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Mitchell v. Modern Woodmen of America

United States District Court, N.D. Alabama, Southern Division

December 10, 2014

DERRICK MITCHELL, as the Personal Representative of the Estate of Tom James Mitchell, et al., Plaintiffs,
v.
MODERN WOODMEN OF AMERICA, Defendant.

MEMORANDUM OPINION

JOHN E. OTT, Chief Magistrate Judge.

This case involves two insurance certificates issued by Modern Woodmen of America on the life of Stephanie Mitchell in 2008, the first providing $1 million in life insurance coverage and $350, 000 in accidental death coverage, and the second providing an additional $1 million in life insurance coverage. In March 2009, less than a year after Modern Woodmen issued the certificates, Stephanie Mitchell died from gunshot wounds to the head. Her death was ruled a homicide.

Tom Mitchell, Stephanie's husband, was the principal beneficiary of both insurance certificates. In May 2009, he submitted a claim to Modern Woodmen for benefits under both certificates. Because Stephanie's death occurred within two years of the issuance of the certificates, Modern Woodmen conducted a claim review. After nearly a year passed with no payment of the claim, Tom Mitchell and Brittany Allred, the contingent beneficiary of both certificates, filed this action against Modern Woodmen for breach of the insurance certificates and for bad-faith refusal to pay the claim for benefits.[1] (Docs. 1, 4).[2] Modern Woodmen answered the complaint and asserted a counterclaim seeking a declaratory judgment as to whether benefits are payable under either certificate and, if so, to whom the benefits are owed. (Docs. 12, 29).

In February 2012, after nearly two years of litigation, Modern Woodmen formally denied Tom Mitchell's claim for benefits based on Stephanie Mitchell's alleged failure to give "accurate and complete" answers to the questions on her insurance applications. Fifteen months later, Modern Woodmen issued a second denial citing additional alleged "material misrepresentations" by Stephanie Mitchell.

This action is now before the court on three motions: (1) Plaintiffs' motion for summary judgment in their favor on their claims against Modern Woodmen for breach of the insurance certificates (doc. 83); (2) Modern Woodmen's motion for summary judgment in its favor on all of the claims in Plaintiffs' complaint and on its counterclaim for a declaratory judgment as to whether benefits are payable under the insurance certificates (doc. 86); and (3) Plaintiffs' motion to strike the Declaration of Judy McCoy, which Modern Woodmen submitted in support of its motion for summary judgment. (Doc. 104). For the reasons set forth below, the court concludes that Plaintiffs' motion for summary judgment is due to be denied and that Modern Woodmen's motion for summary judgment is due to be denied in part and granted in part. Because the court is able to rule on the motions for summary judgment without considering the Declaration of Judy McCoy, Plaintiffs' motion to strike the declaration will be denied as moot.

I. FACTS[3]

A. Tom Mitchell's Businesses

Tom Mitchell owned and operated two businesses. He sold cars under the name "Mitchell Motors" and boats under the name "Mitchell Marine." (Doc. 86 at ¶ 11). Neither business was incorporated. (Doc. 86 at ¶ 15).

Tom Mitchell considered Stephanie Mitchell to be his partner in the two businesses. (Doc. 86 at ¶ 12). Stephanie kept the books for both businesses and handled the paperwork, including tax papers and bills of sale. ( Id. ) She also assisted in sales. ( Id. )

Because Mitchell Motors and Mitchell Marine were not incorporated, their income and expenses were reflected on Schedule C (Profit or Loss from Business) of Tom Mitchell's federal tax returns. (Doc. 86 at ¶ 15). His 2007 Schedule C reflects an income of $4, 521 for the year. ( Id. ) It further reflects an ending inventory for the year of $2, 500. (Doc. 86 at ¶¶ 14-15).

