Horowitz v. Federal Kemper Life Assurance Co. ( 1995 )

Opinions of the United
1995 Decisions States Court of Appeals
for the Third Circuit
6-7-1995
Horowitz v Federal Kemper
Precedential or Non-Precedential:
Docket 94-1900
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UNITED STATES COURT OF APPEALS
FOR THE THIRD CIRCUIT
___________
Nos. 94-1900 and 94-1901
___________
DONA W. HOROWITZ, individually and as co-executrix
of the estate of LEONARD N. HOROWITZ, deceased;
ALFRED CAMNER, co-executor of the estate of
LEONARD N. HOROWITZ, deceased
vs.
FEDERAL KEMPER LIFE ASSURANCE COMPANY
Appellant in No. 94-1900
DONA W. HOROWITZ, individually and as co-executrix
of the estate of LEONARD N. HOROWITZ, deceased;
ALFRED CAMNER, co-executor of the estate of
LEONARD N. HOROWITZ, deceased
Appellants in No. 94-1901
vs.
FEDERAL KEMPER LIFE ASSURANCE COMPANY
___________
Appeal from the United States District Court
for the Eastern District of Pennsylvania
(D.C. Civil No. 93-cv-00192)
___________
Argued
May 1, 1995
Before: SLOVITER, Chief Judge,
MANSMANN and ALITO, Circuit Judges.
(Filed June 7, 1995)
___________
Dean F. Murtagh, Esquire (Argued)
John P. Shusted, Esquire
German, Gallagher & Murtagh
200 South Broad Street
5th Floor
Philadelphia, PA 19102
Counsel for Appellant in No. 94-1900
Counsel for Appellee in No. 94-1901
James E. Beasley, Esquire
Barbara R. Axelrod, Esquire (Argued)
Beasley, Casey, Colleran,
Erbstein, Thistle & Kline
1125 Walnut Street
Philadelphia, PA 19107
Counsel for Cross-Appellants in No. 94-1901
Counsel for Appellees in No. 94-1900
Rita M. Theisen, Esquire
LeBoeuf, Lamb, Grene & MacRae
1875 Connecticut Avenue, N.W.
Suite 1200
Washington, DC 10009-5728
Of Counsel:
Phillip E. Stano, Esquire
Richard E. Barnsback, Esquire
American Council of Life Insurance
1001 Pennsylvania Avenue, N.W.
Washington, D.C. 20004
Counsel for Amicus-appellant in No. 94-1900
Counsel for Amicus-appellee in No. 94-1901
___________
OPINION OF THE COURT
__________
MANSMANN, Circuit Judge.
In this diversity case, the plaintiffs asserted that
Federal Kemper Life Assurance Company's refusal to pay the
proceeds of a life insurance policy to plaintiff Dona W. Horowitz
was a breach of contract and violated Pennsylvania's Unfair Trade
Practices and Consumer Protection Law, 73 Pa. C.S.A. § 201-1 et
seq., and Pennsylvania's bad faith statute, 42 Pa. C.S.A. § 8371.
We are called upon to determine whether Federal Kemper
"attached" an application amendment to the policy within the
meaning of section 441 of Pennsylvania's Insurance Company Law of
1921, 40 Pa. C.S.A. § 441, and may, therefore, proceed with a
fraud defense against the plaintiffs' breach of contract claim
and a counterclaim for rescission based on alleged material
misrepresentations and omissions in the policy application and
the amendment. We must also determine whether Federal Kemper's
conduct was in contravention of Pennsylvania's unfair trade
practices and bad faith statutes.
We find that Federal Kemper's use of a binder with
pockets or sleeves to contain the policy, application and
amendment satisfied the attachment requirement of section 441,
and that Federal Kemper reasonably refused payment. We will
therefore vacate the district court's grant of summary judgment
to the plaintiffs on their breach of contract claim and remand
for further proceedings on this issue. In addition, we will
affirm the district court's grant of summary judgment in Federal
Kemper's favor on the plaintiffs' unfair trade practices and bad
faith claims.
I.
We begin our analysis by reviewing the evidence
presented in this case. With one critical exception, the
following material facts surrounding Federal Kemper's refusal to
pay Dona Horowitz's claim are not in dispute.1
On September 26, 1991, Mrs. Horowitz and her husband,
Dr. Leonard N. Horowitz, met with Frederick Raffetto, an
independent insurance agent, and completed an application for a
$1 million Federal Kemper life insurance policy, naming Dr.
