Fraud Rescission in Pennsylvania: No More Excuses

May 7, 2012

In an opinion dated March 30, 2012, the Third District Court of Appeals affirmed the Eastern District of Pennsylvania's grant of summary judgment to Guardian and Berkshire (see text box), holding as a matter of law that the disability insurance policies issued to Michael Sadel (Mr. Sadel) had been properly rescinded due to fraud.

The critical take away from the Third Circuit and the District Court's opinions is that an explanation for failing to provide accurate answers on an application for insurance coverage does not prevent a finding of fraud when the undisputed evidence establishes that the applicant knew the accurate answer to the application question and chose to provide an inaccurate response. The reason the applicant made the choice does not vitiate the fraud.

Wilson Elser attorney Salvatore Clemente represented Berkshire Life Insurance Company of America (Berkshire) and Guardian Life Insurance Company of America (Guardian) in the Eastern District of Pennsylvania matter Sadel v. Berkshire Life Insurance Company & Guardian Life Insurance Company, 2011 U.S. Dist. LEXIS 8993, January 28, 2011, Decided, January 31, 2011, Filed, Affirmed by Sadel v. Berkshire Life Ins. Co. of Am., 2012 U.S. App. LEXIS 6455 (3d Cir. Pa., Mar. 30, 2012) 2012 U.S. App. LEXIS 6455.


The Policies Issued to Mr. Sadel
Mr. Sadel is a pharmacist in Philadelphia. He applied to Berkshire for a disability insurance policy and a future increase option policy (the Policies) in January 2005. He signed the Disability Application on January 18, 2005, and the Application Part II, Medical Representations, on February 14, 2005 (the Applications). He denied on the Applications that he had ever used stimulants, hallucinogens, narcotics or any other controlled substance. Berkshire issued the Policies to Mr. Sadel in February 2005. 

Both Policies issued to Mr. Sadel provided that: "This policy will be incontestable as to the statements, except fraudulent statements, contained in the application after it has been in force for a period of two (2) years during your lifetime." This policy form was approved by the Pennsylvania Commissioner for sale and issuance in the Commonwealth of Pennsylvania. This policy language is mandatory in Pennsylvania. 40 P.S. § 753(2)(a). The two-year contestable period ended in February 2007.

Mr. Sadel's Drug Use
The District Court found, based on undisputed deposition testimony by Mr. Sadel, that in 2002, approximately three years prior to signing the Applications, Mr. Sadel had abused prescription drugs for approximately four months. He sought treatment for the addiction for the first time in September 2002. He diligently and consistently continued to participate in individual and group therapy sessions for several years thereafter. Mr. Sadel had no relapses and no history of drug use prior to the four-month period in 2002.

Mr. Sadel's Disability
Unfortunately, Mr. Sadel sustained a serious gunshot wound during a robbery at his pharmacy. Subsequently, he submitted a claim for benefits under the Policies. Mr. Sadel's prior drug use was discovered during the investigation of the claim. The investigation was arduous as Mr. Sadel's therapist was reluctant to provide information to Berkshire and Mr. Sadel would not answer Berkshire's questions about his prior drug use. He referred the company to his counsel.

While the claim was still being investigated, Mr. Sadel sued Berkshire and Guardian in State Court for breach of contract and bad faith for the failure to pay the claim. In March 2009, Berkshire removed the matter to the District Court and filed a counterclaim for declaratory relief to rescind the Policies based on the fraudulent concealment of Mr. Sadel's drug abuse. Berkshire was required to prove fraud as the Policies were outside of the contestable period and, thus, relied on the fraud exception in the contestability clause in the Policies.

Mr. Sadel's Deposition Testimony 
During his deposition, Mr. Sadel admitted that at the time he signed the Applications he knew about his drug abuse and his treatment for drug abuse. He further admitted that the question on the Applications concerning drug use was read to him and he responded "no." He also admitted to the treatment he received for the drug abuse, that he obtained the drugs from his pharmacy and that drug abuse by a pharmacist is a serious matter. 

Mr. Sadel also testified as to the reason why he responded "no" to the drug use question on the Applications. He indicated that he gave this response because, by the time he signed the Applications, he considered his drug use to be a small matter as it lasted only four months and he had not relapsed. He further had no prior history of drug use and he was diligent in his treatment. Thus, he considered it a mishap in his past that he had overcome long ago. It did not occur to him to respond "yes" to the drug use question as he "breezed through" the questions on the Applications with the agent. However, he testified that he did not intend to mislead Berkshire.


The District Court Opinion

The issue for Berkshire was to prove fraud as a matter of law in the face of Mr. Sadel's explanation for not providing the accurate information in response to the drug use question on the Applications.

