692 F.

2d 289

HOUGHTON, Mary D., Appellee,

v.
AMERICAN GUARANTY LIFE INSURANCE COMPANY,
Appellant.
No. 82-1148.

United States Court of Appeals,

Third Circuit.
Argued Sept. 13, 1982.
Decided Nov. 3, 1982.

Thomas J. Speers (argued), McTighe, Weiss & Stewart, Norristown, Pa.,

for appellant.
James J. Oliver (argued), Wright, Manning & Sagendorph, Norristown,
Pa., for appellee.
Before SEITZ, Chief Judge, ROSENN, Senior Circuit Judge, and
GARTH, Circuit Judge.
OPINION OF THE COURT
GARTH, Circuit Judge.

American Guaranty Life Insurance Company ("AGLIC"), appeals from an

order which granted summary judgment for Mary D. Houghton. The district
court held that the terms of the health insurance policy issued by AGLIC to
Mary Houghton provided coverage for medical expenses which she incurred
after the termination of the policy, where the expenses were the result of the
sickness which she suffered during the life of the policy. We affirm.

I.
2

Mary Houghton, a Pennsylvania resident, in response to an AGLIC

advertisement, applied for a health insurance policy. The policy was advertised
as a "new Federal Medicare supplemental Major Medical insurance program

that pays up to $250,000.00 in benefits!" App. at 227a. After payment of the

premium, AGLIC issued Houghton a "Medicare Booster" policy on January 1,
1979. The policy provided for Basic Medicare as well as Major Medical
coverage. By the policy's terms, AGLIC contractually reserved the right to
decline to renew the policy by giving Houghton thirty days' written notice.
However, AGLIC could decline renewal but only if it also cancelled all the
issued policies bearing the same form number in the insured's state. Houghton's
policy, which became effective on January 1, 1979, was the only policy issued
by AGLIC in Pennsylvania.1
3

In March 1979, Houghton suffered a stroke with resulting brain damage while
she was hospitalized for a hip injury. On November 30, 1979, AGLIC sent
Houghton a written notice of its decision not to renew her policy as of
December 31, 1979. AGLIC paid Houghton for the stroke related expenses
incurred by her up to the cancellation date of the policy, but refused to make
any payments for such expenses incurred after that date.

Houghton thereupon instituted an action against AGLIC in the District Court

for the Eastern District of Pennsylvania. She sought payments for her
continuing stroke related post-cancellation medical expenses. AGLIC moved
for summary judgment claiming among other things, that it had cancelled the
policy in conformance with its terms. AGLIC contended that the policy only
covered expenses actually incurred during the life of the policy and that it had
met this contractual obligation by compensating Houghton for her expenses
incurred until the date the policy was cancelled.

Houghton filed a cross-motion for summary judgment. She argued that AGLIC
was estopped from cancelling the policy because she was "lured" into buying
the policy and had become an uninsurable risk after she had suffered her stroke.
She also argued that the insurance policy provided coverage for all expenses
incurred even after the cancellation of the policy, when the expenses resulted
from a sickness which had occurred prior to the policy's cancellation. She asked
the district court to reinstate the policy and to require AGLIC to pay all her
claimed Allowable Expenses under the policy.

The district court denied AGLIC's motion but granted Houghton's cross-motion
for summary judgment. In a memorandum opinion, it found that AGLIC had
not used clear and unambiguous language in the policy to limit its liability only
to medical expenses actually incurred by the insured during the term of the
policy coverage. Therefore, it concluded "that the uncertainty in the policy with
regard to the payment of medical expenses incurred after the policy had been
cancelled but resulting from a physical injury incurred during the policy

coverage period should be construed in favor of the insured." App. at 274a.

Ruling in Houghton's favor, the district court ordered AGLIC to "pay the
allowable expenses as provided under the insurance policy." App. at 276a. This
appeal followed.
II.
7

On appeal, AGLIC makes three arguments. Its primary argument is that the
district court erred in finding the terms of the policy to be ambiguous regarding
the risk that was insured. It claims that the plain language of the policy clearly
establishes that only actual expenses incurred during the life of the policy were
to be reimbursed, and therefore, the district court erred in finding that the
insurance policy covered expenses incurred after the cancellation of the policy
provided those expenses resulted from a pre-termination sickness.

