ON APPEAL FROM THE UNITED STATES DISTRICT COURT FOR THE EASTERN DISTRICT OF PENNSYLVANIA
Before: GIBBONS, HUNTER and ROSENN, Circuit Judges
Francis J. Batka, a policyholder of two insurance policies issued by Liberty Mutual Insurance Company, appeals from a judgment in favor of Liberty Mutual Fire Insurance Company in his diversity suit for recovery of the amount of a fire loss occurring to his home and automobile. Liberty Mutual asserted defenses of arson, fraud in the presentation of the fire loss claims, and fraud in the application for the policy. The jury's verdict was in Batka's favor on the arson and fraud in the loss claim, and that aspect of the case is not before us. The jury answered affirmatively, however, two special verdict interrogatories. These asked whether Liberty Mutual had proved by a preponderance of the evidence: (1) that Batka wilfully misrepresented or concealed material facts in the application for insurance when he answered "no" to the question "Has applicant or other occupant of the household had any property or casualty insurance declined or cancelled in the past three years (excluding auto)"; and (2) that Batka wilfully misrepresented or concealed material facts in the application for insurance concerning losses caused by burglary, robbery, theft, fire, wind, vandalism, and water damage, and that the defendant reasonably relied upon the material facts in issuing the policy. The trial court entered judgment in favor of Batka for loss of the automobile, but in favor of Liberty Mutual on the home fire loss. The court also denied Batka's motion for judgment notwithstanding the verdict and for a new trial. Because we conclude that the issue of fraud in the application was submitted to the jury under an erroneous legal standard of proof, we reverse the judgment and remand for a new trial.
Batka's diversity action was filed in the United States District Court for the Eastern District of Pennsylvania. The fire loss occurred, however, on November 6, 1977 in Collingswood, New Jersey. Moreover it is undisputed that the fire insurance policy was issued in that state, and contains the standard provisions required by N.J. Stat.Ann. 17:36-5.20 (West Supp. 1982). Most of the evidence offered by both sides in a protracted trial was addressed to the two issues, arson and false claim, which were decided by the jury in Batka's favor. We summarize the evidence with respect to Liberty Mutual's defense of fraud in the application.
On October 15, 1975 Batka was informed by American Policyholders' Insurance Company that it did not intend to renew its homeowners policy on his home, which would expire on December 13. Norman Krusen, a sales representative for Liberty Mutual, called Batka and arranged to meet him on December 10, 1975 to discuss insurance coverage. At this meeting Krusen asked Batka questions from the Liberty Mutual homeowners insurance application form, sometimes paraphrasing rather than quoting verbatim. Krusen entered Batka's answers on the form, which Batka signed. Question 13 on the application form reads:
Has applicant or other occupant of the household had any property or casualty insurance declined or cancelled by any company during the past three years excluding auto?
Krusen testified that he recalls asking if Batka had been "cancelled or non-renewed," and he checked off Batka's reply to Question 13 as no. There is no evidence that Krusen transmitted to the Liberty Mutual underwriting department information on his variation of the inquiry. On December 10, 1975 the no answer to Question 13 was literally true, because coverage had not been cancelled by American Policyholders' Insurance Company, and Batka's only application to it had not been declined. The American Policyholders' coverage was not "nonrenewed" until three days later, although an expression of intention not to renew had been sent earlier. Moreover Liberty Mutual, on this record, could not have relied on any representation Batka made about non-renewal, to the attention of its underwriting department, and the question does not mention non-renewal.
Question 17 on the application reads:
During the past 3 years have you or other occupants of the household ever had a loss caused by any of these perils:
A. burglary, robbery, theft, holdup, etc.?
B. fire, wind, vandalism, riot or civil commotion, water damage, ruptured plumbing or heating, ...