Opinion
Case Number 01-10293-BC
May 13, 2002
This case involves a contest to the proceeds of a life insurance policy insuring the deceased, Larry D. Martin, between the deceased's children and a lender who claims to be an assignee of the policy benefits. The insurer, Transamerica Occidental Life Insurance Company ("Transamerica"), contends that it is not obliged to pay at all because of the failure to fulfill a condition precedent and the deceased's misrepresentation as to the state of his health. The parties have filed cross-motions for summary judgment. The Court heard the parties' oral argument on May 2, 2002.
The Court finds that Larry D. Martin failed to satisfy at least one condition precedent required by Transamerica's policy application, that the insurance policy therefore never went into effect, and therefore Transamerica is entitled as a matter of law to a dismissal of the breach of contract claims against it.
Because the Court will grant Transamerica's motion for summary judgment on this ground, it is unnecessary to consider Transamerica's alternate arguments for rescission and the remaining motions seeking allocation of the policy proceeds.
I.
Larry Martin was a principal owner of Black River Asphalt Corporation. On January 6, 1999, cross-claimant Northern Michigan Foundation ("NMF") loaned Black River Asphalt $250,000. Among other collateral security, NMF demanded that Martin obtain an insurance policy on his life in the amount of $250,000 to secure repayment of the Black River obligation in the event of his death.
Pursuant to the loan agreement, Martin executed an assignment stating NMF was the designated beneficiary of the life insurance policy for which Martin had applied to Transamerica.
On January 5, 1999, Martin completed an Application Part I for life insurance from Transamerica. He asked to be insured at the "preferred, nicotine qualification" class of risk. Further, by signing the Application Part I, Martin acknowledged and agreed that "[a]ll of the statements and answers given in this Application to the best of [Martin's] belief must be true and complete as of the date of [Martin's] personal receipt of the policy and that the policy will not take effect if the facts have changed." Transamerica S.J. M. Ex. A., Step I Application, at 2.
Martin completed Part II of the Application, which included a Paramedical Exam, on January 26, 1999. He paid his first annual premium at that time. Martin represented on this form that within the preceding five years, he had never been told that he had "cancer or [a] tumor," Id. ¶ 7(i), at 3, nor had he "[c]onsulted, been examined, or been treated by any physician or practitioner." Id. ¶ 6(a), at 3.
Transamerica declined to issue a policy to Martin at the requested "preferred, nicotine qualification" class of risk. Instead, on February 21, 1999 Transamerica issued the insurance policy to Martin at the higher "Standard Smoker" class of risk. Transamerica also furnished Martin an "Application Amendment" that he was required to sign as a precondition to delivery. On March 5, 1999, the insurance agent for Transamerica, Kenneth Pletcher, delivered the policy to Martin with the Amendment; Martin then signed the amendment form and paid the additional premium for the new policy.
Among other provisions, the amendment to the application contained the following section:
I represent, to the best of my knowledge and belief, that since the date of the application for the policy no person to be covered by the policy has, except as stated below:
1. Had a change in health due to injury or sickness; or
2. Consulted, been examined, or been treated by any physician or practitioner; or
3. Changed occupation, aviation or military status; or
4. Had any life or accident and sickness, or medical service benefits declined, modified, cancelled, or been refused issue, renewal or reinstatement of such insurance or benefits; or
5. Applied for issuance of reinstatement of any insurance providing income during disability or providing hospital or medical expense benefits.
The only exceptions are: (State "none" if there are no exceptions) ___.
Transamerica S.J. M. Ex. C, Application Amendment. Martin answered all the questions in his amendment to the application other than the question stated above. Martin neither checked a box indicating an exception nor stated "none" as instructed. Transamerica, however, accepted Martin's amendment to the application for life insurance and proceeded to collect premiums for the next several months.
