neck (question 33). Babayan's answers to questions 36 and 36 appear to call for more subjective answers, such that inconsistencies in responses might not incontrovertibly establish bad faith, as a matter of law. However, the Court concludes that the answers to questions 14 and 33 are so significantly different that they permit the Court to conclude as a matter of law that Babayan intended to deceive the insurance company.⁹

9 By distinguishing this case from Justofin IV, this Court acts consistently with the Third Circuit's opinion. In determining that the insured's bad faith had not been incontrovertibly established in Justofin IV, the Third Circuit did not conclude that an insured's knowledge of misrepresentations and bad faith never could be inferred as a matter of law. Rather, the Third Circuit acknowledged that there inevitably would be circumstances where an insured's intent and bad faith could be determined through summary judgment. The Third Circuit favorably referred to Freedman v. Mutual Life Insurance Co. of New York, 21 A.2d 81 (Pa. 1941), holding, "We believeFreedman's finding of bad faith as a matter of law must be confined to the cases where 'the insured [falsely] denies in his answer that any physician has been consulted, or any medical or surgical treatment has been received during the period of inquiry.'" 372 F.3d at ___, 2004 U.S. App. LEXIS 12853, at *14 n. 10 (quoting Freedman, 21 A.2d at 84). It is beyond cavil that Babayan falsely denied in her answers to questions 14 and 33 that any physician had been consulted, or any medical or surgical treatment had been received during the period of inquiry.
Finally, assuming without deciding that Justofin IV arguably makes a departure from at least some previously decided cases on insurance coverage, the Court chooses to interpret the case narrowly, rather than expansively.

The Court concludes that this matter is more factually similar to American Franklin Life, a case in which an insurer sought to rescind a policy where the insured had misstated his medical history, income level, and job duties. In American Franklin Life, the insured disputed that he knowingly made the false statements or made them in bad faith, and he contended that the questions were answered falsely by the agent who had sold the policy. 776 F. Supp. at 1060. Similar to this case, the application in American Franklin Life contained a printed representation that the insured had read both the questions and the provided answers in the completed application, and that the answers given were, to the best of the insured's knowledge, were true and complete. Id.

In concluding that the insured was bound by his representation that he had reviewed and verified the contents of the application, the court in American Franklin Life held:

[The insured] has admitted that the application bearing his signature contains misrepresentations. Given this admission, [the insured] cannot, under Pennsylvania law, avoid responsibility for the misstatements appearing above his signature. If [the insured] did review the answers on the application, as is explicitly required by the application, then he must have realized that the application contained false statements. . . . Bad faith may therefore be inferred as a matter of law. The fact that [the insured] did not himself physically complete the application is immaterial; the statements may be imputed to [the insured] through the signed affirmation that [he] had read and attested to the truth of the contents of the application. . . .

On the other hand, if [the insured] did not review the application, but rather relied on [the agent] to provide appropriate answers, then [the insured's] act of singing the application constituted bad faith. Where an application includes an affirmation that the applicant has read and attests to the accuracy of the contents of the application, the applicant may not avoid the responsibility imposed by the application by signing a blank form and leaving it to another to fill in the appropriate responses.

Id. at 1060-61 (citations omitted).

In this case, Babayan has admitted that the application bearing her signature contains misrepresentations. The paperwork contained clauses that Babayan had reviewed and approved its content prior to signing. Either Babayan ignored her misrepresentations in reviewing the documents or Babayan failed to doublecheck her answers despite her assurances that she had done so. Whichever happened in this case, the Court concludes, as a matter of law, consistent with Justofin IV and American Franklin Life, that Babayan knew either that her representations were false when made or that her representations were made in bad faith.

3. Whether the representation was material to the risk being insured

"A misrepresented fact is material if being disclosed to the insurer it would have caused it to refuse the risk altogether or to demand a higher premium." N.Y. Life, 923 F.2d at 281. Northwestern contends that Babayan's answers to the medical and treatment questions were essential to the underwriter's ability to evaluate the degree and character of the risk and the decision to issue the Policy. Northwestern states that the Policy would not have been issued had Babayan truthfully reported her disorders and treatment in February 2001 when she applied to Northwestern for disability income insurance. (Kien Decl., Northwestern's Ex. V.)

Babayan does not dispute that an insured's representations about current or prior health and past treatment by a physician are material to the risk assumed by the insurer as a matter of law. Justofin II, 2002 U.S. Dist. LEXIS 20145, at *12 (quotingBerkshire Life Ins. Co. v. Aiello, No. 88-7927, 1989 U.S. Dist. LEXIS 9952, at *10 (E.D. Pa. Aug. 21, 1989)).¹⁰

10 See supra note 7.

However, Babayan contends that there are exceptions to the general rule that treatment by a physician is material as a matter of law, such that summary judgment might not be automatically granted. Babayan claims one such exception exists where an insurer waives its right to contest answers on an insured's application by virtue of the insurer's failure to investigate answers on the application. Justofin II, 2002 U.S. Dist. LEXIS 20145, at *12-19. Absent ambiguous, unresponsive, or incomplete answers, an insurer generally has no obligation to investigate the accuracy of an insurance application. See, e.g., Bujak v. Old Line Life Ins. Co., No. 97-3358, 1998 U.S. Dist. LEXIS 16831, at *4-6 (E.D. Pa. Apr. 14, 1998).

