Stowe Tp. v. Standard Life Ins. Co. of Indiana
| Citation | 507 F.2d 1332 |
| Decision Date | 24 January 1975 |
| Docket Number | No. 74-1409,74-1409 |
| Parties | STOWE TOWNSHIP, Appellee, v. STANDARD LIFE INSURANCE COMPANY OF INDIANA, Appellant. |
| Court | United States Courts of Appeals. United States Court of Appeals (3rd Circuit) |
William L. Standish, William H. Powderly, III, Alan G. Keith, Reed, Smith, Shaw & McClay, Pittsburgh, Pa., for appellant.
Melvin Schwartz, William A. Johnson, Cooper, Schwartz, Diamond & Reich, Pittsburgh, Pa., for appellee.
On appeal from the United States District Court for the Western District of Pennsylvania (No. 73-44).
Before ALDISERT, ADAMS and HUNTER, Circuit Judges.
The issue presented on this appeal is whether the plaintiff made out a prima facie case to reform a group annuity contract. We conclude that insufficient evidence was produced to sustain the finding of reformation, and consequently vacate the judgment of the district court, 372 F.Supp. 433.
To secure retirement benefits for its municipal employees and commissioners, plaintiff Stowe Township, prior to 1970, entered into a series of individual deferred annuity policies with the defendant Standard Life Insurance Company of Indiana. Each individual annuity policy contained, inter alia, a provision for cash surrender value on termination.
In 1970, an agent of Standard Life, Mr. Markotan, recommended a new group contract of the deposit administration type to replace the individual policies as a means of funding and implementing Stowe's retirement plan. Stowe thereupon entered into the group annuity contract which is the basis of the present action. Under the group contract, Stowe deposited funds with Standard Life and, subject to certain adjustments to the pool of money thus created, Standard Life was to provide individual annuities to Stowe's employees and commissioners as their retirements occurred. 1 The new group contract did not in explicit terms grant cash value on termination. When the new group plan became effective, the individual policies were cancelled and reserve monies under the individual contracts were applied to the new group fund.
In 1972 Stowe terminated its group contract with Standard Life, and demanded that, pursuant to the termination clause, 2 Standard life issue individual paid-up deferred annuity policies for named municipal personnel. Also, as part of its demand, Stowe insisted that the new individual policies 'have cash values the same as previously issued policies of the same type.' 3 In response to Stowe's demand, and in conformity with the terms of the group contract, Standard Life agreed to issue paid-up deferred annuities, but refused to include a provision for cash surrender value.
Maintaining that the group contract should be either construed or reformed to provide for policies with cash surrender value clauses, Stowe filed suit in the Common Pleas Court of Allegheny County. Based on diversity of citizenship, the suit was removed to the United States District Court for the Western District of Pennsylvania. 28 U.S.C. 1332, 1441(b), 1446. Both parties concede that the law of Pennsylvania governs the dispute.
The district court held before trial that the group contract as written did not include a right to cash surrender values upon termination, nor did Pennsylvania law superimpose such a provision onto a contract of this sort. Neither party has questioned this holding. Accordingly, to create a cash surrender value provision in the group contract would require a reformation of the group contract. The principal thrust of Stowe's position was that the insurance agent had proposed the group contract to Stowe as a change in its manner of funding retirement benefits. In its pretrial narrative, Stowe alleged that Standard Life had made assurances that the value and costs of the new group plan would be at least as attractive to Stowe as the individual policies it replaced. Also, Stowe asserted that under these circumstances Standard Life had a duty-- which it had breached-- to advise Stowe that the group contract would not carry cash surrender values upon termination. In effect, Stowe contended that the group contract should be reformed to incorporate the cash surrender provisions from the previous individual contracts.
In response, Standard Life insisted that no such duty to explain existed where, as here, a group contract embodying a wholly new concept of administering and funding a retirement program was substituted for a series of individual annuity contracts. The situation presented here, claimed Standard, was not a renewal.
