PHL Variable Insurance v. Fulbright McNeill, Inc.

RILEY, Circuit Judge,

dissenting.

I respectfully dissent. The majority’s opinion states, “McNeill’s representations in the policy application were continuing until the issuance of the policy. Once McNeill learned the true nature of his health, his statements in the application became false,” grounding this conclusion upon a common law duty of utmost good faith owed by McNeill. I disagree, because this approach uses the “duty of utmost good faith” to broaden the explicit policy language.

The PHL policy limited the ■ grounds upon which PHL could “contest the validity of this policy” to “any material representation of a fact,” as long as it is “contained in the written application” which is “attached to this policy when issued.” PHL and McNeill are fully within their rights to contract to limit the scope of misrepresentations which can be relied upon by PHL as grounds upon which to challenge the validity of the policy. See Pittman v. West American Ins. Co., 299 F.2d 405, 411 (8th Cir.1962) (“[Pjarties may by their contract make material a fact that would otherwise be immaterial, or make immaterial a fact that would otherwise be material.”). It is uncontroverted that McNeill’s representations in the policy application, which was attached to the policy when the policy was issued, were true and accurate when made. As such, these representations are not misrepresentations that PHL can use to challenge the policy’s validity under the policy’s own terms.

The majority suggests we need to go beyond the plain language of the policy by superimposing the “duty of utmost good faith.” According to the majority, this duty overrides the specific agreed limitations on PHL’s rescission rights so that PHL can rescind this policy based on McNeill’s failure to inform PHL of a cardiac test done after McNeill truthfully completed the policy application, and after he was examined by a medical practitioner selected by PHL. I disagree. When a conflict exists between a general common law duty and the explicit language of a contract, the language of the contract should control. This is especially true when the contractual language is language which was unilaterally drafted by PHL, language PHL now wishes to avoid.

The only case in which the Arkansas courts address the issue of a duty of utmost good faith owed by an insured to an insurance company is Dodds v. Hanover Ins. Co., 317 Ark. 563, 880 S.W.2d 311 (1994), the case relied upon by the district court in this case. The Supreme Court of Arkansas in Dodds does not adopt what it refers to as “the generally accepted rule uberrima fides which requires an insurance applicant to use due and reasonable *831diligence to disclose all facts affecting the risk which arise subsequent to the application and prior to the completion of the contract.” Id. at 569, 880 S.W.2d at 314. Instead, the Dodds court only explains that the insurance company “further re-lie[d]” upon this “generally accepted rule” and that the insureds did not challenge the existence of this “generally accepted rule” because they claimed they met their obligations under the rule. Id. Thus the Dodds decision is grounded in the narrower general rule relating to backdated policies and losses which occur before the issuance of a policy, both of which are not germane to the present case. As such, I do not believe that the Arkansas courts have explicitly stated an insured owes a “duty of utmost good faith” to an insurance company.

The district court also asserted the duty of utmost good faith rule had been adopted by the Eighth Circuit in Springfield Fire & Marine Ins. Co. v. National Fire Ins. Co., 51 F.2d 714 (8th Cir.1931). Springfield Fire is an Iowa case in which our court declared the “second cardinal rule of insurance contracts” is “[t]hat they are contracts uberrimae fidei” and that this rule has “been adopted as to life insurance contracts.” Id. at 719 (citing Stipcich v. Ins. Co., 277 U.S. 311, 316, 48 S.Ct. 512, 72 L.Ed. 895 (1928)). In Stipcich, the Supreme Court noted that while “[ijnsurance policies are traditionally contracts uberrimae fidei ... the modern [in 1928] practice of requiring the applicant for life insurance to answer questions prepared by the insurer has relaxed this rule to some extent, since information not asked for is presumably deemed immaterial.” Stipcich, 277 U.S. at 316, 48 S.Ct. 512. But, the Supreme Court in Stipcich, made clear “[a]n insurer may of course assume the risk of such changes in the insured’s health as may occur between the date of application and the date of the issuance of a policy.” Id. at 315, 48 S.Ct. 512. Thus, insurance policies in 1928 were traditionally considered to be contracts imposing this duty of utmost good faith, but this duty was being relaxed as insurance companies took greater steps to require applicants to answer questions and this duty did not preclude insurance companies from assuming the risk that changes in the insured’s health may occur between the date of application and the date of issuance of a policy. As such, the duty owed by an applicant to the insurance company is a duty which may be modified if the insurance company elects to assume the risk of changes in the insured’s health. This is what the policy language in PHL does by explicitly limiting when a misrepresentation can be considered material so as to void the policy.

The Stipcich Court also acknowledged that “narrow and unreasonable interpretations of clauses in an insurance policy are not favored” and where “[t]hey are prepared by the insurer” and “open to two constructions, [the construction] most favorable to the insured will be adopted.” Id. at 322, 48 S.Ct. 512 (citations omitted). Under Stipcich, the policy language which limits the grounds upon which PHL could “contest the validity of this policy” to “any material representation of a fact” as long as it is “contained in the written application” which is “attached to this policy when issued” must be construed in McNeill’s favor, limiting the grounds for contesting the policy to material facts contained in the written application and attached to the policy when issued. Where McNeill’s alleged misrepresentation is his failure to inform PHL of medical exam results from an exam done weeks after the application was completed, and where this representation is not in the written application attached to the policy when issued, in my view, the alleged failure to disclose is not a valid grounds for contesting the validity of the policy.

*832PHL could have used language in its application or in its policy establishing a duty upon the applicant to provide PHL with new medical information or any other new information arising before issuance of the policy that would make the application representations false. PHL chose not to require such a continuing obligation. Having failed to do so, PHL should not now receive relief from our court by amending the parties’ contract with an implied duty of disclosure.