                                                                                                                           Opinions of the United
1995 Decisions                                                                                                             States Court of Appeals
                                                                                                                              for the Third Circuit


6-7-1995

Horowitz v Federal Kemper
Precedential or Non-Precedential:

Docket 94-1900




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                 UNITED STATES COURT OF APPEALS
                     FOR THE THIRD CIRCUIT
                          ___________

                    Nos. 94-1900 and 94-1901
                          ___________

          DONA W. HOROWITZ, individually and as co-executrix
          of the estate of LEONARD N. HOROWITZ, deceased;
          ALFRED CAMNER, co-executor of the estate of
          LEONARD N. HOROWITZ, deceased

                         vs.

          FEDERAL KEMPER LIFE ASSURANCE COMPANY

                               Appellant in No. 94-1900



          DONA W. HOROWITZ, individually and as co-executrix
          of the estate of LEONARD N. HOROWITZ, deceased;
          ALFRED CAMNER, co-executor of the estate of
          LEONARD N. HOROWITZ, deceased

                               Appellants in No. 94-1901

                         vs.

          FEDERAL KEMPER LIFE ASSURANCE COMPANY
                           ___________

          Appeal from the United States District Court
            for the Eastern District of Pennsylvania
                  (D.C. Civil No. 93-cv-00192)
                           ___________

                             Argued
                           May 1, 1995
                 Before: SLOVITER, Chief Judge,
               MANSMANN and ALITO, Circuit Judges.

                     (Filed June 7, 1995)
                          ___________

Dean F. Murtagh, Esquire (Argued)
John P. Shusted, Esquire
German, Gallagher & Murtagh
200 South Broad Street
5th Floor
Philadelphia, PA    19102

            Counsel for Appellant in No. 94-1900
            Counsel for Appellee in No. 94-1901

James E. Beasley, Esquire
Barbara R. Axelrod, Esquire (Argued)
Beasley, Casey, Colleran,
Erbstein, Thistle & Kline
1125 Walnut Street
Philadelphia, PA 19107

            Counsel for Cross-Appellants in No. 94-1901
            Counsel for Appellees in No. 94-1900

Rita M. Theisen, Esquire
LeBoeuf, Lamb, Grene & MacRae
1875 Connecticut Avenue, N.W.
Suite 1200
Washington, DC 10009-5728

Of Counsel:

  Phillip E. Stano, Esquire
  Richard E. Barnsback, Esquire
  American Council of Life Insurance
  1001 Pennsylvania Avenue, N.W.
  Washington, D.C. 20004

            Counsel for Amicus-appellant in No. 94-1900
            Counsel for Amicus-appellee in No. 94-1901
                             ___________

                         OPINION OF THE COURT
                              __________


MANSMANN,     Circuit Judge.

            In this diversity case, the plaintiffs asserted that

Federal Kemper Life Assurance Company's refusal to pay the

proceeds of a life insurance policy to plaintiff Dona W. Horowitz

was a breach of contract and violated Pennsylvania's Unfair Trade

Practices and Consumer Protection Law, 73 Pa. C.S.A. § 201-1 et

seq., and Pennsylvania's bad faith statute, 42 Pa. C.S.A. § 8371.
          We are called upon to determine whether Federal Kemper

"attached" an application amendment to the policy within the

meaning of section 441 of Pennsylvania's Insurance Company Law of

1921, 40 Pa. C.S.A. § 441, and may, therefore, proceed with a

fraud defense against the plaintiffs' breach of contract claim

and a counterclaim for rescission based on alleged material

misrepresentations and omissions in the policy application and

the amendment.   We must also determine whether Federal Kemper's

conduct was in contravention of Pennsylvania's unfair trade

practices and bad faith statutes.

          We find that Federal Kemper's use of a binder with

pockets or sleeves to contain the policy, application and

amendment satisfied the attachment requirement of section 441,

and that Federal Kemper reasonably refused payment.   We will

therefore vacate the district court's grant of summary judgment

to the plaintiffs on their breach of contract claim and remand

for further proceedings on this issue.   In addition, we will

affirm the district court's grant of summary judgment in Federal

Kemper's favor on the plaintiffs' unfair trade practices and bad

faith claims.



                                I.