Horowitz the proposed insured and Mrs. Horowitz, the applicant,
owner and primary beneficiary. Both Dr. and Mrs. Horowitz signed
Part B of the application, promising to inform Federal Kemper of
"any change in the health or habits of the Proposed Insured that
occurr[ed] after completing [the] application but before the
Policy [was] delivered . . . and the first premium [was] paid."
On October 3, 1991, at Federal Kemper's request, Dr.
Horowitz was examined by Carol Coady, a registered nurse. After
taking urine and blood samples and checking Dr. Horowitz's vital
signs, nurse Coady asked Dr. Horowitz a series of questions
regarding his health and medical history and recorded the answers
1
. Our standard of review upon the grant of summary
judgment is plenary. Commercial Union Ins. Co. v. Bituminous
Casualty Corp., 851 F.2d 98, 100 (3d Cir. 1988). On review, an
appellate court is required to apply the same test the district
court should have used initially. Id. Summary judgment is only
appropriate where there is no genuine issue of material fact for
the jury to decide. Fed. R. Civ. P. 56(c). Facts that could
alter the outcome are "material", see Anderson v. Liberty Lobby,
Inc., 477 U.S. 242, 248 (1986), and disputes are "genuine" if
evidence exists from which a rational person could conclude that
the position of the person with the burden of proof on the
disputed issue is correct. Celotex Corp. v. Catrett, 477 U.S.
317, 322 (1986). Summary judgment is inappropriate when a case
will turn on credibility determinations. See Liberty Lobby, 477
U.S. at 255.
he gave on Part F of the policy application. When asked whether
he had ever received treatment for "[an] [u]lcer, colitis,
hepatitis, pancreatitis or other disorder of the esophagus,
stomach, intestines, liver or pancreas", Dr. Horowitz reported
that he had been treated for lactose intolerance and a spastic
colon in 1985 and as a result, avoided the ingestion of milk
products and took "Metamucil" every so often. In response to
inquiries regarding consultations with physicians or other
medical practitioners and the performance of electrocardiograms,
blood studies or other medical tests within the last five years,
Dr. Horowitz stated that he consulted with his family doctor on a
yearly basis for a routine checkup, electrocardiogram and blood
analysis, and identified Dr. Bradley Fenton as his personal
physician, whom he had last visited in August, 1991. Dr.
Horowitz did not disclose, however, that he had seen Dr. Anthony
J. DiMarino, Jr., a gastroenterologist, on several occasions
beginning in 1986 and had been examined by Dr. DiMarino most
recently in August, 1991, or that he had undergone a series of
small bowel studies, blood tests for anemia, and tests for
vertigo within the last five years, and two colonoscopies, one in
1987 and another on August 8, 1991.
Approximately one month later, in November of 1991, Dr.
Horowitz complained to Dr. DiMarino of pain when swallowing. On
December 4, 1991, Dr. Horowitz underwent a CT scan and an
endoscopy with biopsy, and on December 5, 1991, was diagnosed as
having terminal adenocarcinoma of the stomach. On December 6,
1991, Dr. and Mrs. Horowitz consulted a specialist and were told
that Dr. Horowitz had approximately six months to live. During
the following week, Dr. Horowitz obtained three additional
medical opinions, all confirming the original diagnosis of
terminal adenocarcinoma. On December 16, 1991, Dr. Horowitz had
a catheter surgically inserted for the administration of
chemotherapy, and on the morning of December 20, 1991,
chemotherapy treatment was begun.
After learning of his condition and prognosis, Dr.
Horowitz informed his personal attorney that he had previously
applied to Federal Kemper for a life insurance policy and of the
change in his health. The attorney advised Dr. Horowitz to take
whatever steps were necessary to secure delivery of the policy
and reassured him that any disputes that might arise with Federal
Kemper would be resolved in court.
On December 20, 1991, in the afternoon, Mr. Raffetto
met with Dr. and Mrs. Horowitz and delivered the Federal Kemper
life insurance policy which had been issued on December 3, 1991.
Dr. Horowitz, in turn, paid the first premium. During Mr.
