Plaintiffs filed a complaint for breach of contract and breach of the implied covenant of good faith and fair dealing against Old Line in the Superior Court of Santa Clara County on July 17, 1996. Defendant Old Line timely removed this action to federal court on the basis of diversity jurisdiction. On September 11, 1996, Old Line filed a third party complaint against the remaining beneficiary, Norry Beth Carrel, seeking declaratory judgment that the policy is void by virtue of Mr. Casey's alleged misrepresentation and concealment of material facts in his insurance application and that Ms. Carrel is not entitled to any life insurance benefits under the Policy.
III. SUMMARY JUDGMENT STANDARDS
Summary judgment is proper "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 judgment as a matter of law." Fed.R.Civ.P. 56(c). The moving party bears the initial burden of demonstrating the absence of a genuine issue of material fact. Celotex Corp. v. Catrett, 477 U.S. 317, 323, 106 S. Ct. 2548, 2553, 91 L. Ed. 2d 265 (1986). If the moving party will bear the burden of proof on an issue at trial, either because it is the plaintiff or, as a defendant, is asserting an affirmative defense, it must establish beyond controversy all of the essential elements of the claim or defense. See Fontenot v. Upjohn Co., 780 F.2d 1190, 1194 (5th Cir. 1986). However, the moving party has no burden to negate or disprove matters on which the non-moving party will have the burden of proof at trial. The moving party need only point out to the court that there is an absence of evidence to support the non-moving party's case. Celotex, 477 U.S. at 325, 106 S. Ct. at 2554.
The burden then shifts to the non-moving party to "designate 'specific facts showing that there is a genuine issue for trial.'" Id. at 324, 106 S. Ct. at 2553 (quoting Rule 56(e)). To carry this burden, the non-moving party must "do more than simply show that there is some metaphysical doubt as to the material facts." Matsushita Electric Industrial Co., Ltd. v. Zenith Radio Corp., 475 U.S. 574, 586, 106 S. Ct. 1348, 1356, 89 L. Ed. 2d 538 (1986). "The mere existence of a scintilla of evidence . . . will be insufficient; there must be evidence on which the jury could reasonably find for the [non-moving party]." Anderson v. Liberty Lobby, Inc., 477 U.S. 242, 252, 106 S. Ct. 2505, 2512, 91 L. Ed. 2d 202 (1986). Evidence that "is merely colorable, or is not significantly probative," is not sufficient to avoid summary judgment. Id. at 249-250, 106 S. Ct. at 2511.
Summary judgment cannot be granted where a genuine dispute exists as to any material fact. Rule 56(c), F.R.Civ.P. A "material" fact is one which might affect the outcome of the case under the applicable law. Id. at 248, 106 S. Ct. at 2510. A dispute about a material fact is genuine if a reasonable jury could return a verdict for the non-moving party. Id. In deciding a motion for summary judgment, the evidence is viewed in the light most favorable to the non-moving party, and all justifiable inferences are to be drawn in its favor. Id. at 255, 106 S. Ct. at 2513. Moreover, "credibility determinations, the weighing of the evidence, and the drawing of legitimate inferences from the facts are jury functions, not those of a judge [when] he is ruling on a motion for summary judgment." Id.
A. First Claim for Breach of Insurance Contract
Defendant Old Line contends that it had the right to rescind the policy of insurance issued to John Casey based upon misrepresentations made by Casey in his application for life insurance. Old Line contends that John Casey had a duty to inform Old Line of his treatment at Ross Hospital for alcoholism and benzodiazepine abuse, which occurred two weeks after he completed Part B of the application. Old Line relies upon two provisions of the insurance application to support its contention that John Casey had a duty to inform Defendant of his treatment at Ross Hospital: (1) Part A's statement above Casey's signature, which states, "It is represented that all statements in this application are true, full and complete, and bind all parties in interest under any policy applied for"; and (2) the "continued insurability" or "good health" provision of the same part, which states, "A contract of insurance shall take effect only if a policy is issued on this application and the first premium is paid in full (a) during the lifetime of all proposed insureds and (b) while there is no change in the insurability and health of all such persons from that stated in this application."
