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Northwestern Mutual Life Insurance Co. v. Babayan

November 30, 2005; as amended December 12, 2005


On Appeal from the United States District Court for the Eastern District of Pennsylvania. (D.C. Nos. 03-cv-00717 and 03-cv-01622) District Judge: Honorable Michael M. Baylson.

The opinion of the court was delivered by: Fisher, Circuit Judge.


Argued October 26, 2005

Before: SLOVITER, FISHER, and GREENBERG, Circuit Judges.


For the third time in the past four years, we are asked to determine whether summary judgment was properly granted in favor of an insurer on the basis that an insurance applicant's material omissions on an application constituted bad faith as a matter of law and rendered the policy void ab initio. Compare Justofin v. Metropolitan Life Ins. Co., 372 F.3d 517 (3d Cir. 2004), with Burkert v. Equitable Life Assur. Soc. of America, 287 F.3d 293 (3d Cir. 2002). Appellant Kathleen Babayan argues that our recent decision in Justofin created a "bright-line" rule that bad faith can never be inferred as a matter of law if the applicant provides some relevant medical information, but fails to provide complete information. We decline to adopt Babayan's proposed bright-line rule in this case. The record contains incontrovertible documentary evidence that Babayan omitted information in bad faith, and there is no relevant relationship between the information Babayan provided on her application and the specific information she omitted. Accordingly, we will affirm the judgment of the District Court that Babayan's omissions on her insurance application constituted bad faith as a matter of law.

We also reject Babayan's remaining grounds for appeal. We conclude that the District Court did not err in granting summary judgment in favor of Appellee Northwestern Mutual Life Insurance Co. ("Northwestern") with respect to Babayan's novel bad faith claim premised upon Northwestern's "post-claim underwriting" practices. In addition, we hold that the District Court did not err in granting summary judgment in favor of Babayan's insurance agent, Thomas Gallina, as to Babayan's negligence claim because Gallina's actions did not cause Northwestern to rescind Babayan's policy.

I. Background

A. The Application Process

After missing six days of work because of Bell's Palsy Disorder in late December 2000, Babayan decided to obtain disability income insurance. In January 2001, Babayan telephoned Gallina's insurance agency. Shortly thereafter, Gallina met with Babayan at her office in New Jersey. During this meeting, Babayan provided Gallina with general, personal information for Gallina to use in preparing a specific insurance proposal. Several weeks later, on February 11, 2001, Gallina presented his proposal to Babayan.

Babayan agreed to go forward with the application process and filled out a disability insurance application and a non-medical questionnaire. Each of the documents required Babayan to respond to a number of specific questions that required either a "yes" or "no" response. Gallina verbally asked Babayan each question, then recorded her response on the application and the non-medical questionnaire. Gallina testified at his deposition that he read the questions from the documents verbatim.

The crux of the dispute between the parties is the interaction between Gallina and Babayan at the February 2001 meeting, particularly Babayan's "responses" to two of the questions. Question 14.K.2 of the disability insurance application asked:

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?

Babayan does not dispute that Question 14.K.2 was answered "no" on the insurance application. Neither does Babayan dispute that the answer to Question 14.K.2 is false. According to Babayan, she informed Gallina that she had previously been involved in a motor vehicle accident and a slip-and-fall accident in 1995 or 1996.*fn1 Babayan claims that Gallina told her not to disclose the incidents because "that's far enough away." Gallina allegedly told her, "I don't think it will be a problem, but when you sign the medical waiver, they go get your records from your doctors and they'll find out that stuff." Thus, Babayan asserts that she acquiesced in Gallina's advice to mark "no" on the application.

In addition, Babayan answered "no" to Question 33.k of the non-medical questionnaire, which stated: "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?"*fn2 There is no evidence in the record that Babayan asked Gallina any questions relating to Question 33.k, or that Gallina gave Babayan any advice on how to answer the question.

After Gallina finished filling out the questionnaire in response to Babayan's answers, Babayan signed both the insurance application and the non-medical questionnaire. Each of the documents contained certain representations above the signature line.*fn3 By signing the application and the non-medical questionnaire, Babayan represented that her answers on both forms were truthful and accurate.

The answers contained on the insurance application and the non-medical questionnaire set forth above, however, were false. Babayan was in an automobile accident on September 24, 1996, within five years of the date she submitted her insurance application. In addition, Babayan was treated by several physicians between 1996 and February 2001 for neck, back, hip, leg, and knee pain resulting from her automobile accident, as well as a separate slip-and-fall accident in July 1996. Babayan acknowledged in her deposition that the answer to Question 33.k was false; she stated, however, that she thought that the word "disorder" meant "disease." Babayan further testified that had she read Question 33.k at the February 11, 2001 meeting with Gallina, she would have asked Gallina to explain what the question meant to clear up any misunderstanding. She claims that if Gallina had told her that Question 33.k referred to "treatment for ongoing problems," she would have answered "yes" based upon her "new understanding."

