Darling v. Savers Life Ins Co

UNPUBLISHED
UNITED STATES COURT OF APPEALS
FOR THE FOURTH CIRCUIT
STEPHEN E. DARLING; RHONDA RENE
DARLING,
Plaintiffs-Appellants,
v.
SAVERS LIFE INSURANCE COMPANY,
No. 97-1429
Defendant-Appellee,
and
AMERICAN HEALTH UNDERWRITERS,
INCORPORATED,
Defendant.
Appeal from the United States District Court
for the District of South Carolina, at Charleston.
Patrick Michael Duffy, District Judge.
(CA-94-2452-2-23)
Argued: October 1, 1997
Decided: December 15, 1997
Before WILKINSON, Chief Judge, and WILKINS and
LUTTIG, Circuit Judges.
_________________________________________________________________
Affirmed by unpublished per curiam opinion.
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COUNSEL
ARGUED: Eric James Davidson, DROSE, DAVIDSON & BEN-
NETT, Charleston, South Carolina, for Appellants. Harry Lee Davis,
DAVIS & HAMRICK, L.L.P., Winston-Salem, North Carolina, for
Appellee. ON BRIEF: Danny H. Mullis, HOLMES & THOMSON,
Charleston, South Carolina, for Appellee.
_________________________________________________________________
Unpublished opinions are not binding precedent in this circuit. See
Local Rule 36(c).
_________________________________________________________________
OPINION
PER CURIAM:
Appellee, Savers Life, entered into a contract to provide health
insurance to Stephen Darling and his wife, Rhonda Darling. The
application for insurance, on which the contract was based, was com-
pleted by Michael O. Benke, an insurance salesman, 1 in consultation
with Stephen Darling on September 24, 1993. See J.A. at 123, 144.
Rhonda Darling was not present during the meeting between her hus-
band and Benke, but Stephen Darling spoke with her on the telephone
to obtain information for the application. See id. at 112-13, 145. Ste-
phen Darling signed the application for himself; at Benke's urging,
Rhonda Darling authorized Stephen Darling's mother, Erica Darling,
to sign the application on Rhonda Darling's behalf and Erica Darling
did so. See id. at 126, 146. The Application states that the insureds
"agree that the falsity of any answer or statement in this Application
may bar the right to recover thereunder if such answer materially
affects the acceptance of the risk or hazard assumed by the Com-
pany." Id. at 54. On or about October 2, 1993, a Savers Life
employee, Norma Long, conducted a telephone interview with
_________________________________________________________________
1 Mr. Benke operated an insurance agency known as Business Manage-
ment Consultants and was a sub-agent of American Health Underwriters
(formerly known as Savers Health Underwriters). American Health
Underwriters is not corporately related to appellee, Savers Life. See J.A.
at 105-108, 141. In accordance with South Carolina law, Benke was
licensed to submit applications for insurance to Savers Life through
American Health Underwriters. See id. at 105-108, 141-143.
2
Rhonda Darling to follow upon the information contained in the
application. Id. at 172-176.
Based on the information provided both in the application and dur-
ing the telephone interview with Mrs. Darling, Savers Life issued a
Certificate of Insurance ("Certificate") to the Darlings, effective Octo-
ber 8, 1993. See id. at 57, 80. The application was attached to and
made a part of the Certificate. The Certificate states:
Please read the copy of the Application attached to this Cer-
tificate. Carefully check the application to be sure all infor-
mation is correct. If you find errors or if any past medical
history has been left out of the Application, contact us at
8064 North Point Boulevard, Winston-Salem, North Caro-
lina 27106, immediately. This Application is part of the Cer-
tificate, and the Certificate was issued on the basis that the
answers to all questions and the information shown on the
Application was correct and complete.
Id. at 58. The Darlings did not report any inaccuracies or omissions
in the information on the Application.
