DEFENDER INDUS. v. NW MUT. LIFE INS.

• Decision Date: 15 December 1989
• Docket Number: Civ. A. No. 3:88-3231-16.
• Citation: 727 F. Supp. 252
• Court: U.S. District Court — District of South Carolina
• Parties: DEFENDER INDUSTRIES, INC., Plaintiff, v. The NORTHWESTERN MUTUAL LIFE INSURANCE COMPANY, Defendant.

727 F. Supp. 252

DEFENDER INDUSTRIES, INC., Plaintiff, v. The NORTHWESTERN MUTUAL LIFE INSURANCE COMPANY, Defendant.

Civ. A. No. 3:88-3231-16.

United States District Court, D. South Carolina, Columbia Division.

December 15, 1989.

COPYRIGHT MATERIAL OMITTED

Thomas English McCutchen, John Calvin Bradley, Jr., Columbia, S.C., for plaintiff.

David Clay Robinson, Columbia, S.C., for defendant.

ORDER

HENDERSON, District Judge.

This matter is before the Court on the post-trial motions of the defendant, The Northwestern Mutual Life Insurance Company ("Northwestern"), and the plaintiff, Defender Industries, Inc. ("Defender"). Northwestern moves for judgment notwithstanding the verdict, for a new trial or for a remittitur. Fed.R.Civ.P. 50(b). Defender moves the Court to amend the judgment to add prejudgment interest. For the reasons set forth below, the Court sets aside the punitive damages award and modifies it, grants the plaintiff's motion for prejudgment interest on the actual damages award and denies the remaining motions.

On motion for judgment n.o.v., the Court must consider the record as a whole and in the light most favorable to the party opposing the motion and, if there is substantial evidence opposed to the motion, that is, evidence of such quality and weight that reasonable and fair-minded men in the exercise of impartial judgment could reasonably return a verdict for the non-moving party, the motion should be denied. Wyatt v. Interstate & Ocean Transp. Co., 623 F.2d 888, 891 (4th Cir.1980).

I.

Viewed in the light most favorable to the plaintiff, the facts are as follows. In 1985, Defender was in the process of evaluating various life insurance policies it had on its key employees and executives. Agents of Northwestern met with officers of Defender in hopes of selling Defender new policies to replace some that were then in effect. The Northwestern agents procured applications for new policies from Defender. The Defender employees and executives who were potential insureds then submitted to physical examinations. The Northwestern agents sold Defender several policies and were eager to provide a policy on the life of Kathryn C. Inabinet, Defender's chairman of the board, in the amount of Eight Million ($8,000,000) Dollars. Defender was uncertain at the time, however, as to the amount of coverage it needed for Inabinet; estate taxes in the event of her death were projected to range from Five Million ($5,000,000) to Eight Million ($8,000,000) Dollars. Because Defender already had in effect with another company a life insurance policy covering Inabinet in the amount of Five Million ($5,000,000) Dollars, Defender's officers felt it best to delay purchasing a replacement policy until they had a better idea of the amount of coverage needed. In order to close the deal, one of Northwestern's agents promised Defender's officers that, if Defender then purchased a policy for Eight Million ($8,000,000) Dollars, Inabinet's maximum insurability, it could later reduce the amount of coverage and receive a rebate for the difference in premiums. Defender agreed to this term and purchased the policy.¹ Several months later Defender asked Northwestern to reduce the amount of coverage to Seven Million ($7,000,000) Dollars and to credit Defender with the difference in premiums paid from the date the policy was purchased. Northwestern agreed to reduce the amount of coverage but refused to rebate the difference in premiums. Defender then requested rescission of the contract; Northwestern refused. Defender let the policy lapse and brought this action claiming breach of contract, breach of contract accompanied by a fraudulent act, fraud, constructive fraud, outrage and negligence.

At trial, Northwestern was granted leave to amend its answer to assert as an affirmative defense that the alleged promise to rebate the premium, if made, would be unenforceable as a violation of S.C.Code Ann. § 38-55-50 (1976, as amended).² At the close of all of the evidence, Defender withdrew its outrage claim. The Court granted Northwestern's directed verdict motions on the negligence, breach of contract and breach of contract accompanied by a fraudulent act claims. The Court concluded, however, that section 38-55-50 ("the statute") was not designed to shield a fraud and that Defender's fraud and constructive fraud claims survived.

The jury returned a verdict for Defender on both the fraud and the constructive fraud claims in the amount of One Hundred Six Thousand, Five Hundred Thirteen and 74/100 ($106,513.74) Dollars in actual damages and Five Million ($5,000,000) Dollars in punitive damages.

II.

