Drelles v. Manufacturers Life Ins. Co.

• Decision Date: 19 September 2005
• Citation: 881 A.2d 822
• Court: Pennsylvania Supreme Court
• Parties: Speros DRELLES and Marie D. Drelles, husband and wife v. The MANUFACTURERS LIFE INSURANCE COMPANY, Manulife Financial, and Jeffrey Joel Sherman v. Speros Drelles v. Metropolitan Life Insurance Company and Jeffrey Joel Sherman Appeal of Speros Drelles.

Page 822

881 A.2d 822

Speros DRELLES and Marie D. Drelles, husband and wife v. The MANUFACTURERS LIFE INSURANCE COMPANY, Manulife Financial, and Jeffrey Joel Sherman v. Speros Drelles v. Metropolitan Life Insurance Company and Jeffrey Joel Sherman

Appeal of Speros Drelles.

Superior Court of Pennsylvania.

Argued December 7, 2004.

Filed July 5, 2005.

Reargument Denied September 19, 2005.

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Kenneth R. Behrend, Pittsburgh, for appellant.

Richard F. Rinaldo, Pittsburgh, for Manulife, appellee.

Marshall J. Tindall, Pittsburgh, for Sherman, appellee.

B. John Pendleton, Jr., Newark, NJ, for Metropolitan Life, appellee.

Before: HUDOCK, MUSMANNO and TAMILIA, JJ.

HUDOCK, J.:

¶ 1 This is an appeal from the orders granting summary judgment in favor of all defendants on all counts presented in two separate actions which were consolidated in the trial court. We reverse the grant of summary judgment and remand for further proceedings.

¶ 2 The record discloses that Speros Drelles (Drelles) was covered by two five-year renewable and convertible participating term life insurance policies with accidental death benefit (ADB) (commonly called double indemnity) and with automatic waiver of premiums (AWP) upon proof of permanent and total disability. Both policies were issued by Metropolitan Life Insurance Company (MetLife) at a face amount of $50,000.00 and were guaranteed renewable until Drelles reached a specific age. (According to the policies' cover sheets, No. 23 129 046, issued in 1957, was guaranteed renewable "prior to age 65" while No. 617 218 870 PR, issued in 1961, was guaranteed renewable "before age 66.") Jeffrey Joel Sherman (Sherman), an agent of MetLife, approached Drelles in 1988 and suggested converting the two renewable term policies to a single whole life policy with a $100,000.00 face amount. Sherman presented Drelles and his wife, Marie D. Drelles, with a proposal and illustrations representing that the premium payments for the new whole life policy would require out-of-pocket expenditures only for the first eight years of the policy's term. Sherman represented that by the ninth year, the whole life policy's premiums would be "paid up by" or "fully paid by" the cash dividends accruing on the policy and no more out-of-pocket expenditure would be required.¹ This sales technique is sometimes designated as a "vanishing premium" plan.

¶ 3 Drelles completed an application for conversion of his renewable term life insurance policies in June of 1988. The new policy's premium was $369.00 per month, or $4,428.00 annually. The new policy was issued on June 14, 1988, at MetLife No. 882 634 905 PR (the 1988 policy). Subsequently, Sherman and William D. Hague (Hague) met with Drelles. Hague presented himself to Drelles as an account representative with MetLife and indicated that he is a licensed attorney. Sherman and Hague recommended that the Drelleses ought to purchase a second-to-die life insurance policy with a face amount of $1,000,000.00.² The purpose of the survivorship policy was to defray the impact of federal estate taxes on the inheritance that presumptively will be left to the Drelleses' children.

¶ 4 Drelles concluded that $1,000,000.00 in coverage was unnecessary, but decided that a $500,000.00 insurance policy was warranted. The survivorship policy also was pitched to the Drelleses under a vanishing premium plan. According to Sherman and Hague, by the fourteenth year of the policy, the accumulated dividends would be sufficient to pay the annual premiums so there would be no more out-of-pocket expenditure required to keep the policy in force.

¶ 5 The Drelleses were convinced by the representations made by Sherman and Hague and decided to purchase a whole life survivorship policy under a vanishing premium plan. MetLife did not carry survivorship policies of the type Sherman and Hague discussed with the Drelleses. Consequently, the policy application was placed with Manufacturers Life Insurance Company (Manufacturers). On April 12, 1990, Manufacturers issued the survivorship policy to the Drelleses in a face amount of $500,000.00, as Manufacturers Policy No. 5 117 835-8 (the 1990 policy).

¶ 6 Vanishing premium insurance plans are a product of the soaring interest rates of the late 1970s and early 1980s. Cotton v. Massachusetts Mutual Life Insurance Company, 402 F.3d 1267, at 1273 n. 4, 2005 U.S.App. Lexis 4330, at *8 n. 4 (11th Cir. filed March 16, 2005).