          We begin our analysis by reviewing the evidence

presented in this case.   With one critical exception, the
following material facts surrounding Federal Kemper's refusal to

pay Dona Horowitz's claim are not in dispute.1

          On September 26, 1991, Mrs. Horowitz and her husband,

Dr. Leonard N. Horowitz, met with Frederick Raffetto, an

independent insurance agent, and completed an application for a

$1 million Federal Kemper life insurance policy, naming Dr.

Horowitz the proposed insured and Mrs. Horowitz, the applicant,

owner and primary beneficiary.   Both Dr. and Mrs. Horowitz signed

Part B of the application, promising to inform Federal Kemper of

"any change in the health or habits of the Proposed Insured that

occurr[ed] after completing [the] application but before the

Policy [was] delivered . . . and the first premium [was] paid."

          On October 3, 1991, at Federal Kemper's request, Dr.

Horowitz was examined by Carol Coady, a registered nurse.   After

taking urine and blood samples and checking Dr. Horowitz's vital

signs, nurse Coady asked Dr. Horowitz a series of questions

regarding his health and medical history and recorded the answers

1
 .        Our standard of review upon the grant of summary
judgment is plenary. Commercial Union Ins. Co. v. Bituminous
Casualty Corp., 851 F.2d 98, 100 (3d Cir. 1988). On review, an
appellate court is required to apply the same test the district
court should have used initially. Id. Summary judgment is only
appropriate where there is no genuine issue of material fact for
the jury to decide. Fed. R. Civ. P. 56(c). Facts that could
alter the outcome are "material", see Anderson v. Liberty Lobby,
Inc., 477 U.S. 242, 248 (1986), and disputes are "genuine" if
evidence exists from which a rational person could conclude that
the position of the person with the burden of proof on the
disputed issue is correct. Celotex Corp. v. Catrett, 477 U.S.
317, 322 (1986). Summary judgment is inappropriate when a case
will turn on credibility determinations. See Liberty Lobby, 477
U.S. at 255.
he gave on Part F of the policy application.    When asked whether

he had ever received treatment for "[an] [u]lcer, colitis,

hepatitis, pancreatitis or other disorder of the esophagus,

stomach, intestines, liver or pancreas", Dr. Horowitz reported

that he had been treated for lactose intolerance and a spastic

colon in 1985 and as a result, avoided the ingestion of milk

products and took "Metamucil" every so often.    In response to

inquiries regarding consultations with physicians or other

medical practitioners and the performance of electrocardiograms,

blood studies or other medical tests within the last five years,

Dr. Horowitz stated that he consulted with his family doctor on a

yearly basis for a routine checkup, electrocardiogram and blood

analysis, and identified Dr. Bradley Fenton as his personal

physician, whom he had last visited in August, 1991.    Dr.

Horowitz did not disclose, however, that he had seen Dr. Anthony

J. DiMarino, Jr., a gastroenterologist, on several occasions

beginning in 1986 and had been examined by Dr. DiMarino most

recently in August, 1991, or that he had undergone a series of

small bowel studies, blood tests for anemia, and tests for

vertigo within the last five years, and two colonoscopies, one in

1987 and another on August 8, 1991.

          Approximately one month later, in November of 1991, Dr.

Horowitz complained to Dr. DiMarino of pain when swallowing.      On

December 4, 1991, Dr. Horowitz underwent a CT scan and an

endoscopy with biopsy, and on December 5, 1991, was diagnosed as

having terminal adenocarcinoma of the stomach.    On December 6,

1991, Dr. and Mrs. Horowitz consulted a specialist and were told
that Dr. Horowitz had approximately six months to live.    During

the following week, Dr. Horowitz obtained three additional

medical opinions, all confirming the original diagnosis of

terminal adenocarcinoma.   On December 16, 1991, Dr. Horowitz had

a catheter surgically inserted for the administration of

chemotherapy, and on the morning of December 20, 1991,

chemotherapy treatment was begun.

          After learning of his condition and prognosis, Dr.

Horowitz informed his personal attorney that he had previously

applied to Federal Kemper for a life insurance policy and of the

change in his health.   The attorney advised Dr. Horowitz to take

whatever steps were necessary to secure delivery of the policy

and reassured him that any disputes that might arise with Federal

Kemper would be resolved in court.

          On December 20, 1991, in the afternoon, Mr. Raffetto

met with Dr. and Mrs. Horowitz and delivered the Federal Kemper

life insurance policy which had been issued on December 3, 1991.

