1 The Honorable Charles B. Kornmann, United States District Judge for the District of South Dakota, sitting by designation. 

## United States Court of Appeals FOR THE EIGHTH CIRCUIT

___________ No. 09-3014

___________ Michael Adam, Administrator of the * Estate of Richard J. Kessel, on behalf * of Briale Kessel, *
* Appellant, * * Appeal from the United States v. * District Court for the * Southern District of Iowa. Stonebridge Life Insurance Company, *
* Appellee. *

___________ Submitted: January 12, 2010 Filed: July 15, 2010

___________ Before SMITH, and COLLOTON, Circuit Judges, and KORNMANN, 1 District Judge.

___________ SMITH, Circuit Judge.
Michael Adam, administrator of the deceased Richard Kessel's estate, brought suit against Stonebridge Life Insurance Company ("Stonebridge") alleging breach of contract and bad faith afte r Stonebridge rescinded an insurance policy and denied Adam's claim for benefits. Stonebridge an swered, asserting the affirmative defenses of equitable estoppel, lack of standing, wa iver, and equitable rescission. The district2 The Honorable John A. Jarvey, United Stat es District Judge for the Southern District of Iowa.

3 "Since this appeal is from a motion for summary judgment, we state the facts in the light most favorable to the nonmoving party." Nelson v. Corr. Med. Serv. , 583 F.3d 522, 525 (8th Cir. 2009).
-2- court 2granted Stonebridge's motion for summary judgment. On appeal, Adam argues that the district court erred in dismissing his claims. We affirm.

I. Background On November 17, 2003, Kessel applied for a $75,000 term life insurance policy issued by Stonebridge. 3 Kessel designated his daughter , Briale Kessel, as the beneficiary. Kessel wrote "Laborer—Part tim e Social Security" in the section titled "Occupation" on the application. The appli cation also contained a number of specific questions. Question A on the application asked:

To the best of your know ledge and belief have you:

A. Sought or received treatment or medical advice or been hospitalized for cancer, stroke, diabetes, blood pre ssure, or for any disease of the heart, blood, liver, kidneys, digestive or respiratory system, or for any nervous, mental, neuromuscular, or connective tissue disorder during the past five (5) years?

Kessel answered "no" in response to Question A. Kessel's answer was false. Kessel had, in fact, "[s]ought or received treatment or medical advice" for a mental disorder within five years of the date of his application. A June 28, 1999 order from the Iowa District Court for Keokuk County st ated that Kessel was "seriously mentally impaired and in need of treatment, but can continue in outpatient treatment." On August 16, 2001, Kessel reported to Carol Schmidt, a registered nurse with the Richland Family Clinic, that he had been diagnosed with bipolar disorder since 1982.-3- Kessel told Schmidt that he had been receiving treatment from psychiatrist Dr. Teresa Rosales in Ottumwa, Iowa, for the past four or five years. Kessel's medical records indicate that he was treated at the psychiatry clinic of the Univer sity of Iowa Hospitals and Clinics between 2001 and 2003. Adam concedes that Kessel's answer of "no" to Question A was false.

If Kessel had accurately answered "yes" to this question, his application would have been denied. Stonebridge uses a simplified underwriting process to review applications for certificates of insurance. If the applicant answers "yes" to a health question such as Question A, the application is declined. If the applicant answers "no" to the health questions, the application is approved. If Stonebridge issues an applicant a policy and later learns from an applicant via a verification form that one of the questions should have been answered "yes," then Stonebridge rescinds the policy and refunds any premiums paid to Stonebridge.

Kessel's application was not reviewed by a human underwriter, but rather keyed into a computer. Because he an swered all health questions "no," a Stonebridge clerk automatically issued a certifi cate of insurance. Stonebridge records show the company never inquired further into Kessel's health during his lif etime or inquired why Kessel, who was 45 years old at the tim e of the application, received Social Security benefits. Stonebridge issued Kessel a certificate of insurance, effective November 25, 2003. Kessel made three premium payments of $72.80, totaling $218.40. On March 6, 2004, Kessel was killed in an automobile collisi on, and his estate sought death benefits under the policy.