Tom Mitchell filed monthly sales tax returns throughout 2008. The returns for June through November reflect sales of zero dollars. (Doc. 86 at ¶ 48). The November return notes that Mitchell Marine closed on November 30, 2008. ( Id. )

Schedule C of Tom Mitchell's 2008 federal tax return shows a beginning inventory of $16, 500 and an ending inventory of zero dollars. (Doc. 86 at ¶ 50). The return also reflects that the cost of goods sold during the year was $16, 500, such that there was no gross profit and no income. ( Id. ) Plaintiffs admit that Tom Mitchell's sales tax returns reported this information, but they note that Tom Mitchell operated on a cash system and contend that the tax returns are not dispositive of his inventory's value or his sales. (Doc. 95 at ¶ 50).

B. Tom Mitchell's Financial Form

On February 21, 2008, Tom Mitchell applied for $1 million in life insurance from Modern Woodmen. (Doc. 86 at ¶ 21). In connection with his application he submitted a financial form in which he represented that he had salary or wages of $280, 000 in 2007 and salary or wages of $40, 000 to $50, 000 year to date. (Doc. 87-39 at 8) He further represented that he had net business or professional income of $60, 000 to $70, 000 in 2007 and that his net worth was $3, 150, 000. ( Id. ).

C. Stephanie Mitchell's First Modern Woodmen Insurance Certificate

On March 26, 2008, Stephanie Mitchell met with Laura Williams, a Modern Woodmen agent, and applied for $1 million in life insurance coverage and $350, 000 in accidental death coverage. (Doc. 87-39 at 26-32). At that time she already had $510, 000 in life insurance coverage and $500, 000 in accidental death coverage with American General Life & Accident Insurance Company. (Doc. 86 at ¶¶ 3-8, 24; Doc. 101-28). She also had a pending application with American General for an additional $200, 000 in life insurance coverage. (Doc. 86 at ¶ 24).

Under the financial underwriting guidelines utilized by Modern Woodmen, the maximum amount of life insurance an applicant is generally eligible for depends on his or her age and earned income. (Doc. 88-2 at ES0677).[4] Based on her age, Stephanie would have qualified for a total line of life insurance equal to her annual earned income multiplied by a factor of 25. ( Id.; Doc. 87-53 at 6). Modern Woodmen also allows a non-working spouse to receive an amount of life insurance coverage equal to the coverage in force on the working spouse. (Doc. 101-1 at ESRS 000007).[5] The written guideline provides that the maximum amount of coverage that can be issued to the non-working spouse is $500, 000 to $1 million ( id. ); Leslie Brown, the Modern Woodmen underwriter who underwrote Stephanie Mitchell's application, testified that Modern Woodmen does not apply that limitation. (Doc. 97-11 at 21). Finally, it is Modern Woodmen's policy that the total amount of accidental death coverage on an insured's life with all insurers may not exceed $350, 000. (Doc. 88-2 at ES0679).

In response to the questions on the Modern Woodmen insurance application concerning "non-medical" information, Stephanie Mitchell stated that she was employed by Mitchell Marine, that her occupation was secretary/housewife, that she kept the books for her husband's businesses, and that she had a "shared income" with her husband. (Doc. 87-39 at 29). The amount of the shared income was not reflected on the application. ( Id. ) Stephanie further stated that she had a total of $200, 000 in life insurance in force with other companies and no accidental death insurance. ( Id. ) She stated that she did not have an application for life insurance pending with another company and was not planning on purchasing life insurance with another company. ( Id. )

The Modern Woodmen application contained a provision (the "Authorization") pursuant to which Stephanie Mitchell authorized third-parties to give and disclose to Modern Woodmen information relating to her "age, occupation, physical condition, prescription authorization, health history, ... character, general reputation, personal characteristics, motor vehicle report, hobbies and mode of living." (Doc. 87-39 at 32). As part of the Authorization, Stephanie acknowledged her understanding that "the information obtained by use of this Authorization will be used by Modern Woodmen... to determine eligibility for insurance coverage or for benefits." ( Id. ) In a separate section of the application, Stephanie also acknowledged her understanding that "I might be personally interviewed if an Investigative Consumer Report is prepared in connection with this application." ( Id. at 31)

