Northwestern Mutual Life Insurance v. Babayan

Opinions of the United
2005 Decisions States Court of Appeals
for the Third Circuit

11-30-2005

NW Mutl Life Ins Co v. Babayan
Precedential or Non-Precedential: Precedential

Docket No. 04-3521

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 PRECEDENTIAL

UNITED STATES COURT OF APPEALS
FOR THE THIRD CIRCUIT

No. 04-3521

THE NORTHWESTERN MUTUAL
LIFE INSURANCE CO.

v.

KATHLEEN L. BABAYAN

D.C. Civil Action No. 03-cv-00717

KATHLEEN BABAYAN

v.

THE NORTHWESTERN MUTUAL
LIFE INSURANCE COMPANY;
JOSEPH M. SAVINO, GENERAL AGENT
NORTHWESTERN MUTUAL
FINANCIAL NETWORK A/K/A
AND D/B/A THE SAVINO
FINANCIAL GROUP; THOMAS GALLINA

D.C. Civil Action No. 03-cv-01622
 Kathleen L. Babayan,

Appellant

On Appeal from the United States District Court
for the Eastern District of Pennsylvania
(D.C. Nos. 03-cv-00717 and 03-cv-01622)
District Judge: Honorable Michael M. Baylson

Argued October 26, 2005

Before: SLOVITER, FISHER, and GREENBERG, Circuit Judges.

(Filed November 30, 2005)

David S. Senoff (Argued)
Billet & Connor
2000 Market Street, Suite 2803
Philadelphia, PA 19103
Attorney for Appellant

Daniel J. Zucker (Argued)
260 South Broad Street, Suite 1200
Philadelphia, PA 19102
Attorney for Appellee,
Northwestern Mutual Life Ins. Co.

2
Charles W. Craven (Argued)
John P. Penders
Marshall, Dennehey, Warner,
Coleman & Goggin
1845 Walnut Street, 16th Floor
Philadelphia, PA 19103
Attorneys for Appellee,
Thomas Gallina

OPINION OF THE COURT

FISHER, Circuit Judge.

For the third time in the past four years, we are asked to
determine whether summary judgment was properly granted in favor
of an insurer on the basis that an insurance applicant’s material
omissions on an application constituted bad faith as a matter of law
and rendered the policy void ab initio. Compare Justofin v.
Metropolitan Life Ins. Co., 372 F.3d 517 (3d Cir. 2004), with Burkert
v. Equitable Life Assur. Soc. of America, 287 F.3d 293 (3d Cir. 2002).
Appellant Kathleen Babayan argues that our recent decision in
Justofin created a “bright-line” rule that bad faith can never be
inferred as a matter of law if the applicant provides some relevant
medical information, but fails to provide complete information. We
decline to adopt Babayan’s proposed bright-line rule in this case. The
record contains incontrovertible documentary evidence that Babayan
omitted information in bad faith, and there is no relevant relationship
between the information Babayan provided on her application and the
specific information she omitted. Accordingly, we will affirm the

3
judgment of the District Court that Babayan’s omissions on her
insurance application constituted bad faith as a matter of law.

We also reject Babayan’s remaining grounds for appeal. We
conclude that the District Court did not err in granting summary
judgment in favor of Appellee Northwestern Mutual Life Insurance
Co. (“Northwestern”) with respect to Babayan’s novel bad faith claim
premised upon Northwestern’s “post-claim underwriting” practices.
In addition, we hold that the District Court did not err in granting
summary judgment in favor of Babayan’s insurance agent, Thomas
Gallina, as to Babayan’s negligence claim because Gallina’s actions
did not cause Northwestern to rescind Babayan’s policy.

I. Background

A. The Application Process

After missing six days of work because of Bell’s Palsy
Disorder in late December 2000, Babayan decided to obtain disability
income insurance. In January 2001, Babayan telephoned Gallina’s
insurance agency. Shortly thereafter, Gallina met with Babayan at her
office in New Jersey. During this meeting, Babayan provided Gallina
with general, personal information for Gallina to use in preparing a
specific insurance proposal. Several weeks later, on February 11,
2001, Gallina presented his proposal to Babayan.

Babayan agreed to go forward with the application process
and filled out a disability insurance application and a nonmedical
questionnaire. Each of the documents required Babayan to respond
to a number of specific questions that required either a “yes” or “no”
response. Gallina verbally asked Babayan each question, then
recorded her response on the application and the nonmedical

4
questionnaire. Gallina testified at his deposition that he read the
questions from the documents verbatim.

The crux of the dispute between the parties is the interaction
between Gallina and Babayan at the February 2001 meeting,
particularly Babayan’s “responses” to two of the questions. Question
14.K.2 of the disability insurance application asked:

In the past 5 years, has the Insured been in a motor
vehicle accident, has the Insured been charged with a
moving violation of any motor vehicle law, or has the
Insured’s driver’s license been restricted, suspended,
or revoked?

Babayan does not dispute that Question 14.K.2 was answered “no” on
the insurance application. Neither does Babayan dispute that the
answer to Question 14.K.2 is false. According to Babayan, she
informed Gallina that she had previously been involved in a motor
vehicle accident and a slip-and-fall accident in 1995 or 1996.1
Babayan claims that Gallina told her not to disclose the incidents
because “that’s far enough away.” Gallina allegedly told her, “I don’t
think it will be a problem, but when you sign the medical waiver, they
go get your records from your doctors and they’ll find out that stuff.”
Thus, Babayan asserts that she acquiesced in Gallina’s advice to mark
“no” on the application.

In addition, Babayan answered “no” to Question 33.k of the
nonmedical questionnaire, which stated: “In the last 10 years, have

1
With her memory refreshed at her deposition, Babayan
acknowledged that she had been in a motor vehicle accident on
September 24, 1996, within five years of the February 11, 2001 date
she submitted her application.

5
you had, been told you had or been treated for: Arthritis, sciatica,
gout, or any disorder of the muscles, bones, joints, spine, back or
neck?”2 There is no evidence in the record that Babayan asked
Gallina any questions relating to Question 33.k, or that Gallina gave
Babayan any advice on how to answer the question.

After Gallina finished filling out the questionnaire in response
to Babayan’s answers, Babayan signed both the insurance application
and the nonmedical questionnaire. Each of the documents contained
certain representations above the signature line.3 By signing the

2
Northwestern argued in its motion for summary judgment
that Babayan’s false responses to Questions 36 and 37 also
constituted bad faith as a matter of law. The District Court, however,
rejected that argument, stating that: “Babayan’s answers to questions
36 and 3[7] appear to call for more subjective answers, such that
inconsistencies in responses might not incontrovertibly establish bad
faith, as a matter of law.” Because the District Court did not rely
upon Babayan’s answers to these questions in its opinion, we need
not examine these discrepancies in detail.
3
Babayan’s insurance application contained the following
representation:

The Insured consents to this application and declares
that the answers and statements made on this
application are correctly recorded, complete and true
to the best of the Insured’s knowledge and belief.
Answers and statements brought to the attention of the
agent, medical examiner, or paramedical examiner are
not considered information brought to the attention of
the Company unless stated in the applications.
Statements in this application are representations and

6
application and the nonmedical questionnaire, Babayan represented
that her answers on both forms were truthful and accurate.

