Billie Osborne, Individually, and As Administrator of the Estate of Shirley Ann Osborne, Deceased; Martha Mcdaniel Moore, Kenneth Wayne Humphreys, Lora M. Moore, and Paul G. Hudgins, Plaintiffs-appellants, v. American Select Risk Insurance Company, Defendant-appellee, Andallstate Insurance Company, Intervenor, 414 F.2d 118 (6th Cir. 1969)

This diversity action was brought by plaintiffs-appellants (hereinafter "plaintiffs") seeking recovery under an automobile liability insurance policy issued to Billie Osborne by the defendant-appellee (hereinafter "defendant").

Billie Osborne filled out an application for insurance on November 22, 1963, at the office of defendant's agent, the Wilson Insurance Agency, of Murray, Kentucky. The premium was paid that day and the contract involved coverage for a period of six months. The policy was issued on December 3, 1963, insuring both Billie Osborne and anyone driving the insured automobile with his permission.

On December 14, 1963, Shirley Osborne, Billie's wife, while driving the insured automobile with permission in Tennessee, negligently collided with an automobile in which Kenneth Humphreys, L. Yates Moore and Boyd Moore were passengers. The collision resulted in injury to Humphreys and in the death of both of the Moores and of Shirley Osborne. Notice of the accident was given to the defendant, but defendant notified Osborne in a letter of cancellation dated January 10, 1964, that it did not recognize any obligation or liability under the insurance policy since the policy was null and void from its inception.

Suits were subsequently filed in the state court of Tennessee against Billie Osborne individually, and as administrator of the estate of his wife, by the widows of L. Yates Moore and Boyd Moore and by Humphreys. Judgments were recovered in the amount of $58,000. This present suit seeks payment from the defendant under the insurance policy in order to satisfy the judgments recovered in Tennessee.

In answer to the plaintiffs' complaint that the defendant refused to defend under the policy provisions specifically providing therefor, the defendant alleged that there were fraudulent or material misrepresentations made in the application for insurance by Billie Osborne;¹  that such answers were material to the risk; that defendant relied on said answers in issuing the insurance policy; and that had it known the truth to these answers, it would not have issued the policy. The plaintiffs' reply set out the contentions that the defendant was estopped from relying on the insurance application since the clerk that was working for defendant's agent filled in the answers to the questions for the applicant Billie Osborne and failed to ask him for his answers to the pertinent questions in the application.²  The defendant filed a motion for summary judgment.

The District Court relied on a case dealing with the issuance of life insurance based on misrepresentations in the application concerning an illness of the applicant. There, the Kentucky Court of Appeals (Mills v. Reserve Life Ins. Co., 335 S.W.2d 955 (1960)) sustained the granting of the insurance company's motion for summary judgment even though the applicant averred that he was illiterate and unable to read the application, and further that the agent failed to ask him any questions concerning illnesses when the application was being filled out. Under the Mills decision the applicable law of Kentucky was that the applicant had a duty to read the information on the application, whether he filled it out or not, and was responsible for the truthfulness of that information. In regard to the materiality of false answers, the Court said:

" [A] false answer is material if the insurer, acting reasonably and naturally in accordance with the usual practice of life insurance companies under similar circumstances, would not have accepted the application if the substantial truth had been stated therein. See John Hancock Mutual Life Ins. Co. v. DeWitt, 259 Ky. 220, 82 S.W.2d 317; Chamberlain v. National Life & Accident Ins. Co., 256 Ky. 548, 76 S.W.2d 628, and Sovereign Camp, W. O. W. v. McDaniel, 251 Ky. 212, 64 S.W.2d 581." 335 S.W.2d at 958. (Emphasis supplied.)

The District Court granted defendant's motion for summary judgment when it found that the answers to the questions in Osborne's application were misrepresentations (a fact admitted by the plaintiffs); that the disputed testimony as to whether defendant's agent asked Osborne the questions was immaterial since Osborne signed the application; that the misrepresentations were material to the risk; and that had the defendant known the truth, it would not have accepted the risk. There was no finding that the misrepresentations were fraudulently made.

In considering the present case, we recognize that under the Erie doctrine (Erie Railroad Co. v. Tompkins, 304 U.S. 64, 58 S. Ct. 817, 82 L. Ed. 1188 (1938)) the substantive law of Kentucky controls in this diversity case.