Regarding contestability of claims, the policy states:

The company cannot contest the Certif icate after it has been in force during the Insured's lifetime for two years from the Insured's Certificate Effective Date or the effective date of the Reinstatement, except for Accidental Death Benefits, if any, fraud, or for not paying premiums.-4- On March 29, 2004, Stonebridge provide d Mike Kennedy, attorney for the estate of Richard Kessel, with a Contes table Life Claim Form because Kessel died within two years of the effective date of the policy. During a contestable review, a claims examiner reviews documentation and determines whether Stonebridge would have issued a policy had Stonebridge recei ved truthful information. After receiving permission to access Kessel's medical records, a Stonebridge claims examiner asked Kennedy whether Kessel received Social Secu rity disability payments. Additionally, the claims examiner wanted to know th e condition for which Kessel received Social Security benefits and the names and addr esses of his treating physicians for that condition.

Kelly Foster, senior underwriter, review ed medical records obtained during the review process and determined that Stonebridge would not have issued the certificate of insurance because Kessel had sought tr eatment and medical advice from Schmidt, who had made an assessment on August 16, 2001, that Kessel had "bipolar disorder" and that this constituted a "mental disord er," which Kessel shoul d have disclosed on his application. On June 29, 2005, Stonebridge sent a letter to Kennedy stating that Stonebridge was rescinding Kessel's insurance due to material omissions on his application regarding medical treatment. Stonebridge refunded the premiums Kessel paid for the policy.

Adam, the administrator for Kessel's estate, acknowledged the decision to rescind in a letter that Kennedy wrote to Ch arles Costa, Vice President of Claims at Stonebridge, on January 20, 2006, and request ed a replacement premium refund check. On January 27, 2006, Stonebridge issued a second check in the amount of $218.40 as a refund of the premiums Kessel paid. The check was cashed. By January 25, 2008, Adam retained a new attorney who initiated the instant lawsuit against Stonebridge.-5- In relevant part, Adam's complaint alleged breach of contract and bad faith and sought punitive damages against Stonebridge . Stonebridge answered, asserting the affirmative defenses of equitable estoppel, lack of standing, waiver, and equitable rescission. The district court granted St onebridge's motion for summary judgment on Adam's breach of contract claim. The court found that no genuine issues of material fact remained regarding any of the elemen ts of equitable rescission. The court also found that Stonebridge lawfully rescinde d the insurance contract based on the misrepresentation Kessel made on his application for life insurance. The district court also granted Stonebridge's motion for su mmary judgment on Adam's bad faith and punitive damages claims, finding that Stonebridge had an objectively reasonable basis for denying Adam's claim.

II. Discussion Adam argues that the district court e rred in granting Stonebridge's motion for summary judgment on his breach of contract claim. First, he argues that Kessel's misrepresentation was not material and Stonebridge's reliance on Kessel's misrepresentation was unreasonable. Second, Adam argues that his bad-faith claim had merit because Stonebridge's denial of his claim for payment on Kessel's life insurance certificate was unreasonable. Fi nally, Adam argues that Stonebridge's actions in denying coveragewere willful and wanton and thus warrant punitive damages.

We "review de novo the district court's grant of summary judgment, viewing all facts and reasonable inferences in th e light most favorable to [Adam as] the nonmoving party." Merriam v. Nat'l Union Fire Ins. Co. of Pittsburgh, Pa ., 572 F.3d 579, 583 (8th Cir. 2009). "Summary judgment is proper when no genuine issues of material fact exist and the moving party is entitled to judgment as a matter of law." HDC Med., Inc. v. Minntech Corp. , 474 F.3d 543, 546 (8th Cir. 2007) (internal quotations and citation omitted). "[S]ummary judgment is appropriate where the pleadings, discovery materials, and any affida vits show that there is no genuine issue-6- as to any material fact and that the movant is entitled to judgment as a matter of law." Kountze ex rel. Hitchc ock Found. v. Gaines , 536 F.3d 813, 817 (8th Cir. 2008) (internal quotations and citation omitted). "To survive summary judgment, a plaintiff must substantiate his allegations withenough probative evidence to support a finding in his favor." Roeben v. BG Excelsior Ltd. P'ship , 545 F.3d 639, 642 (8th Cir. 2008).