Dr. Horowitz, in turn, paid the first premium.   During Mr.

Raffetto's visit, Dr. and Mrs. Horowitz read and executed an

amendment of application which provided in pertinent part:
          The above noted application of Federal Kemper
          Life Assurance Company dated September 26,
          1991 is amended as follows:

          THE REPRESENTATIONS MADE IN THE APPLICATION
          ARE STILL VALID AS OF THE DATE IN THIS
          AMENDMENT, AND THE PROPOSED INSURED HAS NOT
          HAD ANY ILLNESS OR INJURY, AND HAS NOT
          CONSULTED, OR RECEIVED MEDICAL ADVICE OR
          TREATMENT FROM, ANY PHYSICIAN OR OTHER
          MEDICAL PRACTITIONER SINCE THE DATE OF
          APPLICATION EXCEPT AS FOLLOWS:
          It is agreed that this amendment is part of
          the application and of the policy issued, and
          it will be binding on any person who will
          have any interest under the policy. This
          amendment, and the policy, will not take
          effect until signed as required below. It is
          agreed that no coverage is in effect if any
          changes are made to the above statements in
          this form.


Neither Dr. Horowitz nor his wife, however, informed Mr. Raffetto

of Dr. Horowitz's terminal illness, the treatment he was

undergoing or of the several medical opinions he had obtained

since September 26, 1991 regarding his condition.

          Although the parties agree that Mr. Raffetto unstapled

one original amendment from the policy and presented it to Dr.

and Mrs. Horowitz to read and sign, they dispute whether Mr.

Raffetto actually delivered it.    Mrs. Horowitz contends that she

never took possession of the signed amendment, and one of Dr.

Horowitz's attorneys executed an affidavit stating that the

Federal Kemper policy he examined following Dr. Horowitz's death

did not include the amendment.    Mr. Raffetto, on the other hand,

maintains that on December 20, 1991, he unstapled two original

amendments from the policy, saw to it that Dr. and Mrs. Horowitz

read and signed both originals, retained one original for Federal

Kemper's files, placed the second original inside a sleeve in the

pocket binder2 which contained the policy and application, and

gave the binder to Dr. Horowitz.

2
 .        The plaintiffs describe the pocket binder as a "plastic
cover" with a "sleeve" or "pocket" in which papers could be
placed. For the sake of consistency only, we will refer to the
item as a binder.
            Dr. Horowitz spoke again to his attorney after taking

delivery of the Federal Kemper policy and voiced concern over

signing the amendment in light of his illness.    Counsel directed

Dr. Horowitz to send him the policy and reiterated that

litigation would resolve future disputes.

            Dr. Horowitz died on May 21, 1992.   Shortly after Dr.

Horowitz's death, Mrs. Horowitz submitted a claim to Federal

Kemper for the proceeds of the policy.    By a letter dated

September 25, 1992, Federal Kemper refused Mrs. Horowitz's claim,

declaring the policy null and void due to Dr. and Mrs. Horowitz's

failure to disclose the adenocarcinoma as, according to the

insurer, Part B of the application and the application amendment

required.   Federal Kemper also enclosed all premiums that had

been paid on the policy and reserved its right to raise other

defenses to Mrs. Horowitz's claim.

            On December 16, 1992, Mrs. Horowitz, individually and

as co-executrix of Dr. Horowitz's estate, and Alfred Camner, the

estate's co-executor, filed a three count complaint in the Court

of Common Pleas, Montgomery County, Pennsylvania, alleging that

Federal Kemper violated Pennsylvania's Unfair Trade Practices and

Consumer Protection Law, 73 Pa. C.S.A. § 201-1 et seq. (Count I),

acted in bad faith in violation of 42 Pa. C.S.A. § 8371 (Count

II), and breached the parties' insurance contract (Count III).

Federal Kemper removed the case to the United States District

Court for the Eastern District of Pennsylvania on January 14,

1993.   In response to the plaintiffs' complaint, Federal Kemper

raised fraud as a defense and also asserted a counterclaim for
rescission on the ground that Dr. and Mrs. Horowitz had made

material misrepresentations in the policy application and the

application amendment.

