Smith v. United of Omaha Life Insurance
ORDER signed by Judge J P Stadtmueller on 8/3/16 granting 8 Defendant's Motion for Partial Summary Judgment; Plaintiff's cause of action for bad faith denial of her insurance claim is dismissed with prejudice. See Order. (cc: all counsel) (nm)
UNITED STATES DISTRICT COURT
EASTERN DISTRICT OF WISCONSIN
Case No. 15-CV-1344-JPS
UNITED OF OMAHA LIFE INSURANCE,
On June 15, 2016, the defendant, United of Omaha Life Insurance
(“United”), filed a motion for partial summary judgment, as well as a
memorandum in support, statement of facts, and witness affidavits with
exhibits attached thereto. (Motion, Docket #8; Memorandum in Support,
Docket #9; Statement of Facts, Docket #15; Affidavit of Dennis Dickman,
Docket #10; Affidavit of Cathy Hansen, Docket #11 with Exhibits attached as
Docket #11-1, 12, 13, and 14). On July 14, 2016, the plaintiff, Lowanda Smith
(“Smith”), filed a memorandum in opposition to the motion, along with a
response to the statement of facts, a statement of additional facts, and
affidavits of witnesses and counsel. (Memorandum in Opposition, Docket
#17; Response to Statement of Facts and Statement of Additional Facts
(“RSOF”), Docket #18; Affidavit of Gregory J. Cook, Docket #17-1; Affidavit
of Lowanda Smith, Docket #17-2; Affidavit of John D. Rouse, Docket #19). On
July 28, 2016, United filed a reply in support of its motion and a response to
Smith’s statement of additional facts. (Reply, Docket #20; Response to
Statement of Additional Facts (“RSAF”), Docket #21). The motion is now
fully briefed, and for the reasons explained below, it will be granted.
STANDARD OF REVIEW
Federal Rule of Civil Procedure (“FRCP”) 56 provides the mechanism
for seeking summary judgment. FRCP 56 states that the “court shall grant
summary judgment if the movant shows that there is no genuine dispute as
to any material fact and the movant is entitled to judgment as a matter of
law.” Fed. R. Civ. P. 56(a); see Boss v. Castro, 816 F.3d 910, 916 (7th Cir. 2016).
A “genuine” dispute of material fact is created when “the evidence is such
that a reasonable jury could return a verdict for the nonmoving party.”
Anderson v. Liberty Lobby, Inc., 477 U.S. 242, 248 (1986). The Court construes
all facts and reasonable inferences in a light most favorable to the nonmovant. Bridge v. New Holland Logansport, Inc., 815 F.3d 356, 360 (7th Cir.
SMITH’S REQUEST FOR SUMMARY JUDGMENT
Smith, in her response to United’s motion, seeks summary judgment
on her breach of contract claim pursuant to FRCP 56(f). (Docket #17 at 7-10);
Fed. R. Civ. P. 56(f) (“After giving notice and a reasonable time to respond,
the court may: (1) grant summary judgment for a nonmovant; (2) grant the
motion on grounds not raised by a party; or (3) consider summary judgment
on its own after identifying for the parties material facts that may not be
genuinely in dispute.”). FRCP 56(f) is a tool for the Court, not parties, to
dispose of a case on summary judgment where it believes such action is
appropriate. It may not be used to make an end-run around the Court’s
dispositive motion deadline. See National Exchange Bank and Trust v. PetroChemical Systems, Inc., No. 11-CV-134, 2013 WL 1858621 *1 (E.D. Wis. May 1,
2013) (“Rule 56(f) exists largely for the convenience of the court, to save it
from proceeding with trials that it can readily see are unnecessary. It did not
create a substitute for a cross-motion to summary judgment.”).
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Smith’s request for summary judgment comes just under one month
after that deadline. Further, she relies on evidence beyond that contained in
United’s briefing, including a statement by the decedent Calvin Nutt’s
(“Nutt”) treating physician, a statement from medical examiners from
Milwaukee County, and affidavits from both Smith herself and from the
agent who sold the insurance policy at issue. (Docket #17 at 8-10). Smith was
fully equipped to present this evidence in her own motion for summary
judgment by the dispositive motion deadline, which has been in place since
December 10, 2015. (Docket #7 at 1). The Court will not permit her to sidestep the Court’s trial scheduling order or the requirements of FRCP 56 and
Civil Local Rule 56. Smith’s request for summary judgment will not be
The relevant facts are largely undisputed, but the Court will note the
parties’ disagreement on any facts where appropriate. In accordance with the
standard of review, the facts are presented in a light most favorable to Smith.