A. Breach of Contract Adam first argues that Kessel's misrepresentation in Question A of the application was not material and Stonebri dge's reliance upon the answer in Question A was unreasonable. Stonebridge responds th at the undisputed facts demonstrate that Kessel made material misrepresentati ons and omissions on the application, Stonebridge justifiably relied on those misrepresentations and omissions, and Stonebridge would not have issued the certif icate of insurance if Kessel had truthfully answered the question on the application. These facts, Stonebridge contends, established its affirmative defense of equitable rescission as a matter of law. Stonebridge also argues that we shoul d affirm summary judgment because it established the elements of its wa iver defense as a matter of law.

To establish a breach of contract cl aim in Iowa a plaintiff must prove

(1) the existence of a contract; (2 ) the terms and conditions of the contract; (3) that it has performed all the terms and conditions required under the contract; (4) the defendant 's breach of the contract in some particular way; and (5) that plain tiff has suffered dama ges as a result of the breach.

Molo Oil Co. v. River C ity Ford Truck Sales, Inc. , 578 N.W.2d 222, 224 (Iowa 1998).

There is no dispute that a valid contract existed between Kessel and Stonebridge. Stonebridge alle ges that it did not breach the contract; rather, it simply lawfully rescinded the contract. Stonebr idge relies on the doctrine of equitable-7- rescission, which states that "in Iowa, fraudulent misrepresentations leading to the creation of a contract gives rise to a right of rescission." Schmidt v. Fortis Ins. Co. , 349 F. Supp. 2d 1171, 1191 (N.D. Iowa 2005) (int ernal quotations, a lteration, citation omitted). "[T]he proof required for resci ssion based on misrepre sentation under Iowa law is less demanding than the proof necessary for the tort of misrepresentation." Hyler v. Garner , 548 N.W.2d 864, 871 (Iowa 1996). Five elements must be proven to establish equitable rescission: "(1) a re presentation, (2) falsity, (3) materiality, (4) an intent to induce the other to act or refrain from acting, and (5) justifiable reliance." Rubes v. Mega Life & Health Ins. Co. , 642 N.W.2d 263, 269 (Iowa 2002) (internal quotations and citation omitted).

Adam concedes that Kessel's answer to Question A was a false representation and made with an intent to induce. Adam argues that the answer was neither material nor justifiably relied upon by Stonebridge.

1. Materiality Adam argues that Kessel's answer to Qu estion A was not material because the insurance policy Kessel purchased did not contain underwriting exclusions for the applicant's preexisting health conditions. Adam maintains that Stonebridge considered preexisting conditions but was not permitted to do so under its own contract. Kessel notes that the contract between Kessel and Stonebridge contains no dedicated section addressing preexisting conditions. The contract does state, however, that "if you would have been ineligible for coverage had the correctinformation been shown on the enrollment form at the time coverage became effective, upon request, we will return all of the premium contributions paid." Also, the application requires an applicant to sign the following statement, "I understand that the issuing of my Certificate is based on all statements and answers below, and I affirm they are complete and true to the best of my knowle dge and belief." The contract does not state that preexisting conditions will render an applicant ineligible, nor does it exclude consideration of preexisting conditions.-8- Adam's argument is contrary to the plai n language of the c ontract and express Iowa law. Applicable Iowa case law states that

"answers made in response to questions in the application [for life insurance] as to prior illness, consultation with physicians and applications for other insurance, wh ere the applicant, as here, declares that they are true and offers them as an inducement to the issuance of the policy, are deemed material as a matter of law."

Crandall v. Bankers Life Co. , 62 N.W.2d 169, 174 (Iowa 1954) (quoting Fountain & Herrington v. Mut. Life Ins. Co. of New York , 55 F.2d 120, 123 (4th Cir. 1932); see also Rubes , 642 N.W.2d at 270 (finding that insure d's representation that he had not received treatment for alcoholism or been c onvicted of driving while intoxicated was material because the insurance company w ould have denied the application if such information had been disclosed).