          On October 8, 1993, the parties filed cross-motions for

summary judgment.   On August 30, 1994, the district court granted

the plaintiffs' motion on Count III, the breach of contract

claim, and entered judgment in their favor for $1 million.     The

court concluded that even if Mr. Raffetto's version of events

regarding delivery of the policy, application and amendment were

true,3 Federal Kemper was barred as a matter of law from

asserting a fraud defense based on alleged misrepresentations in

the application and amendment because of "Mr. Raffetto's

undisputed failure to reattach the [December 20, 1991] amendment

to the policy at the time of delivery . . ." as required under

section 441 of Pennsylvania's Insurance Company Law of 1921, 40

Pa. C.S.A. § 441.   Horowitz v. Federal Kemper Assurance Co., 861

F. Supp. 1252, 1258 (E.D. Pa. 1994).4   Rejecting Federal Kemper's

3
 .        On summary judgment, where the non-moving party's
evidence contradicts the movant's evidence, then the non-movant's
evidence must be taken as true. Big Apple BMW, Inc. v. BMW of N.
Am., Inc., 974 F.2d 1358, 1363 (3d Cir. 1992), cert. denied, ___
U.S. ___, 113 S. Ct. 1262 (1993).
4
 .        On summary judgment, Federal Kemper's fraud defense and
its counterclaim for rescission were limited to
misrepresentations allegedly made in Parts B and F of the
application and in the application amendment. Because the court
ruled in the plaintiffs' favor on their breach of contract claim,
it did not reach their argument that under 40 Pa. C.S.A. §
511(a), Federal Kemper was precluded by the results of its
October 3, 1991 medical examination of Dr. Horowitz from
defending on the basis of fraud; nor did it reach Federal
Kemper's counterclaim for rescission, concluding that the
insurer's "failure to attach the December 20 amendment to the
argument that section 441 was satisfied when Mr. Raffetto placed

a copy of the amendment inside the sleeve of a binder that also

contained the policy and the application, the court held that the

rule that has emerged from the two leading cases, Sandberg v.

Metropolitan Life Ins. Co., 342 Pa. 326, 20 A.2d 230 (1941),5 and

Frost v. Metropolitan Life Ins. Co., 337 Pa. 537, 12 A.2d 309

(1940), is that "if an insurance company fails to physically

attach the application (or any amendments) to the policy at the

time it is delivered, it is barred from asserting as a defense

any fraudulent misrepresentations contained in the application or

amendments".    Horowitz, 861 F. Supp. at 1258.   As to the

plaintiffs' unfair trade practices and bad faith claims, however,

the district court granted summary judgment in the defendant's

favor, finding that Federal Kemper's refusal to pay Mrs.

Horowitz's claim was neither actionable as malfeasance nor taken

in bad faith.   Id. at 1261-62.   On August 30, 1994, Federal




(..continued)
policy prohibits it from asserting as a fraud defense any of the
misrepresentations contained in the amendment, Part B of the
application (completed on September 26, 1991), or Part F of the
application (completed on October 3, 1991)." Horowitz v. Federal
Kemper Assurance Co., 861 F. Supp. 1252, 1261 n.9 (E.D. Pa.
1994).
5
 .        In Sandberg v. Metropolitan Life Ins. Co., 342 Pa. 326,
20 A.2d 230 (1941), an application was attached to an insurance
policy, but an amendment to the application was not. The
Pennsylvania Supreme Court held that since the amendment was not
attached as required by section 441, both the application and the
amendment had to be excluded from evidence. 342 Pa. at 329, 20
A.2d at 231. The meaning of "attach" as used in section 441 was
not an issue in the case.
Kemper filed this appeal, and the plaintiffs' cross-appeal

followed.    The parties agree that Pennsylvania law applies.6



                                 II.

            For Federal Kemper to void the insurance policy on the

basis of fraud, Pennsylvania law requires that it must show (1)

that Dr. or Mrs. Horowitz's representations in the policy

application and the application amendment were false, (2) that

Dr. or Mrs. Horowitz knew their representations were false or

made them in bad faith, and (3) that the representations were

material to the risk insured.    Coolspring Stone Supply, Inc. v.