Insurers have a duty to investigate only in cases where inconsistencies on the face of the insurance application place the insurer on notice that the answers given in the application are incomplete or inaccurate. In such instances, an insurer may waive a defense of material misrepresentation if it fails to investigate. See Franklin Life Insurance Co. v. Bieniek, 312 F.2d 365 (3d Cir. 1962) (holding that insured's false answers to two questions on an insurance application were so clearly erroneous that the insurer waived its claim of materiality with respect to those answers when it failed to properly investigate them). However, the law is clear that, where an answer is ambiguous, an insurer waives only the right to contest the validity of that particular answer, and retains the right to contest the validity of any other misrepresentations made by the insured. Id. at 375.

Justofin II, 2002 U.S. Dist. LEXIS 20145, at *18.

Babayan posits that her contradictory responses to questions 36 and 37 of the nonmedical and paramedical questionnaires, despite the identical language of the questions themselves, placed Northwestern on notice that the answers given were incomplete or inaccurate. See supra Parts II.A-B. Babayan contends that these inconsistencies not only are "ambiguous" answers, but are "red flags" that should have signaled to Northwestern that her answers were either incomplete, incorrect, or inaccurate. Despite her knowledge of these inconsistent answers, Cynthia Guss, Northwestern's underwriter, performed absolutely no follow-up investigation of these answers at the time she reviewed Babayan's application. (Guss Dep., Babayan's Ex. H, at 34, 41-45.)

Northwestern's failure to investigate the inconsistencies is relevant as, in explaining its reasons for rescission, Northwestern cited Babayan's conflicting responses to questions 36(a) and 36(b). (Letter from Duller to Babayan of 8/21/02, Babayan's Ex. R.) Northwestern also cited Babayan's undisclosed medical history as further justification for its rescission decision. (Id.)

In its Reply Brief, Northwestern assumes arguendo that Babayan's answers for questions 36 and 37 were inconsistent. However, Northwestern emphasizes that in response to question 33(k), Babayan answered that she had not been treated for arthritis, sciatica, gout, or any disorder of the muscles, bones, joints, spine, back or neck in the past ten years, even though Babayan had undergone extensive treatment of her back, right leg, and right knee. Therefore, even if Northwestern has waived its right to contest the validity of questions 36 and 37, Northwestern retains the right to contest the validity of any other representations (e.g., question 33(k)). Justofin II, 2002 U.S. Dist. LEXIS 20145, at *18.

As stated above, the parties do not dispute that an insured's representations about current or prior health and past treatment by a physician are material to the risk assumed by the insurer as a matter of law. The only issue regarding materiality is whether Northwestern waived its right to challenge contradictory answers on Babayan's paperwork. The Court concludes that even if Northwestern has waived its ability to contest questions 36 and 37, Northwestern retains its right to challenge the Policy based on other consistent, yet incorrect answers (e.g., question 33). Northwestern has presented uncontested evidence that Northwestern would not have issued the Policy had Babayan accurately and truthfully answered question 33 at the time she signed the nonmedical and paramedical questionnaires. (Kien Decl., Northwestern's Ex. V, ¶ 10.) Therefore, the Court concludes as a matter of law that Babayan's misrepresentations were material to the risk being insured by the Policy.

B. Whether Northwestern Breached Contractual Obligations to Babayan

Northwestern disputes Babayan's assertion that she is entitled to disability insurance income benefits, and that Northwestern's failure to tender the benefits constitutes a breach of contract. Northwestern contends that it is entitled, as a matter of law, to rescind the contract, and that, as the Policy is voidab initio, there is no contract capable of breach. "Under Pennsylvania law, an insurance policy is void ab initio for misrepresentation when the insurer can establish that the insured knowingly or in bad faith made a false representation which was material to the risk being insured." Royal Indem. Co. v. Deli by Foodarama, Inc., No. 97-1267, 1999 U.S. Dist. LEXIS 3752, at *10 (E.D. Pa. Mar. 31, 1999). Because, according to Northwestern, it cannot be liable for breach of contract, Northwestern argues that it is entitled to summary judgment. The Court agrees with Northwestern. Having concluded that the Policy is void ab initio, see supra Part IV.A, the Court accordingly holds that there was no contract that Northwestern possibly could have breached, and will grant summary judgment in favor of Northwestern on this claim.

C. Whether Babayan Can Prove Bad Faith

Babayan seeks recovery for the bad faith denial of her insurance, to which she is entitled under Pennsylvania law, provided she can establish by clear and convincing evidence that Northwestern (1) lacked a reasonable basis for denying coverage, and (2) knew or recklessly disregarded its lack of a reasonable basis. Keefe v. Prudential Prop. Cas. Ins. Co., 203 F.3d 218, 225 (3d Cir. 2000). Babayan alleges as follows:

When Northwestern denied Kathleen Babayan's claim for disability benefits arising out of her Sjogren's Syndrome and primary biliary cirrhosis, [Northwestern] knew or should have known that [it] lacked a reasonable basis to deny Ms. Babayan's claim since at the time she applied for disability income insurance in February, 2001, she did not suffer from any undisclosed adverse medical condition.

Northwestern's failure to honor Kathleen Babayan's claim for disability benefits arising out of her Sjogren's Syndrome and primary biliary cirrhosis based upon allegedly undisclosed medical conditions evidences Northwestern's willful and reckless disregard in attempting to establish a reasonable basis for the denial of Kathleen Babayan's claim for benefits pursuant to the disability income insurance policy.

(Babayan's Am. Compl. ¶¶ 30-31.) Northwestern clarifies that it rescinded Babayan's policy; it did not deny benefits, as alleged.