Meanwhile, on February 18, 1999, Martin kept an appointment with his personal physician, Dr. Steven R. Frelier, to complain of "a large lump on the right side of his neck" that Martin had noticed six weeks earlier. At Dr. Frelier's direction, an ultrasound of the neck was performed that same date. The medical records note an impression of a "3 cm. mass involving the posterior aspect of the upper neck to the right of midline . . . likely representing an enlarged lymph node with internal changes suggesting chronic inflammation/neoplasm." Transamerica S.J. M. Ex. D, Frelier Notes.
Dr. Frelier referred Martin to Dr. William H. Avery who examined Martin the following day. At that visit, Dr. Avery conducted a detailed physical examination of Martin's neck mass, scheduled a CT scan for February 23, and also scheduled a return visit on February 24 for "tissue diagnosis or aspiration." Id. Ex. E, Avery Letter.
On February 23, 1999, a CT scan was performed on Martin at Dr. Avery's direction. The corresponding "diagnostic consultation" form completed by the attending doctor listed an impression of, among other things, a "2.8 by 2.1 cm mass in the right neck deep to the sternocleidomastoid muscle and posterior to the carotid sheath." A biopsy and further evaluation were recommended. Id. Ex. F, Diagnostic Consultation Form.
On February 24, 1999, a cytopathology report was issued by Dr. Judith A. Hoschner, a pathologist at Burns Clinic Medical Center in Petoskey, Michigan. The report listed a diagnosis "[s]uggestive of malignant lymphoma, fine needle aspirate, neck mass." Id. Ex. G, Cytopathology Report. On February 27, 1999, Martin again registered for outpatient care and received further diagnosis from Dr. Avery.
On March 24, 2000, without notice to NMF, Martin changed the designated beneficiary of his life insurance policy to his children, Josh Martin, Stephanie Hinkley, and Nathan Martin (the "Martin Children"), the plaintiffs in this case. Martin died of complications from cancer on April 22, 2000.
The Martin Children made a claim for the insurance death benefit, which was refused by Transamerica. In his letter denying the Martins' claim for the insurance proceeds, James R. Smith, claims director for Transamerica, stated that the policy would not have been issued had the company known of these changes in Martin's medical history. The plaintiffs do not dispute this assertion.
The Martin Children then filed suit against Transamerica in the Cheboygan County Circuit Court on June 27, 2001 to recover the $250,000 designated policy death benefit. NMF filed a separate complaint in the Antrim County Circuit Court on July 27, 2001 seeking the same proceeds. Transamerica timely removed both actions to this Court on August 13, 2001, and this Court subsequently ordered the actions consolidated in an interpleader action.
Transamerica filed its motion for summary judgment on Count I of its counterclaim on December 11, 2001. The Martin Children and NMF each filed responses to the motion, and also filed motions for partial summary judgment on their respective cross-claims questioning the proper recipient of the insurance proceeds if the policy were deemed valid by the Court.
II.
A motion for summary judgment under Fed.R.Civ.P. 56 presumes the absence of a genuine issue of material fact for trial. The Court must view the evidence and draw all reasonable inferences in favor of the non-moving party, and determine "whether the evidence presents a sufficient disagreement to require submission to a jury or whether it is so one-sided that one party must prevail as a matter of law." Anderson v. Liberty Lobby, Inc., 477 U.S. 242, 251-52 (1986). The "[s]ummary judgment procedure is properly regarded not as a disfavored procedural shortcut, but rather as an integral part of the Federal Rules as a whole, which are designed to secure the just, speedy and inexpensive determination of every action." Celotex Corp. v. Catrett, 477 U.S. 317, 327 (1986) (internal quotes omitted).