In conjunction with subsequent claims submitted to Savers Life by
the Darlings' medical providers, Savers Life obtained certain histori-
cal medical records for the Darlings. See id. at 73-75, 154-59. Savers
Life claimed that the information in those medical records differed
from that provided by the Darlings in the application and during the
telephone interview, and that the Darlings would not have qualified
for coverage if they had provided accurate, complete medical histories
to Savers Life. Relying on the language of the Application that allows
Savers Life to void the policy for material misrepresentations by the
insureds, and on South Carolina Code § 38-71-402 -- which also
_________________________________________________________________
2 Specifically, South Carolina Code Ann. § 38-71-40 provides:
The falsity of any statement in the application for any policy
covered by this chapter does not bar the right to recovery there-
under unless the false statement was made with actual intent to
deceive or unless it materially affected either the acceptance of
the risk or the hazard assumed by the insurer.
Id. (emphasis added).
3
allows an insurer to avoid liability when the insureds made material
misrepresentations -- Savers Life refunded the Darlings' premium
and declared the Certificate void ab initio. See J.A. at 22-23, 162.
Savers Life thus refused to pay the Darlings' claims.
The Darlings then initiated this suit, alleging that Savers Life had
breached the insurance contract and had, in bad faith, refused to make
payments under the contract. The district court found that the Dar-
lings had made numerous material misrepresentations in the informa-
tion they provided to Savers Life. The district court summarized the
discrepancies as follows:
1. The Application indicates that neither Mr. nor Mrs.
Darling suffered from any neck, back, spine or hip disease
or disorder (Question 9(o)). The medical history reveals that
Mr. Darling was diagnosed with a bulging cervical disk on
August 26, 1993, and received physical therapy for this con-
dition as late as September 10, 1993.
2. The Application indicates that neither Mr. nor Mrs.
Darling had ever suffered from any disease of the thyroid
(Question 9(n)). The medical history reveals that Mrs. Dar-
ling was diagnosed with thyroiditis on July 9, 1991.
3. The Application indicates that neither Mr. nor Mrs.
Darling ever received treatment for dyspnea (Question 16).
The medical history of Mrs. Darling establishes that she was
treated for dyspnea in December 1988, January 1992, and
March 1992.
4. The Application indicates that neither Mr. nor Mrs.
Darling had ever suffered from chest pains (Question 9(b))
or anxiety (Question 9(s)). The medical history reveals that
Mrs. Darling had been treated for chest pains on two occa-
sions and anxiety on two occasions.
5. The Application indicates that Mrs. Darling never
had any disease or disorder of her reproductive organs
(Question 10(b)) and never had a caesarian section (Ques-
4
tion 10(f)). Mrs. Darling's medical history reveals a history
of ovarian cysts and three caesarian sections.
6. The Application indicates that neither Mr. nor Mrs.
Darling had ever suffered from any diseases of the gall blad-
der (Question 9(j)). Mrs. Darling's medical history reveals
that she had surgery for the removal of her gall bladder.
7. The Application indicates that neither Mr. nor Mrs.
Darling had ever suffered from any disease of the rectum,
esophagus, or intestines (Questions 9(j) and 9(h)). The med-
ical history reveals that Mrs. Darling had been treated for
diarrhea and rectal bleeding and had undergone a colonos-
copy.
J.A. at 204-205.
Based on these findings, the district court determined that Savers
Life was entitled to rescind the Darlings' insurance policy for material
misrepresentations pursuant to the contractual language of the policy
and to South Carolina Code § 38-71-40.3 The district court granted
summary judgment to Savers Life, and this appeal followed.
Although we disagree with the district court's implicit finding that
there were no disputed factual issues about any of the alleged misrep-
resentations that it enumerated, we believe that no genuine factual
_________________________________________________________________
3 The district court did not decide whether the insurance salesman,
Benke, served as the legal agent of the Darlings or of Savers Life,
although the court noted that, under the applicable legal standard, Benke
appeared to be the legal agent of the Darlings. See J.A. at 200. It was not
necessary to resolve this agency question because even if Mr. Benke was
acting as an agent of Savers Life, that fact would not obviate the Dar-
lings' responsibility for any misrepresentations in the application. See
Parnell v. United Insurance Co., 142 S.E.2d 204 (S.C. 1965) (allowing
insurer to rescind the policy based on material misstatements in the
plaintiff's application, even though the plaintiff alleged that the insurance
company's agent had inserted false answers in her application without
her knowledge and that she had signed the application without reading
it).
