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November 6, 1992



The opinion of the court was delivered by: LEONARD B. SAND


 Plaintiff brings this action against Manhattan Life Insurance Company ("Manhattan Life") and American International Life Assurance Company of New York ("American International") seeking unpaid benefits under two life insurance policies. Jurisdiction is based on diversity under 28 U.S.C. § 1332 (a) (1). Both defendants move for summary judgment pursuant to Rule 56 of the Federal Rules of Civil Procedure. Plaintiff cross-moves for summary judgment against American International.

 Defendant Manhattan Life states three grounds in support of its motion for summary judgment: (1) material misrepresentations in the Application render the policy void as a matter of law; (2) Berger had no insurable interest in Seppinni's life at the time the policy was applied for and issued, and therefore the policy is invalid; and (3) a condition precedent to coverage under the contract, specifically that Seppinni's health at the time of delivery of the policy be the same as represented in the application, was not satisfied, and therefore the policy never took effect. Defendant American International makes essentially the same arguments. Any factual differences between the two defendants will be discussed as they arise.

 While the evidence pertaining to the first two grounds is insufficient to sustain a grant of summary judgment, the Court finds that defendants have established as a matter of law that a condition precedent to coverage under the contract was not satisfied. Summary judgment is therefore granted in favor of the defendants on that ground. Furthermore, because the Court finds that American International has not waived its right to defend the case on the grounds stated above, plaintiff's cross-motion for summary judgment against American International is denied.

 Factual Background

 Joel Berger, a former practicing dentist, brings this action to recover on two key-man life insurance policies issued on the life of Stacy Seppinni, both of which name Dr. Berger as beneficiary. Mr. Seppinni, a convicted felon who had outstanding a warrant for his arrest for criminal possession of a firearm, was a long-time friend of Dr. Berger at all times relevant to this proceeding.

 Berger and Seppinni purported to be partners in a dental supply company called "Visiting Dental Services", begun in 1982 and operated out of Berger's basement. (Berger Decl. PP 17-29.) Plaintiff contends that in the Spring of 1985 he decided to procure $ 2 million of key-man life insurance on Seppinni's life because he believed their new business was going to take off, (Berger Dep. at pp. 172, 332-333), although he admits that to his knowledge Visiting Dental Services never realized a profit (Berger dep., p.186).

 Herbert Schneider, a long time patient of Dr. Berger, was the insurance broker who solicited the two policies under which Berger seeks to recover in this action, as well as a third policy issued by U.S. Life, an insurance company which is not a defendant in this case. Schneider, a licensed insurance broker, acted as plaintiff's agent in brokering the policies; he had no employment relationship with either of the defendants.

 On June 5, 1985 and July 8, 1985, Berger submitted Parts 1 and 2 of an application to defendant American International seeking insurance on the life of Seppinni and naming Berger as beneficiary in the amount of $ 100,000. Seppinni and Berger represented that Seppinni was in good health, answering virtually all of the questions regarding the existence of a host of medical conditions in the negative. The following clause was included at the lower portion of Part 1 of the Application:

 . . . the Company shall incur no liability under this application unless a policy is issued on this application and the full first premium actually paid during the lifetime and continued insurability of the Proposed Insured as stated in this application.

 On August 2, 1985, Berger submitted Part 1 of an application without premium to defendant Manhattan Life seeking $ 150,000 of insurance on Seppinni's life and naming Berger as beneficiary. Plaintiff concedes that two misrepresentations were made in Part 1 of the Application. The first is that Seppinni denied the use of any aliases, when in fact, Seppinni used at least one alias. The second is that Berger and Seppinni, in response to a question regarding whether they had other life insurance applications pending, identified only the American International application, when in fact only a day before the application was made to Manhattan Life they had submitted an application to U.S. Life Insurance Company for a $ 900,000 policy on Seppinni's life naming Berger as beneficiary. On page 2 of Part 1 of the Application there was a status quo clause, similar to the one in the American International application set out above, which provided that:

 Insurance shall take effect when the policy has been issued and delivered, and the first premium for the policy has been paid, all while the health and other material conditions of the Proposed Insureds are the same as described in the application, unless the insurance has previously taken effect under the terms and conditions of the Conditional Receipt.