The party bringing the summary judgment motion has the initial burden of informing the district court of the basis for its motion and identifying portions of the record which demonstrate the absence of a genuine dispute over material facts. Mt. Lebanon Personal Care Home, Inc. v. Hoover Univ., Inc., 276 F.3d 845, 848 (6th Cir. 2002). The party opposing the motion then may not "rely on the hope that the trier of fact will disbelieve the movant's denial of a disputed fact" but must make an affirmative showing with proper evidence in order to defeat the motion. Street v. J.C. Bradford Co., 886 F.2d 1472, 1479 (6th Cir. 1989). A party opposing a motion for summary judgment must designate specific facts in affidavits, depositions, or other factual material showing "evidence on which the jury could reasonably find for the plaintiff." Anderson, 477 U.S. at 252. If the non-moving party, after sufficient opportunity for discovery, is unable to meet his or her burden of proof, summary judgment is clearly proper. Celotex Corp., 477 U.S. at 322-23.
Transamerica claims that it must prevail as a matter of law because it is undisputed that a precondition to the policy taking effect was not met: that none of the facts stated by Martin changed between the date of the application and Martin's personal receipt of the policy. Martin stated in his January 5, 1999 application that within the preceding five years he had not consulted or been examined by a physician, nor had he been told that he had cancer or a tumor. Those facts changed, argues Transamerica, and therefore the condition precedent was unfulfilled because Martin was examined by Dr. Frelier on February 18, 1999 and diagnosed with a malignant lymphoma six days later, all before he received the policy on March 5, 1999.
As noted above, the defendant has invoked this Court's jurisdiction on the basis of diversity of citizenship. In federal cases based on diversity jurisdiction, the court must apply the law of the forum state's highest court. Erie R.R. v. Tompkins, 304 U.S. 64, 78 (1938). If the state's highest court has not decided an issue, then "the federal court must ascertain the state law from `all relevant data.'" Garden City Osteopathic Hosp. v. HBE Corp., 55 F.3d 1126, 1130 (6th Cir. 1995) (quoting Bailey v. VO Press Co., 770 F.2d 601, 604 (6th Cir. 1985)). "Relevant data" includes the state's intermediate appellate court decisions, id., as well as the state supreme court's relevant dicta, "restatements of law, law review commentaries, and the `majority rule' among other states." Angelotta v. American Broad. Corp., 820 F.2d 806, 807 (6th Cir. 1987).
In this case, Michigan law governs. The Court shall, therefore, examine the plaintiff's complaint and the defendant's motion under Michigan law to determine whether the evidentiary materials submitted create a genuine issue of fact for trial.
A condition precedent "is an event, not certain to occur, which must occur, unless its non-occurrence is excused, before performance under a contract becomes due." Restatement (Second) of Contracts § 224 (1981). Michigan has long enforced agreements that excuse performance of a contract until a condition precedent is fulfilled. See, e.g., Sharrar v. Wayne Sav. Ass'n, 246 Mich. 225, 228-29, 224 N.W. 379, 381 (1929) (declaring valid a contract withholding subscriptions until quotas were satisfied); Ogilvie v. Inter-Ocean Ins. Co., 12 Mich. App. 652, 653, 163 N.W.2d 457, 458-59 (1968) (holding that condition precedent that insured remain "in good health" prior to delivery of policy was valid and would bar the policy if not satisfied). Such conditions are enforceable even if performance of the stated condition is impossible. In re Erickson's Estate, 346 Mich. 432, 436-38, 78 N.W.2d 256, 259 (1956). The failure to conform with the stated condition obviates the duty of the other party to perform the contract. Id.; see also Restatement (Second) of Contracts § 225(2) (1981). When such a condition is clear and requires no construction, it is unnecessary to pass upon the question of whether the condition is reasonable or unreasonable, and there is no fact issue to submit to the jury. Merrill v. Fidelity Cas. Co. of New York, 304 F.2d 27, 28-29 (6th Cir. 1962) (applying Michigan law).
