Brown v. Royal Maccabees Life Ins. Co.

• Decision Date: 03 March 1998
• Docket Number: No. 96-8119,96-8119
• Parties: , 98 CJ C.A.R. 1338 Francis D. BROWN; Michael A. Olsen; and Kirk D. Smith, Wyoming residents, suing on behalf of themselves and all other individuals similarly situated, Plaintiffs-Appellants, v. ROYAL MACCABEES LIFE INSURANCE COMPANY, a Michigan Corporation, and a member of Royal Insurance Group, Defendant-Appellee.
• Court: U.S. Court of Appeals — Tenth Circuit

Page 1236

137 F.3d 1236

63 A.L.R.5th 857, 98 CJ C.A.R. 1338

Francis D. BROWN; Michael A. Olsen; and Kirk D. Smith Wyoming residents, suing on behalf of themselves and all other individuals similarly situated, Plaintiffs-Appellants, v. ROYAL MACCABEES LIFE INSURANCE COMPANY, a Michigan Corporation, and a member of Royal Insurance Group, Defendant-Appellee.

No. 96-8119.

United States Court of Appeals Tenth Circuit.

March 3, 1998.

Glenn E. Smith, Glenn E. Smith & Associates, Cheyenne, WY, for Plaintiffs-Appellants.

Keith R. Verges (Mark T. Davenport, Figari & Davenport, L.L.P., Dallas, TX; and William M. McKellar and Peter K. Michael, Boley & McKellar, P.C., Cheyenne, WY, with him on the briefs), Figari & Davenport, L.L.P., Dallas, TX, for Defendant-Appellee.

Before PORFILIO, McKAY, and LUCERO, Circuit Judges.

PORFILIO, Circuit Judge.

Francis Brown, Michael Olsen, and Kirk Smith, named plaintiffs in an uncertified class action, ¹ appeal a district court order granting summary judgment for defendant Royal Maccabees Life Insurance Company (Maccabees). This appeal requires us to answer the following question of state law:

Under Wyoming law, is an illustration used to sell a universal life insurance policy considered part of the insurance contract when the illustration and the policy contain conflicting provisions and the insured party relied on the illustration in entering the insurance contract?

We must also determine whether, under Wyoming law, the provisions of a Maccabees insurance policy control over the provisions contained in an illustration used to sell the policy. Finally, given the undisputed facts presented here, we must determine whether, under Wyoming law, Maccabees is estopped from asserting certain provisions of a universal life insurance policy, based on plaintiffs' alleged detrimental reliance on the provisions of an illustration used to sell the policy. We ultimately conclude (1) an illustration is not considered part of an insurance contract under Wyoming law simply because the insured party relied on the illustration in entering the insurance contract and the policy and illustration contain conflicting provisions; (2) the provisions of the Maccabees insurance policy control over the provisions of the illustration used to sell the policy; and (3) Maccabees is not estopped from enforcing the provisions of the insurance policy. We therefore affirm the district court's order granting summary judgment for Maccabees.

I. BACKGROUND

Maccabees sold a universal life insurance policy known as the Diplomat, ² which required an initial premium payment of approximately $8,000 and provided a Specified Benefit Amount of $1,000,000. The policy further provided "[a]ny decrease in the Specified Benefit Amount during the first ten Policy Years or during the ten year period after an increase will be subject to a pro-rata Surrender Charge." According to the policy's terms, the Accumulated Value would increase on a periodic basis by the amount of any additional premiums paid and by any periodic interest earned and decrease by the periodic cost of maintaining the Specified Benefit Amount and by the amount of any Surrender Charges which might be imposed. As with most universal life insurance policies, the insured was entitled to surrender the policy in full at any time for the Accumulated Value of the policy minus any Surrender Charges or other fees associated with the surrender. The policy also permitted the insured to reduce the Specified Benefit Amount, subject to a "pro-rata" Surrender Charge against the Accumulated Value of the policy.

To assist its sales agents in illustrating the Diplomat's performance, Maccabees developed a computer program which could provide an individualized projection, based on a potential buyer's particular actuarial situation. The program generated a table projecting the Accumulated Value, Surrender Value, and Death Benefit provided each year by the policy under an assumed interest and a guaranteed interest. Although the program correctly accounted for a Surrender Charge upon total surrender of the policy, it contained a programming error and failed to reflect the pro-rata Surrender Charge upon coverage reduction expressly described in the policy.