Raffetto's visit, Dr. and Mrs. Horowitz read and executed an
amendment of application which provided in pertinent part:
The above noted application of Federal Kemper
Life Assurance Company dated September 26,
1991 is amended as follows:
THE REPRESENTATIONS MADE IN THE APPLICATION
ARE STILL VALID AS OF THE DATE IN THIS
AMENDMENT, AND THE PROPOSED INSURED HAS NOT
HAD ANY ILLNESS OR INJURY, AND HAS NOT
CONSULTED, OR RECEIVED MEDICAL ADVICE OR
TREATMENT FROM, ANY PHYSICIAN OR OTHER
MEDICAL PRACTITIONER SINCE THE DATE OF
APPLICATION EXCEPT AS FOLLOWS:
It is agreed that this amendment is part of
the application and of the policy issued, and
it will be binding on any person who will
have any interest under the policy. This
amendment, and the policy, will not take
effect until signed as required below. It is
agreed that no coverage is in effect if any
changes are made to the above statements in
this form.
Neither Dr. Horowitz nor his wife, however, informed Mr. Raffetto
of Dr. Horowitz's terminal illness, the treatment he was
undergoing or of the several medical opinions he had obtained
since September 26, 1991 regarding his condition.
Although the parties agree that Mr. Raffetto unstapled
one original amendment from the policy and presented it to Dr.
and Mrs. Horowitz to read and sign, they dispute whether Mr.
Raffetto actually delivered it. Mrs. Horowitz contends that she
never took possession of the signed amendment, and one of Dr.
Horowitz's attorneys executed an affidavit stating that the
Federal Kemper policy he examined following Dr. Horowitz's death
did not include the amendment. Mr. Raffetto, on the other hand,
maintains that on December 20, 1991, he unstapled two original
amendments from the policy, saw to it that Dr. and Mrs. Horowitz
read and signed both originals, retained one original for Federal
Kemper's files, placed the second original inside a sleeve in the
pocket binder2 which contained the policy and application, and
gave the binder to Dr. Horowitz.
2
. The plaintiffs describe the pocket binder as a "plastic
cover" with a "sleeve" or "pocket" in which papers could be
placed. For the sake of consistency only, we will refer to the
item as a binder.
Dr. Horowitz spoke again to his attorney after taking
delivery of the Federal Kemper policy and voiced concern over
signing the amendment in light of his illness. Counsel directed
Dr. Horowitz to send him the policy and reiterated that
litigation would resolve future disputes.
Dr. Horowitz died on May 21, 1992. Shortly after Dr.
Horowitz's death, Mrs. Horowitz submitted a claim to Federal
Kemper for the proceeds of the policy. By a letter dated
September 25, 1992, Federal Kemper refused Mrs. Horowitz's claim,
declaring the policy null and void due to Dr. and Mrs. Horowitz's
failure to disclose the adenocarcinoma as, according to the
insurer, Part B of the application and the application amendment
required. Federal Kemper also enclosed all premiums that had
been paid on the policy and reserved its right to raise other
defenses to Mrs. Horowitz's claim.
On December 16, 1992, Mrs. Horowitz, individually and
as co-executrix of Dr. Horowitz's estate, and Alfred Camner, the
estate's co-executor, filed a three count complaint in the Court
of Common Pleas, Montgomery County, Pennsylvania, alleging that
Federal Kemper violated Pennsylvania's Unfair Trade Practices and
Consumer Protection Law, 73 Pa. C.S.A. § 201-1 et seq. (Count I),
acted in bad faith in violation of 42 Pa. C.S.A. § 8371 (Count
II), and breached the parties' insurance contract (Count III).
Federal Kemper removed the case to the United States District
Court for the Eastern District of Pennsylvania on January 14,
1993. In response to the plaintiffs' complaint, Federal Kemper
raised fraud as a defense and also asserted a counterclaim for
rescission on the ground that Dr. and Mrs. Horowitz had made
material misrepresentations in the policy application and the
application amendment.