1. Northwestern's Contentions

According to Northwestern, Babayan accuses the insurer of bad faith because the reasons for rescission were unrelated to the misrepresentations in the Policy. The fact that Babayan's disability is unrelated to the concealed conditions "is not controlling. The materiality of the statements went to the risk assumed, not to the loss incurred." Van Riper, 561 F. Supp. at 32 n. 6 (quoting Woods v. Nat'l Life Accident Ins. Co., 380 F.2d 843, 848 n. 12 (3d Cir. 1967)).

In the alternative, Babayan might attempt to establish bad faith on other grounds.¹¹ Babayan has produced an expert report, in which her expert, Dennison S. Doyle, opines that it is a "bad faith claim practice" for an insurer to wait until the time of claim to ask for information that it could have received had the insurer checked with the doctor or hospital at the time of underwriting. Northwestern claims that Doyle's report is inconsistent with Pennsylvania law, which holds that an insurer has no general obligation to investigate the accuracy of an insurance application.

11 If so, Northwestern contends that Babayan then would have to file a Second Amended Complaint that would provide the insurer with a fair idea of the basis of the bad faith claim. Babayan responds that she has sufficiently alleged a bad faith cause of action, but informs the Court that she would formally request leave to amend should the Court conclude that her Amended Complaint currently is insufficient. (Babayan's Opp'n Br., at 34.)

2. Babayan's Response

Babayan responds that Northwestern's decision to conduct post-claim underwriting of her application was performed in bad faith. Babayan admits that her research has not produced any reported Pennsylvania cases in which post-claim underwriting is analyzed in the context of Pennsylvania's bad faith statute, 42 PA. CONS. STAT. ANN. § 8371. Moreover, during oral argument, Babayan's counsel did not dispute that Pennsylvania law imposes no duty on insurers to conduct pre-claim investigation and underwriting.

Nevertheless, Babayan posits that, in evaluating an insurer's conduct under Section 8371, federal and state courts in Pennsylvania have considered: (1) other cases construing the statute and the law of "bad faith" generally; (2) the plain meaning of the term(s) used in the statute; and/or (3) other statutes upon the same or similar subjects. See, e.g., Cohen v. State Auto Prop. Cas. Co., No. 00-3168, 2001 U.S. Dist. LEXIS 1178, at *7 n. 3 (E.D. Pa. Feb. 8, 2001) (Waldman, J.). While Babayan has not discovered a case (favorable or not) that discusses post-claim underwriting in the context of Pennsylvania law, Babayan refers this Court to Lewis v. Equity Nat'l Life Ins. Co., 637 So. 2d 183, 188-89 (Miss. 1994), in which the Mississippi Supreme Court declared that post-claim underwriting was "patently unfair" to claimants who had continued paying premiums and who had failed to consult other insurers in reliance on their existing policies. In further support, Babayan also cites a law review article, Thomas C. Cady Georgia Lee Gates,Post Claim Underwriting, 102 W. VA. L.REV. 809 (2000) (describing post-claim underwriting as an "underwriting abomination," "an artificial vehicle for contract avoidance," and as "quintessentially opportunistic").

Babayan contends that the record unequivocally demonstrates that Northwestern practices post-claim underwriting. She refers to the deposition of Steven Kien, Standards Compliance Consultant for Northwestern, whose current position includes responsibilities consistent with underwriting decisions and underwriting analysis. (Kien Dep., Babayan's Ex. L, at 8.) Babayan contends that Kien's testimony apparently confirms that he was consulted to provide a post-claim underwriting review of her file. (Id. at 15-16.)

Kien testified that Northwestern "automatically performs" post-claim underwriting whenever a claim is filed within a "contestable time frame," i.e., the first two years of the policy. (Id. at 17.) According to Babayan, the only basis that Northwestern had for performing the post-claim review was merely the fact that Babayan submitted her claim within two years of her application. Moreover, Babayan contends (without support) that, standing alone, the "contestable time frame" standard is not a reasonable basis to select her claim (or, by implication, any claim) for post-claim underwriting.

Northwestern has its own standards for conduct post-claim review; Babayan has submitted a portion of Northwestern's "Disability Contestable Claim Guidelines," entitled "When to Conduct a Contestable Review." (Guidelines, Babayan's Ex. U.) The Guidelines state:

When considering whether an in-depth contestable review is necessary, these are some factors to consider:

Cause of disability. If the cause of disability is a condition that typically has a gradual onset or is likely to have been of longstanding duration, it is especially important to verify the health history provided on the application.

Information. Compare the information provided at time of claim regarding income, occupation duties, other disability insurance and avocations with the information provided on the application to determine if there are any inconsistencies and discrepancies that will require clarification. A disability that occurs accidentally does not preclude the possibility that material misrepresentations may have occurred in the application process.

(Id. at 4.)

Lisa Duller, Claims Analyst for Northwestern, confirmed that neither factor was present in Babayan's case, but that the post-claim review occurred notwithstanding. (Duller Dep., Babayan's Ex. I, at 52-54.) Babayan therefore concludes that not only did Northwestern perform a post-claim underwriting review of her claim, which already is allegedly demonstrative of Northwestern's bad faith, Northwestern contravened its own internal policies in reviewing Babayan's claim.

Babayan has filed two reports on post-claim underwriting, submitted by her expert, Dennison Doyle (Expert Reports, Babayan's Ex. V), to support her claim that Northwestern's post-claim underwriting practice constitutes bad faith. In both reports, Mr. Doyle opined:

Had the insurance company checked with the doctor or hospital at the time of underwriting they would have received the same information that they received at the time of claim. To wait until the time of claim to ask for the information is, in my opinion, a bad faith claim practice.

