Velez Gomez v. SMA Life Assurance

• Court: Court of Appeals for the First Circuit
• Decided: November 9, 1993
• Docket: 93-1430
• Status: Published

Opinion

USCA1 Opinion

UNITED STATES COURT OF APPEALS
                                FOR THE FIRST CIRCUIT
                                 ____________________

        No. 93-1430

                              JULIO VELEZ-GOMEZ, ET AL.,

                                Plaintiffs, Appellees,

                                          v.

                             SMA LIFE ASSURANCE COMPANY,

                                Defendant, Appellant.

                                 ____________________

APPEAL FROM THE UNITED STATES DISTRICT COURT

                           FOR THE DISTRICT OF PUERTO RICO

                   [Hon. Gilberto Gierbolini, U.S. District Judge]
                                              ___________________

                                 ____________________

                                        Before

                                  Cyr, Circuit Judge,
                                       _____________

                            Bownes, Senior Circuit Judge,
                                    ____________________

                              and Boudin, Circuit Judge.
                                          _____________

                                 ____________________

Frank Gotay-Barquet, with whom Gustavo  A. Gelpi, Edward A. Godoy,
            ___________________            _________________  _______________
        Feldstein,  Gelpi &  Gotay, and  Ralph L.  Diller,  Associate Counsel,
        __________________________       ________________
        State Mutual Companies, were on brief for appellant.
            John E. Mudd,  with whom Luis Ortiz  Segura and Cordero, Miranda &
            ____________             __________________     __________________
        Pinto were on brief for appellees.
        _____

                                 ____________________

                                   November 9, 1993
                                 ____________________

CYR, Circuit Judge.  SMA Life Assurance Co. (SMA) seeks
                    CYR, Circuit Judge.
                         _____________

          to set aside  the summary judgment entered in  favor of plaintiff

          appellee  Julio V lez  Gom z, contending,  inter  alia, that  the
                                                     _____  ____

          court below incorrectly ruled that the incontestability clause in

          the SMA  disability-income insurance  policy issued  to V lez  is

          ambiguous.  We vacate the  district court judgment and remand for

          further proceedings.

I
                                          I

                                      BACKGROUND
                                      BACKGROUND
                                      __________

The  relevant facts  are  recited  in  the  light  most

          favorable to SMA.   O'Connor v. Steeves, 994  F.2d 905, 907  (1st
                              ________    _______

          Cir. 1993).   V lez was diagnosed with  multiple sclerosis around

          1983.   Sometime in 1986,  V lez and his  wife attended a  dinner

          party at the home of their neighbor, Isidro Ortiz Pep n.  Amongst

          a group of people at the party, V lez's wife  made comments about

          her husband's health.  There  is no evidence that Ortiz overheard

          or  participated in  the conversation,  nor that Ortiz  was aware

          V lez had multiple sclerosis.1

                    Shortly  thereafter,  Ortiz,  who was  neither  an  SMA

          employee nor authorized to sell its insurance, arranged for V lez

          to meet with Luis R. Montes, an SMA  agent.  There was no discus-

          sion of  V lez's condition  at their meeting  and Montes  was not

____________________

               1There is evidence that Ortiz learned that V lez was experi-
          encing  "achaques," a Spanish word roughly equivalent to "general
          aches and pains."

made  aware of  V lez's  "achaques"  or  the  multiple  sclerosis

          diagnosis.

                    V lez represented on the SMA insurance application that

          he had  not been diagnosed  with, or received treatment  for, any
                  ___

          nerve  disorder (viz., multiple  sclerosis) during  the preceding
                           ____

          ten years.  On November 24, 1986,  SMA issued a disability-income

          insurance policy designating V lez as the insured.

                    In  June  of  1989, V lez,  claiming  total disability,

          applied  for benefits under the SMA policy.  Based on the alleged

          material  misstatement by V lez in the insurance application, SMA

          refused  to pay  on the  policy and  refunded all  premiums, with

          interest.  Whereupon, V lez brought the present action.

