Evaluation Systems, Inc. v. Aetna Life Ins. Co.

• Decision Date: 23 December 1982
• Docket Number: No. 82 C 5591.,82 C 5591.
• Citation: 555 F. Supp. 116
• Court: U.S. District Court — Northern District of Illinois
• Parties: EVALUATION SYSTEMS, INC., Plaintiff, v. AETNA LIFE INSURANCE COMPANY, Defendant. AETNA LIFE INSURANCE COMPANY, Counterplaintiff, v. EVALUATION SYSTEMS, INC. and Vreni Naess, Counterdefendants.

555 F. Supp. 116

EVALUATION SYSTEMS, INC., Plaintiff, v. AETNA LIFE INSURANCE COMPANY, Defendant.

AETNA LIFE INSURANCE COMPANY, Counterplaintiff, v. EVALUATION SYSTEMS, INC. and Vreni Naess, Counterdefendants.

No. 82 C 5591.

United States District Court, N.D. Illinois, E.D.

December 23, 1982.

Thomas P. Aiello, Elliott, Carrane, Freifeld & Uruba, Chicago, Ill., for plaintiff.

Jill B. Berkeley, Hinshaw, Culbertson, Moelmann, Hoban & Fuller, Chicago, Ill., for defendant.

MEMORANDUM OPINION AND ORDER

SHADUR, District Judge.

Evaluation Systems, Inc. ("Evaluation Systems") sues Aetna Life Insurance Company ("Aetna"), seeking recovery of (1) $75,000 in insurance proceeds (Count I) and (2) statutory damages under Illinois Insurance Code § 155 (Ill.Rev.Stat. ch. 73, § 767) for Aetna's "vexatious and unreasonable" refusal to pay (Count II). Two motions have been submitted and briefed by the parties:

1. Aetna's under Fed.R.Civ.P. ("Rule") 12(b)(6) to dismiss Complaint Count II; and

2. Evaluation Systems' under Rule 9(c) to strike Aetna's Answer to Complaint ¶¶ 10 and 12.

For the reasons stated in this memorandum opinion and order, Aetna's motion is denied and Evaluation Systems' is granted.

Facts¹

On November 20, 1979 Aetna issued to Evaluation Systems as beneficiary a $75,000 policy (the "Policy") insuring the life of one of the Evaluation Systems partners, Per L. Naess ("Naess"). No question exists as to the propriety of Evaluation Systems' annual premium payments ($516.75 and $563.25, respectively) for the first two years of coverage. For the next year (beginning November 20, 1981), however, Evaluation Systems mistakenly again paid $563.25 rather than the $613.50 called for by the Policy.²

Aetna received and cashed the $563.25 check. It then sent Evaluation Systems a December 1, 1981 form letter:

Thank you for your payment of $563.25. To pay the current premium due, an additional payment of $50.25 is needed. Enclosed is a self-addressed envelope for your convenience.

Once we receive your additional payment, we will apply your checks to pay your November premium due of $613.50.

If we can be of any further assistance, please contact us.

Unfortunately the letter was mailed to Evaluation Systems' old address (the one listed in the Policy application).³ Consequently the letter never reached Evaluation Systems, but was returned to Aetna with the statement "Moved 3 yrs. ago" written on the envelope.

At that point Aetna made no further effort to locate Evaluation Systems, which (from the incomplete information now before the Court) had apparently relocated from Chicago to a Chicago suburb. Instead Aetna mailed the original letter to Naess, whose home address had also been listed in the Policy application. In response Naess' wife Vreni wrote Aetna December 15, 1981 that one of the three Evaluation Systems partners had previously ousted the other two (including Naess) from the company. She asked whether "any regulation on your books" prevented continuation of insurance under those circumstances.

Aetna's next move (two months later) was to send a "Notice of Lapse" to the same former Evaluation Systems address it had already been told was wrong by the postal authorities. Its February 19, 1982 letter read in part:

The annual premium of $613.50 due November 20, 1981 was not received by us within the time allowed for payment.

Consequently, protection has ceased in accordance with the terms of the policy.

Not surprisingly, this letter too never reached Evaluation Systems.⁴

On the same date Aetna sent the second letter, it mailed a $563.25 refund check to a different (but also incorrect) address that had been provided Aetna by its Chicago office. Nothing about any claimed lapse accompanied the check. Rather the non-negotiable stub attached to the check read:

Due to the partnership being dissolved we are refunding payment.

As was the case with the two letters, Evaluation Systems never received the refund check.

Sometime before June 1, 1982 "an oral inquiry was made by the owner Evaluation Systems concerning the lapse of the policy" (Aetna Counterclaim ¶ 14, admitted by Evaluation Systems).⁵ By a June 10, 1982 letter to Evaluation Systems' correct address, an Aetna official outlined the course of events already described in this opinion. That letter concluded by saying a stop payment had been placed on the uncashed February 19 check, and a replacement check would be sent to Evaluation Systems in about three weeks.