AGLIC also argues, for the first time on appeal, that even if the district court
correctly interpreted the policy in imposing liability on the insurer for certain
post-termination expenses, it nevertheless erred in ordering the insurer to "pay
the allowable expenses as provided under the insurance policy." App. at 276a.
It contends that the court should not have granted final relief on a summary
judgment motion, because there were material issues of fact as to the dollar
amount and the period of time for which it was obligated to pay the Allowable
Expenses.

Finally, it argues that the district court order is ambiguous as to the relief
actually granted. It has asked us to modify the district court order granting
judgment in favor of Houghton so that the policy is deemed to have been
properly terminated rather than reinstated. We consider each argument in turn.

A.
10

The principles are well settled regarding the interpretation of insurance policies
under Pennsylvania law.2 In interpreting an insurance policy, which is a
contract, courts are required to determine the intent of the parties as disclosed
by the language of the policy. Eastern Associated Coal Corp. v. Aetna Casualty
& Surety Co., 632 F.2d 1068, 1075 (3d Cir. 1980), cert. denied, 451 U.S. 986,
101 S.Ct. 2320, 68 L.Ed.2d 843 (1981) (citing Mohn v. American Casualty Co.
of Reading, 458 Pa. 576, 326 A.2d 346 (1974); Lovering v. Erie Indemnity Co.,
412 Pa. 551, 195 A.2d 365 (1963); Treasure Craft Jewelers, Inc. v. Jefferson
Insurance Co., 583 F.2d 650, 652 (3d Cir. 1978)). If the language is clear and
unambiguous, courts are to give effect to its plain and ordinary meaning. St.
Paul Fire & Marine Insurance Co. v. United States Fire Insurance Co., 655 F.2d

521, 524 (3d Cir. 1981); Eastern Associated Coal Corp., supra; Pennsylvania
Manufacturers' Association Insurance Co. v. Aetna Casualty & Surety Co., 426
Pa. 453, 457, 233 A.2d 548, 551 (1967). However, because insurance policies
are frequently considered to be contracts of adhesion, any ambiguity in the
policy "must be construed against the insurer, and in a manner which is more
favorable to coverage." Buntin v. Continental Insurance Co., 583 F.2d 1201,
1207 (3d Cir. 1978) (emphasis in original). See, e.g., Alexander & Alexander,
Inc. v. Rose, 671 F.2d 771, 777 (3d Cir. 1982); St. Paul Fire & Marine
Insurance Co., supra, 655 F.2d at 524; Daburlos v. Commercial Insurance Co.
of Newark, New Jersey, 521 F.2d 18, 25-26 (3d Cir. 1975); Mohn, supra, 458
Pa. at 586, 326 A.2d at 351; Burne v. Franklin Life Insurance Co., 451 Pa. 218,
226, 301 A.2d 799, 804 (1973); Penn-Air, Inc. v. Indemnity Insurance Co. of
North America, 439 Pa. 511, 517, 269 A.2d 19, 22 (1970); Cohen v. Erie
Indemnity Co., 288 Pa.Super. 445, 448, 432 A.2d 596, 597 (1981).
Nevertheless, the language of the policy may not be tortured to create
ambiguities where none exist. St. Paul Fire & Marine Insurance Co., supra, 655
F.2d at 524; Eastern Associated Coal, supra, 632 F.2d at 1075; Treasure Craft
Jewelers, Inc., supra, 583 F.2d at 652.
11

Thus, under Pennsylvania law, ambiguous terms of an insurance policy are

construed against the insurer. This principle stems from Pennsylvania's concern
that insurance companies, because of their superior bargaining position, should
not be permitted to thwart the reasonable expectations of the consumer
purchaser. See Collister v. Nationwide Life Insurance Co., 479 Pa. 597, 388
A.2d 1346 (1978), cert. denied, 439 U.S. 1089, 99 S.Ct. 871, 59 L.Ed.2d 55
(1979).