On October 8, 1993, the parties filed cross-motions for
summary judgment. On August 30, 1994, the district court granted
the plaintiffs' motion on Count III, the breach of contract
claim, and entered judgment in their favor for $1 million. The
court concluded that even if Mr. Raffetto's version of events
regarding delivery of the policy, application and amendment were
true,3 Federal Kemper was barred as a matter of law from
asserting a fraud defense based on alleged misrepresentations in
the application and amendment because of "Mr. Raffetto's
undisputed failure to reattach the [December 20, 1991] amendment
to the policy at the time of delivery . . ." as required under
section 441 of Pennsylvania's Insurance Company Law of 1921, 40
Pa. C.S.A. § 441. Horowitz v. Federal Kemper Assurance Co., 861
F. Supp. 1252, 1258 (E.D. Pa. 1994).4 Rejecting Federal Kemper's
3
. On summary judgment, where the non-moving party's
evidence contradicts the movant's evidence, then the non-movant's
evidence must be taken as true. Big Apple BMW, Inc. v. BMW of N.
Am., Inc., 974 F.2d 1358, 1363 (3d Cir. 1992), cert. denied, ___
U.S. ___, 113 S. Ct. 1262 (1993).
4
. On summary judgment, Federal Kemper's fraud defense and
its counterclaim for rescission were limited to
misrepresentations allegedly made in Parts B and F of the
application and in the application amendment. Because the court
ruled in the plaintiffs' favor on their breach of contract claim,
it did not reach their argument that under 40 Pa. C.S.A. §
511(a), Federal Kemper was precluded by the results of its
October 3, 1991 medical examination of Dr. Horowitz from
defending on the basis of fraud; nor did it reach Federal
Kemper's counterclaim for rescission, concluding that the
insurer's "failure to attach the December 20 amendment to the
argument that section 441 was satisfied when Mr. Raffetto placed
a copy of the amendment inside the sleeve of a binder that also
contained the policy and the application, the court held that the
rule that has emerged from the two leading cases, Sandberg v.
Metropolitan Life Ins. Co., 342 Pa. 326, 20 A.2d 230 (1941),5 and
Frost v. Metropolitan Life Ins. Co., 337 Pa. 537, 12 A.2d 309
(1940), is that "if an insurance company fails to physically
attach the application (or any amendments) to the policy at the
time it is delivered, it is barred from asserting as a defense
any fraudulent misrepresentations contained in the application or
amendments". Horowitz, 861 F. Supp. at 1258. As to the
plaintiffs' unfair trade practices and bad faith claims, however,
the district court granted summary judgment in the defendant's
favor, finding that Federal Kemper's refusal to pay Mrs.
Horowitz's claim was neither actionable as malfeasance nor taken
in bad faith. Id. at 1261-62. On August 30, 1994, Federal
(..continued)
policy prohibits it from asserting as a fraud defense any of the
misrepresentations contained in the amendment, Part B of the
application (completed on September 26, 1991), or Part F of the
application (completed on October 3, 1991)." Horowitz v. Federal
Kemper Assurance Co., 861 F. Supp. 1252, 1261 n.9 (E.D. Pa.
1994).
5
. In Sandberg v. Metropolitan Life Ins. Co., 342 Pa. 326,
20 A.2d 230 (1941), an application was attached to an insurance
policy, but an amendment to the application was not. The
Pennsylvania Supreme Court held that since the amendment was not
attached as required by section 441, both the application and the
amendment had to be excluded from evidence. 342 Pa. at 329, 20
A.2d at 231. The meaning of "attach" as used in section 441 was
not an issue in the case.
Kemper filed this appeal, and the plaintiffs' cross-appeal
followed. The parties agree that Pennsylvania law applies.6
II.
For Federal Kemper to void the insurance policy on the
basis of fraud, Pennsylvania law requires that it must show (1)
that Dr. or Mrs. Horowitz's representations in the policy
application and the application amendment were false, (2) that
Dr. or Mrs. Horowitz knew their representations were false or
made them in bad faith, and (3) that the representations were
material to the risk insured. Coolspring Stone Supply, Inc. v.
American States Life Ins. Co., 10 F.3d 144, 148 (3d Cir. 1993),
citing Shafer v. John Hancock Mut. Life Ins. Co., 410 Pa. 394,
189 A.2d 234, 236 (1963).
Section 441 of Pennsylvania's Insurance Company Law of
1921, however, bars an insurer from using certain documents,
6
. When a federal district court exercises diversity
jurisdiction, it must apply the substantive law as decided by the
highest court of the state whose law governs the action. Erie R.
