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Hoffman v. Kansas City Life Insurance Co.

United States District Court, D. South Carolina, Charleston Division

May 30, 2019

DEBORAH HOFFMAN and ALEXANDER TOSI, Plaintiffs,
v.
KANSAS CITY LIFE INSURANCE COMPANY, Defendant.

          ORDER

          DAVID C. NORTON, UNITED STATES DISTRICT JUDGE.

         This matter comes before the court on defendant Kansas City Life Insurance Company's (“Kansas City”) motion to exclude the testimony of plaintiffs Deborah Hoffman (“Hoffman”) and Alexander Tosi's (“Tosi”) (together, “plaintiffs”) expert witness, ECF No. 28, and motion for partial summary judgment, ECF No. 29. For the reasons set forth below, the court DENIES the motion for partial summary judgment and GRANTS IN PART and DENIES IN PART the motion to exclude expert testimony.

         I. BACKGROUND

         This case arises out of Kansas City's denial of a claim for life insurance. In March 2016, David Perrin (“Perrin”) applied for a life insurance policy with Kansas City (“the Policy”). Plaintiff Hoffman is the beneficiary of the Policy, and plaintiff Tosi was assigned a part of the Policy. Perrin died in July 2016 of acute myocardial infarction and coronary artery disease. Kansas City denied Hoffman's claim to receive the benefits under the Policy, contending that Perrin's failure to disclose that he suffered from COPD on his application for the Policy constituted an intentional misrepresentation and that Kansas City would not have approved the Policy if they had known of the COPD. Specifically, Kansas City points to Question 14 of the application for the Policy, which asks “[i]n the last 10 years, have you been diagnosed or treated for any disease or disorder of: . . . 14) Lungs: asthma, emphysema, tuberculosis?” ECF No. 29-8 at 5. Perrin did not submit a paper application, but rather made his application over the phone, with a Kansas City representative allegedly asking Perrin the application questions and Perrin verbally giving his answer. Perrin answered “YES” and then provided the Kansas City representative with additional details, such as that he last had asthma at the age of five but that he has no asthma now. Id. at 6. Page 9 of the application provides, “[i]t is understood and agreed as follows: (1) [t]he statements and answers recorded in all parts of this application are true and complete . . . .” Additionally, Page 10, above the signature line, contains the following language: “[i]t is a crime to knowingly provide false, incomplete or misleading information to an insurance company for the purpose of defrauding the company. Penalties may include imprisonment, fines, or a denial of insurance benefits.”

         According to Kansas City, the Policy permitted Kansas City to review Perrin's medical records after Hoffman submitted a claim for insurance benefits because Perrin died within the Policy's two-year “contestability period.” In denying the claim for benefits, Kansas City relied on the medical records from Perrin's February 3, 2016 visit with Dr. Mark Little, Perrin's treating physician, which occurred 42 days before Perrin completed his application for the Policy. Dr. Little's type-written notes have the following under “Assessment” at the bottom of one page: “Hyperlipidemia ICD10: E78.5 COPD, bronchitic without exacerbation ICD10: J44.9.” Kansas City argues that the failure to disclose the COPD was a knowingly false and material misrepresentation in the application and rescinded the Policy. Kansas City then issued a check for $36, 773.87 to Hoffman to refund the premium, which Hoffman cashed. ECF No. 29-3, Hoffman Dep. 93:18-94:2.

         Plaintiffs field suit in the Charleston County Court of Common Pleas on December 11, 2017, alleging causes of action for (1) breach of contract, (2) bad faith, and (3) declaratory judgment. Kansas City removed the case on February 7, 2018. On March 1, 2019, Kansas City filed its motion to exclude expert testimony, ECF No. 28, and motion for partial summary judgment on the bad faith claim, ECF No. 29. On April 5, 2019, plaintiffs filed their responses. ECF Nos. 35 and 34. On April 19, 2019, Kansas City filed its replies. ECF Nos. 39 and 40. The court held a hearing on the matter on May 15, 2019. The motions have been fully briefed and are ripe for the court's review.

         II. STANDARD

         Summary judgment shall be granted if the pleadings, the discovery and disclosure materials on file, and any affidavits show that there is no genuine dispute as to any material fact and that the movant is entitled to judgment as a matter of law. Fed.R.Civ.P. 56(c). “By its very terms, this standard provides that the mere existence of some alleged factual dispute between the parties will not defeat an otherwise properly supported motion for summary judgment; the requirement is that there be no genuine issue of material fact.” Anderson v. Liberty Lobby, Inc., 477 U.S. 242, 247-48 (1986). “Only disputes over facts that might affect the outcome of the suit under the governing law will properly preclude the entry of summary judgment.” Id. at 248. “[A]t the summary judgment stage the judge's function is not himself to weigh the evidence and determine the truth of the matter but to determine whether there is a genuine issue for trial.” Id. at 249. Rule 56(c) requires summary judgment when the party who bears the burden of proof “fails to make a showing sufficient to establish the existence of an element essential to that party's case.” Celotex Corp. v. Catrett, 477 U.S. 317, 322 (1986). The court should view the evidence in the light most favorable to the non-moving party and draw all inferences in its favor. Anderson, 477 U.S. at 255