12

AGLIC argues that the principles of construction that apply to the interpretation
of an ambiguous contract are not relevant to this case because the language
contained in the "Medicare Booster" policy which it sold to Houghton, clearly
establishes that the coverage of the policy extended only to medical expenses
("Allowable Expenses") actually incurred during the term of the policy. In
essence, AGLIC argues no ambiguity exists. Our review of the policy in
question compels us to reject AGLIC's argument. We agree with the district
court that the Houghton policy is not free from ambiguity.

1.
13

In support of its claim that the policy language unambiguously insures the
payment of medical expenses which were incurred only during the term of the
policy, AGLIC relies on the language contained in the Basic Medicare policy.
That policy, under the section captioned "BENEFITS," reads: "When, as a

result of injury or sickness, you require medical treatment resulting in

Allowable Expense, we will pay you for such Allowable Expense as limited
and described below." App. at 225a. AGLIC contends that when this provision
for Allowable Expense is read together with the first sentence of the policy,
which states: "AGLIC WILL PAY you the Insured for loss resulting from
injury or sickness as limited and described in this policy," App. at 223a, the
terms clearly establish that the risk AGLIC insured was to pay only those
Allowable Expenses incurred during the term of the policy.
14

Examining the section captioned "BENEFITS", we find no express language

which would require that the Allowable Expenses must occur during the term
of the policy in order to warrant reinstatement. Allowable Expense is defined
as: "those charges for all expenses allowable under Part A and Part B of
Medicare but not payable by Medicare because of deductibles or coinsurance or
because they exceed Medicare's maximums except for the following." App. at
225a. Thereafter the policy lists six exceptions as follows:

Allowable Expense does not include

15

(a) Hospital expense beyond Medicare's maximum benefit period or lifetime

reserve;

16

(b) Psychiatric hospital expense beyond Medicare's maximum benefit period or

lifetime limit;

17

(c) Skilled nursing facility expense beyond Medicare's 100 day maximum
during each benefit period;

18

(d) Out-patient psychiatric expense beyond Medicare's calendar year

maximum;

19

(e) Charges by independently practicing physical therapist beyond Medicare's

calendar year maximum; and

20

(f) Expenses incurred in excess of reasonable charges as determined by

Medicare.

21

Id. at 225a.3 It is clear that the exceptions listed do not restrict payments for
Allowable Expense to only those expenses which were incurred during the term
of the policy.

22

Therefore, nothing in the language of the "BENEFITS" section supports

AGLIC's contention that the policy clearly manifests the intention of both
parties to enter into a contract under which the insurer was obligated to pay the
insured only Allowable Expenses actually incurred during the term of the
policy. Indeed, the terms of the policy support just the opposite conclusion.
When the definition of Allowable Expense is considered in light of the six
exceptions which we have reproduced above, it appears that the six specified
exceptions are the only limitations imposed on Houghton's insurance coverage.
An insured could reasonably be led to believe that the policy insured the
payment of certain medical expenses up to Medicare's maximum benefits.
There is nothing which is disclosed in the language to indicate that the AGLIC
may terminate the coverage without cause and absolve itself of liability at a
time when the insured needs health coverage the most--after suffering a serious
illness which results in prolonged and continuing medical treatment and
expenses. As the district court noted, the benefits which appear to be provided
by AGLIC under the policy "would be illusory if the insurer could pay the
allowable expenses for a limited period of time and then exercise the right to
refuse renewal despite the continuing medical expenses." App. at 272a.

2.
23

Moreover, our reading of the term "loss" as it is used in Houghton's policy

enhances the ambiguity that exists in the contract regarding the nature of the
risk which AGLIC insured. The word "loss" is nowhere defined in the policy. It
is instead used in connection with the terms "injury" and "sickness." Injury is
defined as "bodily harm due to an accident resulting in loss while this policy is
in force except loss in the first six months due to a pre-existing condition."
App. at 225a. Sickness is defined as: "ill health or disease resulting in loss
while this policy is in force except loss in the first six months due to a preexisting condition." Id. Thus, reading the terms of the policy as an integrated
whole, we are struck by the same "semantic circuity" that the district court
noted. App. at 273a. Under the terms of the policy, AGLIC has contracted to
pay Houghton for loss resulting from injury or sickness. Yet, "injury" and
"sickness" are themselves defined in terms of loss. Thus, the most crucial term
in the policy, "loss," is left undefined.