A fact is material if it substantially affects the interest of the party alleged to have been defrauded. Thus, materiality has been found where a fact influences a person to enter into a transaction, where it deceives that person or induces that person to act, or where the transaction would not have occurred without it

. Utica Mut. Ins. Co. v. Stockdale Agency , 892 F. Supp. 1179, 1194 (N.D. Iowa 1995) (emphasis added) (int ernal citation omitted).

The parties agree that if Kessel truthfully answered Question A, Stonebridge would not have issued the po licy. Kessel's application answer meets the Iowa test of materiality. Thus, we hold that regardless of whether the contract explicitly stated that preexisting conditions will be considered, as a matter of the plain language of the contract, law and logic, Kessel's an swer to Question A was material.-9- 2. Justified Reliance Adam also argues that Stonebridge's reliance on Kessel's response to Question A was not justified because he indicated el sewhere on the application that he received Social Security benefits, and therefore St onebridge had a duty to perform a reasonable investigation into Kessel's health beforerelying upon his answer to Question A and approving his application. Stonebridge re sponds that its reliance on Kessel's answer to Question A was justified because the simplified underwriting process is a method commonly used by insurance companies in determining whether to provide coverage and that they had no reason to question the veracity of Kessel's representations on the application.

We hold that Stonebridge justifiably re lied upon Kessel's assertion that he had not been treated for a mental health issue w ithin five years of his application for life insurance. Iowa law supports this holding. In Schmidt , the court stated that an insurance company justifiably relied upon an insured's statement that she was not being treated for breast cancer, a fact she stated on an app lication form that indicated that the insurance company would rely upon her answers. 349 F. Supp. 2d at 1192 at n.19 (N.D. Iowa 2005). The Stonebridge app lication form advised Kessel that the company would rely upon his answers in issuing coverage, and Kessel agreed that insurance would be issued based upon "all statements a nd answers below" which he asserted were true.

Additionally, in Rubes , the court found that an in surance company justifiably relied on an applicant's responses becausethe application "sought straightforward answers to known past information" and di d not require the applicant to "speculate about the general state of his health." 642 N.W.2d at 271. Here, Question A asked Kessel to indicate whether he had sought or received treatments, medical advice, or hospitalizations for specific conditions in the past five years. The question was straightforward and required no speculation.-10- Adam argues that Stonebridge should have inquired further into Kessel's claim that he received Social Security benefits as a 45-year-old man. Here, we agree with the district court that Kessel's inclusion of the words "Social Security" in the space provided for him does not mitigate the fact th at he did not truthfully answer Question A.

Stonebridge did not have a duty to dete rmine if Kessel was lying in Question A. "The recipient of a fraudulent misrepresent ation of fact is justified in relying upon its truth, although he might have ascertainedthe falsity of the representation had he made an investigation." Restatement (S econd) of Torts § 540 (1977). Section 541 does state that "[t]he recipient of a fraudul ent misrepresentation is not justified in relying upon its truth if he knows that it is false or its falsity is obvious to him." However, Kessel did not inform Stonebridgethat he had been treated for bipolar disorder. Kessel also did not inform Stonebridge that he was the recipient of Social Security Disability benefits. In respons e to the "Occupation" question, Kessel responded, "Laborer—Part Time" and "Social Security," with no mention of benefits. The misrepresentation—in this case the answer "no" to Question A—was not so obvious as to impel investigation. One can receive Social Security benefits without having received medical care in the five preceding years, which was the subject of Question A. Therefore, because it was not obvious that Kessel was lying on Question A, there was no reason to investigate further.

The plain language of the policy, the evidence presented below, and the Iowa law of equitable rescission all support Stone brige's argument that it justifiably relied upon Kessel's answer to Question A. Because th e representation was also material, we find that the grant of the summary judgment motion was proper.

