776 F.2d 157 (7th Cir. 1985), 84-1306, Prudential Ins. Co. of America v. Sipula

Docket Nº:84-1306.
Citation:776 F.2d 157
Party Name:The PRUDENTIAL INSURANCE COMPANY OF AMERICA, Plaintiff-Appellant, v. Christopher P. SIPULA, Defendant-Appellee.
Case Date:October 30, 1985
Court:United States Courts of Appeals, Court of Appeals for the Seventh Circuit
 
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776 F.2d 157 (7th Cir. 1985)

The PRUDENTIAL INSURANCE COMPANY OF AMERICA, Plaintiff-Appellant,

v.

Christopher P. SIPULA, Defendant-Appellee.

No. 84-1306.

United States Court of Appeals, Seventh Circuit

October 30, 1985

Argued Nov. 13, 1984.

Page 158

Michael P. Mullen, Burke, Griffin, Chomicz & Wienke, Chicago, Ill., for plaintiff-appellant.

Barry L. Kroll, Jacobs, Williams & Montgomery, Ltd., Chicago, Ill., for defendant-appellee.

Before ESCHBACH and COFFEY, Circuit Judges, and DOYLE, Senior District Judge. [*]

ESCHBACH, Circuit Judge.

The primary question presented in this appeal is whether, in the absence of any express restrictions on post-termination activities in an insurance agent's contract, an insurance company has a right to prevent a former agent from selling policies of different insurance companies to his former customers when the new sales result in the cancellation of the original policies he sold or serviced for his former employer. The district court dismissed the insurance company's complaint for failure to state a claim upon which relief could be granted. For the reasons stated below, we will reverse the judgment of dismissal and remand for further proceedings.

I

In considering the propriety of the district court's dismissal of this action, we must accept the well-pleaded factual allegations of the complaint as true. Hishon

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v. King & Spalding, 467 U.S. 69, 104 S.Ct. 2229, 2233, 81 L.Ed.2d 59 (1984); Car Carriers, Inc. v. Ford Motor Co., 745 F.2d 1101, 1104 (7th Cir.1984), cert. denied, --- U.S. ----, 105 S.Ct. 1758, 84 L.Ed.2d 821 (1985). We are of course not bound by the plaintiff's legal characterizations of the facts. See Car Carriers, 745 F.2d at 1106-07.

On May 31, 1977, defendant Sipula entered into an "Agent's Agreement" in Ottawa, Illinois, with Prudential Insurance Company of America ("Prudential"). According to the agreement, which was drafted and printed by Prudential, Sipula agreed to "promote the success and welfare of [Prudential]; conform to and abide by its instructions, rules and requirements; and refrain from engaging in any other pursuit or calling from which [he would] receive financial remuneration while this Agreement is in force." Agreement Sec. 1 (emphasis added). As part of this general obligation, Sipula agreed to "canvass regularly for applications for insurance policies and annuity contracts of the kinds and upon the plans sold by [Prudential]," to "advocate the class of insurance most suitable to the applicant's position," to "not press for a larger amount of insurance than the applicant is able to maintain," to "endeavor to keep in force the existing insurance of [Prudential]," to "secure the reinstatement of insurance that has lapsed," and to "perform all duties, incident to the care and conservation of [Prudential]'s business, that may be assigned to [him] from time to time by [Prudential]." Id. Sec. 2. Additional duties regarding, inter alia, premiums, reports, accounting, and expenses were set forth. The agreement also stated that "all books, records, and supplies furnished to [Sipula] by [Prudential] shall be the property of [Prudential]." Id. Sec. 7(b).

