On Appeal from the United States District Court for the Eastern District of Pennsylvania; D.C. Civil No. 89-3379.
Sloviter, Mansmann, Circuit Judges, and Dickinson R. Debevoise, District Judge.*fn*
DEBEVOISE, District Judge
This is an appeal from the district court's dismissal of the complaint of plaintiff/appellant New York Life Insurance Company ("New York Life"). Pursuant to 28 U.S.C. § 2201, New York Life had sought a judgment declaring that a $50,000 insurance policy it had issued on the life of Kirk Johnson, the deceased son of defendant/appellant Lawrence T. Johnson, Sr. ("Mr. Johnson"), was void ab initio because it had been induced by fraud.
At a hearing on cross-motions for summary judgment and at the trial before the district court it was undisputed that: (i) Kirk Johnson stated in his application for the insurance policy that he had not smoked in the previous twelve months and that he had never smoked cigarettes. (ii) Those statements were false, and in fact Kirk Johnson had smoked since 1973 and during the month he applied for the policy he was smoking approximately 10 cigarettes per day. (iii) Both Kirk Johnson and Mr. Johnson, who was present when the application was completed, knew that the statements were false. (iv) Kirk Johnson's smoking practices were material to the risk which was assumed by New York Life when it issued the policy, because it relied upon his statements when it established the premiums to be paid. After the trial the district court found that had New York Life been informed of the true facts it would have issued a $50,000 life insurance policy on the life of Kirk Johnson but that the premium rate would have been in a higher amount readily ascertainable from an exhibit in evidence.
This is a diversity of citizenship case requiring application of Pennsylvania law. The district court concluded, and the parties agreed, that under Pennsylvania's conflict of laws rule Pennsylvania substantive law is applicable. The decided Pennsylvania cases have held that an insurance policy obtained by means of a material misrepresentation will, if challenged within the period of contestability, be declared void ab initio.*fn1 No Pennsylvania court has applied this rule in the context of a misrepresentation of smoking habits.
The district court predicted that in a smoking misrepresentation case where the insurance carrier would have issued a life insurance policy at an ascertainable higher premium if supplied with the correct smoking information, the Pennsylvania courts would not apply the "Draconian" remedy of voiding the policy ab initio. Rather, the district court concluded, in the present case either the Pennsylvania courts would reduce the proceeds of the policy by the amount by which the premium would have been enlarged had New York Life known of Kirk Johnson's smoking history or else the Pennsylvania courts would reduce the face amount of the policy to that amount of insurance that would have been purchased by the amount of premiums that were in fact paid. The district court recognized "that [this] rule that seems to me a proper and equitable one has no support in any of the decided jurisprudence" and that "the smoking cases, albeit not Pennsylvania cases, are exactly to the contrary of my view." (Bench Op. at A-377).
A district judge's prediction of state law is a determination of law as to which our review is plenary. Compagnie Des Bauxites De Guinee v. Insurance Co. of N. Am., 724 F.2d 369 (3d Cir. 1983). An examination of the pertinent Pennsylvania cases and cases from other jurisdictions leads us to conclude that the district court did not predict correctly what the Pennsylvania courts would do in the circumstance of this case. We conclude that Pennsylvania law requires that the policy in question be declared void ab initio.
The facts are undisputed. They were established by a comprehensive stipulation by the parties, documentary evidence and the testimony of the only witness, Mr. Johnson's expert David T. Warner, a retired insurance company executive.
Kirk Johnson applied for life insurance with New York Life on October 7, 1986. Question 12 of the application required him to provide information as to his past and present smoking habits. In answer to the question he represented that he had not smoked in the past twelve months and that he had never smoked cigarettes. Just above Kirk Johnson's signature at the end of the application is the statement that "all of the statements which are part of the application . . . are complete and true to the best of the knowledge and belief of those persons who made them."
The true facts were that Kirk Johnson had smoked for thirteen years and that during the month that he applied for the policy he was smoking approximately 10 cigarettes per day. Both Kirk Johnson and his father, Mr. Johnson, were aware of the facts. Had New York Life known these facts it would have offered a life insurance policy to Kirk Johnson, but the premium it would have demanded would have been substantially higher.
Kirk Johnson died on July 17, 1988, within two years of the application for insurance, for reasons unrelated to smoking. Mr. Johnson, the beneficiary, filed a claim for the proceeds of the policy. New York Life investigated and learned of the misrepresentations. It denied the claim and sought to effect rescission by tendering to Mr. Johnson a check for the premiums paid under ...