24

Additionally, the subsidiary clause "while this policy is in force" which appears
in both the "injury" and "sickness" definition could just as readily be construed
as modifying the terms "sickness" or "injury" rather than the term "loss"--a
construction urged upon us by AGLIC. If so interpreted, then benefits would be
payable when an injury or sickness occurred at any time during the term of the
policy with no limitation as to when such benefits would terminate.

25

Because the language of the policy is ambiguous 4 in this respect, we are bound
to construe the language against AGLIC, the insurer which drafted the policy.
See Buntin, supra; Blue Anchor Overall Co. v. Pennsylvania Lumbermen's
Mutual Insurance Co., 385 Pa. 394, 123 A.2d 413 (1956); Blocker v. Aetna
Casualty & Surety Co., 232 Pa.Super. 111, 332 A.2d 476 (1975).

3.
26

To bolster its argument, AGLIC cites two non-Pennsylvania cases: Bartulis v.

Metropolitan Life Insurance Co., 72 Ill.App.2d 267, 218 N.E.2d 225 (1966) and
Myers v. Kitsap Physicians Service, 1 Wash.App. 272, 460 P.2d 686 (1969),
rev'd, 78 Wash.2d 286, 474 P.2d 109 (1970). Neither of these authorities
supports AGLIC's position.

27

In Bartulis, the court determined that the medical insurance policy did not
provide coverage for post termination medical expenses because the insurer
had used "crystal clear" language to limit its liability to pre-termination medical
expenses. The policy there provided:

*28* * That any Certificateholder while insured for Hospital Expense Insurance
hereunder * * * shall have become confined as a patient in a legally constituted
hospital upon the recommendation and approval of a physician or surgeon legally
licensed to practice medicine, as a result of any injury. * * *
*29* * That any Certificateholder while insured for Surgical Operation Insurance
hereunder * * * shall have undergone any surgical operation specified in Section 9
hereof, as a result of any injury. * * *
30

218 N.E.2d at 226.

31

The court, relying upon these two clauses and a provision that specifically
entitled the policyholder to certain "Benefits after Cessation of Insurance" but
which did not cover the insured's claim, held that a hospitalization incurred
three months after the policy's cancellation was not covered under the policy
terms.

32

In Kitsap, the insured, in 1960, had suffered a kidney ailment which required
hemodialysis. At that time, he was covered by an insurance policy which
contained no exclusions for kidney disorder treatments. The policy was
subsequently modified, and the insurance company, relying on the modification
which deleted coverage for kidney ailments, refused to pay for the insured's
dialysis. The court of appeals, in affirming the trial court, construed the policy

provisions in favor of Kitsap Medical, the insurer. It is that opinion which

AGLIC has cited to us and on which AGLIC has relied.
33

AGLIC's reliance on the court of appeals opinion is misplaced, however,

because on appeal the Washington Supreme Court, en banc, reversed the lower
court. It held that the language of the original policy was ambiguous and
susceptible to more than one reasonable interpretation and thus, was to be
construed against the insurance company. Myers v. Kitsap Physicians Service,
78 Wash.2d 286, 474 P.2d 109 (1970). Significantly, it also held that the
insured's rights under the policy had become "vested" when he incurred his
illness and therefore those rights could not be terminated by the subsequent
modification of the policy. 474 P.2d at 111.

4.
34

The final provision on which AGLIC relies is a policy provision labeled

"EXTENSION OF BENEFITS", which appears in the Major Medical portion of
the policy issued to Houghton. As noted previously, Houghton, after she had
replied to AGLIC's advertisement, was issued a combined policy which
included both Basic and Major Supplemental Medical coverage. This provision
reads:

35
EXTENSION
OF BENEFITS. If you have incurred Acceptable Charges for an
injury or sickness before the termination date of this policy, we will continue to pay
benefits for such injury or sickness for the balance of the calendar year or for the
number of months this policy was in force, whichever is less.
36

App. at 9a. This provision, if given operative effect, would apparently limit the
post-termination expenses which AGLIC would otherwise be obliged to pay.
AGLIC so argued before us. However, this provision was not brought to the
attention of the district court. Nor did AGLIC argue or rely upon this clause
before the district court.

