Life Insurer Had Reasonable Basis To Rescind; No Bad Faith


lifeinsuranceMILWAUKEE, Aug. 5 — A federal judge in Wisconsin has dismissed a  bad faith claim on the insurer’s motion for partial summary judgment, finding it had a reasonable basis to contest a claim for death benefits based on possible misrepresentations in the application.

Calvin Nutt and Lowanda Smith submitted answers to medical questionnaires as part of the purchase of life insurance from United of Omaha Life Insurance Co.  Mr. Nutt answered “No” to a question regarding whether he had ever been treated for chronic obstructive pulmonary disease (COPD).  The policy cancelled for non payment, but the couple resubmitted the application, and again denied treatment of Mr. Nutt for COPD.

On July 10, 2016, Smith submitted a claim under the policy after Nutt was murdered.  United  undertook a policy review within the two year contestability period and obtained medical records which showed that one of Nutt’s treating doctors ordered diagnostic testing on whether his complaints of chest pain may have been caused by COPD.  The results were negative for COPD.

As part of the claim, Smith obtained an autopsy report which indicated Nutt did not have COPD.  She filed suit in Wisconsin State Court alleging breach of contract and bad faith, and United removed the action to U.S, District Court for the Eastern District of Wisconsin.  The insurer thereafter filed a motion for partial summary judgment on the bad faith claim.

Judge J.P. Stadmueller granted United’s motion on the bad faith claim, and denied Smith’s motion for partial summary judgment on the breach of contract claim on grounds of lateness and reliance on evidence not in the record.   Judge Stadmueller  wrote, in granting United’s summary judgment motion on the bad faith:

“[t]he 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 to deny benefits.’ 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. . . . [T]he fact that the basis for denial later evaporated is no reason to impose bad faith liability for the earlier denial decision.”

The judge also ruled Smith failed to show United was unaware of a reasonable basis to contest the claim, which was also fatal to Smith’s bad faith claim.

Lowanda Smith v. United of Omaha Life Insurance, No. 15-1344, E.D. Wis.; 2016 U.S. Dist. LEXIS 101726




Author: CJ Haddick

C.J. Haddick is a Director with the law firm of Dickie, McCamey, & Chilcote, PC, based in Pittsburgh, Pa. He has advised and represented insurers in insurance coverage and bad faith litigation for more than three decades, and written and spoken throughout the United States on insurance coverage and bad faith prevention and litigation. He is Managing Director of the firm's Harrisburg, Pa. office. Reach him at or 717-731-4800.

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