Northwestern first contends that it is entitled to judgment n.o.v. on the ground that as a matter of law Defender had no right to rely on the promise to rebate the premium. One of the nine elements of a fraud action is the hearer's right to rely on the truth of the alleged misrepresentation. See Mylin v. Allen-White Pontiac, Inc., 281 S.C. 174, 314 S.E.2d 354 (Ct.App.1984). Northwestern contends that because the statute prohibits an insurance agent from paying, allowing or giving, or offering to pay, allow or give, a rebate of premium, no one to whom such an offer is made has a right to rely on such a promise.

Because this action arises under the Court's diversity jurisdiction, South Carolina law applies. Erie Railroad v. Tompkins, 304 U.S. 64, 58 S.Ct. 817, 82 L.Ed. 1188 (1938). Although the statute has been construed several times, there appears to be no controlling South Carolina precedent as to whether the statute would as a matter of law preclude a plaintiff's right to rely on a promise to rebate a premium. This Court's duty as to a question of substantive law the South Carolina courts have not yet ruled on is to foretell the South Carolina Supreme Court's decision if presented with the same question. Patel by Patel v. McIntyre, 667 F.Supp. 1131 (D.S.C.1987), aff'd 848 F.2d 185.

This Court concludes that South Carolina would hold that the statute does not as a matter of law preclude a plaintiff's right to rely on an insurance company's promise to rebate a premium. First, the statute does not expressly prohibit a promisee's bringing legal action on such a promise. More important, the South Carolina Supreme Court has held that the predecessor statute to section 38-55-50, which contained virtually the same language, was not intended to shield a fraud. In Crosby v. Metropolitan Life Insurance Co., 167 S.C. 255, 166 S.E. 266 (1932), the plaintiff, who purchased a policy on her cousin's life, brought a fraud action against the insurer when it refused to pay her the policy proceeds on the cousin's death. The agent had told her she was the beneficiary but the written policy named the insured's estate as beneficiary. As a defense to the fraud claim, the insurance company asserted that an oral side agreement to a written policy violated the statute prohibiting the making of "any contract of insurance or agreement as to such contract other than as plainly expressed in the policy." The State Supreme Court allowed the plaintiff to recover because the action was not on the contract but in tort for fraud and deceit, declaring "the statute was never intended to shield a fraud." 166 S.E.2d 268. In Hood v. Life & Casualty Ins. Co., 173 S.C. 139, 175 S.E. 76 (1934), the court in dicta followed Crosby. See also Aiken Petroleum Co. v. National Petroleum Underwriters, etc., 207 S.C. 236, 36 S.E.2d 380 (1945).

There are exceptions to the general rule that courts will not aid a party to an unenforceable contract. The Restatement of Contracts, which South Carolina has adopted in other particulars,³ recognizes the right of an injured party to recover in some circumstances despite legislation which makes a contract unenforceable. A breach of contract claim can be maintained for a contract declared unenforceable by statute where the promisee is excusably ignorant of legislation of a minor character.⁴ Similarly, restitution is available in favor of a party who is excusably ignorant of such legislation or is not equally in the wrong.⁵ The anti-rebate statute constitutes legislation of a specialized or technical nature with which those in the insurance business would be expected to be familiar while lay people normally would not. The evidence in this action indicates the insurance agents were aware that their promise was unenforceable and that Defender's officers did not know of the statute. This seems to be a case, then, where the Court should not apply a rigid rule forbidding relief.

Northwestern relies on two Oregon decisions involving an almost identical statute.⁶ Those cases advocate that a rigid rule precluding reliance on a promise forbidden by statute encourages compliance with the law. "When purchasers of insurance are aware that if they have entered into insurance contracts in violation of the statutes, the courts of Oregon will refuse to come to their aid if the insurer asserts a defense of illegality, we believe that they will avoid this sort of contract in the future." Mountain Fir Lumber Co., Inc. v. Employee Benefits Ins. Co., 679 P.2d 296, 300 (1984). With respect, the Court rejects the Oregon courts' conclusion, which appears to be one that only that jurisdiction has reached, as a fond hope. It is unrealistic to expect that the public will eventually learn that the statute exists. The statute, or predecessor legislation that was very similar, has been a part of South Carolina statutory law for almost a century yet it is doubtful that many people outside the insurance industry are aware of its provisions.

South Carolina courts would more likely conclude that mere constructive knowledge of a statute would not as a matter of law preclude reliance on a fraudulent representation. In Reid v. Harbison Dev. Corp., 285 S.C. 557, 330 S.E.2d 532 (App.1985), a decision involving a developer's fraudulent nondisclosure of a restrictive covenant, the court dec...