The answers contained on the insurance application and the
nonmedical questionnaire set forth above, however, were false.
Babayan was in an automobile accident on September 24, 1996,
within five years of the date she submitted her insurance application.
In addition, Babayan was treated by several physicians between 1996
and February 2001 for neck, back, hip, leg, and knee pain resulting
from her automobile accident, as well as a separate slip-and-fall
accident in July 1996. Babayan acknowledged in her deposition that
the answer to Question 33.k was false; she stated, however, that she
thought that the word “disorder” meant “disease.” Babayan further
testified that had she read Question 33.k at the February 11, 2001
meeting with Gallina, she would have asked Gallina to explain what
the question meant to clear up any misunderstanding. She claims that
if Gallina had told her that Question 33.k referred to “treatment for
ongoing problems,” she would have answered “yes” based upon her
“new understanding.”

Babayan asserts that written notes she took during her
February 11, 2001 meeting with Gallina confirm her version of the
events. Additionally, Babayan stated that Gallina told her she would
have to sign a waiver authorizing Northwestern to obtain her medical
records. Babayan signed the authorization for release of her medical

not warranties.

Similarly, the nonmedical questionnaire contained the following
representation above the signature line: “I declare that my answers
and statements are correctly recorded, complete, true to the best of my
knowledge and belief. Statements in this application are
representations and not warranties.”

7
records, and she informed Northwestern on the nonmedical
questionnaire that Dr. Joseph Kipp was her primary care physician.

B. Paramedical Examination

On February 13, 2001, a paramedical examiner took
Babayan’s blood pressure and asked her some further questions about
her medical history. Several of the questions the examiner asked
Babayan were identical to questions she had previously answered in
her meeting with Gallina. Babayan testified at her deposition that she
did not remember specific questions the examiner asked her, although
she stated that the examiner “must have asked me obviously at least
some of them.” One of the questions the examiner asked Babayan
was Question 33.k. As in her prior answer on the nonmedical
questionnaire, Babayan answered “no” to Question 33.k on the
paramedical questionnaire.4 Babayan testified at her deposition that
she did not read the paramedical questionnaire before signing it. She
further stated that if she had read the responses marked by the
examiner, she would have realized the answers were incomplete and
inaccurate. Despite not reading the answers marked by the examiner,
Babayan signed the paramedical questionnaire, thereby representing
that her answers and statements were “correctly recorded, complete,
and true to the best of [her] knowledge and belief.”

After receiving Babayan’s application, nonmedical
questionnaire, and paramedical questionnaire, Northwestern
underwriter Cynthia Guss approved Babayan’s policy on March 3,
2001. Guss did not obtain any of Babayan’s medical records at the
time because she “didn’t feel that the medical history provided

4
Questions 31-42 of the paramedical questionnaire were
identical to questions 31-42 on the nonmedical questionnaire
completed by Gallina.

8
warranted medical records being ordered.” In addition, Guss testified
at her deposition that the inconsistencies in Questions 36 and 37 did
not merit ordering Babayan’s medical records.5 After the application
was approved, Gallina delivered the policy to Babayan in March
2001. The effective date of the policy was February 13, 2001, the
date Babayan underwent the paramedical examination.

C. Subsequent Illnesses and Rejection of Claim

Beginning in March or April 2001, Babayan started suffering
from fatigue, pain, headaches, and an inability to concentrate. Dr.
Kipp gave Babayan a preliminary diagnosis of fibromyalgia. Over
the course of the next ten months, Babayan sought treatment from Dr.
Kipp and a number of other physicians for her symptoms. In
February 2002, Babayan applied for and received short-term disability
income payments from the State of New Jersey.6

On March 23, 2002, approximately one year after her
symptoms began, Babayan applied for disability benefits under her
insurance policy. Northwestern assigned disability benefit specialist

5
Regarding Question 36, Babayan told the examiner that she
saw Dr. Kipp for a virus in January 2001. Guss stated that she did not
view a virus “as being something that would cause an extended
disability, keep one from preventing to work at their own occupation
for any significant amount of time.” Regarding Question 37, Guss
concluded that Babayan’s answer did not merit further inquiry
because Babayan said she only missed six days of work due to Bell’s
Palsy virus.
6
Although a resident of Pennsylvania, Babayan worked in
New Jersey and was entitled short-term disability benefits pursuant
to New Jersey law.

9
Lisa Duller to review Babayan’s claim. Duller testified in her
deposition that she made the decision to institute a “constestability”
review of Babayan’s claim because company policy provides that
such a review is automatically performed if a claim is filed within two
years of the application date. Babayan’s application caused Duller to
request certain information from Babayan, including an “Attending
Physician’s Statement” from Dr. Kipp. Dr. Kipp completed the
statement, indicating that he had diagnosed Babayan with
fibromyalgia, depression, chronic pain, and cognitive dysfunction,
and that he had set forth a treatment plan that included pain
management and examination by specialists. Duller also requested
medical records from all of the doctors identified in Dr. Kipp’s
records as providing treatment to Babayan.

Thereafter, Northwestern began a more extensive
investigation of Babayan’s claim. Duller authorized an outside
private investigation service to obtain information about Babayan.
Furthermore, on May 3, 2002, a Northwestern representative, Jim
Porter, interviewed Babayan at her home. During the course of that
interview, Porter informed Babayan that her full and complete
medical history, including her motor vehicle accident and slip-and-
fall accident, had not been reported to Northwestern by Gallina or the
paramedical examiner.

In summer 2002, Babayan was diagnosed with Sjogren’s
Syndrome, an autoimmune disorder, and primary biliary cirrhosis.
Babayan advised Northwestern of her new diagnosis, and informed
the company that the original diagnosis of fibromyalgia might no
longer be applicable.

On July 11, 2002, Duller referred Babayan’s file to Steve
Kien, an underwriter at Northwestern. Kien’s job was to review all
of the information in Babayan’s file to come to a determination

10
whether Northwestern would have issued the policy to Babayan based
upon the information it received during the contestability review. In
a memorandum to Duller dated July 19, 2002, Kien concluded: “Had
we been aware of the chronic pain and arthralgias symptoms,
extensive treatment history and MRI confirmed disc disease and
degenerative changes in the right knee, policy D1408128 would have
been declined.” Duller made the decision to recommend rescission
of the policy on July 26, 2002.

On that same date, Duller sent a memorandum to her
supervisor, Sharon Raymond. Duller testified at her deposition that
she made the recommendation to rescind the policy based upon
Kien’s conclusions. Duller further testified that she probably would
have recommended that the policy be reformed by adding certain
riders to the policy had that been Kien’s recommendation. Raymond
agreed with Duller’s recommendation, and, on August 21, 2002,
Duller sent a letter to Babayan rescinding her policy. Duller enclosed
a check totaling Babayan’s premium payments, plus interest, and
informed Babayan that by cashing the check she would release
Northwestern from all claims.7 Babayan did not cash the check.