A Wyoming insurance agency (the Agent) enlisted this programming flaw in its sales efforts ³ and generated policy projections and illustrations for its customers representing an extremely favorable performance by the Diplomat policy. Because the program did not levy a coverage reduction Surrender Charge against the policy's Accumulated Value, it was possible to create policy illustrations which reflected a coverage reduction from $1,000,000 to $50,000 in the second year, a $50,000 death benefit coverage for fourteen years thereafter, and an ultimate Surrender Value of approximately $14,000 in the fifteenth year. If the program had imposed a Surrender Charge in the manner which Maccabees contends the policy provides, the computer-generated illustrations would have reflected a complete depletion of Accumulated Value upon the coverage reduction in the second year and a subsequent lapse in coverage absent additional premium payments.

The Agent used the favorable computer-generated illustrations to sell Diplomat policies to each of the plaintiffs in this action. In addition, the Agent offered each plaintiff a financing arrangement, under which the plaintiff would pay the initial premium, the Agent would subsequently loan the plaintiff an amount equivalent to the premium paid, and the plaintiff would correspondingly give the Agent a nonrecourse note, securing the loan solely with the Diplomat policy. As the plaintiffs understood the arrangement, if they reduced their coverage in the second year, as described in the illustrations, no further premiums were required to maintain the $50,000 death benefit, thus they could surrender the policy at the end of fifteen years, and obtain sufficient funds to repay the Agent for the nonrecourse loan. The ultimate effect of the arrangement was to give the plaintiffs $50,000 worth of life insurance for fifteen years, "free of charge," with no personal liability on the loan. One hundred and twenty people, the putative class action plaintiffs in this case, purchased Diplomat policies from the Agent on these terms.

Each plaintiff completed applications for the Diplomat policy, which the Agent forwarded to Maccabees. After the applications were approved, each plaintiff received a copy of the policy containing a cover letter which stated "This Policy is a legal contract between the Policy Owner and the Company.... READ YOUR POLICY CAREFULLY." The cover letter also informed each plaintiff he or she had a "TEN DAY RIGHT TO EXAMINE POLICY" and return it if they were not satisfied. An attached page entitled "SCHEDULE OF BENEFITS AND INITIAL MONTHLY EXPENSE CHARGES" indicated the "FIRST YEAR SURRENDER CHARGE" would be $20,350. Finally, the Policy contained an integration clause entitled "THE CONTRACT," which provided:

This Policy, the attached application for this Policy, any attached riders, any additional applications for increases in the Specified Benefit Amount, and any Specification Endorsements make up the entire contract between the parties.

....

Any change or waiver of any provision of this Policy must be in writing and signed by an officer of the Company."

Plaintiffs admit they did not read their policies upon receipt and did not avail themselves of the ten day examination period.

A year later, plaintiffs, through the Agent, began to submit coverage reduction requests to Maccabees (in accordance with the computer-generated illustrations). For the first several reduction requests, the Agent told Maccabees the insured parties wished to reduce their coverage because they had financial difficulties. Maccabees imposed a nominal $100 Surrender Charge for the first ten reductions. However, upon recognizing that an unusually high number of reduction requests were coming through the same Agent, Maccabees began applying the full coverage reduction Surrender Charge pursuant to the policy provisions, retroactively applying the charge to the initial ten reduction requests as well. The Surrender Charges consumed the Accumulated Values in the policies and, because no additional premiums were paid to maintain the death benefit coverage, the policies lapsed.

Plaintiffs brought a class action suit and agreed to submit the central contract issues in the case to the district court prior to seeking certification. The district court granted summary judgment for Maccabees, holding the illustrations were not part of the contract between the plaintiffs and Maccabees and holding the use of illustrations to sell the policies did not estop Maccabees from imposing the pro-rata Surrender Charges. Plaintiffs appeal this order.

II. DISCUSSION

A. Plaintiffs' Claims On Appeal

We review a summary judgment order de novo, applying the same standard used by the district court. Osgood v. State Farm Mut. Auto. Ins. Co., 848 F.2d 141, 143 (10th Cir.1988). The parties agree there are no disputed issues of fact, therefore, we must affirm the district court's order if Maccabees is entitled to judgment as a matter of law. Fed.R.Civ.P. 56(c) (Summary judgment "shall be rendered [if the record shows] there is no genuine issue as to any material fact and ... the moving party is entitled to a judgment as a matter of law."). Because this is a diversity action, the issues before us are governed by Wyoming law, and we must apply Wyoming law or, if Wyoming law is silent, rule as we believe the Wyoming Supreme Court would rule. Fields v. Farmers Ins. Co., 18 F.3d 831, 834 (10th Cir.1994). We conclude Maccabees is entitled to judgment as a matter of law and therefore affirm.

Plaintiffs allege they relied on Maccabees' illustrations when they purchased the life insurance policies and believed Maccabees would not impose a Surrender Charge if th...