Source: https://openjurist.org/146/f3d/1184/security-life-insurance-company-of-america-v-meyling
Timestamp: 2018-12-18 19:22:21
Document Index: 800154624

Matched Legal Cases: ['§ 1144', '§ 1144', '§ 1011', '§ 10707', '§ 10713', '§ 10718', '§ 331', '§ 359', '§ 10380']

146 F3d 1184 Security Life Insurance Company of America v. Meyling | OpenJurist
146 F. 3d 1184 - Security Life Insurance Company of America v. Meyling
146 F3d 1184 Security Life Insurance Company of America v. Meyling
146 F.3d 1184
22 Employee Benefits Cas. 1430, 98 Cal. Daily
Op. Serv. 5375,
98 Daily Journal D.A.R. 7545,
98 Daily Journal D.A.R. 9892
SECURITY LIFE INSURANCE COMPANY OF AMERICA, a Minnesota
Garry L. MEYLING, Defendant-counter-claimant-Appellant.
No. 97-15595.
Argued and Submitted Feb. 13, 1998.
Rehearing En Banc Sept. 14, 1998.
We review de novo a district court's grant of summary judgment. Cisneros v. UNUM Life Ins. Co. of America, 134 F.3d 939, 942 (9th Cir.1998); Babikian v. Paul Revere Life Ins. Co., 63 F.3d 837, 839 (9th Cir.1995). " '[T]he district court's interpretation and application of ERISA provisions and its determination that ERISA preempts a state law,' " are also reviewed de novo. Babikian, 63 F.3d at 839 (citation omitted); see also Serrato v. John Hancock Life Ins. Co., 31 F.3d 882, 884 (9th Cir.1994) (" 'We also review de novo the district court's interpretation and application of ERISA provisions and its determination that ERISA preempts a state law.' ") (citation omitted).
We have repeatedly emphasized that "ERISA contains one of the broadest preemption clauses ever enacted by Congress." See Evans v. Safeco Life Ins. Co., 916 F.2d 1437, 1439 (9th Cir.1990). Generally, ERISA "supersede[s] any and all State laws insofar as they may now or hereafter relate to any employee benefit plan...." 29 U.S.C. § 1144(a). However, ERISA also contains a "savings clause" which provides that "nothing in this subchapter shall be construed to exempt or relieve any person from any law of any State which regulates insurance...." 29 U.S.C. § 1144(b)(2)(A). The district court concluded that although the provisions of the California Insurance Code at issue relate to an ERISA plan, the provisions are not preempted because they fall within ERISA's savings clause. We disagree with that conclusion.
Under the Supreme Court's decisions in Metropolitan Life Ins. Co. v. Massachusetts, 471 U.S. 724, 740-44, 105 S.Ct. 2380, 85 L.Ed.2d 728 (1985) and Pilot Life Ins. Co. v. Dedeaux, 481 U.S. 41, 48-49, 107 S.Ct. 1549, 95 L.Ed.2d 39 (1987), we employ "a two-part test to determine when laws regulate insurance under ERISA's saving clause." Evans, 916 F.2d at 1439; see also Cisneros, 134 F.3d at 945; Serrato, 31 F.3d at 885. First, we ask whether the law fits a "common-sense understanding of insurance regulation." Cisneros, 134 F.3d at 945. Second, we consider three criteria "taken from case law interpreting the phrase 'business of insurance' under the McCarran-Ferguson Act, 15 U.S.C. §§ 1011-15.' " Id. Those criteria are "[f]irst, whether the practice has the effect of transferring or spreading a policyholder's risk; second, whether the practice is an integral part of the policy relationship between the insurer and the insured; and third, whether the practice is limited to entities within the insurance industry." Id. (italics in original). However, "the McCarran-Ferguson factors are simply relevant considerations or guideposts, not separate essential elements of a three-part test that must each be satisfied for a law to escape preemption." Id. at 946.