II. Procedural History

On February 4, 2003, Northwestern filed a two count
complaint alleging misrepresentation and fraud and deceit.
Northwestern sought to have Babayan’s policy declared void ab
initio, to have the policy returned, and to receive costs, fees and other
relief. On March 17, 2003, Babayan filed a complaint against
Northwestern and Joseph M. Savino. The parties stipulated to

7
There were two drafts of the final August 21, 2002 letter.
Duller testified that the August 21, 2002 letter contained all of the
bases for Northwestern to rescind the policy.

11
consolidate the actions for all purposes, and, pursuant to an additional
stipulation, Savino was dismissed with prejudice.

Babayan filed an amended five count complaint on December
24, 2003, against Northwestern and Gallina seeking a declaratory
judgment against Northwestern, alleging bad faith denial of insurance
benefits and breach of contract against both defendants, and alleging
breach of fiduciary duty and negligence against Gallina.8
Northwestern and Gallina filed motions for summary judgment as to
all counts in the complaint. On August 24, 2004, the District Court
granted summary judgment to Northwestern and Gallina. The
District Court first determined that Northwestern could rescind
Babayan’s policy because Babayan knowingly made false and
material misrepresentations as a matter of law. Because this
determination rendered the policy void ab initio, the District Court
then held that Northwestern was entitled to summary judgment on
Babayan’s breach of contract claim. The District Court next
concluded that summary judgment was appropriate in favor of
Northwestern with respect to Babayan’s bad faith claim. Finally, the
District Court held that Gallina was entitled to summary judgment as
to Babayan’s negligence and breach of fiduciary duty claims.9 As to
the negligence claim, the District Court held that Babayan failed to
produce sufficient evidence establishing that Gallina owed her a duty
of care. In addition (based upon its earlier finding that Babayan’s
conduct was fraudulent as a matter of law), the District Court held

8
Babayan’s amended complaint originally alleged breach of
fiduciary duty and negligence claims against Northwestern, as well.
Babayan, however, voluntarily dismissed with prejudice those claims
on January 7, 2004.
9
The District Court’s determination as to the breach of
fiduciary duty claim is not a subject of this appeal.

12
that Babayan could not obtain contribution for her own willful
misconduct as an intentional tortfeasor. Alternatively, the District
Court held that Babayan’s claims against Gallina were barred by the
applicable two-year statute of limitations.

Babayan filed a timely notice of appeal on August 26, 2004.
The District Court had subject matter jurisdiction pursuant to 28
U.S.C. § 1332, because the parties are citizens of different states
(Babyan: Pennsylvania; Northwestern: Wisconsin; Gallina: New
Jersey) and the amount in controversy exceeds the sum of $75,000,
exclusive of interest and costs. We have jurisdiction over an appeal
from a final order of the District Court pursuant to 28 U.S.C. § 1291.
We exercise plenary review over the District Court’s entry of
summary judgment in favor of Northwestern and Gallina. Morton
Int’l, Inc. v. A.E. Staley Mfg. Co., 343 F.3d 669, 679 (3d Cir. 2003).
We therefore apply the summary judgment standard set forth under
Federal Rule of Civil Procedure 56(c). Under that standard, we will
affirm the judgment of the District Court “if the pleadings,
depositions, answers to interrogatories, and admissions on file,
together with the affidavits, if any, show that there is no genuine issue
as to any material fact and that the moving party is entitled to a
judgment as a matter of law.” FED .R.CIV .P. 56(c).

III. Discussion

A. Northwestern’s Rescission Claim

The initial issue confronting the Court is whether Babayan’s
answers to Question 14.K.2 of the insurance application and Question
33.k of the nonmedical and paramedical questionnaires were
knowingly false or made in bad faith. After reviewing the applicable
case law, we conclude that Babayan’s answer to Question 14.K.2 did
not constitute bad faith as a matter of law. If we were considering

13
Babayan’s answer to Question 14.K.2 alone, we would be required to
reverse the judgment of the District Court. We are not, however, and
we hold that Babayan’s answer to Question 33.k constituted bad faith
matter of law for the reasons set forth below.

1.

Generally, in order to void an insurance policy under
Pennsylvania law,10 an insurer has the burden of proving, by clear and
convincing evidence, the following three factors: (1) the insured
made a false representation;11 (2) the insured knew the representation
was false when it was made or the insured made the representation in
bad faith; and (3) the representation was material to the risk being
insured. Justofin, 372 F.2d at 521 (citing Coolspring Stone Supply,
Inc., v. Am. States Life Ins. Co., 10 F.3d 144, 148 (3d Cir. 1993)). In
deciding a motion for summary judgment, the court is required to take
the heightened standard of proof into account. Id. at 521-22 (“Where
the clear and convincing standard applies, the trial judge must inquire
whether the evidence presented is such that a jury applying that
evidentiary standard could find only for one side.”).

The parties do not dispute that the general framework as set
forth in Justofin governs Northwestern’s rescission claim. Nor do
they dispute that Northwestern proved the first (falsity) and third
(materiality) factors as a matter of law. The dispute centers around

10
The parties agree that Pennsylvania law applies to the
pending appeal.
11
Under Pennsylvania law, a false representation includes an
omission of an insured’s medical information. See Justofin, 372 F.3d
at 522 (citing Grimes v. Prudential Ins. Co. of Am., 585 A.2d 29, 31-
32 (Pa. Super. Ct. 1991)).

14
the District Court’s determination that there were no genuine issues
of material fact as to whether Babayan’s answers were knowingly
false or made in bad faith.

2.

Two recent decisions of this Court reached contrary
conclusions as to whether, at the summary judgment stage, an insurer
could obtain a judgment as a matter of law based upon the insured’s
false misrepresentations in an insurance application. Because of their
importance to the pending appeal, we discuss each of the decisions in
detail.

In the first decision, Burkert, we held that a life insurance
policy was void ab initio because the applicant knowingly made
materially false misrepresentations in his insurance application. In
that case, the decedent, Seth Jamison, applied for a $1 million dollar
life insurance policy through Equitable Life. In connection with his
application, Jamison was required to state: (1) whether he used
narcotics and other drugs within the last ten years; and (2) whether he
received medical counseling or medical treatment regarding the use
of alcohol or drugs. Jamison answered that he was treated for cocaine
abuse in the late 1980s and early 1990s, but that he had “no problems
since.” Burkert, 287 F.3d at 297.12 We granted summary judgment
in favor of the insurer on its rescission claim because the irrefutable
evidence revealed that Jamison was undergoing treatment for cocaine
addiction with his clinical psychiatrist at the time he filled out the
application. Id. We rejected the beneficiaries’ argument that
Jamison’s answers were ambiguous, finding that Jamison’s

12
Similar to Babayan’s application above, Jamison’s
application contained a representation that his answers were “true and
complete to the best of my knowledge and belief.” Id.