When she signed her completed application, Stephanie Mitchell confirmed that she had reviewed her answers before signing it. ( Id. at 32). She also agreed that, to the best of her knowledge and belief, the statements and answers in the application were "true, complete, and correctly recorded." ( Id. at 31). She acknowledged that the statements and answers in the application would be the basis for any insurance issued on the application. ( Id. )

Laura Williams completed an Agent's Report as part of the application process. ( See Doc. 87-39 at 36). In her report, Williams noted: "[Stephanie] works with her husband... and her financial questionnaire will be the same as his. If needed, I can get one although she doesn't draw a salary from their businesses." ( Id. )

On April 9, 2008, Reliable Reporting Services conducted a telephone interview of Stephanie Mitchell in connection with her pending insurance application with Modern Woodmen. ( See Doc. 87-49 at 5-7). As reported by Reliable Reporting, Stephanie said that she was a co-owner of Mitchell Marine and Mitchell Motors and that she performed managerial duties for the companies and worked over 40 hours per week. (Doc. 87-49 at 5). Reliable Reporting listed her salary as $70, 000 and her husband's income as $80, 000. ( Id. at 7). According to Reliable Reporting, Stephanie said she had a "small" insurance policy that she was keeping but did not recall the amount of the policy or the name of the insurance company. ( Id. )

On April 22, 2008, Modern Woodmen issued Certificate No. 8227615 (the "First Certificate") insuring Stephanie Mitchell's life in the amount of $1 million and providing $350, 000 in accidental death coverage. (Doc. 87-39 at 10-34). Stephanie's husband, Tom Mitchell, had $3 million in life insurance coverage with Modern Woodmen at that time. (Doc. 95 at 20, ¶ 12). Leslie Brown, the Modern Woodmen underwriter who underwrote Stephanie's application, has stated that she relied on the application, Tom Mitchell's financial form, the Reliable Reporting interview summary, the Agent's Report, and other documents in issuing the First Certificate.[6] (Doc. 87-64 at ¶¶ 3-4).

The cover page of the First Certificate provides: "This certificate was issued based upon the answers on the application. If all answers are not true and complete, insurance benefits may be affected." (Doc. 87-39 at 10). The First Certificate also contains an "Entire Contract" provision that states as follows:

This certificate is a legal contract. The Society [Modern Woodmen] issued this certificate in consideration of the first premium and the statements in the application. The entire contract consists of:
a) this certificate;
b) any endorsements or additional benefit riders;
c) the attached copy of the application;
d) any amendments, supplemental applications or other attached papers; and
e) the Articles of Incorporation and By-Laws of the Society and any amendments thereto made after the date of issue which will govern and control this certificate, provided however, no such amendment will reduce the benefits the Society contracted to give as of the date of issue.
The Society relies on statements made in the application for this certificate. These statements are deemed representations and not warranties except in the case of fraud. No statement will void this certificate or be used in defense of a claim unless:
a) it is contained in the application; and
b) such application is attached to this certificate.
Only the National Secretary of the Society can modify this contract or waive any of the Society's rights or requirements.

( Id. at 18) (emphasis added).

D. Stephanie Mitchell's Second Modern Woodmen Insurance Certificate

On August 4, 2008, Stephanie Mitchell met with Laura Williams, Modern Woodmen's agent, and applied for an additional $1 million in life insurance coverage. (Doc. 87-39 at 52-58). By that time she had a total of $710, 000 in life insurance coverage and $500, 000 in accidental death coverage with American General, in addition to her existing life insurance and accidental death coverage with Modern Woodmen. (Doc. 86 at ¶ 89).

Two months earlier, Stephanie Mitchell had also applied for an additional $1 million in life insurance coverage from American General. ( Id. ) On August 1, 2008, American General made the initial decision to decline the application. (Doc. 87-1 at 89). It is not known whether Stephanie was aware that her American General application had been declined when she submitted her second application to Modern Woodmen on August 4, 2014.

