Shipley v. Arkansas Blue Cross & Blue Shield , 333 F.3d 898 ( 2003 )

United States Court of Appeals
FOR THE EIGHTH CIRCUIT
________________
No. 02-2867
________________
Mary Sue Shipley, Personal *
representative of the Estate of *
William D. Shipley, Jr., deceased, *
* Appeal from the United States
Appellant, * District Court for the
* Eastern District of Arkansas.
v. *
*
Arkansas Blue Cross and Blue *
Shield, a mutual insurance *
company, *
*
Appellee. *
________________
Submitted: January 17, 2003
Filed: June 30, 2003
________________
Before HANSEN,1 Chief Judge, BOWMAN and MELLOY, Circuit Judges.
________________
HANSEN, Circuit Judge.
1
The Honorable David R. Hansen stepped down as Chief Judge of the United
States Court of Appeals for the Eighth Circuit at the close of business on March 31,
2003. He has been succeeded by the Honorable James B. Loken.
Appellant Mary Sue Shipley appeals the final judgment entered by the district
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court in favor of Arkansas Blue Cross and Blue Shield ("ABCBS"), upholding
ABCBS's denial of benefits. We affirm the judgment of the district court.
I.
On April 5, 2000, William Shipley completed an enrollment form to obtain
health insurance through his employer's benefit plan ("the Plan") administered by
Appellee ABCBS. On the form, Shipley answered a number of questions about his
medical history. Specifically, he answered "no" to the following questions:
Has any person applying for coverage ever had a known
indication of or been treated by a physician for:
1. Chest pain, high blood pressure, shortness of breath, stroke,
dizziness, peripheral vascular disease, varicose veins or ulcers, or any
other disorder of the heart and circulatory system?
....
3. Tuberculosis, emphysema, C.O.P.D., asthma, or any disorder
of the sinuses, lungs, respiratory system?
....
11. Have you . . . had any diagnosis, medical treatment, mental
or physical impairment, condition or congenital anomaly not mentioned
above?
....
2
The Honorable Stephen M. Reasoner, United States District Judge for the
Eastern District of Arkansas.
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16. Is any person taking medication prescribed by a physician?
If YES, give name of person, medication, and dosage.
(Appellant's Add. at 11.) Shipley then signed the form which represented that "the
statements and answers given in th[e] application [were] true, complete and correctly
recorded to the best of [his] knowledge and belief. . . ." (Id.)
On August 28, 2000, after a number of doctor visits relating to respiratory
problems, Shipley was diagnosed with cancer and chronic obstructive pulmonary
disease ("C.O.P.D."), or emphysema. After investigating Shipley's medical records,
ABCBS rescinded his insurance coverage retroactive to its effective date because he
had not fully disclosed his medical history. In its letter rescinding coverage, ABCBS
noted that Shipley had made a number of doctor visits for related symptoms that he
had failed to disclose in his application form, and that ABCBS would have rated the
policy differently had Shipley disclosed that information. Specifically, ABCBS noted
that: (1) Shipley was seen and treated for chest congestion and an upper respiratory
infection on April 7, 1997, and was prescribed Keflex to treat the condition; (2)
Shipley was seen and treated for a sinus infection and cough on September 20, 1999,
and was diagnosed with acute sinusitis; (3) Shipley was seen and treated for acid
reflux and sleep difficulties on November 19, 1999, and after an X-ray revealed
expiratory wheezing, he was diagnosed with asthmatic bronchitis for which the doctor
prescribed several medications; and (4) on January 21, 2000, Shipley's doctor
prescribed an additional drug be added to Shipley's medications.
Shipley appealed ABCBS's rescission decision via letter dated April 6, 2001,
but failed to submit any additional evidence. ABCBS denied Shipley's appeal.
Shipley then filed this action in district court.3 The district court granted ABCBS's
3
The district court noted, and the parties do not dispute, that the Plan is
governed by ERISA and that the action was brought under 29 U.S.C. § 1132 (a)(1)(B)
(providing for judicial review of the denial or refusal to pay plan benefits).
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motion for a protective order and determined that the case would be decided on the
administrative record under an abuse of discretion standard. The court then granted
ABCBS's motion for summary judgment, finding that ABCBS did not abuse its
discretion in rescinding the policy because there was substantial evidence that Shipley
had misrepresented his medical history.
