Velez-Gomez v. SMA Life Assurance Co.

                  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

                            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

                            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.
                                

          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.
                           

          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.
                            

          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

                            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