At the non-jury trial that ensued, Stowe presented as its sole witness Mr. Bash, President of Standard Life, and interrogated him as on cross-examination. On the issue of advice by Standard Life to Stowe regarding the absence of cash surrender value for the group policy, the following colloquy occurred:
MR. SCHWARTZ:
Q. Well isn't it true, Mr. Bash, that the prior policies had cash value? We have gone through this once before, is that correct?
MR. BASH:
A. Yes.
Q. Isn't it also true that you never advised, you, being the company, and to your knowledge never advised the Stowe Township Commissioners that once they switched these policies, there would never be any way for them to get the money back?
A. And I am saying that I would imagine in the discussions that the agent would have, that question very logically could have come up.
Q. You never advised them either collectively or individually, did you, Mr. Bash?
A. I cannot say to you what the agent may or may not have said to them.
Q. I am not interested in what the agent may or may not have said. I am interested in what you know personally and what you did personally.
A. I don't know that, and I have answered that question, I believe, that so far as myself personally, so far as the home office is concerned, I don't believe that they were ever-- that there was ever any contact between the company and the borough or the township, excuse me.
Trial trnscript 58-59.
Two exhibits were introduced by Stowe: an application on behalf of the Township for a group annuity contract solicited by the agent, Mr. Markotan, and a letter of October 25, 1972 from Stowe to Standard Life demanding termination arrangements satisfactory to the Township, and reflecting the Township's expectation that the policies carried cash surrender values. 4
Following Mr. Bash's testimony, Stowe rested. Standard Life elected to present no defense. Mr. Markotan was in the courtroom but was not called by either party. No person who had actually participated in the agreement, or in any preparatory negotiations, was requested to give evidence with respect to any assurances or explanations from any agent of Standard Life regarding the operation of the group contract.
By opinion and order dated February 28, 1974, the district court concluded that:
While this could in no sense be called a renewal or extension of an existing policy, there was a very definite continuation of the relationship between the Plaintiff and the Defendant which required the differences and distinctions between these contracts to be explained to the Plaintiff. It is clear from the testimony that no such explanation was made. (District court opinion at 440 of 372 F.Supp.)
The district court found for Stowe, predicated on two conclusions. First, the court determined that, as a matter of law, where one insurance plan evolves from another, an insurer is under a duty to explain any differences in benefits on pain of being held to the more generous benefits of an earlier contract; and, second, that a sufficient showing had been made in this case that the insurer had not explained any differences in the benefits.
Under Pennsylvania law, reformation of an insurance contract is possible where written conditions are changed without any explanation by the insurance company or its agents. 5 In particular, when an insurance renewal contract curtails benefits from those provided by the original insurance policy, insurers have been held to the terms of the original policy. 6
In the insurance renewal cases relied on by the district court, it was established beyond doubt that the new policies were held out as otherwise unaltered versions of original policies. Thus, in Overholt v. Reliance Insurance Co., a leading case, the Pennsylvania Supreme Court declared:
When the defendant company inquired through its agent whether the policy was to be renewed, this was an offer to make a new contract. In the absence of circumstances to indicate that a different meaning was intended, this meant a contract chronologically 'new,' but in form and substance, identical with the original; no other interpretation is reasonable and can be maintained. 7
In the situation here, however, presuming that the facts were established as alleged, application of the renewal rule would constitute an extension of that rule beyond its traditional ambit. Although admittedly to effectuate the same goal as the earlier agreements here a totally new plan was adopted; there was no mere renewal.
While it is thus open to question whether under the facts alleged a Pennsylvania court would conclude that reformation was permissible, we do not reach the issue of the correctness of the district court conclusion in that regard. For, even assuming the legal principle enunciated in the district court opinion to be compatible with Pennsyvania law, inadequate evidence was presented to sustain the judgment in any event.
In the insurance renewal cases, the crucial elements were the existence of the first policy and the terms of its coverage; the renewal; the lessened coverage of the second policy; and finally, evidence regarding the lack of warning by the insurance company about the diminished protection. In the present case, the existence and scope of coverage of the two contracts are admitted. However, even under its own view of the law, in order to prevail in its reformation...
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