Plaintiffs contend that John Casey honestly responded to all questions in Part B of the application when he answered these questions on May 21, 1992. Plaintiffs point out that the application only asked John Casey whether he received treatment or joined an organization for alcoholism or drug dependency, and not whether he had a history of alcoholism. Plaintiffs contend that neither the Stanford University Hospital Records nor the Marin County Hospital Records disclose any such treatment prior to the date Part B was completed. Plaintiffs also assert that Part A of the application did not clearly request information concerning any changes or updates in the health of the insured, but simply sets forth the conditions for the contract of insurance to take effect. Plaintiffs assert that this application is ambiguous to the lay insured, and that Mr. Casey could have reasonably understood that he was simply reaffirming the answers given on his prior application as of the time they were made on May 21, 1992. Plaintiffs also assert that Mr. Casey may not have realized that any change in his health was "material," as a result of his stay at Ross Hospital, and that Casey's second blood test, which indicated no health-related problems, was "an improvement of health relative to the prior blood test" and that "a reasonable person could fairly assume that the second blood test provided all the information needed by Old Line Life to answer its underwriting questions." Opposition to Motion for Summary Judgment, p. 17. Finally, Plaintiffs challenge Defendant's contention that the statement in the application was "material" and asserts that the trier of fact is "not required to believe the 'post mortem' testimony of an insurer's agents that insurance would have been refused had the true facts been disclosed."
Three factors are reviewed in determining whether an insurance company has the right to rescind a policy, which are: (1) that the applicant made a misrepresentation; (2) that the misrepresentation was material; and (3) that the applicant knew that he made a material misrepresentation. Trinh v. Metropolitan Life Ins. Co., 894 F. Supp. 1368, 1372 (N.D.Cal.1995).
1. Misrepresentation by the applicant
"It is generally held that an insurer has a right to know all that the applicant for insurance knows regarding the state of his health. Material misrepresentation or concealment of such facts are grounds for rescission of the policy, and an actual intent to deceive need not be shown." Thompson v. Occidental Life. Ins. Co., 9 Cal. 3d 904, 915, 916, 109 Cal. Rptr. 473, 513 P.2d 353 (1979). However, the burden of proof is on the insurer to establish concealment or misrepresentation, which includes negating possible excuses or explanations offered by the plaintiffs for the misstatement or omissions in the insured's application. Id. at 919.
In this case, there is not sufficient evidence to find, as a matter of law, that John Casey made any misrepresentations at the time he answered the questions set forth in Part B of the Application on May 21, 1992. Although the medical records from Stanford University Hospital and Ross Hospital indicate a history of alcoholism both before and after John Casey's paramedical exam, the records do not reveal that John Casey was treated or joined an organization for alcoholism or drug dependency prior to May 21, 1992. Therefore, no evidence before this court would establish that John Casey lied on his application on May 21, 1992.
It is undisputed that John Casey entered Ross Hospital on June 4, 1992, approximately two weeks after he filled out Part B of the application, and received treatment for alcoholism and benzodiazepine abuse. It is also undisputed that he did not disclose this hospitalization or treatment to Old Line. If John Casey had a continuing duty to correct any material misstatements in Part B of his application for insurance, then failure to inform Old Line that decedent had received treatment for alcohol and drug dependancy could constitute a misrepresentation on the insurance application.
The Ninth Circuit has set forth the applicable requirements of disclosure by an insured to an insurer under California law in Miller v. Republic National Life Ins. Co., 789 F.2d 1336, 1339 (9th Cir. 1986):
Under Cal. Ins. Code § 330 (Deering 1976), "neglect to communicate that which a party knows and ought to communicate, is concealment." Section 332 requires in pertinent part that "each party to a contract of insurance ... communicate to the other, in good faith, all facts within his knowledge which are or which he believes to be material." Sections 330 and 332 on their face, however, do not speak to the time period during which the duty to disclose exists. The court in Security Life Insurance Co. v. Booms, 31 Cal. App. 119, 122, 159 P. 1000, 1001 (1916), looked to the predecessor of section 356 to provide an answer. Section 356 states, as did its predecessor, that "the completion of the contract of insurance is the time to which a representation must be presumed to refer." Accordingly, the Booms court held that the various representations in the application were to be considered to be representations as to the applicant's health at the time the insurance contract was completed, not merely at the time the application was filled out. Thus, in order to avoid making false representations at the time of completion, the applicant had a duty to disclose any material changes in her health that occurred between the time the application was filled out and the time the contract was completed.
