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National Fidelity Life Insurance Co. v. Karaganis

decided: February 2, 1987.


Appeal from the United States District Court for the Northern District of Illinois, Eastern Division, No. 85 C 7228 -- George N. Leighton, Judge.

Author: Cudahy

Before CUMMINGS and CUDAHY, Circuit Judges, and CAMPBELL, Senior District Judge.*fn*

CUDAHY, Circuit Judge. National Fidelity Life Insurance Company ("National Fidelity") brought this action to rescind a life insurance policy it had issued to William Karaganis (the "applicant"). National Fidelity alleged that the applicant fraudulently misrepresented that he was a nonsmoker and that it would not have issued the policy to him had it known that he was a smoker. The defendant, Joan Karaganis ("Karaganis"), is the applicant's widow and the beneficiary of the policy. She presented a motion for judgment on the pleadings which the district court granted. We affirm.


A motion for judgment on the pleadings may be granted only if the moving party clearly establishes that no material issue of fact remains to be resolved and that he or she is entitled to judgment as a matter of law. Flora v. Home Fed. Savings & Loan Ass'n, 685 F.2d 209, 211 (7th Cir. 1982).*fn1 The court may consider only matters presented in the pleadings and must view the facts in the light most favorable to the nonmoving party. Republic Steel Corp. v. Pennsylvania Eng'g Corp., 785 F.2d 174, 177 n.2 (7th Cir. 1986). The court, however, is not bound by the nonmoving party's legal characterizations of the facts. Id. In considering this motion, therefore, we assume the facts as alleged by National Fidelity to be true.

On October 13, 1983, the applicant submitted an application to National Fidelity for a life insurance policy in the amount of $250,000. In response to the question "plan applied for" in item 14 of the application, he wrote "TIP-21 Nonsmoker" in the amount of "$250,000." On November 9, 1983, he submitted a completed medical examination report, which is labeled "Supplement to Application to National Fidelity Life Insurance Company." Prior to the effective date of the policy and at the request of National Fidelity, the applicant signed a document (hereinafter "smoking statement") that states: "I do not know smoke cigarettes nor have I smoked any cigarettes for at least the past twelve months." Unlike the medical examination report, the smoking statement does not bear the heading "Supplement to Application," but is labeled simply "Smoking Statement."

National Fidelity alleged in its complaint, and we must accept as true, that the applicant knowingly provided false answers in his application and smoking statement and that he smoked regularly at the time of and within twelve months prior to the date of the smoking statement. Complaint P10. National Fidelity further claimed that the question whether or not the applicant was a smoker was material to the insurance risk that the company would assume by issuing to him a life insurance policy. Complaint P11. Finally, National Fidelity claimed that it had relied on the truth of the applicant's statements, Complaint PP9, 12, and that it would not have issued the policy "if truthful answers had been made by the Applicant in the application and smoking statement." Complaint P13.

The defendant, Joan Karaganis, moved for judgment on the pleadings. She relied on paragraph 6.1 of the policy, which provides that only statements made in the application itself can void the policy. Paragraph 6.1 reads as follows:

GENERAL: We issue this policy in consideration of the attached application any [sic] payment of the premiums shown on Page 1. This policy and application make up the entire contract. Statements made in the application, in the absence of fraud, are representations and not warranties; no other statement may void this policy or be used in defense of a claim.

Karaganis contended that the application consisted only of the application form and the medical examination report, and that the applicant made no statement concerning his smoking in either of these documents. The smoking statement, she argued, was not part of the application; National Fidelity was, therefore, barred by paragraph 6.1 of its own policy from relying on the smoking statement to void the policy.

The district court granted Karaganis' motion for judgment on the pleadings. The court agreed with Karaganis' interpretation of paragraph 6.1. It also agreed that the smoking statement was not part of the application. The court, therefore, held that, "as a matter of law, plaintiff is precluded from relying on the smoking statement to void the policy, based on the limitations described in paragraph 6.1 therein." National Fidelity Life Ins. Co. v. Karaganis, No. 85-C-7228, mem. op. at 4 (N.D. Ill. Feb. 7, 1986) ("mem. op.")

On appeal, National Fidelity argues several grounds for reversal. National Fidelity contends that even if paragraph 6.1 limits it to misrepresentations in the application, the applicant represented himself as being a nonsmoker in the original application form. National Fidelity further contends that the smoking statement is part of the application and, therefore, misrepresentations in the smoking statement may be used to void the policy. Alternatively, National Fidelity argues that it is not bound by the terms of paragraph 6.1 of its policy. The insurer claims that paragraph 6.1 violates public policy because it conflicts with section 154 of the Illinois Insurance Code and it, along with the rest of the policy, was procured by fraud by the applicant. If paragraph 6.1 is invalid, National Fidelity argues, section 154 governs. Section 154 specifically limits the type of misrepresentations by an insured that an insurance company may use to defeat or avoid a policy. Section 154 provides as follows:

P766. Misrepresentations and false warranties

No misrepresentation or false warranty made by the insured or in his behalf in the negotiation for a policy of insurance, or breach of a condition of such policy shall defeat or avoid the policy or prevent its attaching unless such misrepresentation, false warranty or condition shall have been stated in the policy or endorsement or rider attached thereto, or in the written application therefor, of which a copy is attached to or endorsed on the policy, and made a part thereof. No such misrepresentation or false warranty shall defeat or avoid the policy unless it shall have been made with actual intent to deceive or materially ...

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