Force v. Itt Hartford Life and Annuity Ins. Co.
| Decision Date | 26 January 1998 |
| Docket Number | Civ. No. 97-1619 RHK/FLN. |
| Citation | 4 F.Supp.2d 843 |
| Parties | Liane FORCE, Lonnie Griffin, Nick Marino, and Otto Ladish, on behalf of themselves and all others similarly situated, Plaintiffs, v. ITT HARTFORD LIFE AND ANNUITY INSURANCE COMPANY, and Hartford Life Insurance Company, Defendants. |
| Court | U.S. District Court — District of Minnesota |
Jack L. Chestnut, Karl L. Cambronne, Chestnut & Brooks, Minneapolis, MN, Melvyn I. Weiss, Barry A. Weprin, Brad N. Friedman, Milberg, Weiss, Bershad, Hynes & Lerach, New York City, John J. Stoia, Jr., Theodore J. Pintar, JoBeth Halper, Milberg, Weiss, Bershad, Hynes & Lerach, San Diego, CA, Michael D. Craig Joann B. Harms, Schiffrin & Craig, Buffalo Grove, IL, Ronald R. Parry, Arnzen, Parry & Wentz, Covington, KY, W. Christian Hoyer John Newcomer, James, Hoyer, & Newcomer, Tampa, FL, Andrew S. Friedman, Francis J. Balint, Jr., Bonnett, Fairbourn, Friedman & Balint, Phoenix, AR, H. Sullivan Bunch, Bonnett, Fairbourn, Friedman, & Balint, Signal Mountain, TE, Stephen L. Hubbard, Rob Biederman, Cantilo, Maisel, & Hubbard, Dallas, TX, Allyn Z. Lite, Bruce D. Greenberg, Goldstein, Lite, & DePalma, Newark, NJ, William J. Dutel, Law Offices of William J. Dutel, Covington, LA, for Plaintiffs.
Barry A. Chasnoff, David A. Jones, Akin, Gump, Strauss, Hauer & Feld, San Antonio, TX, Gary J. Haugen, Richard A. Kempf, Maslon, Edelman, Borman, & Brand, Minneapolis, MN, for Defendants.
Plaintiffs Liane Force ("Force"), Lonnie Griffin ("Griffin"), Nick Marino ("Marino"), and Otto Ladish ("Ladish") (collectively, the "Plaintiffs") are the representatives of a plaintiff class that initiated this action against Defendants ITT Hartford Life and Annuity Insurance Company and Hartford Life Insurance Company (collectively, "ITT Hartford"). The Defendants are owned by Hartford Fire Insurance Company, and both entities market and sell life insurance policies throughout the country. (Compl.¶¶ 17-23.) The Plaintiffs allege that the sales schemes and practices of the Defendants constituted fraud, misrepresentation, and violations of various Minnesota statutes. The Plaintiffs have brought claims against ITT Hartford for: (1) Fraud, Fraudulent Concealment and Deceit; (2) Fraudulent Inducement; (3) Breach of Fiduciary Duty/Constructive Fraud; (4) Breach of Contract; (5) Breach of the Implied Covenant of Good Faith and Fair Dealing; (6) Negligent Misrepresentation; (7) Negligence; (8) Deceptive Trade Practices in violation of Minn.Stat. §§ 325D.43 to 325D.48; (9) False Advertising in violation of Minn.Stat. § 325F.67; (10) Consumer Fraud in violation of Minn.Stat. §§ 325F.68 to 325F.70; and (11) Unjust Enrichment. (Compl.¶¶ 108-180.) The Complaint also states as "causes of action" the Plaintiffs' requests for declaratory and injunctive relief and for reformation of the policies at issue. (Id. ¶¶ 181-191.) The matter is before the Court on ITT Hartford's Motion to Dismiss.
The Plaintiffs base their claims on the allegedly false and misleading practices that ITT Hartford used to market life insurance policies under three separate "schemes." The three at issue are the "vanishing premium scheme," the "churning scheme," and the "retirement/investment plan scheme." (See Compl. ¶¶ 3-8.) The gravamen of the Plaintiffs' claims is that ITT Hartford trained its sales agents to misrepresent to potential clients the true nature of the life insurance policies being offered, in an effort to boost the corporations' sales and profits.
In the 1980's, a change took place in the life insurance industry. Life insurance companies, including ITT Hartford, recognized that traditional life insurance was becoming obsolete in the face of other investment vehicles offering higher rates of return. (Compl.¶ 26.) Such companies faced increasing competition not only from mainstream investment funds, but also from insurers that would invest policyholders' premiums in high-risk investments like junk bonds. (Id.) As a result, ITT Hartford, like other insurers, developed new types of life insurance, where the insurance company would invest the premiums more aggressively and policyholders could enjoy the returns of successful investments. The investment strategy behind this new type of policy was more volatile and complex than traditional life insurance policies. (Id.)