15
“incomplete” answers did not raise a question of fact because “fraud
is presumed . . . from knowledge of the falsity.” Id. (quoting
Coolspring Stone Supply, Inc., 10 F.3d at 148). We further stated that
an “inference of fraud is irresistible when, for example, unreported
illness or disability of the insured was so serious and so recent that he
could not have forgotten it.” Id. (quoting Evans v. Penn. Mut. Life
Ins. Co., 186 A. 133, 138 (Pa. 1936)). Accordingly, we held that the
beneficiaries’ argument that Jamison’s answers were simply
“incomplete” was “frivolous” in the face of substantial,
incontrovertible evidence that Jamison was using drugs and
undergoing treatment for drug and alcohol abuse at the time he
completed his application. Thus, Jamison’s misrepresentations
constituted bad faith as a matter of law.

Two years after our decision in Burkert, we came to a
different conclusion after considering a similar issue in Justofin
regarding whether an insurance applicant’s misstatements in her
application constituted bad faith as a matter of law.

Loretta Justofin initially applied for a life insurance policy
from MetLife in 1994. In that application, she stated that her son, Dr.
Christopher Justofin (“Dr. Justofin”) was her personal physician, and
that he treated her for occasional arthritis of the hands and feet.
Justofin, 372 F.3d at 519. MetLife subsequently issued Justofin a life
insurance policy in the amount of $100,000. In 1999, Justofin applied
to MetLife for additional coverage (up to $300,000). In connection
with that process, Justofin was required to complete an additional
application. Justofin answered “yes” to two questions on the
application: (1) that she had been treated for, inter alia, arthritis; and
(2) that she had been examined by a physician within the past five
years. Id. at 519-20. Because Justofin answered “yes” to both
questions, the application instructed her to provide further details,
including: the name of each physician, the nature and severity of her

16
condition, the frequency of attacks, specific diagnoses, and treatment.
Id. at 520. Justofin listed the names of several doctors she had
consulted for treatment, details of the treatment she undergone, and
that she had foot surgery for her arthritis. Justofin, however, did not
mention in the application that her son was her physician. In
addition, Justofin stated in part B of the application that she had
arthritis and that she took Prednisone for her arthritis back in 1969.
In part C of the application, Justofin indicated that she had an
“unknown” type of arthritis that caused her hands to swell.

After Justofin passed away, MetLife brought an action to
rescind her policy on the basis that she knowingly failed to disclose
that her son was her physician and that she was prescribed
Prednisone. The insured relied upon deposition testimony from Dr.
Justofin that he was his mother’s personal physician from 1994 until
1998; that he visited his mother weekly during that period to examine
her and pick up his mail; that his mother had arthritis (either
rheumatoid, osteoarthritis, or both); and that he used to prescibe a six-
month supply of Prednisone for his mother’s arthritis. Id. at 520. We
agreed that Justofin made false representations in the 1999 change
application because the irrefutable evidence in the record showed that
Justofin clearly failed to inform MetLife that she took Prednisone for
her arthritis between 1994 and 1998. Id. at 522. We disagreed,
however, that Justofin’s misrepresentations constituted bad faith as
a matter of law. We noted the general rule that “an insured’s state of
mind is an issue of fact for the jury” because “evaluating state of
mind often requires the drawing of inferences from the conduct of
parties about which reasonable persons might differ.” Id. at 522-23.
Applying this standard, we held that Justofin’s answers in her change
application did not incontrovertibly establish her bad faith. In so
holding, we stated that there were at least two possible reasonable
inferences from the evidence that precluded summary judgment.
First, a jury could conclude that Justofin might not have thought that

17
her son’s casual visits were important enough to report in her new
application because: (a) she had already disclosed in the initial
application that her son was her physician; and (b) her son
discontinued his weekly visits one year prior to her submitting the
change application. Id. at 524.13 Second, as to Justofin’s failure to
list the type of arthritis she suffered from, and to disclose that she was
taking Prednisone to combat her arthritis, we stated that a jury could
determine that further detail on the change application was
unnecessary because she already listed on her change application that
her arthritis was treated, inter alia, by surgery.14 For these reasons,
we held that a material issue of fact existed as to whether Justofin
answered the application in bad faith.

The crux of the parties’ competing arguments on the merits of
Northwestern’s rescission claim is the proper interpretation of our
decision in Justofin. Babayan argues that “Justofin can be read as
creating a bright line rule that where an insured provides some
relevant medical information but fails to provide complete
information, the question of the insured’s intent can not be inferred
as a matter of law.” In opposition, Northwestern raises two
arguments. First, Northwestern argues that “[f]ar from establishing
a bright line rule, the Justofin court confined its holding to the
facts[.]” Second, Northwestern argues that, assuming a bright line
rule was created in Justofin, that rule is inapplicable under the facts

13
In a footnote, we stated that the 1994 and 1999 applications
had to be read together for purposes of determining whether the
answers on the 1999 change application were made in bad faith. Id.
at 522 n.9.
14
Alternatively, we held that summary judgment was
inappropriately granted because there was a genuine issue of material
fact as to whether Justofin’s representations were material. Id. at 525.

18
of this case because Babayan’s own testimony demonstrates that she
provided knowingly false answers in the application and
questionnaires.

We agree with Northwestern that Justofin did not create a
bright-line rule; rather, the holding in Justofin confirms the
importance of analyzing bad faith cases at the summary judgment
stage under the particular factual background of each case. Justofin
and Burkert applied the same three-part framework under
Pennsylvania law. We decline to extend the specific holding in
Justofin to a broad bright-line rule, particularly where numerous
courts have applied the framework to diverse factual situations over
the past sixty years. Compare Justofin, supra; Burton v. Pacific
Mutual Life Ins. Co., 84 A.2d 310, 312 (Pa. 1951) (holding that
judgment should not be entered in favor of the insurer because the
insured was unaware at the time he applied for insurance that he
suffered from incurable throat cancer); and Grimes v. Prudential Ins.
Co. of America, 585 A.2d 29 (Pa. Super. Ct. 1991) (finding that
insured did not act in bad faith when she failed to disclose a liver
disorder and hypertension on her application where there was
testimony that: (a) the insured’s doctor told her that her liver results
were “elevated” but normal; and (b) her hypertension was an
asymptomatic disorder); with Burkert, supra; Freedman v. Mutual
Life Ins. Co. of New York, 21 A.2d 81 (Pa. 1941) (holding that
judgment notwithstanding verdict should be entered in favor of
insurer where insured answered in his application he had not visited
any physicians over the past five years, yet the uncontradicted
evidence revealed he had made twenty visits to five physician over
the five-year period); Stopper v. Manhattan Life Ins. Co. of New York,
241 F.2d 465 (3d Cir. 1957) (relying upon Freedman, Court of
Appeals found that applicant’s withholding of medical information
constituted bad faith as a matter of law); Walsh v. John Hancock Mut.
Life Ins. Co., 63 A.2d 472 (Pa. Super. Ct. 1949) (holding that trial

19
court properly entered judgment notwithstanding the verdict in favor
of insurer on insured’s bad faith where evidence revealed that
plaintiff withheld from insurance application that he had been
hospitalized for cardiac disorder twenty-two days prior to application
date); American Franklin Life Ins. Co. v. Galati, 776 F. Supp. 1054
(E.D. Pa. 1991) (granting judgment on the pleadings in favor of
insurer); and Monarch Life Ins. Co. v. Donahue, 708 F. Supp. 674
(E.D. Pa. 1989) (granting summary judgment in favor of insurer).