Shipley filed this appeal, arguing that the district court erred in applying an
abuse of discretion standard of review and in concluding that ABCBS's decision was
supported by substantial evidence. After Shipley's death on November 14, 2002, his
wife, Mary Sue Shipley, was appointed Personal Representative of his estate.
Pursuant to Federal Rule of Appellate Procedure 43(a)(1), this court substituted Mary
Sue Shipley as the proper party on appeal.
II.
This court reviews de novo the grant of summary judgment, applying the same
standard as the district court. See Delta Family-Care Disability and Survivorship Plan
v. Marshall, 258 F.3d 834, 840-41 (8th Cir. 2001) (reviewing de novo district court's
application of abuse of discretion standard in its review of an ERISA plan
administrator's decision to terminate benefits), cert. denied, 534 U.S. 1162 (2002).
Therefore, if the district court was required to review ABCBS's decision for an abuse
of discretion, this court does the same. Under an abuse of discretion standard, this
court must determine whether ABCBS's "decision was reasonable; i.e., supported by
substantial evidence." Fletcher-Merrit v. NorAm Energy Corp., 250 F.3d 1174, 1179
(8th Cir. 2001). "Substantial evidence is more than a mere scintilla. It means such
relevant evidence as a reasonable mind might accept as adequate to support a
conclusion." Id. (internal quotations omitted).
Appellant argues that the district court should have reviewed ABCBS's
decision de novo. The district court specifically rejected this argument and concluded
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that because the Plan expressly grants the administrator discretionary authority to
determine eligibility for benefits,4 the Supreme Court's decision in Firestone Tire &
Rubber Co. v. Bruch, 489 U.S. 101, 115 (1989), required that it limit its review of the
administrator's decision to an abuse of discretion. Although Appellant argued that
the enrollment form is not part of the Plan, the district court cited to an integration
clause that clearly makes the enrollment form one of the documents that ABCBS has
discretionary authority to review. (Appellant's Add. at 19 ("The entire contract of
insurance is made up of this policy . . . . The individual applications also become part
of this contract.").) Appellant fails to address the integration clause and instead
merely concludes that the enrollment form is not part of the plan and that Bruch does
not apply. Because we agree with the district court's findings that the Plan grants
discretion to ABCBS and that the enrollment form was integrated into the Plan, Bruch
applies, and we reject Appellant's argument that a de novo standard of review was and
is required. See Tillery v. Hoffman Enclosures, Inc., 280 F.3d 1192, 1196-97 (8th
Cir. 2002).
III.
The district court correctly noted that although the Plan is governed by ERISA,
there is no ERISA section that discusses the availability of rescission by an insurer
in response to misrepresentations in a health insurance application. Therefore, federal
common law controls in this case. See McDaniel v. Med. Life Ins. Co., 195 F.3d 999,
4
The policy provides that "[t]he Company acting on behalf of the Plan shall
have authority and full discretion to determine all questions arising in connection
with the Employee's insurance benefits, including but not limited to eligibility,
interpretation of Plan language, and findings of fact with regard to any such
questions." (Appellant's App. at 120.) We have found that similar language vests the
plan administrator with discretionary authority sufficient to evoke the Bruch abuse
of discretion standard. Cf. Marshall, 258 F.3d at 840 n.9; Cash v. Wal-Mart Group
Health Plan, 107 F.3d 637, 641 n.3 (8th Cir. 1997).
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1002 (8th Cir. 1999) (noting that without a governing ERISA provision, federal
common law controls); Mohamed v. Kerr, 53 F.3d 911, 913-14 (8th Cir.) (same), cert.
denied, 516 U.S. 868 (1995); Anderson v. John Morrell & Co., 830 F.2d 872, 877
(8th Cir. 1987) (noting that courts should fashion federal substantive law to fill in
gaps in ERISA's express provisions); see also 29 U.S.C. § 1144(a) (2000)
(preempting state law in cases involving employee benefit plans); Tingle v. Pac. Mut.
Ins. Co., 996 F.2d 105, 107-110 (5th Cir. 1993) (holding that state statute regarding
misrepresentations in insurance applications is preempted by ERISA, and that in the
absence of a specific ERISA provision, federal common law controls). In developing
federal common law, we may look to state law for guidance to the extent that state
law does not conflict with ERISA or its underlying policies. See McDaniel, 195 F.3d
at 1002; Mohamed, 53 F.3d at 913.
