Gaidon v. GUARDIAN LIFE INS.

• Decision Date: 20 December 1999
• Citation: 704 N.Y.S.2d 177,94 N.Y.2d 330,725 N.E.2d 598
• Parties: FRANK J. GAIDON, Individually and on Behalf of All Others Similarly Situated, et al., Appellants, v. GUARDIAN LIFE INSURANCE COMPANY OF AMERICA, Respondent. PAUL A. GOSHEN, Individually and on Behalf of All Others Similarly Situated, Appellant, v. MUTUAL LIFE INSURANCE COMPANY OF NEW YORK et al., Respondents.
• Court: New York Court of Appeals Court of Appeals

94 N.Y.2d 330

725 N.E.2d 598

704 N.Y.S.2d 177

FRANK J. GAIDON, Individually and on Behalf of All Others Similarly Situated, et al., Appellants, v. GUARDIAN LIFE INSURANCE COMPANY OF AMERICA, Respondent.

PAUL A. GOSHEN, Individually and on Behalf of All Others Similarly Situated, Appellant, v. MUTUAL LIFE INSURANCE COMPANY OF NEW YORK et al., Respondents.

Court of Appeals of the State of New York.

Argued October 14, 1999.

Decided December 20, 1999.

Milberg Weiss Bershad Hynes & Lerach, L. L. P., New York City (Melvyn I. Weiss and Barry A. Weprin of counsel), Arnzen, Parry & Wentz, P.S.C., Covington, Kentucky, Bonnett, Fairbourn, Friedman & Balint, P. C., Phoenix, Arizona, Cantilo, Maisel & Hubbard, L. L. P., Dallas, Texas, and James, Hoyer & Newcomer, P.A., Tampa, Florida, for appellants in the first above-entitled action.

Skadden, Arps, Slate, Meagher & Flom, L. L. P., New York City (Thomas J. Dougherty and James R. Carroll of counsel), for respondent in the first above-entitled action.

Milberg Weiss Bershad Hynes & Lerach, L. L. P., New York City (Melvyn I. Weiss and Barry A. Weprin of counsel), Arnzen, Parry & Wentz, P.S.C., Covington, Kentucky, Bonnett, Fairbourn, Friedman & Balint, P. C., Phoenix, Arizona, Cantilo, Maisel & Hubbard, L. L. P., Dallas, Texas, and James, Hoyer & Newcomer, P.A., Tampa, Florida, for appellant in the second above-entitled action.

Dewey Ballantine, L. L. P., New York City (Harvey Kurzweil, Richard W. Reinthaler and James P. Smith III of counsel), and E. Allan Farnsworth for respondents in the second above-entitled action.

Eliot Spitzer, Attorney General, New York City (Preeta D. Bansal, Edward Johnson, Thomas G. Conway, Jane M. Azia and Marion R. Buchbinder of counsel), amicus curiae in the first and second above-entitled actions.

Rice & Justice, Albany (John Carter Rice, Lawrence P. Justice and Bradley F. Rice of counsel), for Business Council of New York State, Inc., amicus curiae.

Milbank, Tweed, Hadley & McCloy, L. L. P., New York City (Jeffrey Barist, David R. Gelfand, Charles Westland and Nicholas Smithberg of counsel), for American Council of Life Insurance, amicus curiae.

Chief Judge KAYE and Judges LEVINE, CIPARICK and WESLEY concur with Judge ROSENBLATT; Judge BELLACOSA dissents in part and votes to affirm in a separate opinion; Judge SMITH taking no part.

OPINION OF THE COURT

ROSENBLATT, J.

In both appeals before us, plaintiffs are policyholders who have brought actions against insurance companies in connection with "vanishing premium" life insurance policies. They allege, in essence, that they purchased their insurance policies based on defendants' false representations that out-of-pocket premium payments would vanish within a stated period of time. Plaintiffs have asserted several theories of liability, two of which merit our review. One is based on plaintiffs' claims that defendants violated General Business Law § 349 by engaging in deceptive marketing and sales practices; the other is based on common-law fraud.

I. Facts and Procedural History

A. The Gaidon-Guardian Action

In the mid-1980s, plaintiff representatives of a purported class each purchased a life insurance policy from defendant Guardian Life Insurance Company of America.¹ Each policy was a "Whole Life Policy With Specified Premium Period." The policies contained provisions setting forth the periods for which premiums were to be paid. These periods varied from policy to policy and ranged from 10 years to life.

Plaintiffs allege that they bought their policies on the strength of false representations made to them by a Guardian sales agent. They assert that as part of the company's standard marketing presentation, the agent prepared a personalized "vanishing premium" illustration for each plaintiff. Using this device, the agent allegedly represented to each plaintiff that he or she would have to pay annual premiums out-of-pocket for only the first eight years of the policy, assuring each of them that the policy's dividends would thereafter cover the premium costs. Plaintiffs contend that the illustrations were premised on dividend projections that Guardian knew or should have known were untenable. Specifically, they allege that Guardian, in the mid-1980s, artificially inflated its current dividend rates despite waning profits because it wanted to continue depicting competitive vanishing dates.

