USCA1 Opinion
UNITED STATES COURT OF APPEALS
FOR THE FIRST CIRCUIT
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No. 93-1430
JULIO VELEZ-GOMEZ, ET AL.,
Plaintiffs, Appellees,
v.
SMA LIFE ASSURANCE COMPANY,
Defendant, Appellant.
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APPEAL FROM THE UNITED STATES DISTRICT COURT
FOR THE DISTRICT OF PUERTO RICO
[Hon. Gilberto Gierbolini, U.S. District Judge]
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Before
Cyr, Circuit Judge,
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Bownes, Senior Circuit Judge,
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and Boudin, Circuit Judge.
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Frank Gotay-Barquet, with whom Gustavo A. Gelpi, Edward A. Godoy,
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Feldstein, Gelpi & Gotay, and Ralph L. Diller, Associate Counsel,
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State Mutual Companies, were on brief for appellant.
John E. Mudd, with whom Luis Ortiz Segura and Cordero, Miranda &
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Pinto were on brief for appellees.
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November 9, 1993
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CYR, Circuit Judge. SMA Life Assurance Co. (SMA) seeks
CYR, Circuit Judge.
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to set aside the summary judgment entered in favor of plaintiff
appellee Julio V lez Gom z, contending, inter alia, that the
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court below incorrectly ruled that the incontestability clause in
the SMA disability-income insurance policy issued to V lez is
ambiguous. We vacate the district court judgment and remand for
further proceedings.
I
I
BACKGROUND
BACKGROUND
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The relevant facts are recited in the light most
favorable to SMA. O'Connor v. Steeves, 994 F.2d 905, 907 (1st
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Cir. 1993). V lez was diagnosed with multiple sclerosis around
1983. Sometime in 1986, V lez and his wife attended a dinner
party at the home of their neighbor, Isidro Ortiz Pep n. Amongst
a group of people at the party, V lez's wife made comments about
her husband's health. There is no evidence that Ortiz overheard
or participated in the conversation, nor that Ortiz was aware
V lez had multiple sclerosis.1
Shortly thereafter, Ortiz, who was neither an SMA
employee nor authorized to sell its insurance, arranged for V lez
to meet with Luis R. Montes, an SMA agent. There was no discus-
sion of V lez's condition at their meeting and Montes was not
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1There is evidence that Ortiz learned that V lez was experi-
encing "achaques," a Spanish word roughly equivalent to "general
aches and pains."
made aware of V lez's "achaques" or the multiple sclerosis
diagnosis.
V lez represented on the SMA insurance application that
he had not been diagnosed with, or received treatment for, any
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nerve disorder (viz., multiple sclerosis) during the preceding
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ten years. On November 24, 1986, SMA issued a disability-income
insurance policy designating V lez as the insured.
In June of 1989, V lez, claiming total disability,
applied for benefits under the SMA policy. Based on the alleged
material misstatement by V lez in the insurance application, SMA
refused to pay on the policy and refunded all premiums, with
interest. Whereupon, V lez brought the present action.
Following discovery, the parties filed cross-motions
for summary judgment. V lez contended that the two-year bar
period for contesting the policy had expired, and, further, that
SMA was estopped from contesting the policy based on V lez's
preexisting medical condition because Ortiz, allegedly SMA's
agent, had known at the time the policy was issued that V lez was
suffering from multiple sclerosis. According to SMA, on the
other hand, the incontestability clause tolled the two-year
period while V lez was disabled, V lez became disabled less than
two years after the policy went into effect and, therefore, SMA
was still entitled to contest the policy.
The district court found for V lez on the incontest-
ability clause issue and two other liability theories. See V lez
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4
Gom z v. SMA Life Assur. Co., 793 F. Supp. 378 (D.P.R. 1992).
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SMA appealed.
II
II
DISCUSSION
DISCUSSION
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We review a grant of summary judgment de novo, employ-
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ing the same criteria incumbent upon the district court in the
first instance. Goldman v. First Nat'l Bank, 985 F.2d 1113, 1116
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(1st Cir. 1993). Summary judgment is appropriate where the
record, viewed in the light most favorable to the non-moving
party, reveals no trialworthy issue of material fact and the
moving party is entitled to judgment as a matter of law. Id.2
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1. The Incontestability Clause.