         III. DISCUSSION

         A. Motion for Summary Judgment

         Kansas City asks the court to grant summary judgment on plaintiffs' bad faith cause of action on the grounds that it was reasonable as a matter of law for Kansas City to believe that Perrin knew or should have known that he had COPD when he completed his application. “An insured may recover damages for bad faith denial of coverage if he or she proves there was no reasonable basis to support the insurer's decision to deny benefits under a mutually binding insurance contract.” Cock-N-Bull Steak House, Inc. v. Generali Ins. Co., 466 S.E.2d 727, 730 (S.C. 1996). Here, Kansas City's basis for denying coverage is that Perrin failed to disclose his COPD. For an insurance company to rescind a policy based on fraudulent misrepresentation, the insurer must demonstrate by “clear and convincing evidence: (1) the statement was false; (2) the falsity was made known to the applicant; (3) the statement was material to the risk; (4) the statement was made with the intent to defraud the insurer; and (5) the insurer relied on the statement when issuing the policy.” Primerica Life Ins. Co. v. Ingram, 616 S.E.2d 737, 739 (S.C. Ct. App. 2005). Kansas City points to Dr. Little's notes, taken at an appointment several weeks before Perrin submitted his health insurance application, as evidence that Perrin knew that he had COPD. Thus, Kansas City argues, Perrin knew or should have known that he had COPD and that his decision to not disclose it on the application for the Policy was done with an intent to defraud the insurer.

         The court finds that it was reasonable for Kansas City to assume that Perrin knew that he had COPD. However, that is not the only question under the Primerica factors. Rather, the dispositive question here is whether there was a reasonable basis for Kansas City to decide, without further investigation, that Perrin intentionally chose not to disclose the COPD in order to defraud the insurer. As plaintiffs point out, Kansas City has not proven definitively that Perrin knew that COPD was a form of asthma, or that it was a respiratory or lung disease that should have been disclosed under Question 14, or even that Perrin understood Question 14 as requesting that he disclose any lung or respiratory disease or disorder. Notably, Question 14 does not merely ask that the applicant disclose any disease or disorder of the lungs; rather after “Lungs” there is a semicolon followed by the words “asthma, emphysema, tuberculosis?” In this respect, Perrin could have thought that he was only supposed to disclose any diagnosis of those three specific diseases or disorders. Because this application was conducted over the phone, the manner in which it was asked could have led Perrin to genuinely believe that he was only being asked to disclose one of those three specific lung diseases. The question then becomes whether it was reasonable for Kansas City to decide, based on this single reference to COPD in Dr. Little's notes, that Perrin intended to defraud Kansas City by leaving COPD off his application.

         Kansas City argues that it was reasonable to believe that Perrin intentionally misrepresented his health condition in part because Perrin had financial incentives to obtain life insurance. According to Kansas City, Perrin was involved in a trucking accident for which he received a structured settlement, which he then elected to sell to Corona Capital, LLC for a lump sum payment. In order to effectuate this transfer, he was required to obtain a life insurance policy; if Perrin had been denied life insurance, Corona Capital could have voided the agreement, denying Perrin the lump sum. Kansas City thus argues that, based on this financial incentive, it was reasonable for Kansas City to presume that Perrin had intentionally lied in not disclosing the COPD. Plaintiffs counter that it is unreasonable to assume based on this structured settlement that Perrin intended to defraud the insurer-if Perrin's intent was to defraud the insurer, plaintiffs reason, he would have most likely hidden his tobacco use, which he disclosed. Additionally, at the hearing, Kansas City could not definitively tell the court whether it knew about the structured settlement when it denied the claim. Thus, the court cannot rely on this information as evidence that Perrin had a particular incentive to lie on his application.

         Kansas City does not appear to have done any investigation into the extent of Perrin's knowledge about his COPD diagnosis. There is conflicting evidence on whether Perrin even knew that he had COPD and a lack of evidence that he knew it should have been disclosed as a type of “asthma” as listed under Question 14. Furthermore, a jury could find that a reasonable person would not have known that question 14 was asking that the applicant disclose anything outside of the three disorders listed-asthma, emphysema, and tuberculosis-and that it was unreasonable for Kansas City to decide, without conducting any further investigation, that Perrin intended to defraud the insurer by not disclosing his COPD. As noted above, Kansas City must demonstrate the Primerica factors by clear ...


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