Against this backdrop, it is clear that the different results in
Burkert and Justofin did not depend on the application of a bright-line
legal rule; instead, we applied the same standard, examined the
record evidence, and simply came to different conclusions as to
whether there was incontrovertible evidence of bad faith. Our
decision in Justofin did not foreclose the possibility of summary
judgment being entered in the bad faith rescission context. In this
respect, the current case does not require us to break any new ground.
Therefore, we reaffirm that summary judgment may be entered on a
rescission claim when, based upon the evidence produced in
discovery, the only reasonable inference a fact finder could draw is
that the applicant’s answers were knowingly false, or made in bad
faith.15

15
We applied this standard in our decisions in Burkert and
Justofin. Summary judgment in favor of the insurer was appropriate
in Burkert because the only reasonable inference that could be drawn
from Jamison’s failure to disclose his extensive history of drug and
alcohol abuse and treatment was that his omission was made in bad
faith. In contrast, such an inference could not be drawn in Justofin on
the basis of the record evidence because (as in Grimes and Burton):
(1) it was unclear whether Justofin even knew the type of arthritis she
suffered from; and (2) Justofin actually disclosed that she underwent
surgery for arthritis, an event she might have thought more significant

20
 Babayan’s bright-line approach would create a number of
practical problems. First, the approach ignores that we have to
consider each response in the application separately. Certainly, a
number of questions might be similar in an insurance application,
generating similar responses. In that respect, a complete (or partially
complete) answer to one question may raise an issue of fact as to bad
faith if the applicant answered a similar question differently. See
Justofin, supra. However, if a question in an application inquires
about a specific health disorder, and the record reveals that the
applicant’s answer was incontrovertibly false, the applicant should
not be permitted to rely upon the fact that she provided information
about a wholly unrelated ailment in response to another question in
order to create a genuine issue of material fact as to bad faith. As
examined in Section III.A.4 below, this is a principal failure of
Babayan’s approach. Second (and related to the first concern),
Babayan’s approach would relieve the insurance applicant from ever
having to answer insurance applications completely and truthfully.
Rather, the applicant could create a smokescreen by providing some
evidence of unrelated disorders in response to a specific question and
then argue, if the insurer attempted to rescind the policy, that the
information provided was not false, but “incomplete.” We decline to
adopt a broad standard that would encourage insurance applicants to
be less than forthcoming in their applications. Finally, Babayan’s
standard contains too expansive a concept of “completeness.” It is
imprudent to adopt a rule that signing a waiver for the insurance
company to retrieve medical information absolves the applicant of the
obligation to provide truthful information.16

than the particular drug she took after her surgery.
16
To analogize Babayan’s case to Justofin, the applicant there
answered “yes” to two health-related questions. Justofin’s purported
failure to disclose information related to the incomplete information

21
 In summary, we do not find that Justofin upset the framework
applied by courts considering Pennsylvania law in this context over
the past sixty years. Thus, we will consider Babayan’s appeal under
the existing framework and will not adopt a bright-line approach that
would engender more confusion than clarification.

3.

Applying the framework to the specific false answers Babayan
gave to Northwestern, we agree with Babayan that her answer to
Question 14.K.2 did not constitute bad faith as a matter of law.
Question 14.K.2 stated:

In the past 5 years, has the Insured been in a motor
vehicle accident, has the Insured been charged with a
moving violation of any motor vehicle law, or has the
Insured’s driver’s license been restricted, suspended,
or revoked?

Babayan answered “no” to Question 14.K.2. Babayan subsequently
acknowledged in her deposition testimony that her answer to
Question 14.K.2 was false.

she provided in the “Details” section adjacent to her response.
Perhaps in that type of situation, a stronger argument could be made
for requiring the insurer to investigate further. There, the insurer
knows that the applicant suffers from a particular ailment; the issue
from the point of view of the insurer would be the severity of the
ailment. In contrast, a different situation arises here, where the
applicant failed to acknowledge the existence of an ailment in the
face of incontrovertible opposing evidence.

22
 The issue, however, is whether a fact finder could draw a
reasonable inference from the record that Babayan knew at the time
she answered Question 14.K.2 that her answer was false, and/or was
made in bad faith. A review of the record demonstrates that there is
a genuine issue of material fact on this point. For example, Babayan
also testified in her deposition that she had the following exchange
with Gallina:

I recall I did talk about the slip and fall and the car
accident. I remember I was embarrassed that I had
two incidents within three months. I felt like I was a
klutz or something. And I told him and he said to me,
when was it? I said I can’t remember right now. I
think it was ‘96, ‘95. He said, that’s far enough away.
I don’t think it will be a problem, but when you sign
the medical waiver, they go get your records from
your doctors and they’ll find out that stuff.

From this evidence, it would not be unreasonable for a fact finder to
infer that Babayan was not sure of the date of her accident. Taking
Babayan’s testimony as true, an inference can be drawn that Babayan
relied upon Gallina’s representation that the accident was “far enough
away” that it did not have to be listed in the application. A fact finder
could ultimately decide to reject Babayan’s answer as implausible,
but, based upon evidence in the record, it was inappropriate for the
court to reach that conclusion at the summary judgment stage.

4.

In contrast, the District Court correctly determined that
Babayan’s false answer to Question 33.k constituted bad faith as a
matter of law. Based upon the detailed nature of Question 33.k,
Babayan’s response, and Babayan’s deposition testimony, the only

23
reasonable inference a fact finder could draw would be that the
answer to Question 33.k was made in bad faith or with knowledge of
its falsity.

In support of her argument that she produced sufficient
evidence to create a genuine issue of material fact as to whether her
answers were made in bad faith, Babayan points out that she
disclosed: the name of her family doctor; that she had once been
hospitalized overnight; that she suffered from Bell’s Palsy within the
past year; and that she was treated for pain relief as a result of a virus.
The problem with Babayan’s argument is that the information she
provided cannot be reconciled with the actual false representation she
made in filling out her application. The information she points to as
sufficient to create a genuine issue of material fact is irrelevant to the
specific question at issue.

Question 33 (set forth in the footnote below), contains fifteen
detailed and distinct categories of queries regarding the applicant’s
medical treatment over the past ten years.17 In this context, it is clear

17
The question, in full, reads as follows:

33. In the last 10 years, have you had, been told
you had or been treated for:
a. Disorder of eyes (including double vision),
ears, nose, mouth, throat, or speech?
b. Dizziness, loss of balance, headaches, seizures
or convulsions, muscle weakness, tremor,
paralysis, stroke, memory loss, or any disease
of the brain or nervous system?
c. Anxiety, depression, stress, or any
psychological or emotional condition or
disorder?