Babayan asserts that written notes she took during her February 11, 2001 meeting with Gallina confirm her version of the events. Additionally, Babayan stated that Gallina told her she would have to sign a waiver authorizing Northwestern to obtain her medical records. Babayan signed the authorization for release of her medical records, and she informed Northwestern on the non-medical questionnaire that Dr. Joseph Kipp was her primary care physician.

B. Paramedical Examination

On February 13, 2001, a paramedical examiner took Babayan's blood pressure and asked her some further questions about her medical history. Several of the questions the examiner asked Babayan were identical to questions she had previously answered in her meeting with Gallina. Babayan testified at her deposition that she did not remember specific questions the examiner asked her, although she stated that the examiner "must have asked me obviously at least some of them." One of the questions the examiner asked Babayan was Question 33.k. As in her prior answer on the non-medical questionnaire, Babayan answered "no" to Question 33.k on the paramedical questionnaire.*fn4 Babayan testified at her deposition that she did not read the paramedical questionnaire before signing it. She further stated that if she had read the responses marked by the examiner, she would have realized the answers were incomplete and inaccurate. Despite not reading the answers marked by the examiner, Babayan signed the paramedical questionnaire, thereby representing that her answers and statements were "correctly recorded, complete, and true to the best of [her] knowledge and belief."

After receiving Babayan's application, non-medical questionnaire, and paramedical questionnaire, Northwestern underwriter Cynthia Guss approved Babayan's policy on March 3, 2001. Guss did not obtain any of Babayan's medical records at the time because she "didn't feel that the medical history provided warranted medical records being ordered." In addition, Guss testified at her deposition that the inconsistencies in Questions 36 and 37 did not merit ordering Babayan's medical records.*fn5 After the application was approved, Gallina delivered the policy to Babayan in March 2001. The effective date of the policy was February 13, 2001, the date Babayan underwent the paramedical examination.

C. Subsequent Illnesses and Rejection of Claim

Beginning in March or April 2001, Babayan started suffering from fatigue, pain, headaches, and an inability to concentrate. Dr. Kipp gave Babayan a preliminary diagnosis of fibromyalgia. Over the course of the next ten months, Babayan sought treatment from Dr. Kipp and a number of other physicians for her symptoms. In February 2002, Babayan applied for and received short-term disability income payments from the State of New Jersey.*fn6

On March 23, 2002, approximately one year after her symptoms began, Babayan applied for disability benefits under her insurance policy. Northwestern assigned disability benefit specialist Lisa Duller to review Babayan's claim. Duller testified in her deposition that she made the decision to institute a "constestability" review of Babayan's claim because company policy provides that such a review is automatically performed if a claim is filed within two years of the application date. Babayan's application caused Duller to request certain information from Babayan, including an "Attending Physician's Statement" from Dr. Kipp. Dr. Kipp completed the statement, indicating that he had diagnosed Babayan with fibromyalgia, depression, chronic pain, and cognitive dysfunction, and that he had set forth a treatment plan that included pain management and examination by specialists. Duller also requested medical records from all of the doctors identified in Dr. Kipp's records as providing treatment to Babayan.

Thereafter, Northwestern began a more extensive investigation of Babayan's claim. Duller authorized an outside private investigation service to obtain information about Babayan. Furthermore, on May 3, 2002, a Northwestern representative, Jim Porter, interviewed Babayan at her home. During the course of that interview, Porter informed Babayan that her full and complete medical history, including her motor vehicle accident and slip-and-fall accident, had not been reported to Northwestern by Gallina or the paramedical examiner.

In summer 2002, Babayan was diagnosed with Sjogren's Syndrome, an autoimmune disorder, and primary biliary cirrhosis. Babayan advised Northwestern of her new diagnosis, and informed the company that the original diagnosis of fibromyalgia might no longer be applicable.

On July 11, 2002, Duller referred Babayan's file to Steve Kien, an underwriter at Northwestern. Kien's job was to review all of the information in Babayan's file to come to a determination whether Northwestern would have issued the policy to Babayan based upon the information it received during the contestability review. In a memorandum to Duller dated July 19, 2002, Kien concluded: "Had we been aware of the chronic pain and arthralgias symptoms, extensive treatment history and MRI confirmed disc disease and degenerative changes in ...

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