Nevertheless, in light of the above ruling, the Court will limit this narrative
to the facts relevant to United’s claim for summary judgment.
On April 4, 2014, Nutt and Smith submitted an application for life
insurance to United. RSOF ¶ 1.1 Smith was the policy owner and beneficiary.
RSOF ¶ 2. John Rouse (“Rouse”), an independent insurance agent, actually
sold them the policy and helped them fill out the application. RSAF ¶ 1. The
application asked, inter alia, whether Nutt had ever been treated for chronic
obstructive pulmonary disease (“COPD”), to which he answered “no.” RSOF
Citations to the responsive fact documents are for brevity only; the cite
may refer to material in the asserted fact and/or the response.
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¶¶ 3-4. Rouse also reviewed other medical questions with Nutt, and Nutt
stated that he had never been treated or even been told to seek treatment for
COPD. RSAF ¶ 2.
The application included an acknowledgment by which Nutt and
Smith agreed that their answers to its questions were true and that incorrect
answers would render the application void. RSOF ¶ 5. The parties disagree
as to whether United would have issued any life insurance policy had Nutt
answered “yes” to the COPD question.2 RSOF ¶ 6. Nutt was interviewed by
a United representative on April 7, 2014. RSOF ¶ 7. He was again asked
about having a history of COPD, and he again answered in the negative.
RSOF ¶¶ 8-9.
The insurance policy (the “Policy”) was issued on May 3, 2014. RSOF
¶ 10. Due to non-payment of premiums, the Policy was cancelled. RSOF
¶¶ 11-12. Nutt and Smith resubmitted their application, and Nutt’s answer
to the COPD question remained “no.” RSOF ¶ 13. The Policy was reissued
on July 3, 2014. RSOF ¶ 14.
On July 10, 2015, Smith submitted a claim under the Policy. RSOF
¶ 15. She included a copy of Nutt’s death certificate, indicating that he had
died of a gunshot wound, and that it had been ruled a homicide. RSOF ¶ 16;
RSAF ¶ 9. Because the Policy included a two-year contestability period,
United began to review the Policy application and Nutt’s medical records.
RSOF ¶ 17; RSAF ¶ 8. United could only obtain records from one of Nutt’s
United claims that it would not have issued the level benefit policy that it
actually did issue, while Smith counters that United would have issued a graded
benefit policy. RSOF ¶ 6; RSAF ¶ 5. This dispute need not be resolved because it
is not material to United’s motion.
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treating physicians, Dr. Geoffery Nkwazi (“Dr. Nkwazi”), despite seeking
other medical records. RSOF ¶ 18; RSAF ¶¶ 10, 15, 17.
Dr. Nkwazi’s records appeared to show that Nutt complained of chest
pain in 1992 and a recent bout of coughing. RSOF ¶¶ 19-20; RSAF ¶ 18. Dr.
Nkwazi’s handwritten notes included the words “COPD” and a diagnosis
code for COPD. RSOF ¶¶ 21-22. He ordered laboratory tests and x-rays, and
his order included the phrase “COPD and smoker.” RSOF ¶ 23. The
radiology report of the x-rays stated that Nutt’s lungs were “well aerated and
clear.” RSAF ¶ 20. At a follow-up visit, Dr. Nkwazi noted that Nutt’s lungs
were clear and did not mention COPD. RSOF ¶ 25; RSAF ¶ 21. The visit
resulted in a prescription for cough medication. RSOF ¶ 24.
Dr. Nkwazi provided a physician’s statement (the “Statement”) to
United dated August 3, 2015. RSOF ¶ 26; RSAF ¶ 16. The Statement, made
without the benefit of Nutt’s autopsy report, indicated that Nutt had chronic
COPD since the beginning of 2011. RSOF ¶ 27; RSAF ¶ 24.3 Based on Dr.
Nkwazi’s records and the Statement, United concluded that Nutt had lied
about his COPD on the Policy application, and rescinded the Policy on
September 1, 2015. RSOF ¶¶ 28-29; RSAF ¶ 28. Smith was refunded the
premiums which had been paid on the Policy. RSOF ¶ 30.