24
that Question 33.k requires a specific answer as to whether the
applicant was diagnosed with or treated for any of the specific
disorders that are listed (arthritis, sciatica, gout, or any disorder of the

d. Persistent shortness of breath, hoarseness,
cough, coughing up blood, asthma,
emphysema, tuberculosis, or any lung or
respiratory disorder?
e. Jaundice, hepatitis, intestinal bleeding, ulcer,
hernia, colitis, diverticulitis, recurrent
indigestion, or any disorder of the stomach,
intestines, liver, gall bladder, or pancreas?
f. High blood pressure, chest pain, chest
discomfort, chest tightness, irregular heart
beat, heart murmur, heart attack or any other
disorder of the heart or blood vessels?
g. Sugar, albumin, blood or pus in the urine,
sexually transmitted or venereal disease, or
any disorder of the kidney, bladder, prostrate,
or reproductive organs?
h. Diabetes, thyroid or any glandular (endocrine)
disorder?
i. Cancer, tumor, polyp, or disorder of the lymph
gland(s) or breast(s)?
j. Anemia, bleeding tendency, or any disorder of
the blood?
k. Arthritis, sciatica, gout, or any disorder of the
muscles, bones, joints, spine, back, or neck?
l. Chronic or unexplained fatigue, fever, or
illness?
m. Any allergies?
n. Any disorders of the skin?
o. Deformity, lameness or amputation?

25
muscles, bones, joints, spine, back, or neck). During a lengthy
colloquy with Northwestern’s counsel during her deposition Babayan
expressly admitted each of the following facts:

• she sought treatment and care from five (5)
physicians regarding knee and back pain on
numerous occasions during the relevant ten-
year time period listed on the application;

• she underwent at least five (5) magnetic
resonance imaging (“MRI”) tests on her knees
and/or back, and she had an electromyogram
(“EMG”) because of chronic back problems;

• she was aware that these diagnostic tests
revealed abnormalities in her knees and back;

• she was aware that she was diagnosed with a
bulging disc in her back; and

• she received a cortisone injection in her knee
to reduce constant pain.

Furthermore, the record contains a verified complaint Babayan filed
in state court following her slip-and-fall accident in which she alleged
that, as a result of her accident, she “was caused to sustain serious
personal injuries to her knee and hip and surrounding areas.” See
Whiting v. Krassner, 391 F.3d 540, 543-44 (3d Cir. 2004) (“Judicial
estoppel prevents parties from taking different positions on matters
in litigation to gain advantage.”).18 In spite of these concessions,

18
Babayan’s deposition testimony in the state court matter,
which contains a lengthy discussion of the injuries she suffered as a

26
Babayan answered “no” to Question 33.k. She testified in her
deposition that the question was unclear,19 but that with her “new
understanding” she agreed that her previous answers were
“inaccurate.” In addition, although Babayan conceded that she did
not read her responses on the final application, she admitted that she
certified her answers were truthful and accurate.

The fact that Babayan was hospitalized for one night for blood
tests, received a prescription for pain relief as a result of a virus in
January 2001, and missed six days of work with Bell’s Palsy within
the six months prior to her application is irrelevant to the question of
whether she was diagnosed with or treated for “arthritis, sciatica,
gout, or any disorder of the muscles, bones, joints, spine, back, or
neck.”20 Neither is it relevant that Gallina may have told Babayan not

result of her accidents, is part of the record.
19
Babayan claims she thought the term “disorder” meant
“disease,” and that she should have asked Gallina for clarification.
20
That information would have been relevant if, for example,
Northwestern had challenged Babayan’s “no” answer to Question
33.b. That question asked whether the applicant had been treated for
or diagnosed with “[d]izziness, loss of balance, headaches, seizures
or convulsions, muscle weakness, tremor, paralysis, stroke, memory
loss, or any disease of the brain or nervous system.” Babayan’s
diagnosis of Bell’s Palsy arguably falls under the category of
symptoms listed in Question 33.b, yet she failed to answer the
question affirmatively. Babayan answered “yes” to Question 37,
however, and stated that she missed some time at work due to a
“virus which caused Bell’s Palsy.” Under those circumstances, there
would have certainly been an issue of fact as to whether Babayan’s
false answer to Question 33.b was made in bad faith when considered

27
to list the automobile accident on the application because it occurred
far enough in the past.21 Information regarding the accident is not
“incomplete” as to the issue of whether Babayan was treated for or
diagnosed with any of the specific disorders listed in Question 33.k.
Rather, like the answer at issue in Burkert, Babayan’s answer can be
characterized as “frivolous” in the face of substantial evidence that
she visited five different physicians on a number of occasions relating
to problems with her knees and back, and that diagnostic tests
confirmed that she had knee and back problems. On this information,
the only reasonable inference a fact finder could draw is that Babayan
answered “no” in bad faith or knowing that her answer was false.

Babayan’s concept of “incompleteness” seems to be that if an
applicant provides evidence of a certain medical problem, the
applicant does not have to provide any other information in answering
a question regarding a totally different type of medical problem in
order to survive a motion for summary judgment. That argument is
a non sequitur. For example, suppose Babayan, who checked “no”
to a question asking whether she had “high blood pressure,” took a
daily prescription to control her high blood pressure. Would the fact
that she disclosed that she had Bell’s Palsy for six days over the past
year be sufficient to support an inference that her answer to the blood
pressure question was merely “incomplete” rather than knowingly
false? Sound public policy counsels against embracing Babayan’s
concept of “incompleteness.” See Orr v. Union Fidelity Life Ins. Co.,
198 A.2d 431, 432-33 (Pa. Super. Ct. 1964) (holding that an answer
describing only one of numerous injuries to a question asking

in connection to her response to the subsequent question.
21
There is no support in the record for Babayan’s argument
that she relied upon Gallina’s advice to answer Question 33.k. See
section III.E, infra.

28
applicant to list “any” injuries was not a truthful answer to a question
on an insurance application). In the face of incontrovertible
documentary evidence that she was treated on numerous occasions for
back and knee pain during the relevant time period, Babayan cannot
defeat Northwestern’s motion for summary judgment by pointing to
her disclosure of unrelated ailments. In this respect, the District
Court did not err in finding that Babayan’s answer to Question 33.k
was made in bad faith as a matter of law and in entering summary
judgment in favor of Northwestern on counts one and two of
Northwestern’s complaint.

B. Babayan’s Breach of Contract Claim

Because the District Court correctly concluded that the
disability insurance contract was void ab initio, the District Court did
not err in granting Northwestern’s motion for summary judgment as
to Babayan’s breach of contract claim. It is axiomatic that a breach
of contract claim may not be maintained in the absence of a valid
contract. See Reformed Church of Ascension v. Theodore Hooven &
Sons, Inc., 764 A.2d 1106, 1109 (Pa. Super. Ct. 2000) (holding that
a claim for breach of contract requires the existence of a contract,
including its essential terms). Thus, the District Court properly
dismissed count four of Babayan’s complaint.

