dissenting:

We review the district court’s interpretation of state law based upon the clearly wrong standard. Camacho v. Civil Service Commission, 666 F.2d 1257, 1262 (9th Cir. 1982); S.A. Empresa De Viacao Aerea Rio Grandense v. Boeing Co., 641 F.2d 746, 752 (9th Cir.1981); C.R. Fredrick, Inc. v. Borg-Warner Corp., 552 F.2d 852, 856 (9th Cir. 1977). I conclude that the district court’s interpretation of the Montana case law clearly is in error. We are bound to follow decisions of the highest state court in resolving diversity cases. Erie Railroad v. Tompkins, 304 U.S. 64, 78 , 58 S.Ct. 817, 822 , 82 L.Ed. 1188 (1938); Stoddard v. Stoddard, 641 F.2d 812 (9th Cir.1981).

The district court held that the “good health” clause in the insurance policy was not a condition precedent, finding that it “merely establishe[d] that during the interim period between initial application and payment of the first premium the applicant was not provided coverage under the insurance contract.” The district court found an “inherent ambiguity” in the good health provision and construed it against the insurer.

Two Montana Supreme Court decisions, however, dictate a finding that the good health clause is not ambiguous and that it is a condition precedent which must be strictly fulfilled. In Schroeder v. Metropolitan Life Insurance Co., 103 Mont. 547 , 63 P.2d 1016 (1937) (Schroeder), the Montana Supreme Court held an insurance policy void because the clause “the Insured is not alive or is not in sound health” was a condition precedent. The insured had not fulfilled the condition because she had a serious heart affliction on the date the policy was issued. In McDonald v. Northern Benefit Association, 113 Mont. 595 , 131 P.2d 479 (1942) (McDonald), the Montana Supreme Court, relying on Schroeder , construed a provision that “there will be no liability on the part of the Ass’n. unless and until the certificate of membership is issued and delivered to me while I am ... in good health, free from disease” as a condition precedent to liability of the insurer. The insured was not in gqpd health on the date the insurance certificate issued. The language in the policy in the case before us is substantially identical to the language held to constitute a condition precedent by the Montana Supreme Court in Schroeder and McDonald . These decisions by the highest state court require us to hold that the good health clause in this case is not ambiguous. See also Hildebrandt v. Washington National Insurance Co., 181 Mont. 231, 234 , 593 P.2d 37, 39 (1979) (citing Schroeder and stating that “insurance contracts are still subject to the-general rules of contract law, and our liberal construction should not abrogate or ignore critical provisions of a contract”).

Pelican v. Mutual Life Insurance Co., 44 Mont. 277 , 119 P. 778 (1911) (Pelican), relied on by the majority, is distinguishable. Pelican focused on whether the insured made a fraudulent representation to the insurer. The inquiry was relevant because the policy' stated that “[a]ll statements made by the insured shall, in the absence of fraud, be deemed representations and not warranties.” 44 Mont. at 287 , 119 P. at 780 (summary of action). In the absence of this policy language, fraud would not have been relevant to a determination whether the good health clause was a warranty or condition precedent. In the case before us, the policy contains a statement similar to that quoted above from Pelican . The district court, however, correctly separated its discussion of this language from its discussion of whether the good health clause was a condition precedent.

I would reverse the judgment of the district court and hold that the “good health” clause was a condition precedent. I would remand for consideration of whether the condition precedent was met.