Co. v. Tompkins, 304 U.S. 64, 78 (1938); Commercial Union, 851
F.2d at 100. When the state's highest court has not addressed
the precise question presented, a federal court must predict how
the state's highest court would resolve the issue. Borman v.
Raymark Indus., Inc., 960 F.2d 327, 331 (3d Cir. 1992). Although
not dispositive, decisions of state intermediate appellate courts
should be accorded significant weight in the absence of an
indication that the highest state court would rule otherwise.
See Rolick v. Collins Pine Co., 925 F.2d 661, 664 (3d Cir. 1991).
Our review of the district court's prediction and application of
state law is plenary. Borse v. Piece Goods Shop, Inc., 963 F.2d
611, 613 (3d Cir. 1992).
including a policy application, as evidence of fraud against an
insured unless they are "attached and accompany[] the policy":
All insurance policies . . . in which the
application of the insured, the constitution,
by-laws or other rules of the company form
part of the policy or contract between the
parties thereto, or have any bearing on said
contract, shall contain, or have attached to
said policies, correct copies of the
application as signed by the applicant, or
the constitution, by-laws, or other rules
referred to; and, unless so attached and
accompanying the policy, no such application,
constitution or by-laws, or other rules shall
be received in evidence in any controversy
between the parties to, or interested in, the
policy, nor shall such application,
constitution, by-laws, or other rules be
considered a part of the policy or contract
between such parties.
40 Pa. C.S.A. § 441.
A.
The Pennsylvania courts have often stated that section
441 was passed "in the interest of fair dealing" and its
provisions should be "strictly enforced." Syme v. Bankers Nat.
Life Ins. Co., 393 Pa. 600, 609, 144 A.2d 845, 850 (1958); Ellis
v. Metropolitan Life Ins. Co., 228 Pa. 230, 231, 77 A. 460
(1910). Enacted primarily for the protection of insureds,
section 441 establishes uniform rules for determining whether
particular promises or statements are included within the
contract between the insurer and the insured. Frost, 337 Pa. at
541, 12 A.2d at 309. In Lenox v. Greenwich Ins. Co., 165 Pa.
575, 577, 30 A. 940, 941 (1895), the Pennsylvania Supreme Court
expressed what is still regarded as the aim of the statute:
It is well known that the evil aimed at in
this legislation was the custom of insurance
companies to put in their blank forms of
application long and intricate questions or
statements to be answered or made by the
applicant, printed usually in very small
type, and the relevancy or materiality not
always apparent to the inexperienced, and
therefore liable to become traps to catch
even the innocent unwary. The general intent
was to keep these statements before the eyes
of the insured, so that he might know his
contract, and if it contained errors, have
them rectified before it became too late.
Applying Pennsylvania's rules of statutory
construction, the Pennsylvania courts have directed that the
words and phrases of section 441 be construed according to their
"common and approved usage" and instructed that the statute's
letter may not be disregarded or broadened to pursue its spirit.
Frost, 337 Pa. at 540, 12 A.2d at 310. The courts have also
emphasized, however, that it is essential to use reason when
interpreting section 441 and to avoid an absurd result. Ross v.
Metropolitan Life Ins. Co., 403 Pa. 135, 142-43, 169 A.2d 74, 78
(1961). Thus, in Ross v. Metropolitan Life, after considering
the language and purpose of section 441, the Pennsylvania Supreme
Court determined that the statutory requirement that a "correct"
copy of an application be attached to a policy does not mean that
"trivial and immaterial" errors in the copy which do not mislead
the insured render the application inadmissible, id., and in
Prudential Ins. Co. v. Pagano, 407 Pa. 473, 474-75, 181 A.2d 319,
320-21 (1962), held that section 441 was satisfied even though
the insurer attached to the policy only one of two identical
application sections the insured had completed.