C. Babayan’s Bad Faith Claim

Babayan’s bad faith claim against Northwestern is premised
primarily on the argument that Northwestern’s “post-claim
underwriting practices” constituted bad faith. We conclude that the
District Court correctly determined that Northwestern was entitled to
summary judgment on Babayan’s bad faith claim.

29
 1.

The Pennsylvania statute governing bad faith insurance
actions provides:

In an action arising under an insurance policy, if the
court finds that the insurer has acted in bad faith
toward the insured, the court may take all of the
following actions:

(1) Award interest on the amount of the claim from
the date the claim was made by the insured in an
amount equal to the prime rate of interest plus 3%.

(2) Award punitive damages against the insurer.

(3) Assess court costs and attorney fees against the
insurer.

42 PA . CONS. STAT . ANN . § 8371. The statute does not define the
term “bad faith.” We have predicted that the Pennsylvania Supreme
Court would define the term according to the definition set forth by
the Pennsylvania Superior Court in Terletsky v. Prudential Property
and Casualty Ins. Co., 649 A.2d 680 (Pa. Super. Ct. 1984). See Keefe
v. Prudential Property and Cas. Ins. Co., 203 F.3d 218, 225 (3d Cir.
2000). There, the court adopted the following definition of “bad
faith”:

“Bad faith” on part of insurer is any frivolous or
unfounded refusal to pay proceeds of a policy; it is not
necessary that such refusal be fraudulent. For
purposes of an action against an insurer for failure to
pay a claim, such conduct imports a dishonest purpose

30
 and means a breach of a known duty (i.e., good faith
and fair dealing), through some motive of self-interest
or ill will; mere negligence or bad judgment is not bad
faith.

Terletsky, 649 A.2d at 688 (quoting BLACK’S LAW DICTIONARY 139
(6th ed. 1990)) (citations omitted).

Ultimately, in order to recover on a bad faith claim, the
insured must prove: (1) that the insurer did not have a reasonable
basis for denying benefits under the policy; and (2) that the insurer
knew of or recklessly disregarded its lack of a reasonable basis in
denying the claim. Keefe, 203 F.3d at 225. Courts have extended the
concept of “bad faith” beyond an insured’s denial of a claim in
several limited areas. See W.V. Realty, Inc. v. Northern Ins. Co., 334
F.3d 306, 317-18 (3d Cir. 2003) (insurer’s failure to follow internal
guidelines evidence of bad faith); Bonenberger v. Nationwide Mut.
Ins. Co., 791 A.2d 378, 381 (Pa. Super. Ct. 2002) (insurer’s claims
practice manual is relevant evidence in bad faith claim against
insurer); O’Donnell ex rel. Mitro v. Allstate Ins., 734 A.2d 901 (Pa.
Super. Ct. 1999) (bad faith may extend to the misconduct of an
insured during the pendency of litigation); Liberty Mut. Ins. Co. v.
Marty’s Exp., Inc., 910 F. Supp. 221 (E.D. Pa. 1996) (bad faith may
extend to an insurer’s conduct in retrospectively rating and collecting
premiums). The insured is required to meet its burden of proving
“bad faith” by clear and convincing evidence. Terletsky, 649 A.2d at
688. Although the insurer’s conduct need not be fraudulent, “mere
negligence or bad judgment is not bad faith.” Brown v. Progressive
Ins. Co., 860 A.2d 493, 501 (Pa. Super. Ct. 2004).22 The insured

22
For example, an insurer’s denial of a claim does not
constitute bad faith if it is based on a reasonable legal position in an
unsettled area of the law. Terletsky, 649 A.2d at 690; Brown, 860

31
must ultimately show that “the insurer breached its duty of good faith
through some motive of self-interest or ill will.” Id. At the summary
judgment stage, the insured’s burden in opposing a summary
judgment motion brought by the insurer is “commensurately high
because the court must view the evidence presented in light of the
substantive evidentiary burden at trial.” Kosierowski v. Allstate Ins.
Co., 51 F. Supp. 2d 583, 588 (E.D. Pa. 1999) (citing Anderson v.
Liberty Lobby, Inc., 477 U.S. 242, 255 (1986)).

2.

Babayan argues that we should predict that the Pennsylvania
Supreme Court would conclude that “post-claim underwriting” may
constitute bad faith. Babayan concedes in her brief that there are no
decisions interpreting Pennsylvania law that have extended bad faith
claims to post-claim underwriting practices. Babayan, however,
urges us to consider “the law of bad faith generally.” Specifically,
she directs us to consider a decision of the Mississippi Supreme
Court, Lewis v. Equity National Life Ins., 637 So.2d 183 (Miss.
1994), and a law review article condemning the practice. See Thomas
C. Cady & Georgia Lee Gates, Post Claim Underwriting, 102 W.Va.
L. Rev. 809, 810 (2000) (concluding that post-claim underwriting is
per se evidence of bad faith).23

A.2d at 501. Neither does an insurer’s low, but reasonable estimate
of damages or loss constitute bad faith. Id.
23
In Lewis, the Mississippi Supreme Court held that an insurer
engaged in post-claim underwriting in bad faith because the insurer
issued a policy under simplified guidelines and admittedly failed to
perform any underwriting on the policy under after the insured filed
her claim. 637 So.2d at 188-89. A subsequent decision interpreting
Lewis, however made a distinction between post-claim underwriting

32
 We need not determine whether the Pennsylvania Supreme
Court would hold that the practice utilized by the insurer in Lewis
constitutes bad faith. We note that the concept of “post-claim
underwriting” itself is nebulous, particularly because it is difficult to
draw a distinction between post-claim eligibility investigation and
post-claim underwriting. For example, Pennsylvania law provides
that it is not bad faith to conduct a thorough investigation into a
questionable claim. See O’Donnell, 734 A.2d at 907-08 (noting the
existence of “red flags” that prompted the investigation). See also
New York Life Ins. Co. v. Johnson, 923 F.2d 279, 280 (3d Cir. 1991)
(referencing period of contestability based upon material
misrepresentations).24 Babayan’s concept of “post-claim

and post-claim investigation of eligibility. In Wesley v. Union
National Life, 919 F. Supp. 232 (S.D. Miss. 1995), the district court
determined that an insurer did not engage in post-claim underwriting
because, unlike the simplified application at issue in Lewis, “the
questions on the insurance application were one method for screening
out applicants who presented unacceptable risks.” Id. at 235. Thus,
the court concluded that the insurer’s practices did not constitute bad
faith because “to deny [the insurer] the right to engage in post claim
investigation would mean that insurers would have to investigate
every answer by every applicant before insuring them and to pay
claims regardless of the misrepresentations contained in the
application.” Id. (emphasis added).
24
As Northwestern points out in its brief, a Pennsylvania
statute seemingly condones the practice of post-claim investigation
with respect to health and accident insurance policies. That statutory
provision states:

The falsity of any statement in the application for any
policy covered by subdivision (b) of this article shall

33
underwriting” would usurp this general principal and prevent insurers
from engaging in post-claim investigations, even in the face of
incontrovertible evidence that an insured made a clear
misrepresentation.

