2005 Decisions

Opinions of the United

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Precedential or Non-Precedential: Precedential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
2

 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.
3

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
4

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 lateDecember 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
With her memory refreshed at her deposition, Babayan 1

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

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
Northwestern argued in its motion for summary judgment 2

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.

Babayan’s insurance application contained the following 3

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

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?” There is no evidence in the record that Babayan asked

2

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. By signing the 3
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

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
Questions 31-42 of the paramedical questionnaire were 4

identical to questions 31-42 on the nonmedical questionnaire

completed by Gallina.

8

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. Babayan testified at her deposition that 4

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
Regarding Question 36, Babayan told the examiner that she 5

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.

Although a resident of Pennsylvania, Babayan worked in 6

New Jersey and was entitled short-term disability benefits pursuant

to New Jersey law.

9

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. After the application 5

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
10

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-andfall 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
There were two drafts of the final August 21, 2002 letter. 7

Duller testified that the August 21, 2002 letter contained all of the

bases for Northwestern to rescind the policy.

11

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. Babayan did not cash the check. 7

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
Babayan’s amended complaint originally alleged breach of 8

fiduciary duty and negligence claims against Northwestern, as well.

Babayan, however, voluntarily dismissed with prejudice those claims

on January 7, 2004.

The District Court’s determination as to the breach of 9

fiduciary duty claim is not a subject of this appeal.

12

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. As to 9

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
13

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
The parties agree that Pennsylvania law applies to the 10

pending appeal.

Under Pennsylvania law, a false representation includes an 11

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

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, an insurer has the burden of proving, by clear and 10

convincing evidence, the following three factors: (1) the insured

made a false representation; (2) the insured knew the representation 11

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 summaryjudgment, 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
Similar to Babayan’s application above, Jamison’s 12

application contained a representation that his answers were “true and

complete to the best of my knowledge and belief.” Id.

15

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 misrepresentationsin 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. We granted summary judgment 12

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
16

“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
17

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 sixmonth 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
In a footnote, we stated that the 1994 and 1999 applications 13

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.

Alternatively, we held that summary judgment was 14

inappropriately granted because there was a genuine issue of material

fact as to whether Justofin’s representations were material. Id. at 525.

18

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. Second, as to Justofin’s failure to 13

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. For these reasons,

14

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
19

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
We applied this standard in our decisions in Burkert and 15

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 whetherJustofin even knew the type of arthritis she

suffered from; and (2)Justofin actually disclosed that she underwent

surgeryfor arthritis, an event she might have thought more significant

20

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
than the particular drug she took after her surgery.

To analogize Babayan’s case to Justofin, the applicant there 16

answered “yes” to two health-related questions. Justofin’s purported

failure to disclose information related to the incomplete information

21

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
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

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.
23

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
The question, in full, reads as follows: 17

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

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. In this context, it is clear

17
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

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
Babayan’s deposition testimony in the state court matter, 18

which contains a lengthy discussion of the injuries she suffered as a

26

muscles, bones, joints, spine, back, or neck). During a lengthy

colloquywith 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 tenyear 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.”). In spite of these concessions, 18
result of her accidents, is part of the record.

Babayan claims she thought the term “disorder” meant 19

“disease,” and that she should have asked Gallina for clarification.

That information would have been relevant if, for example, 20

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

Babayan answered “no” to Question 33.k. She testified in her

deposition that the question was unclear, but that with her “new

19

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.” Neither is it relevant that Gallina may have told Babayan not 20
in connection to her response to the subsequent question.

There is no support in the record for Babayan’s argument 21

that she relied upon Gallina’s advice to answer Question 33.k. See

section III.E, infra.

28

to list the automobile accident on the application because it occurred

far enough in the past. Information regarding the accident is not 21

“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
29

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.
30

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). SeeKeefe

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
For example, an insurer’s denial of a claim does not 22

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

and means a breach of a known duty (i.e., good faith

and fair dealing), through somemotive 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). The insured

22
A.2d at 501. Neither does an insurer’s low, but reasonable estimate

of damages or loss constitute bad faith. Id.

In Lewis, the Mississippi Supreme Court held that an insurer 23

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

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
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).

As Northwestern points out in its brief, a Pennsylvania 24

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

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). Babayan’s concept of “post-claim 24
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.

Northwestern’s claims manual states: “If, during the two 25

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” 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, an investigation was triggered under company 25

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
In fact, the claims manual recognizes that, in order to

26

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.”

Additionally, Babayan argues that Northwestern committed 27

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

underwriting. For these reasons, we conclude that the particular 26

practice undertaken by Northwestern in this case did not constitute

bad faith. Accordingly, the District Court did not err in granting 27
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.

We have stated, under Pennsylvania law, that “an insurance 28

broker is under a duty to exercise the care that a reasonably prudent

businessman in the brokerage field would exercise under similar

36

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 duty to advise Babayan to provide 28
circumstances. . . .” Consolidated Sun Ray, Inc. v. Lea, 401 F.2d 650,

656 (3d Cir. 1968).

Babayan cites to deposition testimony relating solely to 29

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 offact as to Babayan’s response

to Question 14.K.2, and is insufficient to establish causation and

damages with respect to Question 33.k.

The parties agreed at oral argument that the District Court’s 30

alternative basis for granting summary judgment on the negligence

37

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. The fact that Gallina 29

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 ailmentsshe 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
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 SupremeCourt 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

IV. Conclusion

Based upon the foregoing reasons, we will affirm the District

Court’s grant of summary judgment in favor of Northwestern and

Gallina.