The presumption in section 356 is a rebuttable one, however, and it is a question of fact whether it has been rebutted. See Metropolitan Life Ins. Co. v. Devore, 66 Cal. 2d 129, 137, 56 Cal. Rptr. 881, 886, 424 P.2d 321 (1967). Thus, if the presumption is rebutted, and the representations in the application in fact refer to an earlier time than the completion of the contract, under the Booms rule the duty to disclose will end at a time before the completion of the contract. (emphasis added.)
John Casey's statements in Part B of his application that he had not undergone treatment for alcoholism or drug dependency or abuse are presumed to have been representations of his state of health as of the date the contract was completed, not just the date he answered the questions. Plaintiffs must raise a genuine issue of material fact that shows this presumption can be rebutted and that John Casey's duty of disclosure ended at a time before the completion of the contract.
Defendant Old Line contends that Part A's statement that "it is represented that all statements in this application are true, full and complete, and bind all parties in interest under any policy applied for," together with the "good health" or "continued insurability" clause placed Casey on notice that he was obliged to correct his application responses to 3a and 3b of Part B. Plaintiffs contend that the "good health" or "insurability" clause is ambiguous, and the application could be interpreted as affirming that the statements in the application were true when made (i.e., May 21, 1992 for response solicited in Part B).
It is a well-settled rule that all ambiguities must be interpreted against the insurer. Metropolitan Life Insurance Co. v. Devore, 66 Cal. 2d 129, 136, 56 Cal. Rptr. 881, 424 P.2d 321 (Cal. 1967). However, courts "will not engage in strained or tortured interpretation of the terms of an insurance contract in order to fabricate an ambiguity where none exists." Lunardi v. Great-West Life Assurance Co., 37 Cal. App. 4th 807, 820 (1995). While rebutting the presumption of section 356 is generally regarded as an issue of fact, contract interpretation is a question of law. Therefore the issue of whether the application is ambiguous and supports Plaintiffs' asserted interpretation is amenable on a motion for summary judgment.
In this case, Part A of the application unambiguously informed the applicant that the entire insurance application consisted of Part A and one or more of Parts B and that a contract of insurance would only take effect if the first premium is paid in full "while there is no change in the insurability and health of all such persons from that stated in the application." The provision then seeks an affirmation that all statements in the application are true, stating, "It is represented that all statements in this application are true, full and complete, and bind all parties in interest under any policy applied for."
This provision unambiguously informs the insured that two conditions must be satisfied before an insurance policy will take affect. First, the applicant must pay the first premium in full, and second, there must not be any change in the insurability or health of the applicant from that stated in the application (defined as Parts A and B). The applicant then signs the application, affirming that all statements in the application are "true, full and complete" and bind all parties in interest. There is nothing in the language of the application or the circumstances under which John Casey completed Part A of the application that could rationally be interpreted as affirming the veracity of the questions in Part B only as of the date these questions were answered, or support the interpretation that an applicant need not inform the insurance company of any material changes in his response to the application questions. Even if the term "insurability" could be construed as unclear to a lay person, the requirement that there be no change in the health of the applicant from that stated in the application is clear.
In Lunardi, the court of appeals found that a similar "continued good health" provision as that contained in Part A of Old Line's application was not ambiguous, despite typographical errors, and that it "informed the applicant that the answers to those questions in the application must still be true when the policy is delivered." The provision at issue in Lunardi, which was signed approximately six months before the applicant's diagnosis of leukemia but before the insurance premium was paid and policy was issued, provided:
All statements and answers to the questions made in this application and any supplements to it are true and complete to the best of my knowledge and belief. ... no insurance under this application shall take effect unless a policy has been delivered while there has been no material change, to the best of my knowledge, in the answers and statements continued (sic.) in this application and any supplements to it. 37 Cal. App. 4th at 814, 815.