After receiving the rescission letter, Smith called United multiple
times, stating that the reference to COPD in Nutt’s medical records must be
a mistake, as she had no knowledge of him ever being treated for the disease.
RSAF ¶¶ 30-31. Smith also asked whether United would forward the autopsy
report to Dr. Nkwazi and send her Nutt’s medical records. RSAF ¶¶ 32-33.
The autopsy report seemed to indicate a lack of pulmonary and circulatory
damage associated with COPD, and it did not list COPD as one of Nutt’s medical
conditions. RSAF ¶ 23.
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United did neither. RSAF ¶ 34. United conducted no other investigation on
its decision to rescind after September 1, 2015. RSAF ¶ 35. At the end of 2015,
the Milwaukee County Medical Examiner’s office issued a report indicating
that Nutt did not have COPD. RSAF ¶ 36. Based on his review of the autopsy
report, Dr. Nkwazi offered an addendum to the Statement in the spring of
2016 which recanted his prior COPD diagnosis. RSAF ¶ 37.
Smith’s lawsuit presents two claims: one for breach of contract, and
the other for bad faith denial of her insurance claim. See generally (Docket
#1-1). United has moved for summary judgment with respect to the bad faith
claim only. (Docket #8). As this Court sits in diversity jurisdiction, Wisconsin
law governs. (Docket #1 at 1); Erie R. Co. v. Tompkins, 304 U.S. 64 (1938).
Wisconsin treats bad faith denial of insurance claims as “a separate
intentional wrong” from an insurer’s breach of the insurance contract
because it “results from a breach of duty imposed as a consequence of the
relationship established by contract.” Anderson v. Continental Ins. Co., 271
N.W.2d 368, 374 (Wis. 1978). To prove a bad faith claim, a plaintiff must
show “(1) ‘the absence of a reasonable basis for denying benefits of the
policy,’ and (2) ‘the defendant’s knowledge or reckless disregard of the lack
of a reasonable basis for denying the claim.’” Blue v. Hartford Life & Acc. Ins.
Co., 698 F.3d 587, 595 (7th Cir. 2012) (quoting Anderson, 271 N.W.2d at 376).
The first element of a bad faith claim is an objective test as to
“‘whether the insurer properly investigated the claim and whether the
results of the investigation were subject to a reasonable evaluation and
review.’” Advance Cable Co., LLC v. Cincinnati Ins. Co., 788 F.3d 743, 748 (7th
Cir. 2015) (quoting Brown v. Labor & Indus. Review Comm’n, 671 N.W.2d 279,
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287-88 (Wis. 2003)). In other words, “[a]n insurer will have committed the
tort of bad faith only when it has denied a claim without a reasonable basis
for doing so, that is, when the claim is not fairly debatable.” Mowry v. Badger
State Mut. Cas. Co., 385 N.W.2d 171, 180 (Wis. 1986).
The parties disagree on the time at which the “reasonable basis” for
denial is assessed. United asserts that the analysis is constrained to the time
at which the decision to deny benefits is made. Tripalin v. American Family
Mut. Ins. Co., 880 N.W.2d 183, 2016 WL 1370129 *3 n.5 (Wis. App. Apr. 7,
2016) (citing Ullerich v. Sentry Ins., 824 N.W.2d 876, 884-85 (Wis. App. 2012));
(Docket #9 at 10-11). Smith argues that it is a continuing inquiry, and given
Dr. Nkwazi’s changed diagnosis and the medical examiners’ report, no
reasonable basis for denial exists today. (Docket #17 at 13). However, Smith’s
only citation in support of this argument is inapposite. The Alt case
concerned an insurer’s liability on a bad faith “failure to settle” claim, not bad
faith denial of benefits. See generally Alt v. American Family Mut. Ins. Co., 237
N.W.2d 706 (Wis. 1976). The Court declines what is essentially Smith’s
invitation to disagree with Tripalin.
