Franklin Life Insurance Company of Illinois (Company) was the plaintiff in an action in the United States District Court for the Western District of Pennsylvania against Mary E. Bieniek and Sewickley Savings & Loan Association (Sewickley), both of Pennsylvania, for a judgment declaring a policy of insurance issued by it on the life of the husband of Mrs. Bieniek, the late Brownie J. Bieniek, to be null and void. After a hearing without a jury, judgment was entered dismissing the complaint of the Company and this appeal followed. Jurisdictional diversity and amount are present.
The background of the litigation is as follows: In early 1958 Sewickley granted the Bienieks a mortgage loan of $15,000 in connection with the purchase of a home. On March 13, 1958 Mr. Bieniek applied to the Company for a twenty year reducing term policy in an amount sufficient to provide for monthly payments of $80.17, intending that the insurance would secure the repayment of the mortgage loan in the event of his death. As part of the application he answered certain questions concerning his prior medical history and state of health, which were recorded and certified by him in the application. On March 13, 1958 Mr. Bieniek was examined by the Company's physician, Dr. P. M. Haver, who reported his findings to the Company stating that he considered him to be in good health. On March 21, 1958 the Company executed a policy of insurance, which was delivered to Sewickley as assignee, in accordance with Mr. Bieniek's instructions and a certificate as to the issuance and delivery of the policy was sent to him.
On May 4, 1959 Mr. Bieniek died. On June 3, 1959 the Company notified Mrs. Bieniek that it would not honor the policy because of material, false representations knowingly made by Mr. Bieniek in his application and at the same time tendered a return of the premiums paid. The Company filed its suit on March 14, 1960.
In its opinion, reported at 199 F.Supp. 838 (1961), the District Court concluded that the statements of Mr. Bieniek were "plainly (1) false (2) material and (3) made with knowledge of their falsity on the part of the insured." Nevertheless it held that answers to two questions*fn1 were so clearly erroneous in nature that the Company was put on notice that it should have made further inquiry failing which it waived the misrepresentations in the application.
The District Court also alluded to the question of whether the Company had contested the payment of the policy within the time limit of the incontestability clause therein, but did not pass upon the point.*fn2
It seems orderly to resolve this issue first. Preliminarily it should be determined whether the letter of June 3, 1959 with the accompanying refund of premiums is sufficient notice of a contest.
That the policy was delivered in the State of Pennsylvania, the place of residence of the insured, is unquestioned. Therefore Pennsylvania law governs its interpretation. New York Life Ins. Co. v. Levine, 138 F.2d 286 (3 Cir. 1943).
In Feierman v. Eureka Life Ins. Co., 279 Pa. 507 (1924), in a dictum, actual suit was not considered necessary to convey the insurer's intent to contest the policy. The court said:
"The great weight of authority supports the position that the insurer must at least disavow liability within the contestable period to be relieved, - not necessarily by legal action, but some definite step, specifying the ground of complaint, in such form as to effect a cancellation of the contract." at 508-509.
Later, a Pennsylvania Superior Court, consistent with the majority of jurisdictions, held that notification by letter is insufficient and that a suit must be commenced or an answer interposed. In Prudential Ins. Co. v. Ptohides, 122 Pa. Super. 469 (1936), it was said:
"The next inquiry is whether the only legally effective way in which an insurer may 'contest' its liability under a policy is by offensive or defensive proceedings in a court. In other words, is the contest contemplated by the clause a contest in court, either by the institution, within the time limited, of appropriate proceedings for the surrender and cancellation of the policy or by making a defense to a suit brought within the period upon the policy?
"In so far as we are informed, this question has not been squarely rules upon by either of our appellate courts, but we think the rule established in New York and many other jurisdictions - that appropriate proceedings in a court are essential to a valid contest by the insurer - should be adopted here." 122 Pa. Super. at 474-475.
The court quoted copiously from Killian et al. v. Metropolitan Life Insurance Company, 251 N.Y. 44 (1929) including the conclusion of Justice Cardozo that:
"'. . . For present purposes it is enough to say that a contest begins when the contestants, satisfied no longer with minatory gestures, are at grips with each other in the arena of the fight. When the fight is a civil controversy, the arena is the court.'"*fn3 122 Pa. Super. at 478.
In 1940, in Ulakovic v. Metropolitan Life Insurance Co., 339 Pa. 571, the Pennsylvania Supreme Court noted the foregoing cases of Feierman v. Eureka Life Ins. Co., supra, Prudential Ins. Co. v. Ptohides, supra, and Killian v. Metropolitan Life Ins. Co., supra, but found it unnecessary to discuss them since it decided the case before it on another point.
In 1948, in New York Life Ins. Co. v. Del Bianco, 161 Pa. Super. 566, 568, the ruling in Prudential v. Ptohides, supra, adopting the language in Killian v. Metropolitan Life Ins. Co., was specifically approved.
The direction pointed by the Pennsylvania Superior Court and the weight of authority in other jurisdictions lead to the conclusion that the letter of the Company of June 3, 1959 does not constitute notice of the contest, but that ...