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Two minor plaintiffs brought suit through their court appointed guardian following their father’s death seeking benefits under his life insurance policy. A claim review took place because the policy had been issued within two years of decedent’s death. In the review process, decedent’s answers to the health related questions in the insurance application were compared to his medical records.

In the application, decedent was asked if he had, “ever (a) received care or treatment for, or (b) been advised by a member of the medical profession to seek treatment for, or (c) consulted with a health care provider regarding… (e) Diabeties with onset before age 50 or with vascular or renal complications?” Decedent answer “no” to the question. The application indicated if the applicant answered “yes” to this question, they would not be eligible for the policy. To complete the application, decedent signed the Agreement on the signature line, with the accompanying statement, “I have read and understand… (the application)… and approve of all my answers as recorded.”

According to decedent’s medical records, however, the adjuster discovered decedent had, in fact, been diagnosed with diabetes prior to his 50th birthday in late 2009. He was also treated for diabetes and elevated blood glucose levels in January and February of 2010. The policy was issued in October of 2011. Following these revelations, the insurer rescinded the policy, refunded all premium payments, and sent a letter to plaintiffs indicating the insurance proceeds would not be paid due to the material misrepresentation made by decedent in the application.

Plaintiffs then brought suit against the carrier, alleging breach of contract and bad faith. The case was removed to federal court, and the carrier filed a motion for judgment on the pleadings.

Under Pennsylvania law, an insurance policy is void ab initio for misrepresentation when the insurer establishes three elements: “(1) that the representation is false; (2) that the insured knew that the representation was false when made or made it in bad faith; and (3) that the representation was material to the risk of being insured.”

There is no dispute that the representation made by decedent was false; plaintiffs concede that decedent was diagnosed with diabetes before the age of fifty. The dispute, however, arises in the second factor of the test. Plaintiffs allege that due to the confusing wording of the question and the time period that passed between diagnosis and decedent’s signing of the application, his answer was not intentionally false or made in bad faith. The court did not agree, finding that although the question was broken into subparts, it clearly asked whether the applicant had been diagnosed, treated or consulted with a health care provider regarding diabetes before the age of fifty.

Furthermore, decedent was diagnosed on December 31, 2009, and treated at a local hospital for his diabetic condition in January and February of 2010. Thus, decedent’s false answer could not be disregarded as an “honest mistake,” and must be viewed as a fraudulent misrepresentation.

The Pennsylvania Supreme Court defines bad faith as “an action undertaken with the purpose of fraud, dishonesty, or corruption.” Based on the finding that decedent’s statement was a fraudulent misrepresentation, the court found that it also fell within the bad faith definition, and found the statement was made in bad faith. Such a finding could also be reached through an inference of bad faith under Pennsylvania law.

Finally, Pennsylvania law has long held that all statements made in connection with the application for life insurance regarding prior medical conditions and treatments are material to the risk.

Date of Decision: June 13, 2013

S.B. v. United of Omaha Life Ins. Co., Civil Action No. 13-1463, 2013 U.S. Dist. LEXIS 83642 (E.D. Pa. June 13, 2013) (Kelly, J.)