On a separate page, accompanying each illustration, however, limitations such as the following appeared:

"Figures depending on dividends are neither estimated nor guaranteed, but are based on the [current year's] dividend scale."

"The [current year's] dividend scale reflects current company claims, expense, and investment experience * * * and taxes under current laws. Actual future dividends may be higher or lower than those illustrated depending on the company's actual future experience."

After deciding to purchase the policy each plaintiff signed an application. Several weeks later Guardian delivered the policies. Each policy contained the following provisions:

(1) "[a] participating policy shares in Guardian's divisible surplus. The policy's share, if any, is determined yearly by Guardian"; and

(2) "[t]he dividend will reflect Guardian's mortality, expense, and investment experience."

Moreover, the policies contained several integration or merger clauses stating, in words or substance, that only the actual policy provisions controlled.²

In 1995, eight years after the sale of the policies, Guardian informed each plaintiff that his or her premiums would, in fact, not vanish and that if the policies were to remain in force, plaintiffs would have to continue out-of-pocket premium payments.³ Plaintiffs brought this purported class action suit against Guardian in 1996.⁴

In its pre-answer motion, Guardian moved to dismiss. Supreme Court granted the motion and dismissed the complaint for reasons that varied with the particular plaintiff.⁵ The Appellate Division affirmed but made no distinction among plaintiffs, holding that, among others, the fraudulent inducement and General Business Law § 349 claims failed as a matter of law (Gaidon v Guardian Life Ins. Co., 255 AD2d 101, 101-102).

B. The Goshen-MONY Action

Plaintiffs' assertions against defendants Mutual Life Insurance Company of New York and MONY Life Insurance Company of America (collectively "MONY") mirror those in the Gaidon/Guardian case. In essence, they allege fraudulent representations and a deceptive marketing scheme, both based on untenable dividend projections.

Plaintiffs (members of certified class) purchased whole and universal life insurance policies in the mid-1980s from MONY. The MONY policies, like Guardian's, set forth premium payment schedules covering a stated number of years. MONY pre-sale illustrations were accompanied by "Limitations" pages similar to those in Guardian:

"This illustration shows the surrender of values dependent in whole or in part on dividends paid by the Company. These values are not guaranteed."

"Dividends shown and amounts dependent on them are based on the current illustrative formula. They are neither guarantees nor estimates of future results."

Each prospective policyholder submitted an application and, several weeks later, received a policy containing generally worded integration clauses.⁶

In 1995, MONY began informing plaintiffs that if they wished to keep their policies in force they would be required to pay additional premium payments beyond the depicted vanishing date. Employing theories similar to those in the companion case, plaintiffs commenced this action against MONY.⁷

Supreme Court certified the class to include

"all persons or entities * * * who have, or at the time of the policy's termination had, an ownership interest in one or more whole life or universal life insurance policies issued by [MONY] * * * and were harmed due to [MONY's] alleged wrongful conduct with respect to the sale of Policies on an alleged `vanishing premium' basis * * * during the period from January 1, 1982 through and including December 31, 1995."⁸

Following discovery, Supreme Court granted MONY summary judgment on all claims, including those for fraudulent inducement and violation of General Business Law § 349. The Appellate Division, citing its decision in Gaidon (supra), affirmed, without opinion.

II. Vanishing Premium Life Insurance: The Background

The cases before us are not unique. They involve allegations and practices of a national scope that have generated industry-wide litigation (see, 7 Holmes, Appleman on Insurance 2d § 49.19). In resolving this case, we consider the various types of cash value life insurance that are marketed, and the import of "vanishing premiums" in that setting.

All the policies in the appeals before us provide "whole life" or "universal life" insurance—each a form of "cash value" life insurance. Cash value life insurance combines "pure" life insurance with an investment component that creates a potential accumulation of money in the policy (Downes and Goodman, Dictionary of Finance and Investment Terms, at 81 [4th ed]; see also, Black and Skipper, Life Insurance, at 177-78 [12th ed] [discussing "dual nature" of cash value life insurance]). In a cash value policy, the carrier typically invests accumulated money and pays returns to the policyholder in the form of dividends or interest (Downes and Goodman, op. cit., at 81).

When cash value insurance first emerged, insurance companies invested accumulated money exclusively in conservative securities with fixed interest rates, such as municipal and corporate bonds (see, Fischel and Stillman, The Law and Economics of Vanishing Premium Life Insurance, 22 Del J Corp L 1, 4 [1997]). Commentators point out that because interest rates "soared" in the late 1970s and early 1980s, the economics of these cash value life insurance policies became unattractive to investors who sought to take advantage of the high interest rates (s...