5
dispute exists as to the Darlings' material misrepresentations about
Mr. Darling's bulging cervical disk, Mrs. Darling's history of chest
pain, and Mrs. Darling's treatment for dyspnea, and that those misrep-
resentations were sufficient grounds for Savers Life to rescind its con-
tract with the Darlings. Consequently, we affirm the district court's
grant of summary judgment for Savers Life.
There is no dispute that Mr. Darling misrepresented his health his-
tory on the insurance application by failing to disclose that he had
recently suffered a bulging cervical disk. Indeed, at oral argument, the
Darlings' counsel conceded that Mr. Darling incorrectly answered the
application question that inquired whether the applicants had ever suf-
fered "any Neck, Back, Spine or Hip Disease or Disorder?", J.A. at
53, and that Mr. Darling should have told Savers Life about his bulg-
ing cervical disk. The record confirms that Mr. Darling was diagnosed
with a bulging cervical disk through an MRI study on August 26,
1993, see id. at 56, and that he received physical therapy for this cer-
vical disk condition as late as September 10, 1993-- just two weeks
prior to the date of his application for Savers Life insurance, see id.
at 154-56.
Moreover, the record clearly reflects that this misrepresentation
was material to Savers Life's assumption of the risk of insuring Mr.
Darling. Thomas E. Gullett, who made the decision to issue the Cer-
tificate of Insurance to the Darlings in his capacity as Director of
Major Medical and Chief Underwriter for Savers Life, testified in his
deposition that Mr. Darling's bulging cervical disk was "material to
the risk undertaken by Savers Life in underwriting[that] Certificate"
and that "the Certificate would not have been issued had that injury
and diagnosis been disclosed to Savers Life." Id. at 82. Gullett also
testified that Savers Life relies solely upon the Health Underwriters'
Guide issued by the American United Life Insurance Company as its
underwriting guidelines, see id. at 81; pursuant to those guidelines,
back problems of the sort suffered by Mr. Darling would require at
least that a rider attach to the policy, excluding coverage for that con-
dition, see id. at 95.
The Darlings assert that Savers Life actually published its own
underwriting guide and failed to disclose that fact to the Darlings. See
Appellants' Brief at 6. Consequently, the Darlings have submitted an
6
attachment to their brief that contains underwriting guidelines -- on
Savers Life letterhead -- which indicate that they are effective as of
October 1, 1992. See Appellant's Attachment to Brief [hereinafter,
"A.T.B."] at 1. This underwriting manual apparently was not submit-
ted to the district court. Whether the guidelines in the Attachment to
Brief are those actually relied on by Savers Life, however, is of no
significance because those guidelines also prescribe that a rider
should attach for back strain suffered within one year of application.
See A.T.B. at 2.
The Darlings argue that the fact that the guidelines merely pre-
scribe that a rider should attach indicates that their misrepresentation
was not material because it would not have precluded their ultimate
insurability. Ultimate insurability alone is not the test of materiality,
however. If a condition would preclude ultimate insurability then it
is certainly material, but a condition is not immaterial simply because
the applicants might still be insurable under some hypothetical set of
policy terms. Instead, information is material when a reasonable per-
son would regard it as likely to affect the insurance company's assess-
ment of the risk and thus its decision whether -- and on what terms
-- it is willing to provide coverage. See Atlantic Life Ins. Co. v.
Hoefer, 66 F.2d 464, 466 (4th Cir. 1933) (holding that a "representa-
tion is material when reasonably careful and intelligent men would
regard the fact involved as substantially increasing the chances of the
loss insured against; and that this is especially true when the insurer,
on becoming aware of the fact, would raise the rates or reject the risk
altogether"); Southern Farm Bureau Casualty Ins. Co. v. Ausborn,
155 S.E.2d 902, 908 (S.C. 1967) (holding that a"representation is
material when the insured knows or has reason to believe that it will
likely affect the decision of the insurance company as to the making
of the contract of insurance or as to its terms ") (emphasis added).