(Id.) Babayan contends that based upon the clear and convincing evidence of Northwestern's improper post-claim underwriting — e.g., Northwestern's disregard of internal policies dictating when to conduct reviews; Northwestern's decision to rescind despite its allegedly known lack of a reasonable basis; and Mr. Doyle's expert report equating Northwestern's practice with bad faith — there remains a genuine issue of material fact as to Northwestern's alleged bad faith, such that summary judgment should be denied.

3. Northwestern's Reply

Northwestern disputes that its decision to review Babayan's application constituted bad faith post-claim underwriting, and also disagrees that post-claim underwriting is ipso facto bad faith. Northwestern emphasizes that Babayan has not found any Pennsylvania precedent supporting her position, and refers to a case, issued not by the Mississippi Supreme Court (as is Babayan's case, Lewis, supra) but by the United States District Court for the Southern District of Mississippi, Wesley v. Union National Life, 919 F. Supp. 232 (S.D. Miss. 1995).

The court in Wesley, granted the insurer's motion for summary judgment, permitting rescission on account of false answers contained in the insured's application relating to, inter alia, medical treatment within the last three years. As in this case, it was undisputed in Wesley that the questionnaire answers were false and that the insurer would not have provided the same policy at the same premium had the questionnaire answers been truthful. 919 F. Supp. at 233. The plaintiff beneficiary sued for bad faith and breach of contract, contending that the insurer engaged in post-claim underwriting in violation of Mississippi law, relying on Lewis, supra. The court in Wesley rejected the argument, holding:

The Mississippi Supreme Court has defined post claim underwriting as an insurer's waiting until after the insured makes a claim to determine whether the claimant is eligible for insurance according to the risks he presents. Lewis v. Equity Nat'l Life Ins. Co., 637 So. 2d 183, 188-89 (Miss. 1994). The court has criticized this practice, reasoning that "an insurer has an obligation to its insureds to do its underwriting at the time a policy application is made, not after a claim is filed." Id. at 188-89. However, defendant did not engage in post-claims underwriting as defined in Lewis. The questions on the insurance application were one method for screening out applicants who presented unacceptable risks. Defendant made an underwriting decision not to insure applicants who answered "yes" to any of these questions. In answering three of these questions falsely, the insured bypassed defendant's underwriting process. The remedy provided by Mississippi law is for defendant to have the option to rescind the insurance policy as a whole. Defendant has properly exercised this legal right.

. . . Plaintiff would have this court impose liability on the defendant for accepting the insured's answers on his application as true and for denying coverage when the circumstances surrounding his death and the facts that were revealed by a subsequent investigation showed that he misrepresented facts that would have made him ineligible for the coverage.

919 F. Supp. at 235.

Northwestern also disputes whether its agents violated its own internal policies by reviewing Babayan's application even where the two listed factors (i.e., cause of disability and information) were admittedly not present. Northwestern claims that its guidelines list some factors that an examiner should consider when deciding whether an in-depth contestable review is necessary, and that these factors are neither described to nor understood by its analysts as being exclusive.

The Court agrees with Northwestern. However Mississippi might resolve allegations of bad faith post-claim underwriting, the parties indisputably have presented no precedent that originates in Pennsylvania on this matter. While there might be local precedent that supports Babayan's contention that Pennsylvania courts can consult the scholarship of other jurisdictions is deciding these issues, the inescapable conclusion is that no Pennsylvania law forbade Northwestern from conducting post-claim underwriting. As a federal court exercising its diversity jurisdiction and interpreting state law, the Court believes that it would be imprudent to graft Mississippi law onto these circumstances in order to empower Babayan to assail post-claim underwriting where it is unclear whether Pennsylvania courts even would permit her arguments. As for Babayan's allegations that Northwestern's review of her claim violated its own internal policies, the Court concludes that her contentions are unpersuasive for two reasons. One, given that Northwestern lists "cause of disability" and "information" as some factors to consider in deciding whether an in-depth contestable review is necessary, the Court concludes that an administrative decision to review a claim for reasons other than those suggested would not be inconsistent with Northwestern's internal procedure. Two, even were this Court to conclude that Northwestern failed to adhere to its own policies, Babayan has not produced any support for her proposition that an insurer's failure to follow its claim review policies would constitute bad faith.

V. Gallina's Motion for Summary Judgment

Gallina contends that he is entitled to summary judgment for two reasons: One, Pennsylvania law estops Babayan from pursuing a claim against Gallina; two, Babayan's claims against Gallina are foreclosed by the relevant statute of limitations.

A. Pennsylvania Law

1. Gallina's contentions

Gallina emphasizes that Babayan signed the February 11, 2001 application for disability insurance, effectively verifying that its contents were truthful and accurate. Babayan testified that she declined the opportunity to read the application before signing, as she was in a hurry and trusted that Gallina had recorded everything properly. (Babayan Dep., Babayan's Ex. A, at 81-85.) Gallina contends that Pennsylvania law clearly holds that where an applicant signs an insurance application, which includes an affirmation that the applicant has read and has verified its contents, the applicant cannot later avoid responsibility for any misstatements.