B. Bad Faith Adam next argues that the district court erred in granting Stonebridge's motion for summary judgment on his bad faith cl aim because Stonebridge's denial was-11- unreasonable. Adam contends that Stone bridge possessed enough information to put it on notice that it needed to investigate Ke ssel's health further before approving his application for coverage. Adam asserts that his reference to Social Security in his occupation answer by itself sufficiently a dvised Stonebridge that Adam could not have truthfully represented that he had not received medical treatment in the preceding five years.

Stonebridge, on the other hand, asserts that it had an objectively reasonable basis to deny Kessel's claim for benefits because Kessel did not truthfully answer Question A, and if Kessel had truthfully answered Question A, Stonebridge would not have issued Kessel a certificate of insurance.

Iowa law recognizes a common-law bad faith claim against an insurer for an insurer's bad faith refusal for payment of benefits. Merriam v. Nat'l Union Fire Ins. Co. of Pittsburgh, Pa. , 580 F. Supp. 2d 838, 867 (S.D. Iowa 2008), aff'd in part and rev'd in part and remanded , 572 F.3d 579 (8th Cir. 2009) (granting defendant's motion for summary judgment on plaintiff's ba d faith claim, which we affirmed). To prevail on such a claim, the plaintiff must prove by substantial evidence: (1) that the insurer had no reasonable basi s for denying benefits under th e policy and (2) that the insurer knew, or had reason to know, th at its denial wa s without basis. Rodda v. Vermeer Mfg. , 734 N.W.2d 480, 483 (Iowa 2007). The first prong is objective and the second prong is subjective. Merriam , 580 F. Supp. 2d at 867 (citing Bellville v. Farm Bureau Mut. Ins. Co. , 702 N.W.2d 468, 473 (Iowa 2005)).

"A reasonable basis for denying insurance be nefits exists if the claim is fairly debatable as to either a matter of fact or law." Rodda , 734 N.W.2d at 483 (internal quotations and citation omitted). The "fairly debatable" inquiry is an objective one. Id . "A claim is fairly debatable when it is open to dispute on any logical basis." Id

. (internal quotations and citation omitted). "Thefocus is on the existence of a debatable issue, not on which party was correct." Reid v. Pekin Ins. Co. , 436 F. Supp. 2d. 1002,-12- 1011 (N.D. Iowa 2006) (internal quotations and citation omitted). "A court does not weigh the conflicting evidence that was be fore the insurer; it decides whether evidence existed to justify denial of the claim." Id. (internal quotations, alteration and citation omitted).

A court can generally determine as a ma tter of law whether a claim is "fairly debatable." Id . That is because "[w]here an objec tively reasonable basis for denial of claim actually exists, the insurer cannot be he ld liable for bad faith as a matter of law." Gardner v. Hartford Ins. Accident & Indem. Co. , 659 N.W.2d 198, 206 (Iowa 2003) (internal quotations and citation omitted). "An insurance company has the right to debate claims that are 'fairly debatable' without being subject to a bad faith tort claim." Sampson v. Am. Standard Ins. Co. , 582 N.W.2d 146, 150 (Iowa 1998).

Stonebridge had a reasonable basis for denying insurance benefits. A material misrepresentation on the in surance application is a reasonable basis for denial. Whether Adam had a valid claim for Kesse l's life insurance proceeds was "fairly debatable." In fact, the debate is notparticularly close. As discussed supra , it is undisputed that Kessel misrepresented his tr eatment history on the application. It is also undisputed that had he been truthful, he would not have received coverage."Where an insurer has an objectively reasonable basis to deny coverage, it has no duty to investigate further before denying the claim." Merriam , 580 F. Supp. 2d at 870. Further, reasonable minds could hold that denial based on this misrepresentation was proper. See Bellville , 702 N.W.2d at 474 (finding that an insurer is innocent of bad faith as a matter of law if the insurer took a position in regard to the claim "that reasonable minds could hold").

Because we hold that Stonebridge had a reasonable basis to deny Adam's claim there is no need to consider whether St onebridge knew, or had reason to know, that its denial was without basis. For the same reason, we also need not consider whether-13- Adam waived any right to pursue a claim against Stonebr idge. Finally, because Adam cannot prevail, we need not consider his arguments on punitive damages.

III. Conclusion Accordingly, we affirm the judgment of the district court.

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