Moreover, Babayan’s bad faith claim would not succeed even
under the more demanding Mississippi test set forth in Lewis. The
evidence is clear that Guss approved Babayan’s policy after reviewing
the application, nonmedical questionnaire, and the paramedical
questionnaire. Based upon Babayan’s responses in the documents,
including the medical information that she provided, Guss did not
seek to obtain Babayan’s medical records. Thus, Northwestern
utilized Babayan’s responses as “one method for screening out
applicants who presented unacceptable risks.” Wesley, 919 F. Supp.
at 235. When Babayan brought her claim within the two-year
contestability period,25 an investigation was triggered under company
policy. The fact that someone with the title of “underwriter” was
involved in the investigatory process does not transform a permissible
post-claim investigation into impermissible post-claim

not bar the right to recovery thereunder, unless such
false statement was made with actual intent to
deceive, or unless it materially affected either the
acceptance of the risk or hazard assumed by the
insurer.

40 PA . CONS. STAT . ANN . § 757.
25
Northwestern’s claims manual states: “If, during the two
year contestability period, the Company becomes aware of material
misrepresentations in that information, it has the right in most states
to rescind the policy and deny the claim.”

34
underwriting.26 For these reasons, we conclude that the particular
practice undertaken by Northwestern in this case did not constitute
bad faith.27 Accordingly, the District Court did not err in granting

26
In fact, the claims manual recognizes that, in order to
determine whether a policy should be contested, the company
“need[s] input from Underwriting Standards, and, on occasion, from
the Law Department to make that decision.”
27
Additionally, Babayan argues that Northwestern committed
bad faith by failing to follow its own claim review policies. The
District Court stated in its opinion that Babayan failed to provide any
support for the proposition that an insurer’s failure to follow its claim
review policies would constitute bad faith. Although no court
interpreting Pennsylvania law has directly spoken on the issue, we
suggested in W.V. Realty, Inc. that an insurer’s failure to follow its
internal guidelines could constitute evidence of bad faith. 334 F.3d
at 317-18; see also Bonenberger, 791 A.2d at 381 (holding that an
insurer’s claims practice manual was relevant evidence in a bad faith
claim against the insurer). Assuming without deciding that failing to
follow internal claims procedures could constitute bad faith, summary
judgment remains appropriate in this particular case. It is true that
Northwestern’s claims manual lists two “factors” to consider (the
cause of the disability and inconsistent information provided by the
applicant) in undertaking a contestable review, and that Duller
testified that neither of these factors existed in Babayan’s case. A
review of the claims manual, however, reveals that these two factors
are not exclusive requirements to trigger a contestable review.
Rather, the manual states that the review process must be completed
if a claim is brought within the “two-year contestable period,” and
that the claims analyst must “start the process of verifying the
information provided on the application as soon as possible.” Duller
testified that she requested records from Babayan’s doctor and

35
summary judgment in favor of Northwestern as to count one of
Babayan’s complaint.

D. Babayan’s Negligence Claim

A claim for negligence under Pennsylvania law contains four
elements: (1) a duty or obligation recognized by the law, requiring
the actor to conform to a certain standard of conduct for the
protection of others against unreasonable risks; (2) a failure to
conform to the standard required; (3) a causal connection between the
conduct and the resulting injury; and (4) actual loss or damage
resulting in harm to the interests of another. In re TMI, 67 F.3d 1103,
1117 (3d Cir. 1995) (citations omitted). Babayan’s negligence claim
is premised on the allegation that “Ms. Babayan followed Mr.
Gallina’s instructions and did not advise [Northwestern] of her motor
vehicle accident and slip and fall accident.” Accepting Babayan’s
allegation as true, her negligence claim fails based upon our holding
that Northwestern is entitled to rescission because of Babayan’s bad
faith response to Question 33.k. As a result, even if Babayan could
establish that Gallina breached a duty28 to advise Babayan to provide

attempted to verify information as part of “performing a routine
review.” Kien confirmed in his deposition testimony that, over the
course of his 25-year tenure at Northwestern, analysts were required
to “automatically perform” a “routine review if a claim presents in a
contestable time frame.” Babayan is unable to point to any evidence
to refute this testimony and to support her argument that
Northwestern’s review of her claim within the two-year time period
constitutes a failure to follow internal guidelines.
28
We have stated, under Pennsylvania law, that “an insurance
broker is under a duty to exercise the care that a reasonably prudent
businessman in the brokerage field would exercise under similar

36
an accurate response to Question 14.K.2, Babayan cannot prove that
Gallina’s purported breach was the cause of her damages –
Northwestern’s rescission of the insurance agreement. That
rescission was based upon Question 33.k.

Babayan’s assertion that Gallina instructed her not to put
information about her prior medical history on her insurance
application is not supported by the record.29 The fact that Gallina
allegedly told Babayan not to worry about the date of her accident on
a question that inquired about motor vehicle accidents within the past
five years is irrelevant to Babayan’s response to a question asking her
to list specific medical ailments she suffered within the past ten years.
Thus, because there is no evidence that Gallina’s alleged negligence
caused Northwestern to rescind Babayan’s policy, we will affirm the
District Court’s entry of summary judgment in favor of Gallina on
Babayan’s negligence claim at count three of her complaint. See
Industrial Valley Bank & Trust Co. v. Dilks Agency, 751 F.2d 637,
640 (3d Cir. 1985) (an insurance customer must prove that broker’s
failure to exercise due care is the “direct cause of loss to his
customer”).30

circumstances. . . .” Consolidated Sun Ray, Inc. v. Lea, 401 F.2d 650,
656 (3d Cir. 1968).
29
Babayan cites to deposition testimony relating solely to
Gallina’s alleged failure to advise her appropriately regarding her
answers to Question 14.K.2. This deposition testimony would only
be sufficient to create a genuine issue of fact as to Babayan’s response
to Question 14.K.2, and is insufficient to establish causation and
damages with respect to Question 33.k.
30
The parties agreed at oral argument that the District Court’s
alternative basis for granting summary judgment on the negligence

37
 IV. Conclusion

Based upon the foregoing reasons, we will affirm the District
Court’s grant of summary judgment in favor of Northwestern and
Gallina.

claim – that the common law discovery rule was inapplicable because
Babayan learned of her alleged injury within the applicable
limitations period, yet failed to exercise due diligence to prosecute
her claim – was overruled by the Pennsylvania Supreme Court’s
recent decision in Fine v. Checcio, 870 A.2d 850, 859 (Pa. 2005). In
that decision, the Pennsylvania Supreme Court held that, for purposes
of applying the discovery rule, it is immaterial whether the prescribed
limitations period has expired at the time the plaintiff becomes aware
of an injury. Rather, “the discovery rule applies to toll the statute of
limitations in any case where a party neither knows nor reasonably
should have known of his injury and its cause at the time his right to
institute suit arises.” Id. at 859.

38