The Supreme Court's decision in Pilot Life informs our determination that California Insurance Code sections 331, 359, 10380 do not fit within a "common sense" understanding of insurance regulation. In Pilot Life, 481 U.S. at 48-51, 107 S.Ct. 1549, the Supreme Court considered whether Mississippi's law of bad faith was a state law that regulates insurance under ERISA's savings clause. The Court stated that:
Id. at 50, 107 S.Ct. 1549. Following the Supreme Court's direction in Pilot Life, we have held that California's general laws of contract interpretation, even when directed at the insurance industry, are not laws that regulate insurance and are not saved from ERISA preemption. See Serrato, 31 F.3d at 886 (finding that a California decision that merely applied general rules of insurance contract interpretation did not regulate insurance and was not saved from preemption); Tingey v. Pixley-Richards West, Inc., 953 F.2d 1124, 1133 (9th Cir.1992) ("Like the Mississippi law against bad faith insurance settlement practices, the Arizona tort ... [at issue] 'arises from a breach of [a] duty ... implicit in all contracts....' Such a law ... is preempted under Pilot Life 's express authority.") (citations omitted); Evans, 916 F.2d at 1440 ("In Kanne, we held that state laws of insurance policy interpretation do not qualify for the saving clause exception and are preempted."); Kanne v. Connecticut General Life Ins. Co., 867 F.2d 489, 494 (9th Cir.1988) (finding that California law of contract interpretation is not saved under McCarran-Ferguson analysis nor is its unfair insurance practice law).
In Serrato, for example, we held that although in proper circumstances state case law regulating insurance may fall under ERISA's savings clause, a California insurance contract interpretation case was not saved because it represented a "decision that merely applie[d] general rules of insurance contract interpretation." 31 F.3d at 886. As such, it was not a law that regulated insurance. See id. In support of that conclusion, we cited many cases, including the Sixth Circuit's decision in International Resources, Inc. v. New York Life Ins. Co., 950 F.2d 294, 299 (6th Cir.1991).
In International Resources, the Sixth Circuit held that the Kentucky tort of bad faith insurance practices, which was limited to the insurance industry, was not protected by ERISA's savings clause. See id. at 299-300. Quoting language from Pilot Life, which emphasized that a law does not regulate insurance when it is firmly rooted in general contract or tort law, the Sixth Circuit concluded that "[t]he Supreme Court has taken a narrow view of the factors that shall be deemed 'integral' to insurance law...." Id. at 300.
More recently, the Sixth Circuit analyzed an issue almost identical to the one in the instant appeal. See Davies v. Centennial Life Ins. Co., 128 F.3d 934 (6th Cir.1997). In Davies, the Sixth Circuit considered an Ohio Insurance Code provision which permitted an insurer to rescind a policy on the basis of false statements made in the application process. Id. at 942. Although the provision was found in the insurance code, and, thus, appeared to be specifically directed at the insurance industry, "its roots [were] firmly planted in the general principles of Ohio contract law." Id. at 941. Therefore, the provision was not "specifically directed at the insurance industry, [but was] merely a codification of the general principles of contract law and fraudulent inducement." Id. at 942. Because those general principles do not specifically regulate insurance, spread risk, or control an integral part of the policy relationship, the court held that the provision did not come within ERISA's savings clause. See id. at 942-43; see also Tingle v. Pacific Mut. Ins. Co., 996 F.2d 105, 108-09 (5th Cir.1993) (finding that rescission provision in insurance code did not come within ERISA savings clause). Again, the Sixth Circuit was exactly right.
We, therefore, conclude that California Insurance Code sections 331, 359, and 10380 do not fit a common sense understanding of insurance regulation. Although the provisions are found in the Insurance Code, they do little more than codify long-standing principles of California contract law. See Reveles v. Toyota by the Bay, 57 Cal.App.4th 1139, 67 Cal.Rptr.2d 543, 551 (1997) ("It has long been recognized that a used vehicle buyer may rescind the sales contract where the seller fraudulently misrepresented the vehicle's condition...."); Osborne v. Cal-Am Financial Corp., 80 Cal.App.3d 259, 145 Cal.Rptr. 584, 589 (1978) ("Every contract is executed subject to implied legal conditions of good faith, which include the buyer's right to rescind within a reasonable time after discovery of the falsity of seller's material representations."); Wilke v. Coinway, Inc., 257 Cal.App.2d 126, 64 Cal.Rptr. 845, 854 (1967) (allowing rescission of a contract to purchase coin operated machines on the basis of fraudulent misrepresentations); Civille v. Bullis, 209 Cal.App.2d 134, 25 Cal.Rptr. 578, 581 (1962) (allowing rescission of a real estate contract on the basis of false representations). The provisions cannot be readily distinguished from California's common law of insurance contract interpretation. See Kanne, 867 F.2d at 494 (finding that insurance contract interpretation is "not 'specifically directed toward [the insurance] industry.' "). Like any other contract entered into on the basis of a material misrepresentation, insurance contracts can be rescinded. That is not the stuff that savings clause insurance regulation is made of.