                    Following  discovery, the  parties filed  cross-motions

          for summary  judgment.   V lez contended  that  the two-year  bar

          period for contesting the policy had  expired, and, further, that

          SMA  was estopped  from contesting  the  policy based  on V lez's

          preexisting medical  condition  because  Ortiz,  allegedly  SMA's

          agent, had known at the time the policy was issued that V lez was

          suffering  from multiple  sclerosis.   According to  SMA, on  the

          other  hand,  the  incontestability  clause  tolled  the two-year

          period while V lez  was disabled, V lez became disabled less than

          two years after  the policy went into effect  and, therefore, SMA

          was still entitled to contest the policy.

                    The  district court found  for V lez on  the incontest-

          ability clause issue and two other liability theories.  See V lez
                                                                  ___ _____

4

Gom z  v. SMA  Life Assur. Co.,  793 F. Supp.  378 (D.P.R. 1992).
          _____     ____________________

          SMA appealed.

II
                                          II

                                      DISCUSSION
                                      DISCUSSION
                                      __________

We review a grant of summary  judgment de novo, employ-
                                                           __ ____

          ing the  same criteria incumbent  upon the district court  in the

          first instance.  Goldman v. First Nat'l Bank, 985 F.2d 1113, 1116
                           _______    ________________

          (1st  Cir.  1993).   Summary  judgment is  appropriate  where the

          record,  viewed in  the light  most favorable  to the  non-moving

          party,  reveals no  trialworthy  issue of  material fact  and the

          moving party is entitled to judgment as a matter of law.  Id.2
                                                                    ___

1.   The Incontestability Clause.
          1.   The Incontestability Clause.
               ___________________________

                    Incontestability  clauses  set  temporal limits  on  an

          insurer's  right to  challenge  its  insurance  policy  based  on

          alleged  misstatements in  the insurance  application.   The  SMA

          incontestability  clause,  a  simplified  version  of  the  model

          contained in the  Puerto Rico Insurance Code, see  P.R. Laws Ann.
                                                        ___

          tit. 26,   1606 (1977), provides:

                    (a) After this  policy has been in  force for
                    two years during your lifetime (excluding any
                                                    _________ ___
                    period during which you are disabled),  [SMA]
                    ______ ______ _____ ___ ___ ________
                    will not  be able  to contest the  statements
                    made in the application.

____________________

               2Contrary to  V lez's novel  contention, SMA's  cross-motion
          for summary judgment does not estop it from claiming that genuine
          issues of material fact precluded summary judgment against SMA.
                                                             _______ ___

                                          5

(Emphasis added.)  The quoted parenthetical governs this case.3

                    The district court found the parenthetical ambiguous as

          to  "whether  . . . disability  is  determined from  the  time of

          actual physical  disability, or  . . . from the  time of  the in-

          surer's notice of disability."  V lez Gom z,  793 F. Supp. at 381
                  ______ __ __________    ___________

          (emphasis  added).   On  appeal, SMA  contends that  the district

          court improvised ambiguity where there was none.

                    The insurance policy is to be interpreted in accordance

          with Puerto Rico law recently surveyed by this court:

                         Under  Puerto  Rico law,  the  Insurance
                    Code of Puerto  Rico, 26 L.P.R.A.     101, et
                    seq., controls  the interpretation  of insur-
                    ance contracts.   Roberto Mel ndez  Pi ero v.
                                      ________________________
                    Levitt & Sons of Puerto Rico, Inc., 91 J.T.S.
                    __________________________________
                    95, 9052 (December 13, 1991).  Article 11.250
                    of the Insurance Code of Puerto Rico provides
                    that every insurance contract  "shall be con-
                    strued according to the entirety of its terms
                    and conditions as  set forth  in the  policy,
                    and as  amplified, extended,  or modified  by
                    any lawful rider, endorsement, or application
                    attached  and made a part of the policy."  26
                    L.P.R.A.   1125.  See also Puerto Rico  Elec-
                                      ___ ____ __________________
                    tric Power  Authority  v.  Philipps,  645  F.
                    _____________________      ________
                    Supp. 770, 772  (D.P.R. 1986).  When  the In-
                    surance Code of Puerto Rico  does not provide
                    an  interpretive  approach for  a  particular
                    situation, the Civil  Code is used as  a sup-
                              
          ____________________

               3The  Puerto Rico  Insurance Code  authorizes the  following
          clause in disability-insurance policies:

               INCONTESTABLE:  After this policy has been in force for
               a period  of three  years  during the  lifetime of  the
               insured (excluding any period  during which the insured
                        _________ ___ ______  ______ _____ ___ _______
               is disabled), it  shall become incontestable as  to the
               __ ________
               statements contained in the application.