The case of Frost v. Metropolitan Life Ins. Co., 337
Pa. 537, 12 A.2d 309 (1940), where the Pennsylvania Supreme Court
construed the meaning of section 441's attachment requirement, is
singularly on point. There, the plaintiff commenced a breach of
contract action to recover the proceeds of a $5,000 policy issued
by Metropolitan Life to one Emerson E. Weiser. Attached to the
policy upon which the plaintiff brought suit were an instrument
referred to as an "Accidental Death Benefit" (Exhibit B) and a
photostatic copy of Weiser's application for a previously issued
$10,000 policy (Exhibit C).7 While the plaintiff asserted that
Exhibits B and C were the only papers attached to the policy,
Metropolitan Life alleged that an additional document which
affirmed the application for the $10,000 policy and also amended
it to make it an application for the $5,000 policy (Exhibit A)
was "attached to the policy `by placing the same in said policy'
and delivering the policy `with the said amendment and affirmance
duly executed, folded therein, to the insured.'" 337 Pa. at 538,
12 A.2d at 310. Metropolitan Life further alleged by way of a
defense to the plaintiff's claim that Weiser had given false
answers in Exhibit C, the application, but conceded that unless
7
. The court stated that Exhibits B and C were attached to
the policy; it did not, however, describe the means of
attachment. Frost v. Metropolitan Life Ins. Co., 337 Pa. 537,
538, 12 A.2d 309, 310 (1940).
Exhibit A, the additional paper, had been "attached" to the
policy as required by section 441, it could not introduce the
application as proof of Weiser's fraud. Id.
Based on the dictionary definition of "attach": "`to
bind, fasten, tie or connect; to make fast or join, as to attach
with a string'", the Pennsylvania Supreme Court found against
Metropolitan Life, refusing to "distort" the plain meaning of
attach or to excuse the insurer's "gross neglect" to follow the
requirements of section 441:
In view of this approved definition by
the courts and in view of the rules laid down
by the Legislature and by the courts in
connection with the interpretation of words
and phrases, would it not require that the
plain meaning of the word "attached" be
distorted in order to find that this
Defendant's Exhibit A had been attached to
the policy by merely folding it and placing
it in the policy? . . . `We see no reason
why this company should be exempt from the
penalty for its gross neglect to obey the
plain injunction of an act of assembly.' The
court is, therefore, of the opinion that
Defendant's Exhibit A was not "attached" as
provided by the Act of Assembly and to find
otherwise, a meaning would have to be given
to the word other than its plain definition.
337 Pa. at 540-541, 12 A.2d at 311 (citation omitted).
The lesson we glean from Frost is that the words which
defined "attach" and upon which the Pennsylvania Supreme Court
relied to reach its decision -- bind, fasten, tie, connect or
join -- all required the introduction of some method or mechanism
to hold loose papers together, such that Metropolitan Life's mere
placement of the application inside the insurance policy without
more was not sufficient. Hence, Federal Kemper's use of a binder
to contain the policy, the application and the amendment
distinguishes this case from Frost, where the insurer took no
steps whatsoever to seek to insure that the various papers it
sought to introduce against the insured would be kept together.
Today's meaning of "attach" is virtually identical to
its meaning in 1940 when Frost was decided: "make fast or join
(as by string or glue): bind, fasten, tie ...", Webster's Third
New International Dictionary (1981), and likewise connotes the
application of a mechanism that holds items in one place. We
thus believe that if under the definition of attach, an insurer
may "tie" a policy, an application and amendments with a string,
it may also "bind" or "join" these documents in a device with
pockets (referred to as a "binder") designed to contain them
together, and we further believe that the Pennsylvania Supreme
Court would agree. Moreover, we do not find any support for the
district court's conclusion that an insurer must "physically"
attach an application and amendments to a policy in order to
comply with comply with section 441.8 This qualifier is not
found in the definition of attach in the Frost decision or in the
language of the statute. We therefore conclude that Federal
Kemper's use of a binder is consistent with the plain meaning of
section 441.
8
. The plaintiffs assert that section 441 requires that an
application and amendments be "physically" attached or "fastened"
to a policy.
B.
As is required by Pennsylvania law, our conclusion not
only adheres to the plain meaning of section 441, but also
effectuates its general purpose and avoids an unreasonable or
absurd result. Section 441 is a prophylactic measure, enacted in
the interest of fair dealing and designed to eliminate sharp
practices by assuring that a policy holder has all of the
documents that comprise the insurance contract. This is not a
case where the insurer attempted to take advantage of the insured
or neglected to provide the policy holder with a mechanism to
keep all parts of the contract between the parties before him and
together. Thus, were we to uphold the district court's
construction of section 441, the statute would be turned on its
head.