During this time, "the economics of traditional whole life insurance policies turned unattractive" because the policies generally "earned a rate of return based on the average interest rate of the predominately fixed-rate securities in the company's investment portfolio, which generally had interest rates that were much lower than the rates then available to consumers." Daniel R. Fischel & Robert S. Stillman, The Law and Economics of Vanishing Premium Life Insurance, 22 Del. J. Corp. L. 1, 5 (1997). The industry responded to this phenomenon by offering consumers several new types of interest-sensitive policies. These new policies differed from traditional whole life insurance in that their returns were based on current interest rates rather than the interest and dividend income produced by the insurance company's historical investments. Id. at 5-6. The vanishing premium plan was one common payment option for these new types of policies; Professors Daniel R. Fischel and Robert S. Stillman describe the economics of its rise and fall as follows:

In a vanishing premium plan, the policyholder pays higher-than-normal premiums in the early years of the policy. By making higher payments in early years, a higher fraction of premium dollars is distributed into the policy's savings account (i.e., accumulation fund), allowing the cash value of the policy to accumulate faster. The goal of a vanishing premium plan is to set premiums at a level where, after a certain number of years, enough cash value has accumulated within the policy so that future administrative and insurance costs can be paid out of the accumulation fund, with no further out-of-pocket payments by the policyholder. In the mid-1980s, when the new policies were marketed most aggressively, the assumption of most vanishing premium "illustrations" was that no further out-of-pocket premiums would be required after five or ten years.

Id. Vanishing premium plans did not work as contemplated primarily because low interest rates upset the economics of the plans. Id. Although rates rose as high as twelve percent in the mid-1980s, in the 1990s they fell to close to three percent. Id. With the economy-wide decline in interest rates, cash value ceased to grow at a rate anywhere near sales projections and illustrations. Id. As a result, cash value has proven to be insufficient to pay the cost of the insurance. Id. Many consumers who bought insurance on a vanishing-premium basis were forced to make out-of-pocket premium payments well beyond the expected term of years. Id. In some instances, the insurance was terminated or the death benefits reduced. Id.

¶ 7 By the early 1990s, the national media began presenting information on deceptive marketing and sales practices in the life insurance industry. Several class action suits arose in the federal courts involving the various insurance companies implicated. Drelles learned through local news media coverage that MetLife's insurance agents were implicated in the allegations of industry-wide deceptive marketing practice.³ These deceptive practices included marketing whole life insurance policies under vanishing premium plans of the same type the Drelleses purchased. A multi-district federal class action suit was filed against MetLife over these allegedly illegal sales practices. MetLife settled this suit in December of 1999. Drelles v. Metropolitan Life Insurance Company, 90 Fed.Appx. 587, 2004 U.S.App. Lexis 2210, *1 (3d Cir. filed January 12, 2004). However, the Drelleses opted out of the federal class action litigation, preferring to present their claims against MetLife and Manufacturers in state court. Id.

¶ 8 On October 6, 1995, the Drelleses commenced an action against MetLife and Sherman by writ of summons, at GD-95-16273 (the 1995 litigation). The Drelleses commenced a second and separate action against Manufacturers and Sherman by writ of summons at GD-96-14270, filed September 30, 1996 (the 1996 litigation). Upon motion, the trial court consolidated the two actions under GD-95-16273 on September 15, 2000. In both the 1995 and 1996 litigation, the Drelleses alleged common law fraud and deceit, negligence, violations of the Pennsylvania Unfair Trade Practices and Consumer Protection Law (UTPCPL),⁴ negligent supervision, and breach of an implied covenant of good faith and fair dealing.

¶ 9 The consolidated matter proceeded through discovery. In December of 2003, the insurance companies and Sherman moved for summary judgment. On December 8, 2003, the trial court dismissed the complaint filed at GD-95-016273 as well as the counts against Sherman in the complaint filed at GD-96-014270. Several counts of the consolidated case remained pending against Manufacturers. The Drelleses filed an appeal from the trial court's order, which was docketed at Superior Court No. 82 WDA 2004. We quashed the appeal on February 26, 2004. On February 12, 2004, the trial court granted Manufacturers' petition for permission to file a motion for summary judgment. Subsequently, on May 17, 2004, the trial court granted the ensuing motion for summary judgment and dismissed all remaining counts of the consolidated action. The Drelleses filed a timely notice of appeal on May 27, 2004. The trial court's docket does not indicate that the trial court ordered the Drelleses to file a Rule 1925(b) statement, and none appears to have been filed.

¶ 10 Procedurally, the trial court's action can be...