37

We can only surmise that the "EXTENSION OF BENEFITS" clause was not
brought to the attention of the district court because AGLIC, in moving for
summary judgment, for a reason that the record does not reveal, had provided
the district court with a copy of its insurance policy which only contained the
Basic Medicare Supplement policy. As a consequence, in making its arguments
to the district court, AGLIC relied only on the language contained in the Basic
Medicare policy. The "EXTENSION OF BENEFITS" clause is not a part of
that policy.

38

In the absence of "exceptional circumstances, an issue not raised in the district

court will not be heard on appeal." Altman v. Altman, 653 F.2d 755, 758 (3d
Cir. 1981) (quoting Franki Foundation Co. v. Alger-Rau & Associates, Inc.,
513 F.2d 581, 586 (3d Cir. 1975)). See also Singleton v. Wulff, 428 U.S. 106,
120-21, 96 S.Ct. 2868, 2877, 49 L.Ed.2d 826 (1976); Newark Morning Ledger
Co. v. United States, 539 F.2d 929, 932-33 (3d Cir. 1976). We have recognized
that exceptional circumstances exist "when the public interest requires that the
issue be heard or when manifest injustice would result from the failure to
consider the new issue." Altman, supra, 653 F.2d at 758. Here, AGLIC has not
demonstrated any exceptional circumstances which would require us to depart
from our established rule. Indeed, no reason has been suggested why we should
excuse AGLIC's failure to raise this issue before the district court. AGLIC drew
the policy and therefore, cannot credibly claim unfamiliarity with its terms.
Moreover, if this provision conclusively establishes AGLIC's interpretation of
its policy, there is even less reason to excuse AGLIC's failure to call the district
court's attention to it.5

B.
39

We also reject AGLIC's argument that instead of granting final relief on a

summary judgment motion, the district court should have held an evidentiary
hearing to determine "how much and for how long the insurer was obligated to
pay [the Allowable Expenses]." Appellant's brief at 12.

40

We agree with the district court's determination that there were no disputed
material issues of fact. In moving for summary judgment, AGLIC had stated
that there were no material issues of fact and that "it may be assumed that
plaintiff [Mary Houghton] has incurred medical expense which could be
'allowable expenses' under the policy if it were still in effect." App. at 216a.

41

Houghton submitted affidavits of her treating physicians in support of her claim

that her continued expenses resulted from the stroke she suffered in March
1979. AGLIC did not dispute those affidavits except for making a general
demand for proof. App. at 265a. A mere demand for proof does not create a
material issue of fact requiring the denial of a motion for summary judgment.
See, e.g., Tunnell v. Wiley, 514 F.2d 971, 976 (3d Cir. 1975) ("Given the
opportunity to respond to a movant's affidavits, an adverse party may not rest
upon a mere cryptic and conclusionary allegation in his pleading, but must set
forth specific facts showing that there is a genuinely disputed factual issue for
trial"); Bolt Associates, Inc. v. Alpine Geophysical Associates, Inc., 365 F.2d
742, 747 (3d Cir. 1966) (must present facts which indicates that material issues
of fact exist); Robin Construction Co. v. United States, 345 F.2d 610, 613 (3d

Cir. 1965) (cannot defeat a summary judgment motion by "mere formal denials
or general allegations which do not show the facts in detail and with
precision").
42

Moreover, AGLIC cannot assert the "EXTENSION OF BENEFITS" clause for

the first time on appeal in order to create a material issue of fact as to the period
of time for which it can be held responsible for making payments for posttermination Allowable Expenses incurred by Houghton. Having failed to urge
this consideration before the district court, AGLIC cannot now be heard to
complain.