Based on our understanding of the language and aim of
section 441 and our in-depth review of Pennsylvania's rules of
statutory construction and relevant decisions, we find that the
district court erred in applying the Pennsylvania Supreme Court's
holding in Frost to the facts in this case. We further predict
that the Pennsylvania Supreme Court would conclude that an
insurer's use of a binder to contain a policy and other essential
documents meets the mandate of 40 Pa. C.S.A. § 441.
We therefore hold that the district court erred in
granting summary judgment to the plaintiffs on their breach of
contract claim, and will vacate the district court's order in
this regard. Because there exists a genuine issue of material
fact as to whether the December 20 amendment was included in the
binder that insurance agent Raffetto delivered to Dr. Horowitz,
however, summary judgment in Federal Kemper's favor on either the
plaintiffs' breach of contract claim or its counterclaim for
rescission, assuming it met the standard of proof necessary to
establish fraud under Pennsylvania law,9 is precluded, and this
case must be remanded for trial.
III.
In their cross-appeal, the plaintiffs challenge the
district court's grant of summary judgment to Federal Kemper on
their unfair trade practices and bad faith claims, both of which
are based on the September 25, 1992 letter Federal Kemper sent to
notify Mrs. Horowitz of its refusal to pay the claim she had made
for the proceeds of the life insurance policy. The plaintiffs
assert that the letter was unfair and deceptive because it misled
Mrs. Horowitz into believing that she had no hope of recovering
benefits, and was sent in bad faith because Federal Kemper did
not have a reasonable basis for denying the claim.
9
. As noted, because the district court granted summary
judgment to the plaintiffs on their breach of contract claim, it
did not decide whether Federal Kemper sustained its burden of
proof on the essential elements of fraud under Pennsylvania law,
see Evans v. Penn Mut. Life Ins. Co., 322 Pa. 547, 555-59, 186
A.2d 133, 139-41 (1936)(ordinarily the issue of fraud is for the
jury to decide, but where uncontradicted documents and/or the
uncontradicted testimony the insured's own witnesses establish
facts essential to the insurer's case, judgment may be entered
for the insurer); nor did it reach the plaintiffs' argument based
on 40 Pa. C.S.A. § 511(a). See supra, f.n. 4. In light of our
disposition of the case, we do not resolve these issues.
In Pennsylvania, only malfeasance, the improper
performance of a contractual obligation, raises a cause of action
under the Unfair Trade Practices and Consumer Protection Law, 73
Pa. 73 C.S.A. § 201-1 et seq., and an insurer's mere refusal to
pay a claim which constitutes nonfeasance, the failure to perform
a contractual duty, is not actionable. Gordon v. Pennsylvania
Blue Shield, 378 Pa. Super. 256, 264, 548 A.2d 600, 604 (1988).
See Raab v. Keystone Ins. Co., 271 Pa. Super. 185, 187-88, 412
A.2d 638, 639 (1979). In our view, Federal Kemper's September
25, 1992 letter announced its decision to refuse Mrs. Horowitz's
claim and its reasons for denying payment, and does not represent
misfeasance. We therefore find that the district court did not
err in granting Federal Kemper's motion for summary judgment on
the plaintiffs' unfair trade practices claim.
Finally, we agree with the district court that the
plaintiffs' bad faith claim must fail because under the
circumstances, Federal Kemper had a reasonable basis to deny Mrs.
Horowitz's claim and ample grounds for its allegations of fraud.
See D'Ambrosio v. Pennsylvania Nat'l. Mut. Ins. Co., 494 Pa. 501,
510, 431 A.2d 966, 971 (1981) (in jurisdictions which recognize a
cause of action for bad faith conduct on the part of an insurer,
the plaintiff must show the absence of a reasonable basis for
denying benefits or a reckless disregard of the lack of a
reasonable basis for refusing the claim).
IV.
For the foregoing reasons, we will affirm the district
court's grant of summary judgment on Counts I and II of the
complaint in Federal Kemper's favor. We will vacate the district
court's order granting summary judgment to the plaintiffs on
Count III and remand for further proceedings on the plaintiffs'
breach of contract claim and Federal Kemper's counterclaim for
rescission.
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