However, because we can affirm on any ground supported by the record, we must go on to determine whether rescission was precluded by AB 1672. We must also decide whether it was proper under federal common law. See United States v. Burnette, 698 F.2d 1038, 1048 (9th Cir.1983) (noting that we may affirm the district court on any basis fairly presented in record).
B. AB 1672 and RESCISSION
Initially, we emphasize that the express terms of AB 1672 do not prohibit the remedy of rescission. Because the rescission provisions were part of the Insurance Code prior to the enactment of AB 1672, under established principles of California statutory interpretation, we assume that the California Legislature was aware of the provisions when it enacted AB 1672. See Unzueta v. Ocean View School Dist., 6 Cal.App.4th 1689, 8 Cal.Rptr.2d 614, 618-19 (1992) (" 'The Legislature is presumed to know the existing law and have in mind its previous enactments when legislating on a particular subject.' "); see also Bailey v. Superior Court, 19 Cal.3d 970, 140 Cal.Rptr. 669, 568 P.2d 394, 398 n. 10 (1977). Although an insurance company may not initially exclude an eligible employee on the basis of his "actual or expected health condition," Cal. Ins.Code § 10707, that does not mean that it cannot rescind for fraud or misrepresentation. And although the legislature has specifically declared that the insurance company need not renew the health plan when there is "fraud or misrepresentation," Cal. Ins.Code § 10713(b), that, too, does not preclude rescission. Moreover, AB 1672 specifically provides that "[n]otwithstanding any other provision of law, no provision of this chapter shall be construed to limit the applicability of any other provision of the Insurance Code unless such provision is in conflict with the requirements of this chapter." Cal. Ins.Code § 10718.7. We do not see AB 1672 as an impediment to rescission because nothing in the statute prohibits rescission, and because the mere fact that a policy must issue does not inexorably require that a policy based on misrepresentations cannot be rescinded. See Unzueta, 8 Cal.Rptr.2d at 618 (" 'An intent that finds no expression in the words of the statute cannot be found to exist. The courts may not speculate that the legislature meant something other than what it said. Nor may they rewrite a statute to make it express an intention not expressed therein.' "). Thus, Security's ability to rescind its insurance agreement with Meyling will depend entirely on federal common law.3 Therefore, we now turn to an analysis of that body of law.
C. FEDERAL COMMON LAW and RESCISSION
Under ERISA, Congress has authorized the courts "to formulate a nationally uniform federal common law to supplement the explicit provisions and general policies set out in [the Act]." Peterson v. American Life & Health Ins. Co., 48 F.3d 404, 411 (9th Cir.1995). In that regard, we have held that "ERISA preemption does not mean that general principles of state law are irrelevant to interpretation of ERISA-governed insurance contracts." Saltarelli v. Bob Baker Group Medical Trust, 35 F.3d 382, 386 (9th Cir.1994). On the contrary, courts are directed to formulate federal common law by considering both state law and governing federal policies. Id.