After the District Court disposition of the case based on Mills v. Reserve Life Ins. Co., the Kentucky Appeals Court has had an opportunity to review the law in the area of fraudulent or material misrepresentations in the application for life insurance. In the cases after Mills (Kentucky Central Life Ins. Co. v. Combs, 432 S.W.2d 415 (Ky.1968) and Paxton v. Lincoln Income Life Ins. Co., 433 S.W.2d 636 (Ky.1968)), the Kentucky court had before it cases dealing with life insurance applications. Combs and Paxton reaffirmed the position of Mills and set out a new rule in regard to the person responsible for seeing that the correct information is in the application (as between the applicant and the agent for the insurance company). The Court in Paxton stated:

" [T]he rule is that as between the applicant and the insurance company it is the applicant's responsibility to see that the application is correctly filled out." 433 S.W.2d at 638.

Since Mills, Combs and Paxton dealt with life insurance applications, the law of Kentucky is clear as to the situation created by misrepresentation in a life insurance application. This left open the question of whether this rule applied to all types of insurance applications. Then, on March 25, 1969, the Kentucky Court of Appeals, in Pennsylvania Life Ins. Co. v. McReynolds, 440 S.W.2d 275, considered a case dealing with misrepresentations in the application for nonmedical accident and health insurance policies. There, the Court stated that the life insurance rule pertaining to misrepresentations in the application was not applicable to the applications for non-life insurance policies. The Court sought to balance the interests of the insurance company in getting true statements concerning the risk to be covered with the need of protecting the honest applicant against the "evil incidents of sales methods" employed by the insurance agents. The Court stated:

"This problem is peculiarly acute, we believe, in the field of nonmedical health and accident insurance where the carrier waives its power to require a medical examination of an applicant before issuing a policy and instead relies on the fidelity of its agents and the honesty of the applicant for its protection against undue risks.

"In order to effect a better balance between the interests and responsibilities of the carrier and the applicant in the field of nonmedical health and accident insurance, we no longer will place the full responsibility on the applicant as stated in Ky. Central Life Ins. Co. v. Combs, supra, to see that the application is correctly filled out except where the applicant, or his agent, inserts the answers on the application form signed by or for him. Of course if the applicant knows that false answers are being put down he will be responsible for them. However, his knowledge of the falsity may depend on how fully he understands exactly what information the application questions seek." 440 S.W.2d at 279. (Emphasis supplied.)

In McReynolds, the applicant made a full disclosure to the agent who considered the answers too inconsequential to report on the application form. There, the Court stated that the question was whether there was in fact any misrepresentation in these circumstances, and that if the jury found that the applicant acted in good faith, then there was no material or fraudulent misrepresentation. Here, plaintiffs contend that Osborne was not asked to supply the answers on the application and that the defendant's agent filled in the answers for him. In this connection, plaintiffs support their position by showing that defendant's agent in Murray, Kentucky, was writing policies for bad risks and that as a result of that agent's high loss ratio, defendant cancelled the agency contract on December 31, 1963.

We find that the question here is whether there was in fact any misrepresentation in these circumstances. The District Court found that the disputed testimony as to whether defendant's agent asked Osborne the questions was immaterial, but we in the light of McReynolds find this factor to be material and a factual question for the jury. The applicant's good faith is also a question for the jury, since the court in McReynolds stated that "the issue of good faith should be tried." 440 S.W.2d at 279.

While not necessary to the result we reach in the present case, it is to be noted that a reasonable extension of the rationale of McReynolds moves logically into the area of the automobile coverages. McReynolds seeks in terms to achieve a "better balance" between the rights of the insured and of the carrier when the latter chooses to forego medical examination requirements and makes a distinction between cases involving misrepresentations in life and nonmedical accident and health policy applications. Even more compelling reasons dictate the propriety of drawing a distinction between misrepresentations in life insurance and automobile liability insurance applications, since in the latter the public interest is involved (since any member of the public may suffer injury), whereas in the former only the rights of the beneficiary are at issue.

Plaintiffs also contend that the District Court erred in denying their request under Rule 34, F.R.Civ.P. for the production of certain correspondence between the defendant and one of its agencies pertaining to the policy of Billie Osborne. We find that the District Court did not abuse its discretion in denying those parts of the plaintiffs' motion for the production of documents.

The judgment of the District Court is vacated and the case remanded for further proceedings consistent with this opinion.