Knox v. Anderson, Civ. No. 1382.

• Citation: 159 F. Supp. 795
• Decision Date: 17 February 1958
• Docket Number: Civ. No. 1382.
• Parties: Roger I. KNOX, Plaintiff, v. J. Leland ANDERSON, Defendant.
• Court: United States District Courts. 9th Circuit. United States District Court (Hawaii)

159 F. Supp. 795

Roger I. KNOX, Plaintiff, v. J. Leland ANDERSON, Defendant.

Civ. No. 1382.

United States District Court D. Hawaii.

February 17, 1958.

Smith, Wild, Beebe & Cades, J. Russell Cades, William B. Borthwick, Honolulu, Hawaii, for plaintiff.

Robertson, Castle & Anthony, J. Garner Anthony, William F. Quinn, Honolulu, Hawaii, Tannenbaum, Steinberg & Shearer, Bertram Fields, Beverly Hills, Cal., for defendant.

McLAUGHLIN, District Judge.

Is the purchase of $150,000 of life insurance a "do-it-yourself" project?

In 1952 Roger I. Knox, 38, a professional biologist and graduate of Stanford University, lived with his wife Ellen and their three young children on the "Valley Isle" of Maui, 70 miles from metropolitan Honolulu. Maui, with its volcanic soil, is a sugar producing island of the Hawaiian group. Knox was employed on one of the sugar plantations as a field superintendent. He was in 1952 earning a salary of $8,100 a year and had an income of approximately $1,500 from investments. Like other plantation executives Knox and his family lived in a rent-free company house, had a gardener furnished him to care for its surrounding two acres, and was supplied with the use of a company automobile. His position in plantation society seemed economically secure. Knox looked forward hopefully to the day when he would be promoted to assistant manager of his plantation at a salary of $12,000 a year.

Son of a beekeeper, J. Leland Anderson, former Mormon missionary and once a Real Silk salesman, had been in the insurance business for 25 years principally in the Los Angeles area where he resides. His specialty was selling bank financed insurance. In the past eight years he had "delivered" twenty-five million dollars of insurance so financed. When his wife persuaded him to take a vacation, their visit to the Hawaiian Islands proved little solace to him. The fabled charms of Polynesia left his one great desire unaffected. He wished only to sell more insurance. While other vacationers lolled and enjoyed the sun Anderson investigated the area for contacts. He became convinced that Hawaii could use his service of bank financed insurance. To this end Anderson returned to the Islands after his vacation, and in 1952 established an office in Honolulu, which was essentially the same in organization as the one he maintained in Los Angeles. The basic ingredients were Anderson's abilities as a salesman and the bank connections of his associate, William Van de Carr, which enabled loans to be put through once Anderson had sold the program.

Bank financed insurance is not a revolutionary concept. The method prescribes a bank loan. Instead of the loan being paid to the borrower it is utilized by the bank to pay his insurance premiums as they become due. Under the present tax law the interest paid to the bank on the loan is deductible for income tax purposes, and the saving thus incurred can be used to purchase additional insurance coverage if desired. The amount of this saving depends on the tax bracket of the insured. Below the 40% bracket his savings would be negligible and below 30% non-existent. When Anderson applied to the Insurance Commissioner for a license to sell bank financed insurance in Hawaii he was warned about selling procedures, especially where the client was a family man on a fixed income.

In the field Anderson had his bird dogs. The function of a bird dog to a large extent is implied by the name itself. He precedes the agent into the field, searches for information on prospects, and holds their interests at bay until the principal agent can arrive and consummate the sale. In approaching a prospect, Anderson instructed Frank Kreidler, his number one bird dog:

"* * * Keep them in anticipation of meeting me, explaining to them that I will be able to give them all the information they desire * *

"I would suggest that after you get them examined and the applications are obtained that the applications, with the information blanks, which I am enclosing for your use in obtaining the necessary information, be mailed to me. I will, according to common procedure, fill in the amount I think the individual should purchase, sign the application and forward it back to you to be turned in to your branch office. I realize this will take some extra time but it is most important that the application go through my hands before going into the company."