1. The Incontestability Clause.
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Incontestability clauses set temporal limits on an
insurer's right to challenge its insurance policy based on
alleged misstatements in the insurance application. The SMA
incontestability clause, a simplified version of the model
contained in the Puerto Rico Insurance Code, see P.R. Laws Ann.
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tit. 26, 1606 (1977), provides:
(a) After this policy has been in force for
two years during your lifetime (excluding any
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period during which you are disabled), [SMA]
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will not be able to contest the statements
made in the application.
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2Contrary to V lez's novel contention, SMA's cross-motion
for summary judgment does not estop it from claiming that genuine
issues of material fact precluded summary judgment against SMA.
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5
(Emphasis added.) The quoted parenthetical governs this case.3
The district court found the parenthetical ambiguous as
to "whether . . . disability is determined from the time of
actual physical disability, or . . . from the time of the in-
surer's notice of disability." V lez Gom z, 793 F. Supp. at 381
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(emphasis added). On appeal, SMA contends that the district
court improvised ambiguity where there was none.
The insurance policy is to be interpreted in accordance
with Puerto Rico law recently surveyed by this court:
Under Puerto Rico law, the Insurance
Code of Puerto Rico, 26 L.P.R.A. 101, et
seq., controls the interpretation of insur-
ance contracts. Roberto Mel ndez Pi ero v.
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Levitt & Sons of Puerto Rico, Inc., 91 J.T.S.
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95, 9052 (December 13, 1991). Article 11.250
of the Insurance Code of Puerto Rico provides
that every insurance contract "shall be con-
strued according to the entirety of its terms
and conditions as set forth in the policy,
and as amplified, extended, or modified by
any lawful rider, endorsement, or application
attached and made a part of the policy." 26
L.P.R.A. 1125. See also Puerto Rico Elec-
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tric Power Authority v. Philipps, 645 F.
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Supp. 770, 772 (D.P.R. 1986). When the In-
surance Code of Puerto Rico does not provide
an interpretive approach for a particular
situation, the Civil Code is used as a sup-
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3The Puerto Rico Insurance Code authorizes the following
clause in disability-insurance policies:
INCONTESTABLE: After this policy has been in force for
a period of three years during the lifetime of the
insured (excluding any period during which the insured
_________ ___ ______ ______ _____ ___ _______
is disabled), it shall become incontestable as to the
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statements contained in the application.
P.R. Laws Ann. tit. 26, 1606 (1977). Deviations from the
Insurance Code model (e.g., SMA's use of a two-year, rather than
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a three-year, contestability period) are permitted provided they
benefit the insured. Id. 1113(2), 1604 (1977).
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6
plemental source of law in interpreting the
insurance contract. Puerto Rico Housing Bank
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v. Pagan Insurance Underwriters, 11 Official
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Translations 3, 8 (1981); 111 D.P.R. 1, 6;
Gonzalez v. John Hancock Mutual Life Insur-
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ance Co., 927 F.2d 659, 669 (1st Cir. 1991).
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Article 1233 of the Puerto Rico Civil Code
provides that when "the terms of a contract
are clear and leave no doubt as to the inten-
tions of the contracting parties, the literal
sense of its stipulations shall be observed."
31 L.P.R.A. 3471.
Nieves v. Intercontinental Life Ins. Co., 964 F.2d 60, 63 (1st
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Cir. 1992). As a general matter, ordinary rules of construction
apply to incontestability clauses. 1A J. Appleman, Insurance Law
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and Practice, 311 at 313 (1981) (hereinafter Appleman); 18 G.
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Couch, Couch on Insurance 2d 72:9 (rev. ed. 1983) (hereinafter
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Couch).