American States Life Ins. Co., 10 F.3d 144, 148 (3d Cir. 1993),

citing Shafer v. John Hancock Mut. Life Ins. Co., 410 Pa. 394,

189 A.2d 234, 236 (1963).

            Section 441 of Pennsylvania's Insurance Company Law of

1921, however, bars an insurer from using certain documents,




6
 .        When a federal district court exercises diversity
jurisdiction, it must apply the substantive law as decided by the
highest court of the state whose law governs the action. Erie R.
Co. v. Tompkins, 304 U.S. 64, 78 (1938); Commercial Union, 851
F.2d at 100. When the state's highest court has not addressed
the precise question presented, a federal court must predict how
the state's highest court would resolve the issue. Borman v.
Raymark Indus., Inc., 960 F.2d 327, 331 (3d Cir. 1992). Although
not dispositive, decisions of state intermediate appellate courts
should be accorded significant weight in the absence of an
indication that the highest state court would rule otherwise.
See Rolick v. Collins Pine Co., 925 F.2d 661, 664 (3d Cir. 1991).
Our review of the district court's prediction and application of
state law is plenary. Borse v. Piece Goods Shop, Inc., 963 F.2d
611, 613 (3d Cir. 1992).
including a policy application, as evidence of fraud against an

insured unless they are "attached and accompany[] the policy":
          All insurance policies . . . in which the
          application of the insured, the constitution,
          by-laws or other rules of the company form
          part of the policy or contract between the
          parties thereto, or have any bearing on said
          contract, shall contain, or have attached to
          said policies, correct copies of the
          application as signed by the applicant, or
          the constitution, by-laws, or other rules
          referred to; and, unless so attached and
          accompanying the policy, no such application,
          constitution or by-laws, or other rules shall
          be received in evidence in any controversy
          between the parties to, or interested in, the
          policy, nor shall such application,
          constitution, by-laws, or other rules be
          considered a part of the policy or contract
          between such parties.


40 Pa. C.S.A. § 441.



                                A.

           The Pennsylvania courts have often stated that section

441 was passed "in the interest of fair dealing" and its

provisions should be "strictly enforced."   Syme v. Bankers Nat.

Life Ins. Co., 393 Pa. 600, 609, 144 A.2d 845, 850 (1958); Ellis

v. Metropolitan Life Ins. Co., 228 Pa. 230, 231, 77 A. 460

(1910).   Enacted primarily for the protection of insureds,

section 441 establishes uniform rules for determining whether

particular promises or statements are included within the

contract between the insurer and the insured.   Frost, 337 Pa. at

541, 12 A.2d at 309.   In Lenox v. Greenwich Ins. Co., 165 Pa.
575, 577, 30 A. 940, 941 (1895), the Pennsylvania Supreme Court

expressed what is still regarded as the aim of the statute:
          It is well known that the evil aimed at in
          this legislation was the custom of insurance
          companies to put in their blank forms of
          application long and intricate questions or
          statements to be answered or made by the
          applicant, printed usually in very small
          type, and the relevancy or materiality not
          always apparent to the inexperienced, and
          therefore liable to become traps to catch
          even the innocent unwary. The general intent
          was to keep these statements before the eyes
          of the insured, so that he might know his
          contract, and if it contained errors, have
          them rectified before it became too late.


          Applying Pennsylvania's rules of statutory

construction, the Pennsylvania courts have directed that the

words and phrases of section 441 be construed according to their

"common and approved usage" and instructed that the statute's

letter may not be disregarded or broadened to pursue its spirit.

Frost, 337 Pa. at 540, 12 A.2d at 310.   The courts have also

emphasized, however, that it is essential to use reason when

interpreting section 441 and to avoid an absurd result.   Ross v.
Metropolitan Life Ins. Co., 403 Pa. 135, 142-43, 169 A.2d 74, 78

(1961).   Thus, in Ross v. Metropolitan Life, after considering

the language and purpose of section 441, the Pennsylvania Supreme

Court determined that the statutory requirement that a "correct"

copy of an application be attached to a policy does not mean that

"trivial and immaterial" errors in the copy which do not mislead

the insured render the application inadmissible, id., and in

Prudential Ins. Co. v. Pagano, 407 Pa. 473, 474-75, 181 A.2d 319,
320-21 (1962), held that section 441 was satisfied even though

the insurer attached to the policy only one of two identical

application sections the insured had completed.