In looking to state law, federal courts cannot simply decide what one particular
state or a majority of the states has done in similar situations. Rather, federal courts
create federal common law by adopting and applying the common law principles that
further the policy considerations underlying ERISA. See Singer v. Black & Decker
Corp., 964 F.2d 1449, 1453 (4th Cir. 1992). After considering the policy implications
in this case, we, like a number of our sister circuits, conclude that federal common
law allows for the equitable rescission of an ERISA-governed insurance policy that
is procured through the material misstatements or omissions of the insured. See, e.g.,
Sec. Life Ins. Co. of Am. v. Meyling, 146 F.3d 1184, 1191 (9th Cir. 1998) (finding
that "ERISA must provide a rescission remedy when an insured makes material false
representations regarding his health"); Davies v. Centennial Life Ins. Co., 128 F.3d
934, 943-44 (6th Cir. 1997) (adopting general principles of contract law to determine
the effect of a misrepresentation in an insurance application governed by ERISA);
Hauser v. Life Gen. Sec. Ins. Co., 56 F.3d 1330, 1333-35 (11th Cir. 1995) (assuming
that a right of rescission exists under ERISA-created federal common law); Nash v.
Trustees of Boston Univ., 946 F.2d 960, 966-67 (1st Cir. 1991) (recognizing fraud
in the inducement as a defense under federal common law interpreting ERISA); see
6
also Tingle v. Pac. Mut. Ins. Co., 837 F. Supp. 191, 193 (W.D. La. 1993)
(ascertaining, on remand, the proper federal common law approach).
This rule is consistent with general contract and insurance law principles, see
Restatement (Second) of Contracts, § 164(1) (1981) ("If a party's manifestation of
assent is induced by either a fraudulent or a material misrepresentation by the other
party upon which the recipient is justified in relying, the contract is voidable by the
recipient."); see also Stipcich v. Metro. Life Ins. Co., 277 U.S. 311, 316 (1928)
("Insurance policies are traditionally contracts uberrimae fidei and a failure by the
insured to disclose conditions affecting the risk, of which he is aware, makes the
contract voidable at the insurer's option."); Countryside Cas. Co. v. Orr, 523 F.2d
870, 872 (8th Cir. 1975) ("Under the common law, a material misrepresentation made
on an application for an insurance policy and relied upon by the insurance company
will void the policy. See 12 J. Appleman, Insurance Law and Practice §§ 7293- 97
(1943)."), and is followed by a majority of the states, see, e.g., Methodist Med. Ctr.
of Ill. v. Am. Med. Sec. Inc., 38 F.3d 316, 320 (7th Cir. 1994) (Illinois law); John
Hancock Mut. Life Ins. Co. v. Weisman, 27 F.3d 500, 504 (10th Cir. 1994) (New
Mexico law); Stephens v. Guardian Life Ins. Co. of Am., 742 F.2d 1329, 1332-33
(11th Cir. 1984) (Alabama law); Casey Enters., Inc. v. Am. Hardware Mut. Ins. Co.,
655 F.2d 598, 602 (5th Cir. 1981) (Georgia law); Soanes v. Empire Blue Cross/Blue
Shield, 970 F. Supp. 230, 243 (S.D.N.Y. 1997) (New York law); White v. Cont'l Gen.
Ins. Co., 831 F. Supp. 1545, 1553-54 (D. Wyo. 1993) (Wyoming law); Royal Am.
Mgrs., Inc. v. Int'l Surplus Lines Ins. Co., 760 F. Supp. 788, 792 (W.D. Mo. 1991)
(Missouri law); Cohen v. Penn Mut. Life Ins. Co., 312 P.2d 241, 244 (Cal. 1957);
Munroe v. Great Am. Ins. Co., 661 A.2d 581, 584 n.4 (Conn. 1995); Cont'l Assurance
Co. v. Carroll, 485 So. 2d 406, 409 (Fla. 1986); Bennett v. CrownLife Ins. Co., 776
N.E.2d 1264, 1269-70 (Ind. Ct. App. 2002); Cont'l Cas. Co. v. Pfeifer, 229 A.2d 422,
426-27 (Md. 1967); Pahigian v. Mfrs. Life Ins. Co., 206 N.E.2d 660, 665 (Mass.