Michigan courts generally have addressed representations gone bad under a misrepresentation framework. For example, the Michigan Supreme Court recently found misrepresentation in a case very similar to the facts at bar in Oade v. Jackson Nat'l Life Ins. Co. of Mich., 465 Mich. 244, 632 N.W.2d 126 (2001). In that case, the decedent had filled out a life insurance application claiming that he had neither suffered chest pains nor been hospitalized in the last five years. Although these answers were accurate at the time the application was completed, the decedent was subsequently admitted to the hospital for chest pains after he filed the application but before the issuance of the policy. The applicant also had signed an interim document in which he agreed that "no policy will go into force unless all my statements and answers in this application continue to be true as of the date I receive the policy," and that "if my health or any of my answers or statements given in this . . . supplement . . . change prior to the delivery of the policy, I must so inform the Company in writing." The insurance company, unaware of the changes in the decedent's health history, issued the policy. Nine months later, the decedent died of a heart attack. The insurance company investigated the decedent's health history, discovered the hospitalization for chest pains in the interim period between his application and issuance of the policy, and refused to pay out the value of the policy, claiming that the decedent had misrepresented his health history and had failed to satisfy conditions precedent to the insurance coverage. The supreme court agreed that the decedent had not complied with the continuing duty imposed by the interim document to supplement the application and found a misrepresentation that avoided the obligation to pay the death benefit.
The contract in this case does not contain a "continuing duty" requirement like the application in Oade, but it does include a condition precedent similar to language in Oade's interim document. Although the Michigan Supreme Court has not squarely addressed this particular type of condition precedent in a life insurance contract, relying instead on a misrepresentation theory, the enforcement of similar provisions in decisions from other states, coupled with the Michigan courts' enforcement of other types of conditions precedent against beneficiaries and insureds, leads the Court to conclude that the Michigan Supreme Court would enforce the condition precedent against the plaintiffs in this case to bar recovery. See, e.g., Ogilvie, 12 Mich. App. at 653, 163 N.W.2d at 458 (holding that unfulfilled condition precedent of continuing "good health" before delivery of the policy prevented insurance contract from taking effect); Dailey v. Mid-States Ins. Co., 321 Mich. 438, 441-42, 32 N.W.2d 698, 699-700 (1948) (upholding condition requiring claimants to file proof of loss with insurer within a defined period of time in order to receive compensation).
The Illinois intermediate appellate court recently addressed the enforceability of conditions precedent in Mijes v. Primerica Life Ins. Co., 740 N.E.2d 1160 (Ill.App.Ct. 2000). In that case, the insurance contract required as a condition of coverage that the insureds submit blood and urine samples upon request. The insurance company requested those specimens in June 1997, but the insured put off the testing and went on vacation instead, where she was killed in a car accident. The beneficiaries sued for breach of contract but the appellate court affirmed the trial court's entry of judgment for the insurer, holding that the provision for request of blood and urine samples was an unambiguous condition precedent for coverage, and by failing to conform with the condition, no contract of insurance could come into being. The court also held that the materiality of the condition was irrelevant, and an unfulfilled condition, irrespective of materiality, will bar recovery. Id. at 1163-64 (citing Restatement (Second) of Contracts § 237 cmt. d (1981) ("If . . . the parties have made an event a condition of their agreement, there is no mitigating standard of materiality or substantiality applicable to non-occurrence of that event.")).
Both the Martin Children and NMF have focused their arguments in this case on the state of Martin's knowledge of his cancer diagnosis as they urge this Court to find that a fact question exists on the issue of whether Martin knowingly misrepresented his medical condition. This argument, however, fails to address the issue of whether an enforceable contract could even come into existence, given the undisputed requirement of the prior condition of unchanged facts, and Martin's visits with multiple physicians and testing facilities.
The Court agrees with Transamerica that a condition precedent to the formation of the life insurance contract was not satisfied, and that no policy therefore ever came into being. By signing Part I of the insurance application on January 5, 1999, Martin acknowledged and agreed that "[a]ll of the statements and answers given in this Application to the best of [Martin's] belief must be true and complete as of the date of [Martin's] personal receipt of the policy and that the policy will not take effect if the facts have changed." Transamerica S.J. M. Ex. A at 2. This condition was not satisfied. Among the "statements and answers" provided in the Application Part II were Martin's representations that he had not been diagnosed with cancer or a tumor and had not visited or been tested by a physician within the last five years. Martin did not receive the policy until March 5, 1999, and there appears to be little dispute that he had been diagnosed with a malignant lymphoma by late February 1999. Even more clear is that Martin made several doctor visits between the time he submitted Part II of the application and his receipt of the policy, an unmistakable deviation from his earlier statement that he had not seen a physician for any reason within the previous five years.