Thus, the fact that a rider would be required under either set of
guidelines confirms, rather than negates, a finding that Mr. Darling's
back condition was material, because it demonstrates that the condi-
tion was significant enough to the insurance company's assessment of
the risk insuring him would pose that it would automatically alter the
extent of the coverage the insurance company was willing to extend
to him. Even the Darlings' own expert, Gordon K. Rose, indicated in
his deposition that if an applicant for health insurance had a history
7
within a month prior to the application of a cervical disk bulge, the
insurance company would probably postpone the application and
require a full medical examination by the doctor that does medical
exams for the insurance company. See J.A. at 197. Presumably such
an examination would be necessary precisely so that the company
could effectively evaluate the impact that condition would have on the
risk it was considering assuming.
Mr. Darling's material misrepresentation alone would be sufficient
grounds for Savers Life to rescind its contract with the Darlings. At
oral argument, however, the Darlings' counsel contended that there
are "two cases" before this Court, and that Mr. Darling's misrepresen-
tation is irrelevant to whether Mrs. Darling was entitled to continuing
coverage from Savers Life. We find no basis for this contention.
Counsel's argument implies the existence of two separate contracts,
one between Mr. Darling and Savers Life and one between Mrs. Dar-
ling and Savers Life. The Darlings, however, completed only one
insurance application, were issued only one insurance certificate, and
entered into only one contract with Savers Life. See, e.g., id. at 53;
id. at 57. In fact, Mr. Darling was the policyholder or "the Insured"
under the Savers Life policy. See Application, J.A. at 53 (listing Mr.
Darling as the "applicant" and Mrs. Darling as the spouse of the appli-
cant); Certificate, J.A. at 61 (explaining that the"covered persons"
under the policy are "the Insured" and the insured's "spouse and . . .
unmarried, dependent children who are under the age of twenty-three,
named on application attached to this certificate"). Thus, it appears
that not only were Mr. and Mrs. Darling jointly, rather than sepa-
rately, insured by Savers Life, but also that Mrs. Darling's coverage
was, in some sense, derivative of Mr. Darling's coverage.
The only South Carolina case that even arguably supports the Dar-
lings' position is Johnson v. South State Ins. Co., 341 S.E.2d 793(S.C. 1986). In Johnson, the South Carolina Supreme Court held that
an insured's fraud as to one portion of the claim he submitted to his
insurer did not bar his recovery for that part of the claim that was not
fraudulent, id. at 793, even though the plain language of the contract
specifically provided that "th[e] entire policy shall be void if, whether
before or after a loss, the insured has wilfully concealed or misrepre-
sented any material fact or circumstance concerning this insurance or
the subject thereof . . . or in case of any fraud or false swearing by
8
the insured relating thereto," see Johnson v. South State Insurance
Co., 332 S.E.2d 778, 778 (S.C. Ct. App.) (quoting the insurance con-
tract at issue), rev'd on other grounds, Johnson, 341 S.E.2d at 794.
In so holding, the South Carolina Supreme Court cited with approval
the language of Kerr v. State Farm Fire & Casualty Co., 552 F. Supp.
992 (D.S.C. 1982), aff'd in part, rev'd in part on other grounds, 731
F.2d 227 (4th Cir. 1984), that "fraud will only void provisions tainted
by the fraud." See Johnson, 341 S.E.2d at 794.
One might argue by analogy that Mr. Darling's misrepresentation
taints only those provisions of the Savers Life policy that provide
coverage to Mr. Darling and that his coverage should thus be severed
from Mrs. Darling's coverage. However, this same logic would also
suggest that Mr. Darling's misrepresentation about his back condition
should only taint those provisions of the policy that provide coverage
for that condition -- or, in other words, that the insurer must prove
that there is a causal link between the misrepresentation and the claim
that it is refusing to pay. But the South Carolina Supreme Court has,
since Johnson, specifically rejected the requirement of a causal link
in the context of life insurance policies. See Carroll v. Jackson Nat'l
Life Ins. Co., 414 S.E.2d 777, 778 (S.C. 1992). The court held in
Carroll that an alleged material misrepresentation in an application
for life insurance need not be causally connected to the death of the
insured for the insurance company to void the policy and refuse pay-
ment. See id. Moreover, the court also indicated, more generally, that
"[t]he majority rule is that there is no requirement that the loss be
causally related to the material misrepresentation under a void insur-
ance policy," see id., and narrowed Johnson by indicating that its
requirement of a causal connection applies when construing an exclu-
sion in a valid policy rather than when determining whether a policy
can be voided for material misrepresentation, see id. n.1. Conse-
quently, it seems very unlikely that the South Carolina Supreme Court
would hold that Mr. Darling's coverage was severable from Mrs. Dar-
ling's coverage and thus that Mr. Darling's misrepresentation would
not void Mrs. Darling's coverage. Counsel's bald assertion that there
are two cases before us -- coming on the heels of his concession that
Mr. Darling did not and should have disclosed his back condition to
Savers Life -- appears to be little more than a last ditch attempt to
salvage at least part of the case for his clients.