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The first interpretive waymark, of course, is the
language of the parenthetical tolling provision itself: "exclud-
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ing any period during which you are disabled," where we find no
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ambiguity whatever. Rather, the parenthetical straightforwardly
tolls the running of the two-year period for the duration of any
disability commencing within it. When "the wording of the
contract is explicit and its language is clear, its terms and
conditions are binding on the parties." Nieves, 964 F.2d at 63
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(citations omitted).
Related provisions within the four corners of the
policy likewise counsel a common-sense reading of the plain
language of the tolling provision. First, the term "disability"
is defined in the policy as "injury or sickness [that] makes you
unable to engage in your regular occupation." Thus, the date of
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disability is the relevant tolling event. There is nothing to
suggest that post-disability notification of the insurer is
germane to the tolling inquiry. Second, our interpretation of
the parenthetical in paragraph (a) comports precisely with the
language in companion paragraph (b):
(b) [SMA] will not be able to reduce or deny
any claim for disability which starts after
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two years from the date of issue because the
disease or physical condition existed before
the date of issue.
(Emphasis added.) The hand-and-glove fit between these coordi-
nate provisions is completely undone by V lez's interpretation.
The parenthetical is adapted from a standardized incon-
testability clause mandated by statute in at least forty-five
states, the District of Columbia, and the U.S. Virgin Islands, in
addition to Puerto Rico. We consider it significant that every
other court that has considered the matter to date has arrived at
the interpretation urged by SMA, and no court has suggested a
notification requirement. See, e.g., Wischmeyer v. Paul Revere
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Life Ins. Co., 725 F. Supp. 995, 998 (S.D. Ind. 1989) ("This
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clause of the contract is plain and unambiguous.") (emphasis
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added); Bronson v. Washington Nat'l Ins. Co., 207 N.E.2d 172,
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176 (Ill. App. 1965) (Holding contestability period tolled at
onset of insured's disability); Taylor v. Metropolitan Life Ins.
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Co., 214 A.2d 109, 114-15 (N.H. 1965) (same); Standard Security
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Life Ins. Co. v. Klamer, 276 N.Y.S.2d 645, 646 (N.Y. App. Div.
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1967) (same); Union Mut. Life Ins. Co. v. Kevie, 215 N.Y.S.2d
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298 (N.Y. App. Div. 1961) (same).
8
An understanding of the origins and function of incon-
testability clauses likewise confirms the construction urged by
SMA. In mandating a contractual period of repose on insurer
challenges to disability-income insurance policies predicated on
alleged misrepresentations in the insurance application, legisla-
tures accommodate the interests of both insurers and insureds,
based on two competing policies: promoting insurance security
and deterring insurance fraud. See Appleman, 311 at 305-306;
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see also Couch, 72:16. Thus, after the contestability period
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has run, the insurer cannot withdraw insurance protection even
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though the insurance application contained misstatements. On the
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other hand, to better forfend against the occasional insured who
would perpetrate fraud at the expense of insurers and their
fellow insurance consumers, the contractual limitations period is
tolled for the duration of any disability arising within the
relativelybriefcontestabilityperiodfollowingissuanceofthepolicy.4
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4As the Wischmeyer court explained:
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The clause protects an insured who is healthy
enough to work throughout the two-year period
from losing the security of disability in-
surance because of some prior condition that
might eventually disable him. On the other
hand, the insurer is protected in that it is
not precluded from denying benefits to an ap-
plicant whose pre-existing condition is so
bad that he becomes disabled during the two-
year period.
Wischmeyer, 725 F. Supp. at 1001-02.
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Under the "notification" theory adopted below, however, a
dishonest insured could frustrate this legislative intent com-
pletely, simply by waiting out the contestability period before
submitting a claim. Thus, in our view the parenthetical clause
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2. The Date of Disability.
2. The Date of Disability.
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As an alternate basis for summary judgment, the dis-
trict court specifically found that V lez did not become disabled
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until March 1, 1989, more than two years after the policy was
issued on November 24, 1986. Thus, even under our reading of the
incontestability clause, SMA would be barred from asserting the
present challenge.