The first scheme that the Plaintiffs challenge is the vanishing premium scheme, in which the ITT Hartford sales agent would tell the potential customer that, after a certain number of premium payments, the value of the policy itself would generate sufficient income to maintain the policy for the remainder of the insured's life. (Compl.¶ 29.) According to the ITT Hartford's sales agents, at a certain point, enough investment income would be generated that the policyholder's responsibility to pay premiums out of her own pocket would "vanish." (Id.) What the sales representatives did not tell the customers, according to the Plaintiffs, was that the policies would only become self-supporting (and the premiums thereby vanish) if a number of factors, including interest rates and dividend scales, turned out favorably. (Id. ¶ 31.) Although many of these market factors were highly speculative and many of the assumptions unreasonable, ITT Hartford's sales representatives did not advise the customers of the risk involved, but instead represented that the customers would not be obligated to make additional payments after the scheduled payments. (Id. ¶¶ 31-32.) When the policies did not generate the necessary capital to support the vanishing premium scheme, ITT Hartford first concealed these failures from the policyholders, and then demanded additional premiums from them. (Id. ¶ 33.)
The Plaintiffs further allege that ITT Hartford fraudulently and deceptively convinced its customers to take the cash value of their existing policies and apply that capital to the acquisition of new policies from ITT Hartford. (Compl.¶ 55.) This practice is called "churning" or "twisting," and, because of commissions to the agent and deductions and administrative charges to the company, results in a financial detriment to the policyholder and a corresponding benefit to both the insurance company and the sales agent.2 (Id.) Sales agents targeted for churning both ITT Hartford policyholders and policyholders of ITT Hartford's competitors. (Id. ¶¶ 58-60.) In convincing potential customers to "churn" their policies, agents identified policyholders who had built up substantial cash values in existing policies, called them on the premise of conducting a "policy review," and represented that they could receive additional coverage at no additional expense. (Id. ¶ 61.) The agents failed to tell them that the new policy would be financed by loans taken out against the cash value of the policyholder's existing policy, and also failed to tell them about the commissions, administrative costs, and potential for higher premium payments which occurred as a result of churning. (Id. ¶¶ 56, 61.) In addition to the ITT Hartford agents' misrepresentations to customers about the benefits and drawbacks of churning, they did not provide customers with disclosure forms, as required by Minnesota law. (Id. ¶¶ 61-63.)
Finally, the Plaintiffs allege that ITT Hartford fraudulently and deceptively marketed life insurance policies as "retirement," "savings," or "investment" plans. (Compl.¶ 69-70.) Life insurance policies are distinct from, and have certain disadvantages relative to, investment plans, and ITT Hartford's sales agents intentionally concealed and/or downplayed these differences and disadvantages in marketing the policies. (Id. ¶¶ 69-73.) Specifically, the agents did not disclose that a portion of each premium payment funded a death benefit, and they represented falsely to customers that payment of a fixed number of premiums would result in a specific amount of future income. (Id. ¶ 71.)
In January 1988, Liane Force met with an ITT Hartford sales agent. (Compl.¶ 92.) At that time, she paid monthly premiums of $12.50 on an AETNA life insurance policy that had a face value of $3,000. (Id. ¶ 91.) The agent assured Force that if she cashed in her AETNA policy for an ITT Hartford Signature Series Flexible Premium Adjustable Life policy, she could continue paying monthly premiums of $12.50 and double the value of her insurance, to $6,000. (Id. ¶¶ 92-93.) Based on these representations, Force purchased the ITT Hartford policy. (Id. ¶¶ 93-94.) In 1994, ITT Hartford raised Force's monthly premiums to $30; in 1995, her premiums were again raised, to $40.3 (Id.) Force continued paying the premiums after the initial increase, but ceased payment after the second increase. (Id. ¶ 94.)
In 1982, Lonnie Griffin and his wife met with an ITT Hartford agent, who sold the Griffins each a Signature Series Individual Decreasing Term Benefit with Flexible Premium Annuity Benefit policy. (Compl.¶ 87.) The agent told Mr. and Mrs. Griffin that they would pay $100 every month until they reached age 55, at which point they would each have over $40,000 in their plan. (Id.) The agent marketed these policies as retirement plans, and never referred to them as life insurance policies. (Id.) In 1989, another ITT Hartford agent contacted the Griffins and advised them that ITT Hartford now offered a better retirement plan than the ones they had bought in 1982. (Id. ¶ 88.) The agent told them that they could cash in their 1982 plans, continue paying the same monthly amounts, and upon reaching age 55, their policies would each have a value of $200,000. (Id.) He also prepared for the Griffins a computer illustration which projected annual dividends of 9-10%. (Id.) Based on...
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