Gallina relies primarily on American Franklin Life Insurance Co. v. Gallati, 776 F. Supp. 1054 (E.D. Pa. 1991) (Pollak, J.) for this principle. In American Franklin Life, the insured submitted an application for a disability insurance policy which contained misrepresentations as to the applicant's prior medical history. The insured argued that the insurer did not have the right to rescind the policy because the alleged misrepresentations on the application were answered by the agent without the insured's knowledge or approval. Similar to the instant case, the insurance application in American Franklin Life contained a printed representation that the insured read both the questions and the answers contained in the completed application, and that the provided answers were, to the best of the insured's knowledge, true and complete. 776 F. Supp. at 1060. The court ruled in the insurer's favor, holding:

Where an application includes an affirmation that the applicant has read and attests to the accuracy of the contents of the application, the applicant may not avoid the responsibility imposed by the application by signing a blank form and leaving it to another to fill in the appropriate responses. See Kearnes v. Philadelphia Life Ins. Co., 401 Pa. Super. 292, 296, 585 A.2d 53, 54 (1991). Even if [the insured] provided appropriate answers to questions posed by [the agent], who then completed the form, [the insured's] subsequent failure to review the answers that [the agent] actually placed on the application, in order to correct what [the insured] now acknowledges to be errors contained therein, constituted bad faith.

Id. at 1061.

Gallina refers also to Monarch Life, supra, another case in which an insured submitted an insurance policy application that contained misrepresentations regarding the insured's prior medical history. The court in Monarch Life also ruled in favor of the insurer, holding that, "By certifying the veracity of the representations made in the application by his signature, an insured is estopped not only from claiming that he was induced into making misrepresentations, but also from asserting that questions were not asked or that the answers given were not recorded properly." 708 F. Supp. at 676.

Gallina therefore argues that Pennsylvania law, as detailed inAmerican Franklin Life and Monarch Life, is clear that Babayan cannot avoid responsibility for the inaccurate information appearing on the application that she admittedly signed. Gallina contends that the principles for which these cases stand bar Babayan from asserting any claim against him, as the Policy contained clauses which informed Babayan that by signing the application, she was verifying the veracity of its contents and that she would be held fully responsible for meeting Northwestern's requirements and providing truthful information, despite any action or inaction on Gallina's behalf.

2. Babayan's response

Babayan argues that Gallina's references to American Franklin Life and Monarch Life are irrelevant for purposes of his Motion, as those cases refer to an insurer's ability to rescind a policy, and not to an agent who has been accused of inaccurately filing an application. Babayan contends that, unlike the present matter, neither case cited by Gallina involved claims of negligence against the soliciting agent who procured the policy on behalf of the insured.

In American Franklin Life, the insured had joined the insurance agent as a third-party defendant under a theory of bad faith. 776 F. Supp. at 1062-63. However, unlike Babayan, the insured in American Franklin Life did not allege that the agent acted negligently in completing the insurance application. InMonarch Life, the insured had brought a claim against the agent accused of misrepresenting the insured's medical history on the insurance application. Though, that claim was not at issue in the opinion, and the court remarked that any claims against the agent were stayed pending completion of arbitration proceeding. 708 F. Supp. at 675.

Both of the cases Gallina cites deal strictly with an insurer's ability to rescind a policy based on fraudulent inducement and misrepresentation of the part of the insured. Here, Gallina is not an insurer. The claims against Gallina do not allege breach of contract or bad faith. Babayan argues that there is absolutely no basis, in either American Franklin Life or Monarch Life, for the proposition that an insurance agent cannot be found liable for his actions in soliciting and procuring an insurance application as a matter of law.

In light of Babayan's testimony that she informed Gallina of her past medical history, Babayan contends that a reasonable jury could return a verdict in her favor on her claim that Gallina was negligent in soliciting and procuring her disability insurance policy. Furthermore, because Gallina disputes whether he improperly recorded Babayan's medical information (Gallina Dep., Babayan's Ex. B, at 74-75, 88-89, 170-72, 199-200), this factual dispute is material, as a credibility determination must be made in order to decide which party testifies more credibly.

3. Analysis

At oral argument, Babayan's counsel eloquently argued that to enter summary judgment in favor of Gallina would effectively be to immunize all agents who stand accused of negligence and breach of fiduciary duty. However, in this case, where there is no dispute that Babayan falsely answered several material questions and admittedly signed her name without reading the document, a contrary result would immunize insurance applicants who misrepresent facts intentionally or negligently from any consequences. The applicant might misrepresent her personal history in her application, but could get a trial just by claiming the agent misled her. Neither the legislature nor any court appears to allow or endorse such a result, and this Court will not allow the facts of this case to proceed to trial under such a theory.

The Court agrees with Babayan that Gallina cites precedent not directly on point for purposes of the underlying case and Gallina's pending summary judgment motion. The cases that Gallina references (i.e., American Franklin Life, supra, and Monarch Life, supra) are factually distinguishable from this case, which concerns the legal relationship between an insurance agent and an insured whose policy is subsequently rescinded, whereas Gallina's cases refer to the legal relationship between an insurer and its insured. These cases would more appropriately be discussed in the context of Northwestern's Motion for Summary Judgment.¹² Notwithstanding Gallina's failure to buttress his motion with appropriate case law, the Court still will enter summary judgment against Babayan on her counts of negligence and breach of fiduciary duty.

12 In fact, the Court earlier discusses in depth Judge Pollak's opinion in American Franklin Life in relation to Northwestern's Motion for Summary Judgment. See supra Part IV.A.2.c.

a. Negligence

The Court concludes that Babayan has failed to produce sufficient evidence to create a genuine issue of material fact as to her claim that Gallina was negligent in the services he provided. Alternatively, the Court concludes that summary judgment is warranted as Pennsylvania law expressly precludes an intentional tortfeasor from obtaining contribution for her own willful conduct.