9
In any event, the information the Darlings provided in the applica-
tion and subsequent telephone interview materially misrepresented
not only Mr. Darling's medical history, but Mrs. Darling's medical
history, as well. Although we disagree with the district court's finding
that Mrs. Darling has raised no issue of fact as to whether she inaccu-
rately represented her medical history by failing to disclose, inter alia,
that she had had thyroiditis, caesarian sections, ovarian cysts, gall
bladder surgery, and diarrhea and rectal bleeding, 4 we agree with the
district court's conclusion that no genuine factual dispute exists as to
the Darlings' material misrepresentations about Mrs. Darling's history
of chest pain and Mrs. Darling's treatment for dyspnea. The remain-
ing factual disputes about many of Mrs. Darling's alleged misrepre-
sentations are therefore irrelevant and do not preclude summary
judgment because the latter two misrepresentations (and Mr. Dar-
ling's misrepresentation) justified Savers Life's rescission of the pol-
icy.
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4 We believe that the Darlings, in fact, demonstrated the existence of
a factual dispute as to each of these issues. For example, Savers Life con-
tended, and the district court found, that Mrs. Darling had been diag-
nosed with thyroiditis on July 9, 1991 by Dr. Tracy, but that the
insurance application stated that she had never suffered from any disease
of the thyroid. In fact, Dr. Tracy's notes reveal, at most, a differential
diagnosis of thyroiditis that he would attempt to confirm through further
testing. See J.A. at 74 (stating Dr. Tracy's assessment as "Thyroiditis/
hyper[thyroid] state?"). Dr. Tracy's notes also appear to indicate that
Mrs. Darling's symptoms might be explained by "mono." See id.
Whether Mrs. Darling was ever definitively diagnosed with thyroiditis
would thus be a jury question. Similarly, a factual issue exists as to
whether the Darlings failed to disclose Mrs. Darling's history of caesar-
ian sections, ovarian cysts, and gallbladder surgery. Mrs. Darling testi-
fied in her deposition that she corrected any inaccuracies in her
husband's answers to the relevant application questions about each of
these conditions during her phone interview with Savers Life representa-
tive Norma Long. See Excerpts from the Deposition of Rhonda Darling,
A.T.B. at 145-47. Whether Rhonda Darling in fact provided the required
information in the telephone interview, thus correcting the inaccurate
answers in the application, would be a jury question. Additionally,
whether Mrs. Darling's diarrhea and rectal bleeding constitute "diseases"
that the Darlings should have disclosed on their application would be a
jury question as well.
10
The record indisputably reveals that Mrs. Darling experienced
chest pain while walking on the beach on March 4, 1992; that she was
seen by her physician, Dr. Tracy, that very day; and that Dr. Tracy
diagnosed Mrs. Darling with chest pain of undetermined origin. See
J.A. at 75 (stating Dr. Tracy's assessment as "chest pain cause unde-
termined (poss. reflux, etc.)"). Moreover, uncontradicted evidence in
the record confirms that this chest pain -- which occurred less than
two years before the application date -- was material to Savers Life's
assessment of the risk of insuring Mrs. Darling. Gullett testified that
"[p]ursuant to the underwriting guidelines utilized by Savers Life, the
Certificate would not have been issued had this treatment and diagno-
sis been disclosed." Id. at 83-84. Indeed, the Health Underwriters'
Guide, cautions that "[a]ny chest pain which prompts a medical con-
sultation is of Underwriting Significance. Approach carefully . . . ."