The motto was to be to get there "Firstus with the Mostus." To this end Anderson obtained the cooperation of E. E. Bodge, then a prominent member of the Honolulu business community. Bodge signed and sent a letter which he and Anderson had prepared for prospects on Maui. The one received by Knox, dated August 2, 1952, read as follows:

"I have taken the liberty of giving your name together with a few other prominent citizens of Maui to Mr. J. Leland Anderson and his associate, Mr. Frank M. Kreidler.

"Mr. Anderson, who is an Insurance and Annuity Counselor for the New York Life Insurance Company, is in the islands for a short stay and brings with him the very latest information about a bank finance plan. This plan is a little new in Hawaii but has been in vogue on the mainland for many years.

"Mr. Anderson also writes this plan for the Manufacturers Life Insurance Company for which we are the Territorial Agents. This plan is new to me and after discussing it with some of the other agents in Honolulu, I was a little skeptical about the legality of it as some of the insurance men here are not too enthusiastic about this plan. In discussing it with our outside auditor and our tax consultant, I find that the plan is entirely legal.

"One of the reasons why some of the insurance agents are not too enthusiastic about this plan is that their companies are not in a position to write this particular type of insurance on account of some rules and regulations which have been in force for many years in their companies. Another reason is that some insurance companies' policies are not acceptable to the banks.

"Mr. Anderson has written quite a few of these policies in the short stay that he has been here—among which are a number written by the Manufacturers Life Insurance Company through our firm.

"I feel sure you will be interested in this matter if you care to give Mr. Anderson or his associate, Mr. Kreidler, a few minutes of your time without any obligation whatsoever."

The first contact was made by Kreidler. He called on Knox and asked if he had read Bodge's letter. Knox said he had but was attempting to decrease the size of his insurance expenditures. Kreidler then threw out the bait, and in substance this was the conversational action and reaction:

"How would you like to get twice as much insurance coverage and pay no more than you are paying at present?"

"Who wouldn't, but how can it be done?" inquired Knox.

The answer was bank financed insurance.

Knox at this time held seven insurance policies on himself and his family with a total coverage of $36,000. When Kreidler returned to Honolulu from Maui he had Knox's preliminary applications for $50,000, $75,000 and $100,000 of additional coverage. Knox had not been asked what his tax bracket was because he confessed confusion about taxation, but the applications contained information on salary, age, and present insurance policies. Evaluating these facts, Kreidler offered the opinion to Anderson that $100,000 was too much insurance for Knox. The reply was that he, Anderson, would determine how much insurance was enough.

As part of what he called his modus operandi Anderson demanded four prerequisites of clients before he would render his service. Knox was to be medically examined to determine insurability; he would put his old insurance policies in the hands of Anderson to be analyzed for their collateral value; Ellen Knox would be present with her husband at all meetings with Anderson; and the schedule which Anderson would draw up explaining the operation of the insurance plan in Knox's case was not to be shown to any other insurance agent. When these conditions were agreed to, Anderson wrote Knox that he would come to Maui and would "personally present the program and show you exactly how it will work in your case."

Anderson arrived at the plantation house to find a warm greeting from the Knoxes. Bodge's letter had made an impression. The Knoxes knew of Bodge and looked upon him as being one of the "big" men of Hawaii. They were frankly flattered to have been singled out for this visit by a man to whom Bodge had referred as an annuity and insurance counselor of the New York Life Company. Kreidler had called Anderson the greatest man in the insurance field. Anderson was somewhat embarrassed by the build-up which had preceded him. "I may not be the greatest," he protested, then conceded with a modest laugh "but perhaps there are none greater."

To prove this latter point Anderson offered his credentials, testimonials written by Mainland clients. One such letter lauded Anderson's "new approach" to insurance coverage. A businessman had written from Idaho, "Your Bank Financing Plan represented to me the only constructive thinking in the way of Life Insurance Service that had been presented to me in many years. * * * You have rendered a genuine service to us." The Executive Vice President of a refining company stated, "In short you have created a plan and helped work the plan for me."

In matters of personal finances Knox had always found it more convenient to supply an accountant friend with income information and have his tax forms filled in for him each year. His business was growing sugar and to him an income bracket held no more interest or significance than did some of the more complex aspects of the tax law. His insurance matters likewise had been tended to by others. On a rural island community like Maui it is not considered naive if one places trust in the advice of a neighbor insurance man as to how much coverage one should carry....