But Naess had just died one day before the June 10 letter. Evaluation Systems of course refused to accept the replacement premium refund check (issued by Aetna June 15, 1982). It furnished Aetna with the requisite notice and proof of Naess's death and requested payment of its $75,000 claim.

To make the plot thicker, on July 21, 1982 counsel for Vreni Naess wrote Aetna requesting payment of the insurance proceeds to his client. That letter asserted (1) Evaluation Systems had offered in the fall of 1980 to let the Naess family take over the policy and substitute Vreni Naess as beneficiary, (2) that offer had been accepted and Aetna had been so notified and (3) the Naess family had tendered a premium payment and executed Aetna's change of beneficiary form.

To date Aetna has refused to pay either Evaluation Systems or Vreni Naess any insurance proceeds. After Evaluation Systems brought this action against Aetna, Aetna filed a counterclaim against both Evaluation Systems and Vreni Naess as administratrix of Naess's estate. It seeks a declaratory judgment that Evaluation Systems' failure to pay the full annual premium relieved Aetna of any obligation to pay the insurance proceeds to either counterdefendant.

Complaint Count II

Illinois Insurance Code § 155 ("Section 155") provides:

In any action by or against a company wherein there is in issue the liability of a company on a policy or policies of insurance or the amount of the loss payable thereunder, or for an unreasonable delay in settling a claim, and it appears to the court that such action or delay is vexatious and unreasonable, the court may allow as part of the taxable costs in the action reasonable attorney fees, other costs, plus an amount not to exceed any one of the following amounts:

(a) 25% of the amount which the court or jury finds such party is entitled to recover against the company, exclusive of all costs;

(b) $5,000;

(c) the excess of the amount which the court or jury finds such party is entitled to recover, exclusive of costs, over the amount, if any, which the company offered to pay in settlement of the claim prior to the action.

Complaint Count II charges Aetna's refusal to pay the $75,000 claim was "vexatious and unreasonable" because Aetna lacked any legal justification for doing so. Evaluation Systems' argument to that effect rests on the following asserted interplay of Policy provisions and Illinois case law:

1. Under the Policy's "Premiums and Reinstatement" section:

Premiums may be paid annually, semiannually, quarterly, or with Aetna's consent, monthly at the rates in effect on the Date of Issue. A change to any such frequency will take effect when Aetna accepts the premium for the changed frequency. If any premium is not paid when due or within the grace period 31 days, this policy will terminate, subject to the sections of this policy entitled "Reinstatement."

Evaluation Systems could unilaterally alter the frequency of premium payments from an annual to a semi-annual or quarterly basis.⁶

2. Illinois authorities unanimously hold—as a matter of law—an insurance company "accepts" a premium check by retaining its proceeds for a significant period. Any subsequent refund of the premium will not undercut the finding of acceptance.

3. By immediately negotiating the $563.25 premium check and then retaining the proceeds for a number of months, Aetna "accepted" the partial premium payment. It therefore became obligated to provide coverage for that portion of the Policy year (beginning November 20, 1981) equal to the ratio of the partial payment to the annual premium charge of $613.50. Such coverage extended well beyond the date Naess died.

Aetna's Motion To Dismiss contends Count II fails to disclose any "vexatious and unreasonable" conduct on its part because:

1. There is no allegation of any bad faith or sinister motivations underlying Aetna's refusal to pay Evaluation Systems.

2. All the facts as to Aetna's acceptance of the partial premium payment confirm the reasonableness of its refusal to pay.

Neither argument renders Count II legally deficient.

Aetna's first contention requires a review of the statutory and case law developments that led to the current version of Section 155. Originally the section made insurers whose refusal to pay a claim was "vexatious and without reasonable cause" liable only for "reasonable attorney fees" not to exceed any of three prescribed amounts (the first and third ceiling amounts were identical to subparagraphs (a) and (c) in the current statute, while the second maximum amount was only $500).

Without even addressing the preemptive implications of the statutory remedy, the Fifth District Appellate Court recognized an independent tort action against insurers for breach of their implied duty of good faith and fair dealing. Ledingham v. Blue Cross Plan for Hospital Care, 29 Ill.App.3d 339, 330 N.E.2d 540 (5th Dist.1975). Ledingham has had a mixed reception in the other Illinois Appellate districts. Both the First and Third Districts have disapproved of Ledingham, concluding the original Section 155 foreclosed any judicial enhancement (via common law tort remedy) of recovery for vexatious delay. Tobolt v. Allstate Insurance Co., 75 Ill.App.3d 57, 30 Ill.Dec. 824, 393 N.E.2d 1171 (1st Dist.1979); Debolt v. Mutual of Omaha, 56 Ill.App.3d 111, 13 Ill.Dec. 656, 371 N.E.2d 373 (3d Dist.1978). Tobolt also found the 1977 amendment to Section 155 (its current version) also manifested a legislative...