Id. at 100. The guidelines also indicate that"chest pain due to heart
disease" is an unacceptable risk, that "chest pain due to other cause"
requires a rider, and that "chest pain, cause not found" should be
referred to the medical director -- presumably, for further evaluation
of the risk.5 Id. at 100. Although the Darlings' counsel attempted, at
oral argument, to characterize Mrs. Darling's chest pain simply as
indigestion (based on the doctor's note that one possible explanation
was reflux syndrome), he conceded that if Mrs. Darling's history had
been disclosed, Savers Life would not have dealt with the risk simply
by issuing a rider (which alone establishes materiality), but would
have referred the application to the medical director for special con-
sideration of the risk associated with chest pain that has not been
definitively diagnosed. Indeed, the Darlings' own expert, Gordon K.
Rose, testified in his deposition that "[i]f an applicant for health insur-
ance present[ed] with a history nine months prior to the application
of chest pain of undetermined cause" he would consider that history
both "material" and "serious."6 Id. at 91.
_________________________________________________________________
5 The underwriting guidelines contained in the Appellants' Attachment
to Brief indicate that angina pectoris ("pain in chest usually associated
with heart or circulatory disease") requires a rider if more than two years
have elapsed since diagnosis and requires refusal of the application if
within two years of diagnosis. A.T.B. at 2.
6 Admittedly, the chest pain at issue occurred nineteen months, rather
than nine months, before the application date, but Rose's frank admission
nevertheless underscores the significance that underwriters attach to
undiagnosed chest pain.
11
Additionally, the Darlings also have raised no factual dispute that
would contravene the district court's finding that the failure to dis-
close Mrs. Darling's history of dyspnea (difficulty breathing) was a
material misrepresentation. Because Mrs. Darling had suffered from
a number of conditions about which the application specifically
inquired, Question 16 of the application required her to enumerate
and "give full details" about "any other ailments about which any
Doctor was consulted IN THE LAST 10-YEARS." Id. at 69. Thus, if
Mrs. Darling consulted with her doctor about dyspnea, she was obli-
gated to disclose that fact to Savers Life.
Mrs. Darling's medical records reveal that, on at least one occa-
sion, she consulted with Dr. Tracy because she was having difficulty
breathing. See id. at 75 (listing Mrs. Darling's subjective complaint
as, inter alia, "dyspnea"). Gullett indicated that Mrs. Darling's dys-
pnea was material to the risk assumed by Savers Life in underwriting
the Certificate and also concluded that the Certificate would not have
been issued if full disclosure of this condition had been made. See id.
at 83. The underwriting guidelines in the record confirm that dyspnea
of unknown origin is usually an unacceptable risk and that dyspnea
with an identified cause requires a rider. See id. at 97. Appellants
attempt to explain away Mrs. Darling's dyspnea by dismissing it
merely as Mrs. Darling's subjective complaint, which Dr. Tracy diag-
nosed as "spastic colon." However, even if Dr. Tracy's diagnosis of
"spastic colon" accounted for Mrs. Darling's breathing difficulties
(rather than the other symptoms she apparently complained of that
day), that means only that the cause of the dyspnea was identified and
that a rider -- rather than rejection of the application -- was required.
As discussed above, the requirement of a rider for a condition not dis-
closed confirms, rather than rebuts, a finding that that condition
would be material to the insurance company's assumption of the risk.7
As the foregoing demonstrates, the Darlings materially misrepre-
sented their medical histories in their application for Savers Life
_________________________________________________________________
7 Dr. Tracy apparently diagnosed"URI pleuritis (diaphragmatic)" as
well as "spastic colon," J.A. at 75, and the underwriting guidelines the
Darlings present in their Attachment to Brief specifically state that
pleuritis (or pleurisy) requires a rider if, as with Mrs. Darling, it occurs
within two years of the application date, see A.T.B. at 14.
12
insurance. Savers Life was therefore entitled, both by contractual lan-
guage and by South Carolina Code Annotated § 38-71-40, to rescind
its contract with the Darlings. Accordingly, the judgment of the dis-
trict court is affirmed.
AFFIRMED
13