 Attached to the first two pages of the document signed on August 2, 1985, there was a third page, entitled "Part 2," which bore the legend, in relevant part, "COMPLETE FOR NON-MEDICAL CONSIDERATION ON ANY INDIVIDUAL PROPOSED FOR COVERAGE. Applicable to (1) Proposed Insured IF MEDICAL PART 2 IS NOT REQUIRED." This page contained questions concerning Seppinni's medical condition and family history, and it was left completely blank, although Berger and Seppinni's signatures appear at the bottom of the page attesting to the truth of the answers given.

 On August 7, 1985, after an examination by Manhattan Life's physician, Berger and Seppinni completed and signed a form labeled "PART 2 APPLICATION FOR INSURANCE." The August 7 document did not contain a status quo clause. As in the American International application, Seppinni made a number of representations regarding his medical condition, some of which we will discuss later in more detail, generally representing himself to be in good health. Manhattan Life's medical examiner gave Seppinni a clean bill of health on August 7, 1985.

 On September 29, 1985, Seppinni voluntarily admitted himself into Booth Memorial Medical Center ("the Hospital"). Neither defendant was informed that Seppinni was in the hospital. Seppinni remained in the hospital until his death on October 17, 1985.

 The American International application was approved and issued on October 15, 1985. The Manhattan Life policy was delivered on October 5, 1985, and the initial premium due under the Manhattan Life policy was paid on October 4, 1985. Both companies' policies therefore had been delivered and the premiums paid while Seppinni was in the hospital with an illness that ended in his death.

 Although some of the diagnoses in the authenticated hospital records have been disputed by the parties, the following facts are not in dispute: (1) when Seppinni was admitted to the hospital, he was suffering from hepatic encephalopathy, a liver disorder exhibited by neural effects on the brain resulting from an accumulation of blood toxins not cleared by a malfunctioning liver (see Authenticated Hospital Admitting Record, Exh. B to Kotoros Aff.); (2) when Seppinni was admitted to the hospital he was "confused," (see Authenticated Hospital Records, Exh. B to Brand Decl. at 000664) and "stuporous" (id. at 000674); (3) when Seppinni entered the hospital he had track marks over the veins in his arms and skin-popping lesions, indicating intravenous drug use (id. at 000664, 000674); (4) Seppinni had a prior history of hepatitis, confirmed through hepatitis antibody tests (id. at 000572-000574 and 000631-000634); and (5) Seppinni was terminally ill, and died in the hospital 18 days later.

 On or about November 5, 1985, Manhattan received a claim from Berger seeking benefits under the Manhattan Policy. A routine contestability investigation was conducted, revealing the facts described above. A meeting of Manhattan Life's Claim Review Committee was convened, and based upon its determination that the condition precedent to the Manhattan Life Policy had not been satisfied, the Committee denied Berger's claim. A denial claim letter was sent to Berger's counsel along with a check returning the premium plus interest. The circumstances surrounding the denial of plaintiff's claim by American International will be discussed in detail later in the opinion in reference to plaintiff's cross-motion for summary judgment against American International. This lawsuit followed.


 Pursuant to Rule 56(c) of the Federal Rules of Civil Procedure, summary judgment is appropriate if the supporting evidence demonstrates that there is no genuine issue of material fact and that the movant is entitled to judgment as a matter of law. See, e.g., Knight v. United States Fire Ins. Co., 804 F.2d 9, 11 (2d Cir. 1986), cert. denied, 480 U.S. 932, 94 L. Ed. 2d 762, 107 S. Ct. 1570 (1987). Summary judgement is likewise appropriate where the movant demonstrates that the plaintiff has failed to present any credible evidence to support a necessary element of his claim. Rosenthal v. Kingsley, 674 F. Supp. 1113, 1115 (S.D.N.Y. 1987).

 Plaintiff's failure to present credible evidence establishing an element of his claim mandates entry of summary judgment in favor of both Manhattan Life and American International. Celotex Corp. v. Catrett, 477 U.S. 317, 322, 91 L. Ed. 2d 265, 106 S. Ct. 2548 (1986). Berger's claim against both defendants sounds in breach of contract, an essential element of which is the existence of a viable contract. Based upon Berger and Seppinni's failure to satisfy an unambiguously stated condition precedent to coverage, it is clear that no valid contract of insurance ever came into effect. Absent a contract, Berger's breach of contract action must fail.

