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State Farm Mut. Auto. Ins. Co. v. Armstrong

filed: November 19, 1991.


On Appeal from the United States District Court for the Eastern District of Pennsylvania; D.C. Civil Action No. 88-3088.

Cowen, Nygaard and Higginbotham,*fn* Circuit Judges.

Author: Nygaard


Appellant State Farm Mutual Automobile Insurance Company sought a judgment declaring a compulsory automobile insurance policy issued by it under the Pennsylvania Assigned Risk Plan, and upon which several third-party claims had been made, to be void ab initio and rescindable on the basis of a fraud or material misrepresentation made by the policyholder. After a non-jury trial, the district court entered an order granting judgment against State Farm. State Farm appeals. We have held this case c.a.v. pending the decision of the Pennsylvania Supreme Court in Klopp v. Keystone Insurance Companies, et al., Pa. , 595 A.2d 1 (Pa. 1991). After consideration of the Pennsylvania Supreme Court decision in Klopp, and the supplemental briefs submitted by the parties, we will affirm. We predict that the Pennsylvania Supreme Court would not recognize an insurance company's common law right to rescind benefits payable to innocent third parties under an assigned risk policy on the basis of a fraud or material representation made by the policyholder.


State Farm is an insurance company incorporated in Illinois and doing business in Pennsylvania. Defendants Towns and Thomas are residents of Pennsylvania. Defendant Fidelcor is incorporated in Delaware, has its principal place of business in Maryland, but does business in Pennsylvania.

On November 12, 1987 a man identifying himself as William J. O'Brian ("O'Brian," or "the policyholder") leased a 1987 Nissan Maxima, owned by Fidelcor, from a Pennsylvania automobile dealer. O'Brian applied to the Pennsylvania Automobile Insurance Plan for insurance which assigned the application to State Farm. In a routine inquiry by State Farm into O'Brian's driving history, the Pennsylvania Department of Transportation reported that the drivers license number on the application did not match the applicant's name. State Farm nonetheless issued an Assigned Risk policy to O'Brian around December 1986, which remained in effect until March 1988.

It is undisputed, and the district court so found, that O'Brian made material misrepresentations on his application for the Assigned Risk policy. On the application, O'Brian represented that his name was "William J. O'Brien." This name did not correspond to the drivers license number on his application. He also used the name "William J. O'Brien" in correspondence and conversations related to this vehicle and the accident.

State Farm made repeated attempts to contact O'Brian to get a correct drivers license number and address. O'Brian did telephone State Farm and give them an address, which was also false. Although State Farm never received the correct information, it did receive two premium payments from O'Brian in 1987. State Farm did not inquire about the O'Brian discrepancy with either the lessor dealership or Fidelcor. Indeed, State Farm made no attempt to terminate the policy until it lapsed for nonpayment of premiums on June 17, 1987. On March 4, 1988 State Farm rescinded the policy and refunded all premiums to the policyholder.

Meanwhile, on April 21, 1987 the Nissan Maxima was involved in an accident causing bodily injury to its passengers and to parties in another vehicle. The Nissan, which was being driven by Sylvia Armstrong, also sustained extensive damage. Towns and Thomas were passengers in it.

State Farm sued, seeking a declaratory judgment that: (1) the policy issued by State Farm was void ab initio and/or rescinded; (2) the policyholder made material misrepresentations that State Farm relied upon to its detriment; and (3) State Farm does not owe any obligation to any party arising out of the policy. There is a real Mr. O'Brian who disclaimed by affidavit any connection with the lease of the vehicle. The "policyholder O'Brian" cannot be found and the district court entered default judgment against him. Following a non-jury trial, the district court entered judgment in favor of defendants Towns, Thomas, and Fidelcor and against State Farm on all counts. The district court made findings of fact and conclusions of law, and held that State Farm has no common law right to rescind third-party benefits under this Assigned Risk Plan automobile insurance policy.

We exercise plenary review over the district court's interpretation of the statute, Chrysler Credit Corp. v. First National Bank and Trust Co., 746 F.2d 200, 202 (3d Cir. 1984); its conclusions of law, Dent v. Cunningham, 786 F.2d 173, 175 (3d Cir. 1986); and its prediction of statutory law, Compagnie des Bauxites de Guinee v. Insurance Co. of North America, 724 F.2d 369, 371 (3d Cir. 1983).


The issue presented us is whether State Farm may rescind this fraudulently procured policy and thereby deny recovery for injured third parties. The Pennsylvania Supreme Court has not decided this precise issue. Hence, we must predict how the court would decide the issue if presented to it. Commissioner of Internal Revenue v. Estate of Bosch, 387 U.S. 456, 465, 87 S. Ct. 1776, 1783, 18 L. Ed. 2d 886 (1967); Robertson v. Allied Signal, Inc., 914 F.2d 360, 378 (3d Cir. 1990). Our role is not to form or create state law but to decide the case as we believe it would have been decided by the state's ...

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