          P.R. Laws  Ann. tit.  26,    1606  (1977).   Deviations from  the
          Insurance Code model (e.g., SMA's  use of a two-year, rather than
                                ____
          a three-year, contestability period) are permitted  provided they
          benefit the insured.  Id.    1113(2), 1604 (1977).
                                ___

                                          6

plemental source  of law in  interpreting the
                    insurance contract.  Puerto Rico Housing Bank
                                         ________________________
                    v. Pagan Insurance  Underwriters, 11 Official
                       _____________________________
                    Translations 3,  8 (1981); 111  D.P.R. 1,  6;
                    Gonzalez v. John  Hancock Mutual Life  Insur-
                    ________    _________________________________
                    ance  Co., 927 F.2d 659, 669 (1st Cir. 1991).
                    _________
                    Article 1233 of  the Puerto  Rico Civil  Code
                    provides that when "the  terms of a  contract
                    are clear and leave no doubt as to the inten-
                    tions of the contracting parties, the literal
                    sense of its stipulations shall be observed."
                    31 L.P.R.A.   3471.

          Nieves v.  Intercontinental Life Ins.  Co., 964 F.2d 60,  63 (1st
          ______     _______________________________

          Cir. 1992).  As a  general matter, ordinary rules of construction

          apply to incontestability clauses.  1A J. Appleman, Insurance Law
                                                              _____________

          and Practice,   311 at  313 (1981) (hereinafter Appleman);  18 G.
          ____________                                    ________

          Couch, Couch on Insurance 2d    72:9 (rev. ed. 1983) (hereinafter
                 _____________________

          Couch).
          _____

                    The  first  interpretive  waymark, of  course,  is  the

          language of the parenthetical tolling provision itself:  "exclud-
                                                                    _______

          ing any period  during which you are disabled," where  we find no
          ___ ___ ______  ______ _____ ___ ___ ________

          ambiguity whatever.  Rather,  the parenthetical straightforwardly

          tolls the  running of the two-year period for the duration of any

          disability  commencing  within  it.   When  "the  wording  of the

          contract is  explicit and  its language is  clear, its  terms and

          conditions are binding on the parties."   Nieves, 964 F.2d at  63
                                                    ______

          (citations omitted).

                    Related  provisions  within  the  four  corners of  the

          policy  likewise  counsel  a common-sense  reading  of  the plain

          language of the tolling provision.  First, the  term "disability"

          is  defined in the policy as "injury or sickness [that] makes you

          unable to engage in your regular  occupation."  Thus, the date of

                                          7

disability is  the relevant tolling  event.  There is  nothing to

          suggest  that  post-disability  notification of  the  insurer  is

          germane to the  tolling inquiry.   Second, our interpretation  of

          the  parenthetical in paragraph  (a) comports precisely  with the

          language in companion paragraph (b):

                    (b) [SMA] will not be able  to reduce or deny
                    any claim  for disability which  starts after
                                   __________ _____  ______
                    two  years from the date of issue because the
                    disease or physical  condition existed before
                    the date of issue.  

          (Emphasis added.)   The hand-and-glove fit between  these coordi-

          nate provisions is completely undone by V lez's interpretation.

                    The parenthetical is adapted from a standardized incon-

          testability clause  mandated by  statute in  at least  forty-five

          states, the District of Columbia, and the U.S. Virgin Islands, in

          addition to Puerto  Rico.  We consider it  significant that every

          other court that has considered the matter to date has arrived at

          the interpretation  urged by  SMA, and no  court has  suggested a

          notification requirement.   See, e.g., Wischmeyer v.  Paul Revere
                                      ___  ____  __________     ___________

