
USCA1 Opinion

	




                            UNITED STATES COURT OF APPEALS                                FOR THE FIRST CIRCUIT                                 ____________________        No. 93-1430                              JULIO VELEZ-GOMEZ, ET AL.,                                Plaintiffs, Appellees,                                          v.                             SMA LIFE ASSURANCE COMPANY,                                Defendant, Appellant.                                 ____________________                     APPEAL FROM THE UNITED STATES DISTRICT COURT                           FOR THE DISTRICT OF PUERTO RICO                   [Hon. Gilberto Gierbolini, U.S. District Judge]                                              ___________________                                 ____________________                                        Before                                  Cyr, Circuit Judge,                                       _____________                            Bownes, Senior Circuit Judge,                                    ____________________                              and Boudin, Circuit Judge.                                          _____________                                 ____________________            Frank Gotay-Barquet, with whom Gustavo  A. Gelpi, Edward A. Godoy,            ___________________            _________________  _______________        Feldstein,  Gelpi &  Gotay, and  Ralph L.  Diller,  Associate Counsel,        __________________________       ________________        State Mutual Companies, were on brief for appellant.            John E. Mudd,  with whom Luis Ortiz  Segura and Cordero, Miranda &            ____________             __________________     __________________        Pinto were on brief for appellees.        _____                                 ____________________                                   November 9, 1993                                 ____________________                    CYR, Circuit Judge.  SMA Life Assurance Co. (SMA) seeks                    CYR, Circuit Judge.                         _____________          to set aside  the summary judgment entered in  favor of plaintiff          appellee  Julio V lez  Gom z, contending,  inter  alia, that  the                                                     _____  ____          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                                      __________                    The  relevant facts  are  recited  in  the  light  most          favorable to SMA.   O'Connor v. Steeves, 994  F.2d 905, 907  (1st                              ________    _______          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                                        ____________________               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                  ___          nerve  disorder (viz., multiple  sclerosis) during  the preceding                           ____          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                                                                  ___ _____                                          4          Gom z  v. SMA  Life Assur. Co.,  793 F. Supp.  378 (D.P.R. 1992).          _____     ____________________          SMA appealed.                                          II                                          II                                      DISCUSSION                                      DISCUSSION                                      __________                    We review a grant of summary  judgment de novo, employ-                                                           __ ____          ing the  same criteria incumbent  upon the district court  in the          first instance.  Goldman v. First Nat'l Bank, 985 F.2d 1113, 1116                           _______    ________________          (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                                                                    ___          1.   The Incontestability Clause.          1.   The Incontestability Clause.               ___________________________                    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.                                                        ___          tit. 26,   1606 (1977), provides:                    (a) After this  policy has been in  force for                    two years during your lifetime (excluding any                                                    _________ ___                    period during which you are disabled),  [SMA]                    ______ ______ _____ ___ ___ ________                    will not  be able  to contest the  statements                    made in the application.                                        ____________________               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.                                                             _______ ___                                          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                  ______ __ __________    ___________          (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.                                      ________________________                    Levitt & Sons of Puerto Rico, Inc., 91 J.T.S.                    __________________________________                    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-                                      ___ ____ __________________                    tric Power  Authority  v.  Philipps,  645  F.                    _____________________      ________                    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-                                        ____________________               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               __ ________               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                                ____          a three-year, contestability period) are permitted  provided they          benefit the insured.  Id.    1113(2), 1604 (1977).                                ___                                          6                    plemental source  of law in  interpreting the                    insurance contract.  Puerto Rico Housing Bank                                         ________________________                    v. Pagan Insurance  Underwriters, 11 Official                       _____________________________                    Translations 3,  8 (1981); 111  D.P.R. 1,  6;                    Gonzalez v. John  Hancock Mutual Life  Insur-                    ________    _________________________________                    ance  Co., 927 F.2d 659, 669 (1st Cir. 1991).                    _________                    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          ______     _______________________________          Cir. 1992).  As a  general matter, ordinary rules of construction          apply to incontestability clauses.  1A J. Appleman, Insurance Law                                                              _____________          and Practice,   311 at  313 (1981) (hereinafter Appleman);  18 G.          ____________                                    ________          Couch, Couch on Insurance 2d    72:9 (rev. ed. 1983) (hereinafter                 _____________________          Couch).          _____                    The  first  interpretive  waymark, of  course,  is  the          language of the parenthetical tolling provision itself:  "exclud-                                                                    _______          ing any period  during which you are disabled," where  we find no          ___ ___ ______  ______ _____ ___ ___ ________          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                                                    ______          (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                                          7          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                                   __________ _____  ______                    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                                      ___  ____  __________     ___________          Life Ins.  Co., 725  F. Supp.  995, 998  (S.D. Ind. 1989)  ("This          ______________                                               ____          clause  of the  contract is  plain  and unambiguous.")  (emphasis          ______  __ ___  ________ __  _____  ___ ___________          added);   Bronson v. Washington  Nat'l Ins. Co., 207  N.E.2d 172,                    _______    __________________________          176 (Ill.  App. 1965)  (Holding contestability  period tolled  at          onset  of insured's disability); Taylor v. Metropolitan Life Ins.                                           ______    ______________________          Co., 214 A.2d 109,  114-15 (N.H. 1965) (same); Standard  Security          ___                                            __________________          Life Ins.  Co. v. Klamer, 276  N.Y.S.2d 645, 646 (N.Y.  App. Div.          ______________    ______          1967) (same);   Union Mut. Life  Ins. Co. v. Kevie,  215 N.Y.S.2d                          _________________________    _____          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;                                           ___ ________          see also Couch,    72:16.  Thus, after  the contestability period          ___ ____ _____          has  run, the insurer  cannot withdraw insurance  protection even                                                                       ____          though the insurance application contained misstatements.  On the          ______          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                                        ____________________               4As the Wischmeyer court explained:                       __________                    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.          __________               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                                          9          2.   The Date of Disability.          2.   The Date of Disability.               ______________________                    As  an alternate basis  for summary judgment,  the dis-          trict court specifically found that V lez did not become disabled                                                            ______ ________          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                                 _______                                        ____________________          clearly reflects  the legislature's rejection  of the  "notifica-          tion" theory,  based on  policy grounds well within its exclusive          domain.  Id. at 1004.                   ___               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."                                          10          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.               _______________________                    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                           ______ ___  ______________ ______          view of  our determination, see  supra at pp. 6-8,  that the two-                                      ___  _____          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,                                                                   _______          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.                     ___ _____          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,          _________     ____________________________________          936  (1st Cir. 1987). Drawing all reasonable inferences favorable          to  SMA,  as  we must,  see  Goldman,  985 F.2d  at  1116,  it is                                  ___  _______          inconceivable  to  us  that V lez's  wife's  dinner-party comment          about  her husband's  "achaques" ("aches  and pains")  reasonably                                 ________          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.                                         ____________________               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,                                 _________     ____________          10 Official Translations 913 (1980),  and Heirs of Roche v. Banco                                                    ______________    _____          de la Vivienda, 103 D.P.R. 656, 3 Official Translations 1 (1975),          ______________          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.                                     ______ ___ ______________ ______                                          12                                         III                                         III                                      CONCLUSION                                      CONCLUSION                                      __________                    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                    ___  ________ _____ ________ __ _______ ___ ___ ____ __          remandedfor further proceedings consistent herewith.  So ordered.          ___________ _______ ___________ __________ ________   __ _______                                          13