Under Pennsylvania law, Babayan only would succeed with her negligence claim should she demonstrate the following elements:

(1) a duty, or obligation, recognized by the law, requiring the actor to conform to a ceratin standard of conduct;

(2) a failure on his part to conform to the standard required;

(3) a causal connection between the conduct and resulting injury; and

(4) actual loss or damage resulting to the interests of another.

Provident Life Accident Ins. Co. v. Charles, No. 90-7584, 1993 U.S. Dist. LEXIS 5030, at *39 (E.D. Pa. Apr. 14, 1993). Babayan fails to meet her burden even on the first element.

In Pennsylvania, "[t]he duty of care owed to an insurance purchaser by an insurance agent on a claim of simple negligence is to obtain the coverage that a reasonably prudent professional insurance agent would have obtained under the circumstances."Amendolia v. Rothman, No. 02-8065, 2003 U.S. Dist. LEXIS 22719, at *18 (E.D. Pa. Dec. 8, 2003). An insurance broker is liable for any loss stemming from his negligence "unless the customer is also guilty of failure to exercise care of a reasonably prudent businessman for the protection of his own property and business which contributes to the happening of such loss." Consol. Sun Ray, Inc. v. Lea, 401 F.2d 650 (3d Cir. 1968) (quotation omitted), cert. denied, 393 U.S. 1050, 89 S. Ct. 688, 21 L. Ed. 2d 692 (1969).

In Provident Life, supra, the insurer brought an action for declaratory relief seeking rescission of a disability income insurance policy based on allegedly false statements regarding the insured's medical history. The insured counter-claimed for disability benefits and commenced her own third-party action, alleging negligence, against the insurance brokerage firm that had secured the policy. Similar to Babayan's allegations against Gallina, the insured in Provident Life claimed that the insurance agents had not adequately advised her when completing the application, and that had the agents properly counseled her, she would not have falsely answered the questions on the application. Id. at *33-34. Judge DuBois entered summary judgment in favor of the insurance firm, concluding that the insured had failed to present evidence supportive of her position that the agents had acted negligently in advising her. The court found that the insured "presented no evidence which supports her contention that [the brokerage firm] failed to act as an ordinary, reasonably prudent insurance broker under the circumstances." Id. at *41. The insured's only evidence in opposition was her certification, in which she repeated the allegations found in the third-party complaint, that the brokerage firm, inter alia, failed to alert the insured that the insurer could void the policy should the insured fail to list every doctor whom she had consulted in the previous five years. This certification, absent more corroborative evidence in the record, was insufficient to demonstrate a genuine issue of material fact. Id. at *42. See also Fennell v. Nationwide Mut. Fire Ins. Co., 603 A.2d 1064, 1067 (Pa.Super.Ct. 1992) (affirming summary judgment for an agent where the insurer "merely presented unsupported accusations" that the agent offered improper advice and that the insurer was underinsured as a result of this allegedly deficient advice).

Babayan has not produced any evidence that establishes the duty of care that Gallina, as an insurance agent, owed, let alone the breach of such a duty. Babayan offers nothing beyond her own deposition testimony that Gallina failed to record her answers properly (Babayan Dep., Babayan's Ex. A, at 90) and that Gallina advised her not to disclose information that ultimately led to Northwestern's decision to move for rescission (Id. at 112-13). "[A] plaintiff's unembellished, ad hoc statement at a deposition does not amount to evidence of the standard of conduct or a breach of duty, particularly a specialized duty such as that of an insurance broker." Kearns v. Minn. Mut. Life Ins. Co., 75 F. Supp. 2d 413, 423 (E.D. Pa. 1999) (granting summary judgment against an insured who had failed to produce evidence that his proposed standard was the standard of care applicable or prevailing among insurance brokers at the time). While Kearns involved an insured's claim against an insurance broker, whereas Gallina himself is an insurance agent, the Court concludes that whether Gallina is an agent or broker, the jury still would be left to speculate as to the standard of care and the duty owed by Gallina.

Alternatively, summary judgment is appropriate in this case, as Pennsylvania law expressly precludes an intentional tortfeasor from obtaining contribution for his own willful conduct.

It is well settled under Pennsylvania law that contribution among joint tort-feasors is based upon equitable principles which preclude an intentional tort-feasor from obtaining contribution for his own willful wrongdoing. Indemnity is likewise unavailable to an intentional tort-feasor because it would permit him to escape liability for his own deliberate acts.

Canavin v. Naik, 648 F. Supp. 268, 269 (E.D. Pa. 1986) (citations omitted). In this case, Gallina himself did not in isolation create the harm that Babayan suffered in having Northwestern rescind a policy for which she was not otherwise qualified. The record demonstrates that Babayan knowingly withheld relevant medical information on her application, her attestations as to accuracy notwithstanding.

b. Breach of Fiduciary Duty

In her Amended Complaint, Babayan alleges that Gallina owed her a fiduciary duty of good faith and fair dealing. (Babayan's Am. Compl. ¶ 36.) In particular, Babayan alleges:

By failing to reasonably evaluate Kathleen Babayan's claim for benefits pursuant to her disability income insurance policy with Northwestern, defendants breached their fiduciary duties to Kathleen Babayan.