          The case of Frost v. Metropolitan Life Ins. Co., 337

Pa. 537, 12 A.2d 309 (1940), where the Pennsylvania Supreme Court

construed the meaning of section 441's attachment requirement, is

singularly on point.   There, the plaintiff commenced a breach of

contract action to recover the proceeds of a $5,000 policy issued

by Metropolitan Life to one Emerson E. Weiser.     Attached to the

policy upon which the plaintiff brought suit were an instrument

referred to as an "Accidental Death Benefit" (Exhibit B) and a

photostatic copy of Weiser's application for a previously issued

$10,000 policy (Exhibit C).7   While the plaintiff asserted that

Exhibits B and C were the only papers attached to the policy,

Metropolitan Life alleged that an additional document which

affirmed the application for the $10,000 policy and also amended

it to make it an application for the $5,000 policy (Exhibit A)

was "attached to the policy `by placing the same in said policy'

and delivering the policy `with the said amendment and affirmance

duly executed, folded therein, to the insured.'"    337 Pa. at 538,

12 A.2d at 310.   Metropolitan Life further alleged by way of a

defense to the plaintiff's claim that Weiser had given false

answers in Exhibit C, the application, but conceded that unless


7
 .        The court stated that Exhibits B and C were attached to
the policy; it did not, however, describe the means of
attachment. Frost v. Metropolitan Life Ins. Co., 337 Pa. 537,
538, 12 A.2d 309, 310 (1940).
Exhibit A, the additional paper, had been "attached" to the

policy as required by section 441, it could not introduce the

application as proof of Weiser's fraud.   Id.

          Based on the dictionary definition of "attach":   "`to

bind, fasten, tie or connect; to make fast or join, as to attach

with a string'", the Pennsylvania Supreme Court found against

Metropolitan Life, refusing to "distort" the plain meaning of

attach or to excuse the insurer's "gross neglect" to follow the

requirements of section 441:
               In view of this approved definition by
          the courts and in view of the rules laid down
          by the Legislature and by the courts in
          connection with the interpretation of words
          and phrases, would it not require that the
          plain meaning of the word "attached" be
          distorted in order to find that this
          Defendant's Exhibit A had been attached to
          the policy by merely folding it and placing
          it in the policy? . . . `We see no reason
          why this company should be exempt from the
          penalty for its gross neglect to obey the
          plain injunction of an act of assembly.' The
          court is, therefore, of the opinion that
          Defendant's Exhibit A was not "attached" as
          provided by the Act of Assembly and to find
          otherwise, a meaning would have to be given
          to the word other than its plain definition.


337 Pa. at 540-541, 12 A.2d at 311 (citation omitted).

          The lesson we glean from Frost is that the words which

defined "attach" and upon which the Pennsylvania Supreme Court

relied to reach its decision -- bind, fasten, tie, connect or

join -- all required the introduction of some method or mechanism

to hold loose papers together, such that Metropolitan Life's mere

placement of the application inside the insurance policy without
more was not sufficient.   Hence, Federal Kemper's use of a binder

to contain the policy, the application and the amendment

distinguishes this case from Frost, where the insurer took no

steps whatsoever to seek to insure that the various papers it

sought to introduce against the insured would be kept together.

          Today's meaning of "attach" is virtually identical to

its meaning in 1940 when Frost was decided:   "make fast or join

(as by string or glue):    bind, fasten, tie ...", Webster's Third

New International Dictionary (1981), and likewise connotes the

application of a mechanism that holds items in one place.    We

thus believe that if under the definition of attach, an insurer

may "tie" a policy, an application and amendments with a string,

it may also "bind" or "join" these documents in a device with

pockets (referred to as a "binder") designed to contain them

together, and we further believe that the Pennsylvania Supreme

Court would agree.   Moreover, we do not find any support for the

district court's conclusion that an insurer must "physically"

attach an application and amendments to a policy in order to

comply with comply with section 441.8   This qualifier is not

found in the definition of attach in the Frost decision or in the
language of the statute.   We therefore conclude that Federal

Kemper's use of a binder is consistent with the plain meaning of

section 441.



8
 .        The plaintiffs assert that section 441 requires that an
application and amendments be "physically" attached or "fastened"
to a policy.
                                 B.

            As is required by Pennsylvania law, our conclusion not

only adheres to the plain meaning of section 441, but also

effectuates its general purpose and avoids an unreasonable or

absurd result.    Section 441 is a prophylactic measure, enacted in

the interest of fair dealing and designed to eliminate sharp

practices by assuring that a policy holder has all of the

documents that comprise the insurance contract.    This is not a

case where the insurer attempted to take advantage of the insured

or neglected to provide the policy holder with a mechanism to

keep all parts of the contract between the parties before him and

together.    Thus, were we to uphold the district court's

construction of section 441, the statute would be turned on its

head.