          Life Ins.  Co., 725  F. Supp.  995, 998  (S.D. Ind. 1989)  ("This
          ______________                                               ____

          clause  of the  contract is  plain  and unambiguous.")  (emphasis
          ______  __ ___  ________ __  _____  ___ ___________

          added);   Bronson v. Washington  Nat'l Ins. Co., 207  N.E.2d 172,
                    _______    __________________________

          176 (Ill.  App. 1965)  (Holding contestability  period tolled  at

          onset  of insured's disability); Taylor v. Metropolitan Life Ins.
                                           ______    ______________________

          Co., 214 A.2d 109,  114-15 (N.H. 1965) (same); Standard  Security
          ___                                            __________________

          Life Ins.  Co. v. Klamer, 276  N.Y.S.2d 645, 646 (N.Y.  App. Div.
          ______________    ______

          1967) (same);   Union Mut. Life  Ins. Co. v. Kevie,  215 N.Y.S.2d
                          _________________________    _____

          298 (N.Y. App. Div. 1961) (same).

8

An  understanding of the origins and function of incon-

          testability clauses  likewise confirms the construction  urged by

          SMA.   In  mandating a  contractual period  of repose  on insurer

          challenges to disability-income  insurance policies predicated on

          alleged misrepresentations in the insurance application, legisla-

          tures  accommodate the interests  of both insurers  and insureds,

          based  on two competing  policies:  promoting  insurance security

          and deterring insurance  fraud.  See Appleman,    311 at 305-306;
                                           ___ ________

          see also Couch,    72:16.  Thus, after  the contestability period
          ___ ____ _____

          has  run, the insurer  cannot withdraw insurance  protection even
                                                                       ____

          though the insurance application contained misstatements.  On the
          ______

          other hand, to  better forfend against the occasional insured who

          would perpetrate  fraud  at the  expense  of insurers  and  their

          fellow insurance consumers, the contractual limitations period is

          tolled  for  the duration  of any  disability arising  within the

          relativelybriefcontestabilityperiodfollowingissuanceofthepolicy.4
                              
          ____________________

               4As the Wischmeyer court explained:
                       __________

                    The clause protects an insured who is healthy
                    enough to work throughout the two-year period
                    from losing  the security  of disability  in-
                    surance because of some prior condition  that
                    might eventually  disable him.  On  the other
                    hand,  the insurer is protected in that it is
                    not precluded from denying benefits to an ap-
                    plicant  whose pre-existing  condition is  so
                    bad that he becomes disabled during  the two-
                    year period.

          Wischmeyer, 725 F. Supp. at 1001-02.
          __________

               Under the "notification"  theory adopted  below, however,  a
          dishonest insured  could frustrate  this legislative intent  com-
          pletely, simply by  waiting out the contestability  period before
          submitting a claim.   Thus, in our view  the parenthetical clause

                                          9

2.   The Date of Disability.
          2.   The Date of Disability.
               ______________________

                    As  an alternate basis  for summary judgment,  the dis-

          trict court specifically found that V lez did not become disabled
                                                            ______ ________

          until March 1,  1989, more  than two years  after the  policy was

          issued on November 24, 1986.  Thus, even under our reading of the

          incontestability clause, SMA  would be barred from  asserting the

          present challenge.

                    The district  court based  its disability-date  finding

          exclusively on a letter from IBM, stating that V lez was employed

          from August 9, 1971 until March 1, 1989, when he went on "medical

          disability."5   The  IBM  letter did  not  stand alone,  however.

          V lez's  claim for  disability  benefits  under  the  SMA  policy

          included a statement from his own physician indicating that V lez

          became "totally  disabled (unable to  work)" in October  of 1988,

          within two calendar  years after the policy issued.   The summary

          judgment record  further reveals  that V lez  filed a  disability

          claim with the Social Security Administration on June 5, 1989, in

          which he  represented (in  the  words of  the administrative  law

          judge) that  "he became  disabled as of  November 2, 1987  due to

          Multiple Sclerosis."   Given  this evidence,  and the  reasonable

          inferences  therefrom, Goldman,  985 F.2d  at  1116, the  factual
                                 _______

____________________

          clearly reflects  the legislature's rejection  of the  "notifica-
          tion" theory,  based on  policy grounds well within its exclusive
          domain.  Id. at 1004.
                   ___

               5The  IBM letter states:   "This will serve as certification
          that Mr.  Julio Velez was  employed by [IBM] from  August 9, 1971
          until he went on Medical Disability on March 1, 1989."