43

In its order, the district court required AGLIC to "pay the allowable expenses as
provided under the insurance policy," App. at 276a, but did not expressly state
the maximum monetary amount for which AGLIC could be held contractually
liable. Our examination of Houghton's policy reveals that AGLIC promised to
pay up to $250,000.00 "Maximum Lifetime Benefit." App. at 10a. We hold,
therefore, that AGLIC is liable for payment of Allowable Expenses as provided
under its policy for Houghton's stroke related medical expenses up to the
amount of $250,000.00.

C.
44

As its final argument, AGLIC contends that the district court order is unclear as
to the relief actually granted. AGLIC claims that the district court held that the
AGLIC had properly terminated the policy by giving notice of non-renewal.
Yet, AGLIC claims, despite the district court's holding that the policy term had
not been renewed, it is now faced with an interpretation that the policy has
been, in effect, reinstated. AGLIC therefore seeks a modification of the district
court's order which would state that the policy was indeed terminated, and not
reinstated.

45

The short answer to AGLIC's argument is that the district court, while holding
that AGLIC took the necessary steps to decline renewal of the policy,
nevertheless, held that AGLIC could not cancel its liability to Houghton for her
post-termination medical expenses arising from her stroke. This conclusion is
made crystal clear when the district court's order is read in light of the relief
sought by Houghton in her motion for summary judgment (which was granted),
and the discussion in the district court's memorandum opinion.

46

Houghton, in moving for summary judgment, asked that her policy be

reinstated and that AGLIC be required to pay for all Allowable Expenses. The

district court opinion makes it clear that in granting her motion for summary
judgment, the policy was reinstated, but only for the limited purpose of
establishing AGLIC's liability for Houghton's stroke related medical expenses.
As we read Houghton's Major Medical policy, AGLIC's liability will be limited
to the $250,000.00 "Maximum Lifetime Benefit."6
III.
47

The order of the district court dated February 3, 1982 which granted
Houghton's motion for summary judgment will be affirmed.

AGLIC is not licensed to do business in Pennsylvania. AGLIC claimed in its

Answer that the policy was erroneously issued to Houghton

The district court applied the substantive law of Pennsylvania in interpreting

the "Medicare Booster" policy issued to Houghton by AGLIC. Since neither of
the parties argues that the law of another state is applicable in this diversity
action, and because the policy was issued in Pennsylvania to a Pennsylvania
resident, our analysis too will be guided by Pennsylvania law

The policy that was issued to Houghton had the following additional limitation:
"[t]he Part B deductible amount unless you are actually hospitalized." App. at
8a. The policy addressed by the district court which had been furnished to it by
AGLIC, contained only the six exceptions listed in the text. The parties make
no issue of this difference in number of exceptions or with respect to their
content

This ambiguity in the policy is not cured, despite AGLIC's claim to the
contrary, by the policy term which provides for the payment of certain medical
expenses arising from pre-existing conditions. The policy provides that AGLIC
"will not reduce or deny a claim for loss that begins more than six months after
your Issue Date because a disease or physical condition had existed before your
Issue Date." App. at 224. That provision does not establish that the policy only
covers loss resulting in an Allowable Expense during the term of the policy.
Instead, this provision does no more than provide for payment for certain
expenses resulting from a pre-existing condition as a collateral, additional
benefit which is in no way intended to affect the benefits to be paid for losses
resulting from an injury or sickness which occurred during the term of the
policy

Even if we were to overlook our established practice and were to consider the
"Extension of Benefits" provision, we would still have serious reservations

about giving effect to this clause. The clause as drawn and presented appears to
be ambiguous and susceptible of misleading an insured. The caption,
"EXTENSION OF BENEFITS," implies that benefits under the policy are
being extended. In fact, however, under this clause, the policy coverage appears
to be restricted. Moreover, if we were called upon to construe this clause, we
would not be surprised if an insured argued that such a clause constitutes a
limitation or restriction falling within the doctrine established in Hionis v.
Northern Mutual Insurance Co., 230 Pa.Super. 511, 516-16, 327 A.2d 363, 365
(1974) (burden on insurance company to establish that an exclusion has been
read and explained to the insured and that the insured understood it)
6

In light of our disposition, we need not address the estoppel argument which
Houghton has advanced