The district court based its disability-date finding
exclusively on a letter from IBM, stating that V lez was employed
from August 9, 1971 until March 1, 1989, when he went on "medical
disability."5 The IBM letter did not stand alone, however.
V lez's claim for disability benefits under the SMA policy
included a statement from his own physician indicating that V lez
became "totally disabled (unable to work)" in October of 1988,
within two calendar years after the policy issued. The summary
judgment record further reveals that V lez filed a disability
claim with the Social Security Administration on June 5, 1989, in
which he represented (in the words of the administrative law
judge) that "he became disabled as of November 2, 1987 due to
Multiple Sclerosis." Given this evidence, and the reasonable
inferences therefrom, Goldman, 985 F.2d at 1116, the factual
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clearly reflects the legislature's rejection of the "notifica-
tion" theory, based on policy grounds well within its exclusive
domain. Id. at 1004.
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5The IBM letter states: "This will serve as certification
that Mr. Julio Velez was employed by [IBM] from August 9, 1971
until he went on Medical Disability on March 1, 1989."
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dispute over the onset of V lez's disability simply was not
amenable to summary disposition.
3. The Duty to Investigate.
3. The Duty to Investigate.
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As its third ground for summary judgment, the district
court held SMA estopped from contesting the policy because (1)
Ortiz knew of V lez's multiple sclerosis before the policy
issued; (2) Ortiz was SMA's agent; (3) Ortiz's knowledge is
imputable to SMA; (4) V lez's health problems would have prompted
a reasonably prudent insurer to investigate V lez's preexisting
condition; and (5) SMA failed to investigate during the contest-
ability period. Even assuming that the many subsidiary factual
and legal elements in its conclusion were properly resolved under
our summary judgment jurisprudence, the district court's conclu-
sion cannot stand. Its thesis that SMA failed to meet its duty
to investigate "during the contestability period" collapses in
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view of our determination, see supra at pp. 6-8, that the two-
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year contestability period was tolled by V lez's intervening
disability.
Further, the district court ruling falters on its
impermissible factual premise that SMA was on notice of "certain
medical conditions" which would have prompted a prudent insurer
to investigate. Our summary judgment jurisprudence precludes
judicial resolution of genuine issues of material fact. Goldman,
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985 F.2d at 1116. No doubt what Ortiz knew about V lez's medical
condition, see supra at pp. 2-3, may be hotly contested at trial.
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At the summary judgment stage, however, there is "no room for
11
credibility determinations, no room for the measured weighing of
conflicting evidence such as the trial process entails, no room
for the judge to superimpose his own ideas of probability and
likelihood (no matter how reasonable those ideas may be) . . . ."
Greenburg v. Puerto Rico Maritime Shipping Auth., 835 F.2d 932,
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936 (1st Cir. 1987). Drawing all reasonable inferences favorable
to SMA, as we must, see Goldman, 985 F.2d at 1116, it is
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inconceivable to us that V lez's wife's dinner-party comment
about her husband's "achaques" ("aches and pains") reasonably
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could be considered conclusive evidence sufficient to require a
prudent insurer to act on any general duty to investigate during
the contestability period.6
Given the plain language in the incontestability clause
and the inconclusive state of the summary judgment record, the
legal and factual grounds for holding that SMA violated a duty to
investigate during the contestability period were untenable.
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6The two cases the district court relied on for its holding
that insurers have a general "duty to investigate" during the
contestability period, Rodriguez v. John Hancock, 110 D.P.R. 1,
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10 Official Translations 913 (1980), and Heirs of Roche v. Banco
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de la Vivienda, 103 D.P.R. 656, 3 Official Translations 1 (1975),
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are inapposite. Both involved attempts to contest policies after
the expiration of the contestability period. Neither case stands
for the proposition that insurers have a general duty to investi-
gate, nor that a failure to investigate might estop an insurer
from challenging a policy, during the contestability period.
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III
III
CONCLUSION
CONCLUSION
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For the foregoing reasons, the judgment of the district
court must be vacated and the case must be remanded for further
proceedings.
The district court judgment is vacated and the case is
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remandedfor further proceedings consistent herewith. So ordered.
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