With the “reasonable basis” time frame thus established, the Court
may address the parties’ substantive arguments. United, of course, asserts
that Smith’s claim was fairly debatable. Its primary support for this is the
Hejsak case. Hejsak v. Great-West Life & Annuity Ins. Co., 331 F.Supp.2d 756
(W.D. Wis. 2004). There, the insured answered “no” to a question on the
insurance application asking whether he had a central nervous system
disorder. Id. at 758-59. Upon his death, the insurer denied the claim for
coverage because the medical records revealed that he had been diagnosed
as “‘physically disabled by spinal damage at multiple levels,’ [requiring]
‘ongoing and regularly scheduled medical care for multiple medical
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problems[.]’” Id. at 759. The parties disputed whether this diagnosis fell
within the definition of a “central nervous system disorder.” Id. at 762-65.
The court agreed with the insurer that the “discussion of spinal damage in
Hejsak’s medical records suggests that it had a reasonable basis” to deny the
claim. Id. at 766. The court found that “[a]lthough a reasonable person may
not view his back injury as a ‘central nervous system disorder[,]’ …another
reasonable person working for the insurer might view it as such.” Id. at 767.
United argues that its case is better than the insured in Hejsak. There
is no issue with an ambiguous term here; COPD was specifically referenced
in the application. (Docket #9 at 9-10). The only medical records available to
United at the time were those which mentioned COPD and the Statement
diagnosing COPD. Id. Smith counters that whereas Hejsak was fully aware
that he had a spinal injury, Nutt never believed he had COPD. (Docket #17
at 11-12). Further, the Hejsak insurer asserted the spinal injury as a basis for
denial from the outset, while United’s position has been less resolute. Id. at
12. United initially indicated that it may deny the claim due to a
misrepresentation without stating what the misrepresentation was, and upon
receiving the Statement specifically identified the denial grounds as Nutt’s
COPD diagnosis. Id. at 12-13.
The undisputed evidence shows that Smith’s bad faith claim must fail.
United was within its rights to review the policy given that Smith’s claim
occurred within the contestability window. It sought medical records and,
from those it could obtain, there was some basis to believe that Nutt had lied
about his COPD. Though that basis was moderated by other statements in
the records, for instance the “well aerated” opinion on Nutt’s x-rays, all that
is required “[t]o avoid a bad faith claim…[is] one reasonable basis on which
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to deny benefits.” Hejsak, 331 F.Supp.2d at 766.4 As of September 1, 2015,
United had “exercise[d] its duty of ordinary care and reasonable diligence in
investigating and evaluating” Smith’s claim and had a reasonable basis to
debate the claim. Duir v. John Alden Life Ins. Co., 754 F.2d 245, 249 (7th Cir.
1985). As noted above, the fact that the basis for denial later evaporated is no
reason to impose bad faith liability for the earlier denial decision. Tripalin,
WL 1370129 at *3 n.5. The Court offers no opinion on the appropriateness of
United’s post-denial conduct, but on the undisputed facts presented, it has
avoided Smith’s bad faith claim.
Knowledge of Lack of Reasonable Basis
The second element of a bad faith claim is a subjective question of
“whether the insurer was aware that there was no reasonable basis for denial,
or that it displayed ‘reckless disregard of a lack of a reasonable basis for
denial or a reckless indifference to facts or to proofs submitted by the
insured.’” Advance Cable, 788 F.3d at 748 (quoting Anderson, 271 N.W.2d at
377). Because the Court found that United had a reasonable basis for denial,
Smith’s bad faith claim cannot be proven, and thus it need not reach the
parties’ arguments with regard to this element.
As of September 1, 2015, United had a reasonable basis upon which
to deny Smith’s claim for benefits. The Court must, therefore, grant summary
judgment to United on Smith’s bad faith claim.
Smith insists that Nutt never knew he had COPD, or at least a diagnosis
for COPD. This is irrelevant to her bad faith claim. The only inquiry is to what the
insurer knows and whether that amounts to a “fairly debatable basis for denying
a claim.” American Cas. Co. of Reading, Pa. v. B. Cianciolo, Inc., 987 F.2d 1302, 1306 (7th
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IT IS ORDERED that the defendant’s motion for partial summary
judgment (Docket #8) be and the same is hereby GRANTED; and
IT IS FURTHER ORDERED that the plaintiff’s cause of action for
bad faith denial of her insurance claim (Docket #1-1 at ¶ 17) be and the
same is hereby DISMISSED with prejudice.
Dated at Milwaukee, Wisconsin, this 3rd day of August, 2016.
BY THE COURT:
U.S. District Judge
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