 I. Material Misrepresentations in the Application:

 It is well settled under New York law, which governs in this diversity action, that even an innocent misrepresentation, if material, is sufficient to allow the insurer to avoid a contract of insurance, Process Plants Corp. v. Beneficial Life Ins. Co., 53 A.D.2d 214, 385 N.Y.S.2d 308 (1st Dep't 1976), aff'd 42 N.Y.2d 928, 397 N.Y.S.2d 1007, 366 N.E.2d 1361 (1977). A misrepresentation is material if "knowledge by the insurer of the facts misrepresented would have led to a refusal by the insurer to make such contract", N.Y.Ins.Law § 3105(b). Materiality is usually a question of fact for the jury. However, "where the evidence concerning the materiality is clear and substantially uncontradicted, the matter is one of law for the court to determine", Process Plants, 385 N.Y.S.2d at 310-311. Manhattan Life has not proven materiality as a matter of law with regard to the conceded misrepresentations in the application. Furthermore, genuine issues of material fact remain with regard to the representations concerning Seppinni's health made in both the Manhattan Life application and the American International application.

 The Court will address first the conceded misrepresentations concerning the use of aliases and the existence of pending life insurance policies.

 A. Regarding aliases and pending insurance applications:

 As discussed above, it is undisputed that Manhattan Life's application required Seppinni to disclose any aliases ever used by him, and that Seppinni failed to disclose at least one alias which he used. It is further conceded by plaintiff that Berger and Seppinni represented that they did not have any other life insurance applications pending, when in fact they had submitted an application to U.S. Life Insurance Company for a $ 900,000 policy on Seppinni's life naming Berger as beneficiary only a day before the application was made to Manhattan Life. Both of these statements were clearly misrepresentations. *fn1" Any supposed inadvertency is of no consequence, The Mutual Benefit Life Ins. Co. v. JMR Electronics Co., 848 F.2d 30, 32 (2d Cir. 1988).

 In order to avoid the policy at the stage of summary judgment, Manhattan Life must prove as a matter of law that these misrepresentations were material; that if Manhattan Life had known the truth, it would not have issued the exact policy which it did issue, Vella v. Equitable Life Assurance Society, 887 F.2d 388 (2d Cir. 1989). Plaintiff argues that in order to meet this burden, Manhattan Life must make a conclusive showing of materiality based upon its rules or underwriting standards. Although plaintiff overstates the holdings in Bloom v. Mutual of Omaha Ins. Co., 161 A.D.2d 1047, 557 N.Y.S.2d 614 (3d Dep't 1990) and Wittner v. IDS Ins. Co. of New York, 96 A.D.2d 1053, 466 N.Y.S.2d 480 (2d Dep't 1983), the Court finds that defendant has not met its burden.

 Wittner stands for the proposition that in order to prove materiality as a matter of law, it will generally be necessary for the insurance company to substantiate the testimony of its underwriter with documentation, such as the insurance company's underwriting manuals, which clearly indicates that had the underwriter known the truth, the company would not have issued the exact same policy. Similarly, in Borchardt v. New York Life Ins. Co., 102 A.D.2d 465, 477 N.Y.S.2d 167 (1st Dep't), aff'd, 63 N.Y.2d 1000, 483 N.Y.S.2d 1012, 473 N.E.2d 262 (1984), the court reversed a denial of summary judgment on the grounds of materiality, finding that the underwriter's testimony that he would not have issued the policy if he had known the truth about plaintiff's diabetes was unqualified, uncontroverted and fully supported by the insurance company's underwriting rules. See also Kulikowski v. Roslyn Sav. Bank, 121 A.D.2d 603, 503 N.Y.S.2d 863 (2d Dep't), appeal dismissed, 69 N.Y.2d 705, 512 N.Y.S.2d 364, 504 N.E.2d 691 (1986).

 Manhattan Life's evidence does not establish the materiality as a matter of law of either the misrepresentation regarding the alias, or the misrepresentation regarding the pending insurance applications. Most importantly, in contrast to Wittner and Borchardt, Manhattan Life's underwriter, Stahley, does not unequivocally state that if he had known the truth regarding these matters he would not have issued the exact policy that was issued. Instead, he avers in his affidavit (Stahley Aff., P 6), that "these failures to disclose are material to an underwriter because they improperly narrow the scope of the underwriter's investigation" and that "either of these revelations could have resulted in a declination of coverage, a rated policy, or further investigation" (emphasis added). Furthermore, Manhattan Life has not made any showing that Mr. Stahley's testimony is supported by the underwriting manuals used by Manhattan Life, and counsel conceded at oral argument that he was ...

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