            Based on our understanding of the language and aim of

section 441 and our in-depth review of Pennsylvania's rules of

statutory construction and relevant decisions, we find that the

district court erred in applying the Pennsylvania Supreme Court's

holding in Frost to the facts in this case.   We further predict

that the Pennsylvania Supreme Court would conclude that an

insurer's use of a binder to contain a policy and other essential

documents meets the mandate of 40 Pa. C.S.A. § 441.

            We therefore hold that the district court erred in

granting summary judgment to the plaintiffs on their breach of

contract claim, and will vacate the district court's order in

this regard.    Because there exists a genuine issue of material

fact as to whether the December 20 amendment was included in the
binder that insurance agent Raffetto delivered to Dr. Horowitz,

however, summary judgment in Federal Kemper's favor on either the

plaintiffs' breach of contract claim or its counterclaim for

rescission, assuming it met the standard of proof necessary to

establish fraud under Pennsylvania law,9 is precluded, and this

case must be remanded for trial.



                              III.

          In their cross-appeal, the plaintiffs challenge the

district court's grant of summary judgment to Federal Kemper on

their unfair trade practices and bad faith claims, both of which

are based on the September 25, 1992 letter Federal Kemper sent to

notify Mrs. Horowitz of its refusal to pay the claim she had made

for the proceeds of the life insurance policy.   The plaintiffs

assert that the letter was unfair and deceptive because it misled

Mrs. Horowitz into believing that she had no hope of recovering

benefits, and was sent in bad faith because Federal Kemper did

not have a reasonable basis for denying the claim.



9
 .        As noted, because the district court granted summary
judgment to the plaintiffs on their breach of contract claim, it
did not decide whether Federal Kemper sustained its burden of
proof on the essential elements of fraud under Pennsylvania law,
see Evans v. Penn Mut. Life Ins. Co., 322 Pa. 547, 555-59, 186
A.2d 133, 139-41 (1936)(ordinarily the issue of fraud is for the
jury to decide, but where uncontradicted documents and/or the
uncontradicted testimony the insured's own witnesses establish
facts essential to the insurer's case, judgment may be entered
for the insurer); nor did it reach the plaintiffs' argument based
on 40 Pa. C.S.A. § 511(a). See supra, f.n. 4. In light of our
disposition of the case, we do not resolve these issues.
          In Pennsylvania, only malfeasance, the improper

performance of a contractual obligation, raises a cause of action

under the Unfair Trade Practices and Consumer Protection Law, 73

Pa. 73 C.S.A. § 201-1 et seq., and an insurer's mere refusal to

pay a claim which constitutes nonfeasance, the failure to perform

a contractual duty, is not actionable.   Gordon v. Pennsylvania

Blue Shield, 378 Pa. Super. 256, 264, 548 A.2d 600, 604 (1988).

See Raab v. Keystone Ins. Co., 271 Pa. Super. 185, 187-88, 412

A.2d 638, 639 (1979).   In our view, Federal Kemper's September

25, 1992 letter announced its decision to refuse Mrs. Horowitz's

claim and its reasons for denying payment, and does not represent

misfeasance.   We therefore find that the district court did not

err in granting Federal Kemper's motion for summary judgment on

the plaintiffs' unfair trade practices claim.

          Finally, we agree with the district court that the

plaintiffs' bad faith claim must fail because under the

circumstances, Federal Kemper had a reasonable basis to deny Mrs.

Horowitz's claim and ample grounds for its allegations of fraud.

See D'Ambrosio v. Pennsylvania Nat'l. Mut. Ins. Co., 494 Pa. 501,

510, 431 A.2d 966, 971 (1981) (in jurisdictions which recognize a

cause of action for bad faith conduct on the part of an insurer,

the plaintiff must show the absence of a reasonable basis for

denying benefits or a reckless disregard of the lack of a

reasonable basis for refusing the claim).



                               IV.
          For the foregoing reasons, we will affirm the district

court's grant of summary judgment on Counts I and II of the

complaint in Federal Kemper's favor.   We will vacate the district

court's order granting summary judgment to the plaintiffs on

Count III and remand for further proceedings on the plaintiffs'

breach of contract claim and Federal Kemper's counterclaim for

rescission.



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