1965); Taylor v. Metro. Life Ins. Co., 214 A.2d 109, 112 (N.H. 1965); Tolbert v. Mut.
Ben. Life Ins. Co., 72 S.E.2d 915, 917 (N.C. 1952); Indus. Comm'n of N.D. v.
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McKenzie County, 518 N.W.2d 174, 177 (N.D. 1994); Guardian Life Ins. Co. of Am.
v. Tillinghast, 512 A.2d 855, 859 (R.I. 1986). While we recognize that some states
have altered the common law rule to require proof of fraudulent intent or bad faith in
addition to materiality to rescind an insurance policy based on misrepresentations,
see, e.g., Hays v. Jackson Nat'l Life Ins. Co., 105 F.3d 583, 587 (10th Cir. 1997)
(Oklahoma law); Parsaie v. United Olympic Life Ins. Co., 29 F.3d 219, 220 (5th Cir.
1994) (Texas law); Van Enters., Inc. v. Avemco Ins. Co., 231 F. Supp. 2d 1071, 1090
(D. Kan. 2002) (Kansas law); Van Riper v. Equitable Life Assur. Soc. of U.S., 561
F. Supp. 26, 30 (E.D. Pa. 1982) (Pennsylvania law), aff'd, 707 F.2d 1397 (3d Cir.
1983); Coleman v. Occidental Life Ins. Co. of N.C., 418 So. 2d 645, 646 (La. 1982)
(Louisiana law); Zimmerman v. Cont'l Cas. Co., 150 N.W.2d 268, 271-72 (Neb.
1967), we find that the majority approach is the most logical and equitable alternative
to further ERISA's principal goal of creating uniform, objective standards and to
facilitate the availability and affordability of health insurance. Additional competing
policy considerations relevant to the issue are more properly addressed in the
legislative process. Therefore, until Congress indicates otherwise, we hold that a
misrepresentation as to a material matter made knowingly in an application for an
ERISA-governed insurance policy is sufficient to rescind the policy.
Given the federal courts' authority under ERISA to create a uniform body of
federal common law, see Mass. Mut. Life Ins. Co. v. Russell, 473 U.S. 134, 156
(1985) (Brennan, J., concurring), we do not agree with the district court's assumption
that the Arkansas statute, Ark. Code Ann. § 23-79-107(a) (Michie 1992),
automatically controls in the absence of an explicit ERISA provision. Nevertheless,
because the Arkansas statute is consistent with the federal common law approach
discussed above, we agree with the district court that the proper inquiry in this case
is whether Shipley's answers on the enrollment form were material
misrepresentations. Appellant does not dispute this analysis but asserts that Shipley's
answers were neither false nor material.
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A. Misrepresentations
A misrepresentation is a statement of fact that is untrue or a failure to disclose
a fact in response to a specific question. Appellant argues that Shipley's answers on
the enrollment form were not misrepresentations because the form only required the
applicant to use a subjective standard in answering the questions, and that ABCBS
failed to present any evidence that Shipley's answers were not "true, complete and
correctly recorded to the best of [his] knowledge and belief," (Appellant's Add. at 11).
Appellant asserts that ABCBS abused its discretion in rescinding Shipley's benefits
without investigating his subjective beliefs regarding his medical history or
presenting evidence that he actually believed the statements were incorrect. In
concluding that there was substantial evidence to support ABCBS's finding that
Shipley knew that he gave inaccurate answers on the application form, the district
court noted that Shipley offered no evidence in support of his claimed lack of
knowledge. Appellant asserts that the district court impermissibly shifted the burden
of producing evidence that Shipley's statements were false from ABCBS to Shipley.
In its letter rescinding the benefits, ABCBS clearly stated that it was relying on
Shipley's medical records as evidence that he made material misrepresentations on his
enrollment form. Essentially, ABCBS reasoned that because Shipley was aware that
he needed medical attention, because he sought that attention, because he received
the diagnoses from the doctors, and because he was prescribed medication, he must
have known something about his conditions. Cf. Hauser 56 F.3d at 1332, 1335
(remanding for a factual determination of whether a husband was justified in his
answers about his wife's health conditions). ABCBS asserted that the enrollment
form did not require interpretation of facts and circumstances known, but rather
requested simple disclosure of historical facts. Cf. Ellis v. Great-West Life Assur.
