## Facts

- New York Life issued a $50,000 life insurance policy on Kirk Johnson’s life in 1986; Kirk’s father, Lawrence T. Johnson, Sr., paid premiums and was the named beneficiary.
- A New York Life agent completed the application from information Kirk provided in Mr. Johnson’s presence; Mr. Johnson signed for Kirk at Kirk’s request.
- The application stated Kirk had not smoked in the prior 12 months and had never smoked; both statements were false.
- Kirk had smoked since 1973 and was smoking about 10 cigarettes per day when he applied; Kirk and Mr. Johnson knew the statements were false.
- New York Life relied on the non-smoker statements to set a lower premium.
- Kirk died on July 17, 1988, within two years of issuance, from causes unrelated to smoking.
- After Mr. Johnson submitted a claim, New York Life investigated, discovered the smoking misrepresentation, tendered a return of premiums to rescind, and filed a declaratory judgment action when the tender was refused.
- The district court found the smoking misrepresentation was false and material, but also found New York Life would have issued the same face-amount policy at a higher, ascertainable smoker’s premium.

## Issues

1. Under Pennsylvania law, when a life insurance policy is procured through an intentional, material misrepresentation and challenged within the contestability period, must the policy be declared void ab initio, or may a court instead limit the remedy to reformation (reducing benefits to what the paid premium would have purchased)?
2. In a diversity case, should a federal court apply Pennsylvania’s general rescission rule to a smoking-habit misrepresentation despite the absence of a Pennsylvania decision on that specific fact pattern?

## Decision

- The Third Circuit reversed the district court.
- The court held that Pennsylvania law requires rescission: a life insurance policy obtained by a material misrepresentation and contested within the contestability period is void ab initio.
- The court rejected reformation or benefit-reduction as an available substitute remedy on these facts.
- The case was resolved in New York Life’s favor, entitling it to declare the policy void from inception (with premiums subject to return consistent with rescission).

## Legal Principles

- Under Pennsylvania law, an insurer may rescind a life insurance policy and have it declared void ab initio when the insured makes intentional, material misrepresentations in the application and the insurer challenges the policy within the contestability period.
- Materiality turns on whether the misrepresented fact would affect the insurer’s underwriting decision or premium calculation; the misrepresentation need not be causally related to the insured’s death.
- A court may not replace rescission with reformation merely because the insurer would have issued coverage on different terms (e.g., at a higher premium) had the truth been disclosed.
- Public policy supports full rescission to deter application fraud; limiting the consequence to benefit reduction would create incentives to misstate risk factors.
- In diversity, federal courts must predict and apply state law as it would be applied by the state’s highest court, extending established state rules to new factual contexts where consistent with precedent and policy.

## Conclusion

The Third Circuit held that intentional, material misrepresentations about smoking in a life insurance application, when challenged within the contestability period, require rescission under Pennsylvania law and render the policy void ab initio, making reformation or a proportional reduction of benefits improper.


New York Life Ins. Co. v. Johnson, 923 F.2d 279 (3d Cir. 1991)