In response to the "non-medical" questions on her second Modern Woodmen application, Stephanie Mitchell said that she was a housewife, that she worked with her husband, and that she kept the books for her husband's businesses. (Doc. 87-39 at 55). She answered "no" to the following questions: "Have you applied for life insurance that is currently pending or are you planning on purchasing life insurance with another company?" and "Have you had life or health insurance rejected, rated, postponed, modified, or cancelled?" ( Id. ) Next to the question regarding annual income, Laura Williams (who filled out the application) wrote "check on Tom James Mitchell Financial Form 186." ( Id. ) The questions regarding total amount of life insurance and total amount of accidental death benefits in force with other (external) companies were left blank. ( Id. )

Stephanie Mitchell's second application contained the same Authorization as her first application and the same acknowledgment that the information obtained through the Authorization would be used by Modern Woodmen to determine eligibility for insurance coverage and benefits. (Doc. 87-39 at 58). It also contained the same acknowledgment that she might be personally interviewed if an Investigative Consumer Report was prepared. ( Id. at 57). As before, when Stephanie signed her completed application, she confirmed that she had reviewed the answers in the application before signing it. ( Id. at 58). She again acknowledged that, to the best of her knowledge and belief, the statements and answers in the application were "true, complete, and correctly recorded" and that the statements and answers would be the basis for any insurance issued on the application. ( Id. at 57)

On August 7, 2008, three days after submitting her application to Modern Woodmen, Stephanie Mitchell applied for $1 million in life insurance coverage and $500, 000 in accidental death coverage from Prudential Life Insurance Company. (Doc. 86 at ¶ 71).

On August 13, 2008, Reliable Reporting Services conducted a telephone interview of Stephanie Mitchell regarding her second application to Modern Woodmen. (Doc. 87-49 at 8-10). As reported by Reliable Reporting, Stephanie again said that she worked for Mitchell Marine and Mitchell Motors, that she was a co-owner of the businesses, and that she engaged in managerial duties and worked over 40 hours per week. ( Id. at 8). Reliable Reporting listed Stephanie's salary as $240, 000 and reported that she was updating her "MWA" insurance, which she was keeping. ( Id. at 10).

The next day, Stonebridge Life Insurance Company issued a $100, 000 accidental death and dismemberment policy to Stephanie Mitchell. (Doc. 87-67 at 2-9).

On August 26, 2008, Modern Woodmen issued Certificate No. 8248403 (the "Second Certificate") insuring Stephanie Mitchell's life in the amount of $1 million. (Doc. 87-39 at 38-60). Tom Mitchell still had $3 million in life insurance coverage with Modern Woodmen when Stephanie's Second Certificate was issued. (Doc. 95 at 20, ¶ 3). As before, Leslie Brown underwrote Stephanie's second application. (Doc. 87-64 at ¶ 7). She has represented that she relied on the application and Tom Mitchell's financial form in deciding to issue the Second Certificate. ( Id. at ¶ 8). Plaintiffs dispute Brown's representation, and point out that Tom Mitchell's financial form was not contained in Stephanie Mitchell's underwriting file. (Doc. 95 at 21, ¶ 8).

The Second Certificate contains the same standard provisions as the First Certificate. In particular, it contains the same statement on the cover page that "[i]f all answers [on the application] are not true and complete, insurance benefits may be affected." (Doc. 87-39 at 38). It also contains an identical Entire Contract provision identifying the documents that make up the contract and providing that "[n]o statement will void this certificate or be used in the defense of a claim unless... it is contained in the application; and... such application is attached to this certificate." ( Id. at 46).

On August 28, 2008, American General issued a $1 million life insurance policy to Stephanie Mitchell. (Doc. 86 at ¶ 75; Doc. 87-68). With the addition of that policy, Stephanie had a total of $1.71 million in life insurance coverage with American General, along ...


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