By soliciting Kathleen Babayan to purchase disability income insurance but thereafter not using its best efforts to make certain that her disability claim was reasonably evaluated, defendant Gallina further breached his fiduciary duties to Ms. Babayan.

The breaches by defendants of their fiduciary duties to Kathleen Babayan were in conscious and/or reckless disregard of, and/or indifference to, the high degree of harm which they knew or should have known Ms. Babayan might suffer as a result.

(Id. ¶¶ 37-39.)

The Pennsylvania Supreme Court has recognized that "the utmost fair dealing should characterize the transactions between an insurance company and the insured." Dercoli v. Pa. Nat'l Mut. Ins. Co., 554 A.2d 906, 909 (Pa. 1989) (quotation omitted). A violation of the duty of good faith and fair dealing occurs wherever "1) there has been some type of purposeful misrepresentation and 2) 'the insurer voluntarily assumes to act as the insured's counsel.'" Falbo v. State Farm Life Ins. Co., No. 96-5540, 1997 U.S. Dist. LEXIS 2687, at *17 (E.D. Pa. Mar. 13, 1997) (quoting Miller v. Keystone Ins. Co., 636 A.2d 1109 (Pa.), cert. denied, 513 U.S. 874, 115 S. Ct. 202, 130 L. Ed. 2d 132 (1994)). Moreover, the plaintiff must show "that any breach of the duty of good faith and fair dealing occurred during the performance of the insurance policies in question — not at the time those policies were entered into." Id. at *21. Even were this Court to assume that Gallina's assistance in preparing Babayan's paperwork would satisfy the requirement that Gallina voluntarily assumed to act as Babayan's counsel, Gallina's assistance occurred exclusively during the formation stage of the Policy. Babayan therefore cannot demonstrate Gallina's breach of the duty of good faith and fair dealing, and Gallina is entitled to summary judgment on this count.

B. Statute of Limitations

1. Gallina's contentions

Gallina alternatively argues that Plaintiff's claims are barred by the applicable statute of limitations. In Pennsylvania,¹³ causes of action for negligence and for breach of fiduciary duty are subject to the two-year statute of limitations set forth in 42 PA. CONS. STAT. § 5524, which provides, in pertinent part:

13 As jurisdiction is based on diversity of citizenship, the law of the forum state, Pennsylvania, controls. Erie R.R. Co. v. Tompkins, 304 U.S. 64, 58 S. Ct. 817, 82 L. Ed. 1188 (1938). This includes the forum state's applicable statute of limitations. Walker v. Armco Steel Corp., 446 U.S. 740, 745, 100 S. Ct. 1978, 64 L. Ed. 2d 659 (1980).

The following actions and proceedings must be commenced with two years:

. . .

(7) Any other action or proceeding to recover damages for injury to person or property which is founded on negligent, intentional, or otherwise tortious conduct or any other action or proceeding sounding in trespass, including deceit or fraud. . . .

Id.

Gallina contends that Pennsylvania follows the "occurrence rule," that is, the limitations period for tort actions begins when the alleged breach of duty occurs.

In Pennsylvania, the occurrence rule is used to determine when the statute of limitations begins to run in a legal malpractice action. Under the occurrence rule, the statutory period commences upon the happening of the alleged breach of duty. Bailey v. Tucker, 533 Pa. 237, 251, 621 A.2d 108, 115 (1993). An exception to this rule is the equitable discovery rule which will be applied when the injured party is unable, despite the exercise of due diligence, to know of the injury or its cause. Pocono Raceway v. Pocono Produce, Inc., 503 Pa. 80, 85, 468 A.2d 468, 471 (1983). Lack of knowledge, mistake or misunderstanding will not toll the running of the statute. Id. 503 Pa. at 85, 468 A.2d at 471.

Robbins Seventko Orthopedic Surgeons, Inc. v. Geisenberger, 674 A.2d 244, 246-47 (Pa.Super.Ct. 1996).

Gallina argues that the only alleged negligence or breach of fiduciary duty possibly attributable to him occurred on February 11, 2001, when the disability insurance application was executed. Gallina therefore concludes that any cause of action arising out of that application should have been filed prior to February 11, 2003. Babayan did not commence the present lawsuit against Gallina until December 24, 2003.¹⁴

14 The Court notes that Babayan filed her original complaint against Northwestern and Joseph M. Savino on March 17, 2003.

2. Babayan's response

Babayan does not dispute that a two-year statute of limitations applies to her claims against Gallina; nor does Babayan dispute that Pennsylvania courts follow the occurrence rule in civil malpractice actions. However, Babayan argues that Pennsylvania's exception to the occurrence rule — the equitable discovery rule — applies to this matter, permitting her claim against Gallina to proceed. As stated above, the equitable discovery rule applies when the injured party is unable, despite the exercise of due diligence, to know of the injury or its cause. Robbins, 674 A.2d at 246-47.

Babayan contends that, although Gallina's allegedly negligent conduct (i.e., the failure to record properly and accurately Babayan's answers) occurred on February 11, 2001, under the principles of the equitable discovery rule, Babayan's cause of action against Gallina did not arise until Northwestern rescinded the Policy on August 21, 2002. Babayan contests that the statute of limitations began to run at the time she met Gallina and he completed her application, as Babayan had no discernible cause of action against Gallina at that time. According to Babayan, "[t]he true test in determining when a cause of action accrues is to establish the time when the plaintiff could have first maintained the action to a successful conclusion." Kapil v. Ass'n of Pa. State Coll. Univ. Facilities, 470 A.2d 482, 485 (Pa. 1983).