Co., 43 F.3d 382, 388 (8th Cir. 1994) ("The question asked 'have you ever had' the
various conditions; the question did not ask the applicant to respond in the affirmative
only if the applicant felt the condition presented a serious health threat . . . . [W]hen
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questions are worded in this manner, the facts must be revealed. The insurance
company, not the insured, assesses the significance of the facts."); Jackson v.
Prudential Ins. Co. of Am., 736 F.2d 450, 453 (8th Cir. 1984) (finding that an
insurance applicant's negative answer to question as to whether he had received an
electrocardiogram for chest pain or for any other physical complaint was in fact
incorrect, regardless whether the applicant honestly believed that his physical
discomfort was due to an ulcer). Citing Arkansas caselaw, ABCBS noted that "[t]he
standard of truthful answers for such questions is measured by whether the individual
answering the question was justified in the belief expressed," (Appellant's Add. at 17-
18) and concluded that in light of his medical records, Shipley was not justified in
believing that his answers were truthful.
The district court gave Shipley an opportunity to rebut this evidence, but he
failed to produce anything. Appellant argues that this was impermissible burden-
shifting, but this argument is without merit. If Shipley's medical records served as
substantial evidence that he was aware of his conditions, then the district court did
not impermissibly shift the burden to Shipley, but rather gave him a fair opportunity
to rebut the already-sufficient evidence against him. The district court did not uphold
ABCBS's rescission because Shipley failed to produce evidence in the first instance.
Rather, it upheld ABCBS's rescission because ABCBS put forth substantial evidence
that Shipley knowingly omitted material information from his application form. Even
if Shipley somehow believed that his answers were true, ABCBS did not abuse its
discretion in concluding that the medical records demonstrated that Shipley knew his
answers were false. Cf. Skinner v. Aetna Life & Cas., 804 F.2d 148, 151 (D.C. Cir.
1986) ("[T]he twin qualifiers [knowledge and belief] require[ ] that knowledge not
defy belief . . . . What the applicant in fact believed to be true is the determining
factor in judging the truth or falsity of his answer, but only so far as that belief is not
clearly contradicted by the factual knowledge on which it is based. In such event, a
court may properly find a statement false as a matter of law, however sincerely it may
be believed."). Because Shipley was not justified in believing his answers to be true,
10
we agree with the district court that, as a matter of law, his statements on the
enrollment form were misrepresentations and that ABCBS's decision to rescind
Shipley's coverage based on the information in the medical records was reasonable.
B. Materiality
In cases governed by ERISA, misstatements or omissions have been deemed
material where knowledge of the true facts would have influenced the insurer's
decision to accept the risk or its assessment of the premium amount. See Meyling,
146 F.3d at 1191-92; Davies, 128 F.3d at 943-44; Hauser, 56 F.3d at 1333-34; accord
Ark. Code Ann. § 23-79-107(a)(3), (c); see also 6 Couch on Insurance § 82:13 (3d
ed.) ("Broadly speaking, the test of materiality is whether the fact or circumstance
represented or misrepresented operated to induce the insurer to accept the risk, or to
accept it at a lower premium."). In its letter denying Shipley's appeal, ABCBS stated
that Shipley's answers were material because ABCBS would have rated the plan
differently had it known the true facts up front. Appellant argues that ABCBS failed
to present substantial evidence that the statements were material. Citing to
documents in the record, the district court found that the statements were material.
ABCBS cites its underwriting guidelines related to C.O.P.D. to prove that it
would have treated Shipley's application for insurance benefits differently had it
known about his medical history. (Appellant's App. at 396-99, 445-46.) Appellant
argues that Shipley was not diagnosed with C.O.P.D. until after executing the
application, and therefore ABCBS cannot rely on the C.O.P.D. guidelines to prove
materiality. Nevertheless, the guidelines define the risk factors for C.O.P.D broadly
enough to include a number of the symptoms, risk factors, and diagnoses that Shipley
was aware of before he completed the enrollment form. Furthermore, the fact that the
questions were contained in an application form that clearly limited coverage for
preexisting conditions indicates that Shipley's answers to those questions were
relevant for determining the extent of his coverage and his premium amounts.
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IV.
Accordingly, we affirm the district court's grant of summary judgment in favor
of ABCBS.
A true copy.
Attest:
CLERK, U.S. COURT OF APPEALS, EIGHTH CIRCUIT.
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