The agreement provided further that Sipula's "appointment as Agent and this Agreement may be terminated either by [Sipula] or [Prudential] at any time." Id. Sec. 13 (emphasis added). Upon termination, Sipula was required to:

(1) "submit books and records [of accounts indicating money received by Sipula on Prudential's behalf] for an inspection and accounting," id. Sec. 7(a);

(2) "hand over" "to a proper representative of" Prudential "all books, records, and supplies furnished" to Sipula by Prudential, id. Sec. 7(b);

(3) grant a "prior lien" to Prudential for any indebtedness from Sipula "upon any amounts due [Sipula], [his] executors, administrators or assigns, by the terms of this Agreement, until the amount of such indebtedness is fully paid," id. Sec. 14; and

(4) authorize Prudential to release to third parties, upon request, information regarding Sipula's "personal character, habits, ability, and cause for leaving the service" and to release [Prudential] "from all liability for damages in connection with the furnishing of such information," id. Sec. 15.

No other post-termination obligations were expressly imposed. No mention was made of the confidential nature of policyholder information.

From approximately June 20, 1977, to July 9, 1982, Sipula was employed by Prudential pursuant to the agreement discussed above and was assigned to Prudential's State Park District Office in Ottawa, Illinois. During his employment with Prudential, Sipula sold several types of Prudential whole-life insurance policies to customers in or about the Ottawa, Illinois, area. He also "serviced" these new policyholders as well as other policyholders assigned to him whose policies had previously been issued by Prudential.

A Prudential whole-life insurance policy is a contract between the policyholder and Prudential that is, in the words of the policy, "insurance for the whole of life." Under the policy, Prudential agrees to pay a specified sum to the policyholder or beneficiary on the death of the insured, and to pay dividends and other benefits during the life of the policy. The policies are based on actuarial assumptions that anticipate a long-term contractual relationship. The premium rates, estimates of expected dividends,

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cash surrender value accumulations, mortality assumptions, and other aspects of the policy are premised on the contract remaining in force for a number of years. It has been Prudential's experience that whole-life policies typically remain in effect for more than fifteen years. The policies, however, may be cancelled by the policyholder at any time. Thus, the fifteen-year figure only represents an average.

After selling a whole-life policy, Sipula received first-year commissions from Prudential equal to approximately 40 to 55% of the first-year premiums paid by the policyholder. Sipula also received service commissions on policies he was assigned to service, but had not sold.

During his employment with Prudential, Sipula was given access to information maintained on each policyholder with whom he dealt. This information "was compiled by Prudential at considerable effort and expense and is not readily available from other industry sources." Complaint p 19. The information "included, inter alia, the identity of Prudential policyholders, policy amounts, premium rates, ages, condition of health, available life insurance premium ratings, policy anniversary dates, premium payment dates, beneficiary names, settlement options chosen, dividend options chosen, dividend accumulations, annual increases in cash surrender values and accumulated cash surrender values." Id. According to the complaint, Sipula "was expressly and impliedly bound to treat such confidential and proprietary information as the property of Prudential and not to disclose such information to third parties or use such information on his own account or on account of others." Id.

On or about July 9, 1982, Sipula was terminated as a Prudential agent. He then became an agent for a number of other life-insurance companies and competed with Prudential in the sale of whole-life insurance policies. When he was fired, Sipula threatened to cause the termination of Prudential whole-life insurance policies that he had either sold or serviced for Prudential. After his discharge, he did cause the termination of such policies. Like Prudential, the insurance companies for which Sipula now worked also paid and will continue to pay first-year commissions equal to approximately 50% of the first-year premiums for the new policies Sipula sold that replaced the Prudential policies he sold or serviced. Sipula used "without justification" the information about Prudential policyholders he had acquired as a Prudential agent in the sales of new policies of other companies that resulted in the cancellation of the original Prudential policies that he had either sold or serviced. He also did not comply with regulations issued by the Illinois Department of Insurance that require the filing, by the agent causing the replacement of life-insurance policies, of a Notice Regarding Replacement of Life Insurance. Sipula also failed to comply with Illinois regulations that require that the policyholder be given a Comparative Information Form.

Prudential filed this diversity action in federal court on February 16, 1983, and directed a veritable fusillade of legal theories at Sipula in order to halt his activities. Only the first five counts of the amended complaint, however, are relevant to this appeal. In that amended complaint...

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