Babayan argues that she could not have instituted suit against Gallina at the moment of application because she could not have proved damages then (nor had she suffered any damages until Northwestern later rescinded the Policy). "Proof of damages is an essential element of any negligence claim." Home Indem. Co. v. Alexander Alexander, Inc., No. 89-7715, 1990 U.S. Dist. LEXIS 15675, at *8 (E.D. Pa. Nov. 21, 1990). In most cases, a cause of action in negligence "accrues at the time of the act or the failure to act upon which the claim is based, or when a plaintiff could have first maintained the action to a successful conclusion." Id. (citation and quotation removed). However, this approach does not adequately apply where proof of damages is not readily apparent to the harmed party, as it would be unfair to expect a party to initiate suit where, even with the exercise of due diligence, the party could not possibly realize its damages. Pennsylvania courts have accordingly recognized, as an exception to the general "occurrence rule," a "discovery rule" exception, which "arises from the inability of the injured, despite the exercise of due diligence, to know of the injury or its cause." Id. (quoting Pocono Int'l Raceway, Inc. v. Pocono Produce, Inc., 468 A.2d 468, 471 (Pa. 1983)).

In this case, Babayan alleges that she suffered no damages until the date of her denial of benefits and rescission of the Policy. Babayan's cause of action could not have accrued on February 11, 2001, because, in the absence of damages, Babayan would not have been able to "maintain her action to a successful conclusion." Babayan contends that she was whole (or so she would have thought, in the exercise of due diligence), up and until Northwestern rescinded the Policy. Babayan argues that it would be unfair to conclude that her cause of action against Gallina accrued on February 11, 2001, as no degree of due diligence on her part could have uncovered that Northwestern later would seek to rescind the Policy due to Gallina's alleged inaccuracies.

Moreover, Babayan argues that it would be unfair to expect her to have realized Gallina's errors until she attempted to make a claim under the Policy, as Babayan had been paying her premiums to Northwestern, and as the Policy had been issued and seemingly intact. Only upon Babayan's attempt to make a claim under the Policy did Northwestern begin its investigation into Babayan's coverage, which ultimately led to Northwestern's decision to rescind.

Babayan also notes that counsel for The Savino Group, who is also counsel for Gallina, stipulated to Babayan's filing of her Amended Complaint, without raising an objection at that time that Babayan's amendment was improper or untimely.

3. Analysis

During oral argument, Gallina's counsel referred the Court toMurphy v. Saavedra, 746 A.2d 92 (Pa. 2000), for the proposition that the equitable discovery rule does not apply wherever the plaintiff has the ability to ascertain the cause of action and to institute the suit within the applicable statute of limitations. The Court notes that the Pennsylvania Supreme Court split evenly in Murphy on the issue whether the discovery rule applies wherever the plaintiff ascertains her injury prior to the expiration of the statute of limitations.¹⁵ While the evenly split court served to affirm the lower court's entry of summary judgment in favor of the defendant, the opinion itself has no precedential authority under principles of stare decisis. See Commonwealth v. Covil, 378 A.2d 841, 844 (Pa. 1977).

15 Even prior to Murphy, the Pennsylvania Supreme Court split evenly on the issue whether the discovery rule applies where the plaintiff belatedly ascertains an injury before the applicable statute of limitations would have expired. Baumgart v. Keene Bldg. Prods. Corp., 666 A.2d 238 (Pa. 1995).

Even though this Court should not confidently cite Murphy for its interpretation of the discovery rule, the Court still can rely on previous decisions of the Pennsylvania Supreme Court relevant to this matter. In Pocono International Raceway, Inc. v. Pocono Produce, Inc., 468 A.2d 468 (Pa. 1983), the Pennsylvania Supreme Court held that an action was time-barred where the plaintiff had the ability to ascertain the injury within the statutory period, but failed to file suit within the applicable statute of limitations. The plaintiff's belated discovery of its injury did not create another two-year statute of limitations, as the plaintiff still could have instituted suit within the original two-year period. 468 A.2d at 471.

According to the record, Gallina submitted Babayan's application on February 11, 2001, and Babayan realized that Northwestern rejected her claim on August 21, 2002, still within the original two-year statute of limitations for bringing her claim against Gallina. Pursuant to Pocono International, Babayan is not entitled to a renewed limitations period, and her claims against Gallina cannot continue.

VI. Conclusion

Kathleen Babayan deliberately misrepresented her medical history in her application for a disability income insurance policy. It is uncontested that Northwestern would not have approved the policy had Babayan answered truthfully in her application, that Northwestern would have been justified in rejecting that application, and is now entitled to rescission. Babayan has filed claims against the insurance agent whose advice allegedly prompted Babayan not to disclose her medical history, but these claims must also be rejected, as Babayan has failed to demonstrate a genuine issue of material fact for trial or, alternatively, because Babayan has failed to institute suit against Gallina within the applicable limitations period.

An appropriate Order follows.

ORDER

AND NOW, this 25th day of August, 2004, upon consideration of Northwestern's Motion for Summary Judgment (C.A. No. 03-717, Docket No. 38), it is hereby ORDERED that Northwestern's Motion is GRANTED.

Upon consideration of Gallina's Motion for Summary Judgment (C.A. No. 03-1622, Docket No. 36), it is hereby ORDERED that Gallina's Motion is GRANTED.

All other outstanding Motions are DENIED AS MOOT.

Judgment is granted in favor of The Northwestern Mutual Life Insurance Company and Thomas Gallina, and against Kathleen L. Babayan.