                                          10

dispute  over the  onset  of V lez's  disability  simply was  not

          amenable to summary disposition.

3.   The Duty to Investigate.
          3.   The Duty to Investigate.
               _______________________

                    As  its third ground for summary judgment, the district

          court held  SMA estopped from  contesting the policy  because (1)

          Ortiz  knew of  V lez's  multiple  sclerosis  before  the  policy

          issued;  (2)  Ortiz was  SMA's  agent; (3)  Ortiz's  knowledge is

          imputable to SMA; (4) V lez's health problems would have prompted

          a reasonably  prudent insurer to  investigate V lez's preexisting

          condition; and (5) SMA failed to  investigate during the contest-

          ability period.   Even assuming that the many  subsidiary factual

          and legal elements in its conclusion were properly resolved under

          our summary judgment jurisprudence,  the district court's conclu-

          sion cannot  stand.  Its thesis that SMA  failed to meet its duty

          to  investigate "during the  contestability period"  collapses in
                           ______ ___  ______________ ______

          view of  our determination, see  supra at pp. 6-8,  that the two-
                                      ___  _____

          year  contestability  period was  tolled  by V lez's  intervening

          disability.

                    Further,  the  district  court ruling  falters  on  its

          impermissible  factual premise that SMA was on notice of "certain

          medical conditions" which  would have prompted a  prudent insurer

          to investigate.    Our summary  judgment jurisprudence  precludes

          judicial resolution of genuine issues of material fact.  Goldman,
                                                                   _______

          985 F.2d at 1116.  No doubt what Ortiz knew about V lez's medical

          condition, see supra at pp. 2-3, may be hotly contested at trial.
                     ___ _____

          At the  summary judgment  stage, however, there  is "no  room for

                                          11

credibility  determinations, no room for the measured weighing of

          conflicting  evidence such as the trial  process entails, no room

          for the  judge to  superimpose his own  ideas of  probability and

          likelihood (no matter how reasonable those ideas may be) . . . ."

          Greenburg v.  Puerto Rico  Maritime Shipping Auth., 835 F.2d 932,
          _________     ____________________________________

          936  (1st Cir. 1987). Drawing all reasonable inferences favorable

          to  SMA,  as  we must,  see  Goldman,  985 F.2d  at  1116,  it is
                                  ___  _______

          inconceivable  to  us  that V lez's  wife's  dinner-party comment

          about  her husband's  "achaques" ("aches  and pains")  reasonably
                                 ________

          could be considered  conclusive evidence sufficient to  require a

          prudent insurer to act on  any general duty to investigate during

          the contestability period.6

                    Given the plain language in the incontestability clause

          and the  inconclusive state of  the summary judgment  record, the

          legal and factual grounds for holding that SMA violated a duty to

          investigate during the contestability period were untenable. 

____________________

               6The two cases the district  court relied on for its holding
          that  insurers have  a general "duty  to investigate"  during the
          contestability period, Rodriguez  v. John Hancock, 110  D.P.R. 1,
                                 _________     ____________
          10 Official Translations 913 (1980),  and Heirs of Roche v. Banco
                                                    ______________    _____
          de la Vivienda, 103 D.P.R. 656, 3 Official Translations 1 (1975),
          ______________
          are inapposite.  Both involved attempts to contest policies after
          the expiration of the contestability period.  Neither case stands
          for the proposition that insurers have a general duty to investi-
          gate, nor  that a failure  to investigate might estop  an insurer
          from challenging a policy, during the contestability period.
                                     ______ ___ ______________ ______

                                          12

III
                                         III

                                      CONCLUSION
                                      CONCLUSION
                                      __________

For the foregoing reasons, the judgment of the district

          court must be vacated  and the case must be remanded  for further

          proceedings.

                    The  district court judgment is vacated and the case is
                    ___  ________ _____ ________ __ _______ ___ ___ ____ __

          remandedfor further proceedings consistent herewith.  So ordered.
          ___________ _______ ___________ __________ ________   __ _______

13