This section contains the nature of the case and procedural background.

Kirk stated in his application for the insurance policy that he had not smoked in the previous twelve months and that he had never smoked cigarettes. Those statements were false. Kirk had smoked since 1973, and during the month he applied for the policy he was smoking approximately 10 cigarettes per day. Both Kirk and D, who was present when the application was completed, knew that the statements were false. Kirk's smoking practices were material to the risk which was assumed by P when it issued the policy because it relied upon his statements when it established the premiums to be paid. Kirk Johnson died on July 17, 1988, within two years of the application for insurance, for reasons unrelated to smoking. The trial determined that P would have issued the policy but with a higher premium. The court refused to declare the life insurance policy void ab initio. The district court concluded that Pennsylvania courts would reduce the proceeds of the policy by the amount by which the premium would have been enlarged had P known of Kirk Johnson's smoking history or else the Pennsylvania courts would reduce the face amount of the policy to that amount of insurance that would have been purchased by the amount of premiums that were in fact paid. P appealed.

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