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The insured was a pharmacist who owned two pharmacies in Philadelphia.  He decided to seek treatment after using unprescribed narcotics from his pharmacy’s supply for about three months.  He was diagnosed with substance abuse disorder and underwent a series of individual and group therapy sessions.

More than two years after first seeking treatment, the insured purchased a disability insurance policy from the insurer.  On his application, he stated that he never had used narcotics or any other controlled substance, that he never had received counseling or treatment for alcohol or drug use, and that he had not been treated in the past ten years for anxiety, depression, nervousness, stress, or mental/nervous disorder.  Later, he claimed that he did not disclose his use of substances and subsequent treatment because he “breezed through” the application questions with the insurer’s agent, and that he wanted to keep his treatment confidential “because of the stigma in society associated with non-prescription drug use.”

After the insurer’s agent completed the application, he mailed it to the insured, who signed it.  A portion of the contract stated that the insured affirmed that all answers he gave were complete and true to the best of his knowledge.  He was issued the disability insurance policy about two weeks later.

Around two years after being issued the disability policy, the insured was the victim of an armed robbery at one of his pharmacies, where he was shot in the hand.  He had three fingers amputated and allegedly suffered severe emotional and mental distress as a result of the incident.  He returned to work part-time until he was robbed again only a few months later.  Soon after the second robbery, he decided he could no longer work at the pharmacy, put the insurer on notice of a disability claim, and sold one of his pharmacies.

Eventually, the insurer obtained medical records, which divulged that the insured had taken narcotics in the past and sought treatment for it.  The insurer’s claims adjuster notified the insured that it found inconsistencies in his policy application, and she forwarded a memorandum on the issue to the company’s legal department.

Before the insurer took action or completed its investigation, the insured filed suit, seeking money damages for the disability income benefits.  His Complaint contained counts for breach of contract and bad faith.  The insurer filed a motion to dismiss the entire Complaint.

The insurer asserted that it could properly rescind the insured’s disability policy based on numerous false misrepresentations made by the insured on his application.  The court first noted that “under Pennsylvania law, a life insurance policy is void ab initio where the applicant’s representations are:  1) false; 2) made fraudulently or otherwise made in bad faith; and 3) material to the risk assumed.”  In this case, the insured actually admitted to his treating social worker and acknowledged at deposition that some of his responses on the policy application were fraudulent misrepresentations.  The court therefore determined that the policy could be rescinded by the insurer, and it would not be breaching its contract in doing so.

Concerning the bad faith claim, the insured alleged that there was no reason for denying his disability claim and that the insurer unjustifiably delayed its decision for a long time before inappropriately threatening to rescind the insured’s policy.  The court dismissed the insured’s expert’s opinion that the insurer acted in bad faith as failing to create a genuine issue of material fact or provide clear evidence of bad faith.  The undisputed record showed that the insured took four months to produce documents requested by the insurer for its investigation, and the insurer also had difficulty obtaining documents from the insured’s therapist.  The expert’s report also contained inadmissible legal opinions about Pennsylvania law.  These factors, combined with the insured’s fraudulent misrepresentations creating a reasonable basis to deny him benefits, caused the court to grant the insurer’s motion for summary judgment with respect to the bad faith claim and all other counts in the Complaint.

Date of Decision:  January 28, 2011

Sadel v. Berkshire Life Ins. Co. of Am., Civil Action 09-612, United States District Court for the Eastern District of Pennsylvania, 2011 U.S. Dist. LEXIS 8993, (Jan. 28, 2011) (Goldberg, J.)

This case was subsequently affirmed on appeal.