The continuing accuracy of Martin's initial representations on the Application Part II was an unambiguous condition precedent of the life insurance policy being issued in this case. Neither NMF nor the Martin Children seriously dispute that the condition was not met, and the law is clear that the condition need not be material, although it plainly was in this case. The Martin children and NMF attempt to import from various misrepresentation cases the concept that the "good faith" or "medical condition" of the insured is a question for the jury, but those cases are not apposite to a defense based on the failure of a condition precedent. Good faith will not excuse a failure to perform a condition; if the condition is not excused by the obligee, the failure to meet the condition precludes the contract from coming into existence.
Although the plaintiffs allege that Transamerica "waived" the condition precedent by accepting premiums, no support for that assertion can be found in Michigan case law. The plaintiffs point to no express waiver, nor is any such waiver indicated in the record. See G.P. Enters., Inc. v. Jackson Nat'l Life Ins. Co., 202 Mich. App. 557, 564-65, 509 N.W.2d 780, 784 (1993) (holding that insurer does not waive right to assert condition precedent of continuing good health prior to delivery by delivering the policy). In the absence of an express waiver, only estoppel can be raised, and estoppel will only lie when the insurance company or the agent has knowledge of facts contrary to the insured's representations prior to the issuance of the policy. See, e.g., Hughes v. John Hancock Mut. Life Ins. Co., 351 Mich. 302, 311, 88 N.W.2d 557, 562 (1958) (holding that crucial health information imparted to agent but erroneously not passed onto insurer would estop the insurer from later denying coverage on the basis of misrepresentation). The plaintiffs do not allege, nor is there any supporting evidence in the record suggesting, that Transamerica had any knowledge of Martin's subsequent doctor's visits or cancer diagnosis until it conducted its investigation after Martin's death.
III.
Larry D. Martin failed to satisfy a crucial condition precedent to the insurance contract. Although his representations on Part II of the life insurance application were truthful when made in January 1999, they subsequently became inaccurate because the facts changed before the delivery of the policy to him in March 1999. An insurer has a right to establish reasonable conditions that must be fulfilled before its obligation to pay becomes enforceable. The parties do not assail the reasonableness of Transamerica's requirement that the facts upon which it makes its underwriting decision remain unaltered up to the point it issues the policy and takes on the risk. The fulfillment of a condition precedent does not depend on a party's intent, whether fraudulent or genuine. Either the condition was fulfilled or it was not.
The condition precedent in this case was not fulfilled because Martin visited several doctors subsequent to his submission of Part II of the application but prior to his receipt of the insurance policy. The parties agree on this material fact, and no other material facts remain in dispute. Consequently, the Court must find that the insurance contract never came into being, and therefore Transamerica properly refused payment of the death benefit and returned the premiums to the decedent's estate.
Because the Court finds that no insurance contract was ever formed between Larry Martin and Transamerica, it is unnecessary to consider Transamerica's alternate argument that Martin misrepresented his health status on the Application Amendment.
Furthermore, because there are no policy proceeds to distribute, the cross-motions for partial summary judgment seeking the proper allocation of those proceeds are moot.
Accordingly, it is ORDERED that Transamerica's Motion for Summary Judgment as to Count I of its counterclaim [dkt #18] is GRANTED.
It is further ORDERED that the plaintiffs' complaint and the cross-complaint of NMF are DISMISSED WITH PREJUDICE.
It is further ORDERED that the remaining cross-motions for partial summary judgment [dkt #s 19, 24, and 26] are DENIED AS MOOT.