The District Court concluded that under Pennsylvania law, an insurance policy is void ab initio where the applicant's representations are (1) false, (2) made fraudulently or otherwise made in bad faith and (3) material to the risk assumed. The issue of "materiality" was not disputed in the District Court. See Burkert v. Equitable Life Assur. Soc'y of America, 287 F.3d 293, 296-97 (3d Cir. 2002). The District Court also concluded that the insurer must prove these elements by clear and convincing evidence. Northwestern Mut. Life Ins. Co. v. Babayan, 430 F.3d 121, 129 (3d Cir. 2005).

Based on Mr. Sadel's deposition testimony, the District Court determined that the first prong of this test was established as there was no dispute that Mr. Sadel had taken drugs and abused drugs in the past. The "no" response to the drug use question was clearly false, meaning not accurate. In addition to Mr. Sadel's admissions during his deposition, the Court also found it compelling that Mr. Sadel had 57 individual treatment sessions for drug abuse between September 2002 and the date he signed the Applications. He also was undergoing group therapy sessions the month that he signed the Applications.

As to the second factor, citing Hager v. North Am. Co. for Life & Health Ins., 1988 U.S. Dist. LEXIS 5360, 1988 WL 62195 (E.D.Pa. June 14, 1988) and Shafer v. Hancock Mut. Life Ins. Co., 410 Pa. 394, 399, 189 A.2d 234 (1963), the Court held that "[a]n answer known by the insured to be false when made is presumptively fraudulent." Again, based on Mr. Sadel's deposition testimony, it was undisputed that he understood the drug use question and he knew his response to the question was not accurate at the time he gave the response. The fact that Mr. Sadel later testified that he did not consider responding "yes" to the drug use question did not lessen his admission during earlier testimony that he knew the answer to be inaccurate at the time he gave it.

As for Mr. Sadel's explanations for not providing accurate information, the District Court concluded that these explanations did not "vitiate" the fact that Mr. Sadel knowingly provided false answers. Based on the admissions in his deposition testimony, and the number of treatment sessions he had from September 2002 to the date the Applications were signed, the Court concluded that no reasonable fact finder could find that Mr. Sadel did not know that he had provided fraudulent statements. In other words, Mr. Sadel knew of his prior drug use, he understood that the drug use question on the Applications called for this information and he chose not to provide it. The reason Mr. Sadel made this choice did not change the fact that he knowingly gave an inaccurate answer on the Applications.

The Opinion by the Third Circuit
The Third Circuit, in affirming the District Court's grant of summary judgment, confirmed that to rescind the Policies, Berkshire had to prove by clear and convincing evidence the following three factors: "(1) the insured made a false representation; (2) the insured knew the representation was false when it was made or the insured made the representation in bad faith; and (3) the representation was material to the risk being insured." The Third Circuit agreed with the District Court's conclusion that Mr. Sadel's deposition testimony established each of these factors.

In the most critical portion of the opinion, the Third Circuit explained that Mr. Sadel's reason for not providing an accurate response to the drug use question did not preclude a finding of fraud as a matter of law. The Third Circuit noted that, on appeal, Mr. Sadel did not argue that the findings of the District Court were incorrect. Rather, he tried to "explain away" his fraudulent statements, arguing that he was doing well when he filled out the initial disability insurance application and his drug abuse was a small matter he dealt with in a matter of weeks. Like the District Court, the Third Circuit concluded that these "excuses do not change the fact that Sadel knowingly provided false information on his insurance application." 
Significant Aspects Not Reflected in the Opinions 
There are several important aspects of Sadel v. Berkshire that are not addressed in the court opinions but should be considered in evaluating and applying the opinions.

It was critical that the drug use question on the Applications was clear. It was a "yes/no" question that the District Court characterized as "straightforward." In addition, Mr. Sadel was a pharmacist so he understood the meaning of the phrase "stimulants, hallucinogens, narcotics, or any other controlled substances" in the drug use question. He also knew that the drugs he abused fell into this category. He could not use the age-old excuse that he did not understand the question or that he did not think his drug use was responsive to the question.

In addition, Berkshire was able to solicit from Mr. Sadel at his deposition specifics concerning the questions that were asked of him during the application process and the answers given by him. Mr. Sadel admitted that the inaccurate responses were contained on the Applications at the time he signed them. Mr. Sadel also admitted to the nature and scope of the treatment he received and continued to receive for his drug addiction. It also was significant that Berkshire's motion for summary judgment was based almost exclusively on the admissions by Mr. Sadel during his deposition. Berkshire had to prove fraud by clear and convincing evidence and there is no clearer or more convincing evidence than the admissions of an insured testifying under oath.

Finally, there was no question that prior drug abuse by a pharmacist was material to the underwriting of the Policies. Pharmacists are surrounded by drugs, so there is a more significant risk of relapse. Certainly, the serious nature of the misrepresentations assisted Berkshire in convincing the District Court that the company was entitled to rescind the Policies.


The rescission of an insurance policy is a serious matter that always must be undertaken with caution. The opinions in Sadel v. Berkshire offer insurance carriers valuable guidance in determining those instances in which rescission based on fraud is appropriate.

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