While we have never directly held that there is a right of rescission under ERISA for insurance contracts entered into under a false representation of health, it is clear that the remedy should exist. Seventy years ago, the Supreme Court stated that "[i]nsurance policies are traditionally contracts uberrimae fidei and a failure by the insured to disclose conditions affecting the risk, of which he is aware, makes the contract voidable at the insurer's option." Stipcich v. Metropolitan Life Ins. Co., 277 U.S. 311, 316, 48 S.Ct. 512, 72 L.Ed. 895 (1928). We need not moot whether uberrimae fidei itself still applies to ordinary insurance contracts because many federal courts facing insurance issues have identified a right of rescission. See, e.g., Davies, 128 F.3d at 943-44 (recognizing an insurer's right to rescind an insurance contract where the insured has made fraudulent or material misrepresentation in insurance application); Hauser v. Life General Sec. Ins. Co., 56 F.3d 1330, 1335 (11th Cir.1995) (assuming right of rescission exists under ERISA-created federal common law); Nash v. Trustees of Boston Univ., 946 F.2d 960, 966-67 (1st Cir.1991) (recognizing fraud in the inducement as defense under federal common law interpreting ERISA); Coots v. United Employers Fed'n, 865 F.Supp. 596, 603-04 (E.D.Mo.1994) (recognizing federal common law right of rescission under ERISA for false representations to an insurer); Negoski v. Country Life Ins. Co., 843 F.Supp. 372, 374-75 (N.D.Ill.1993) (assuming right of rescission on basis of material misrepresentation in insurance application). Thus, in accord with the policy of national uniformity, we recognize that ERISA must provide a rescission remedy when an insured makes material false representations regarding his health.
The question of when a misrepresentation is "material" in the insurance context has been a matter of some debate. Although the California Supreme Court has not directly faced the issue, it has stated in dicta that materiality of a misrepresentation on an insurance application "is determined by the probable and reasonable effect that truthful disclosure would have had upon the insurer in determining the advantages of the proposed contract." Holz Rubber Co., Inc. v. American Star Ins. Co., 14 Cal.3d 45, 120 Cal.Rptr. 415, 533 P.2d 1055, 1064 (1975) (In Bank). The California Supreme Court explained that "[e]ssentially, we must decide whether the insurer was misled into accepting the risk or fixing the premiums of insurance." Id. 14 Cal.3d at 61 n. 16.
That view is consistent with the view of a majority of federal courts which have held that materiality is established when the insurer is misled into accepting the risk or in providing a discounted premium. See, e.g. Hays v. Jackson Nat'l Life Ins. Co., 105 F.3d 583, 590 (10th Cir.1997) (" 'If the only consequence of a fraudulent misrepresentation in a life insurance application is to reduce the amount paid under the policy, there is every incentive for applicants to lie.' "); New York Life Ins. Co. v. Johnson, 923 F.2d 279, 281 (3rd Cir.1991) ("A misrepresented fact is material if being disclosed to the insurer it would have caused it to refuse the risk altogether or to demand a higher premium."); Parker v. Prudential Ins. Co. of America, 900 F.2d 772, 778 (4th Cir.1990) (finding that insurance coverage could be denied where insured had misrepresented facts only to receive discounted premium).
The result that Meyling now argues for hatches the very cockatrice that the Second Circuit warned against when it said that failing to allow rescission "would reward the practice of misrepresenting facts critical to the underwriter's task because the unscrupulous (or merely negligent) applicant 'would have everything to gain and nothing to lose' from making material misrepresentations in his application for insurance." Mutual Benefit Life Ins. v. JMR Electronics Corp., 848 F.2d 30, 34 (2nd Cir.1988). That court could have been speaking of Meyling himself when it said that a lying claimant could then "rest assured not only that he may demand full coverage should he survive the contestability period ..., but that even in the event of a contested claim, he would be entitled to the coverage that he might have contracted for had the necessary information been accurately disclosed at the onset." Id. I agree that "[the] law does not permit this anomalous result." Id.
Section 331 provides "[c]oncealment, whether intentional or unintentional, entitles the injured party to rescind insurance." Cal. Ins.Code § 331. Section 359 states "[i]f a representation is false in a material point, whether affirmative or promissory, the injured party is entitled to rescind the contract from the time the representation becomes false." Cal. Ins.Code § 359. Finally, section 10380 states that "[t]he falsity of any statement in the application for any policy covered by this chapter shall not bar the right to recovery under the policy unless such false statement was made with actual intent to deceive or unless it materially affected either the acceptance of the risk or the hazard assumed by the insurer." Cal. Ins.Code § 10380