In re Northwestern Mutual Life Insurance Company Sales Practices Litigation
| Decision Date | 01 January 1998 |
| Docket Number | Civ. No. 97-5213 (DRD).,MDL No. 1213 (DRD) (All Cases).,Civ. No. 99-1545 (DRD).,Civ. No. 98-1875 (DRD). |
| Parties | In Re: THE NORTHWESTERN MUTUAL LIFE INSURANCE COMPANY SALES PRACTICES LITIGATION. |
| Court | U.S. District Court — District of New Jersey |
Miles M. Tepper, Esq. Law Offices of Miles M. Tepper, West Orange, New Jersey and
Howard W. Foster, Esq. Johnson & Bell, Ltd. Chicago, Illinois, Attorneys for Plaintiff Scott Hartmann.
Miles M. Tepper, Esq. Law Offices of Miles M. Tepper, West Orange, New Jersey and
Lee Squitieri, Esq. Karin E. Fisch, Esq. Abbey, Gardy & Squitieri, LLP, New York, New York, Attorneys for Plaintiff Merrill Hess.
Jere L. Beasley, Esq. W. Daniel "Dee" Miles, III, Esq. Scott T. McArdle, Esq. Beasley, Allen, Crow, Methvin, Portis & Miles P.C. Montgomery, Alabama, Attorneys for Plaintiff Wallace B. McGahan.
Kenneth K. Lehn, Esq. Winne, Banta, Rizzi, Hetherington & Basralian, P.C. Court Plaza North Hackensack, New Jersey and
George A. Riley, Esq. O'Melveny & Myers LLP San Francisco, California, Attorneys for Defendant The Northwestern Mutual Life Insurance Company.
In this multi-district litigation concerning the sale of so-called "vanishing premium" life insurance policies by defendant The Northwestern Mutual Life Insurance Company ("NWM") in the 1980's, NWM moves for summary judgment on the claims of plaintiffs Scott Hartmann, Merrill Hess and Wallace B. McGahan. Plaintiffs move for a continuance of NWM's motion in order to permit them to conduct discovery pursuant to Fed. R. Civ. P. 56(f) and plaintiff Hartmann moves to strike the declaration of Keith F. Koppen dated August 13, 1999 (the "Koppen Declaration"). For the following reasons, NWM's motions for summary judgment will be granted, plaintiffs' motions for a continuance will be denied and Hartmann's motion to strike the Koppen Declaration will be granted.
The plaintiffs in this action allege that they were defrauded by NWM because they were induced to purchase life insurance policies on representations from its sales agents that premium payments would have to be made for only a limited number of years in order to obtain fully paid up policies, yet the policies they received required them to pay premiums for many more years. The factual background of each plaintiff's case will be discussed in turn.
Hartmann, a 49-year-old former vice president of a lumber company with a Master's Degree in Business Administration, purchased a $150,000 life insurance policy titled "Whole Life Paid Up at 90" from NWM in 1984 (the "Hartmann Policy").1 As specified in the Hartmann Policy, the annual premiums of $2,424.50 were payable for 56 years, until Hartmann reached age 90. Under the terms of the Hartmann Policy, as long as those scheduled premiums were paid, NWM would pay at least $150,000 on Hartmann's death.
Each premium was required to be "paid on or before its due date." If Hartmann failed to pay the premiums, the Hartmann Policy provided that "a loan will be made to pay an overdue premium." However, the Hartmann Policy specified that a policyholder could not borrow more than the cash value of the policy to pay premiums: "If the policy debt equals or exceeds the cash value, this policy will terminate."
Instead of borrowing against the cash value to pay premiums, Hartmann could stop paying premiums altogether and convert his policy into a "paid up insurance" policy that provided a reduced death benefit but required no further premium payments. The guaranteed cash values and amount of paid up insurance provided under the contract at any given policy year were set forth in a chart on page 4 of the Hartmann Policy called a "Table of Guaranteed Values." For example, if Hartmann paid premiums for three years, according to the Table of Guaranteed Values the cash value of his policy would be $3,255 which he could convert into $11,250 of paid up insurance.
The Hartmann Policy was also eligible for dividends. As explained in the Hartmann Policy, each year NWM calculates the surplus from its operations that it will distribute to its policyholders in the form of dividends. The Hartmann Policy stated that dividends are not guaranteed but are "determined each year." Under his policy Hartmann was allowed to take dividends paid on his policy in cash. Alternatively, he could use the dividends to reduce the premiums due on the policy or to purchase paid up additional insurance (called "paid-up additions" or "Additions"). In his insurance application Hartmann requested that dividends be used to purchase additional insurance. His policy explained that if Additions were purchased, the cash value could increase over the guaranteed values shown on the Table of Guaranteed Values but that if he took out loans on the policy they would reduce dividends and cash values.
Hartmann's policy required him to make annual cash premium payments until he reached age 90. If Hartmann had paid his premiums in cash each year and used dividends to purchase Additions, there would have come a point when he could have paid the annual premiums by using a combination of current dividends and the accrued cash value of accumulated Additions rather than paying the premiums in cash. This concept is known as "Short Pay."2
In 1984, Hartmann met with NWM agent Keith Koppen to discuss life insurance. According to his Complaint, Hartmann wanted to purchase a life insurance policy that would "assure him a death benefit for at least the next twenty years." Koppen proposed that Hartmann purchase a $150,000 90-Life whole life policy. According to Hartmann, Koppen orally promised that if Hartmann paid premiums for three years he would have a $ 150,000 paid up insurance policy for life. Hartmann understood "paid-up" policy to mean "a policy that doesn't need any more premiums."
Koppen's alleged oral promise is inconsistent with the written materials from NWM that Koppen gave to Hartmann and reviewed with him. These materials consisted of two "illustrations" demonstrating how the policy would perform under certain circumstances. The first illustration showed Hartmann how his policy would perform if the dividend scale remained constant at the 1984 level and Hartmann made all of his premium payments in cash.3 The illustration showed that, if the policy continued to earn dividends at the 1984 dividend scale, Hartmann would have to pay premiums for 15 years before he would have paid up insurance equal to the $150,000 face value of the policy. When Koppen reviewed this illustration with Hartmann, Koppen circled "1984" in the phrase "Based on current dividend scale — 1984 scale." Koppen also underlined the number "15" in the phrase "Years to pay up 15" and circled the 15th year of the column titled "paid up insur.," emphasizing that, if dividends remained at 1984 levels, it would take fifteen years to obtain $150,000 of paid up insurance. The illustration also showed that Hartmann would be entitled to only $13,888 in paid up insurance if he stopped paying premiums after three years.
The second illustration was a Short Pay illustration showing how Hartmann's policy would perform, based on the 1984 dividend scale, if he made eight premium payments in cash. This illustration showed that after making eight cash payments Hartmann could elect in the ninth year to pay his premiums out of a combination of dividends on the policy and the cash value of the accumulated Additions, and maintain a death benefit of between $150,000 and $180,000 for the first 20 years of the policy.4 The two core assumptions underlying both these illustrations — that the dividend scale would remain at the 1984 rate and that there would be no loans on the policy — are disclosed in the illustrations as follows:
DIVIDENDS ASSUME NO LOANS; LOANS WILL REDUCE DIVIDENDS. BASED ON CURRENT DIVIDEND SCALE — 1984 ISSUE. NOT AN ESTIMATE OR GUARANTEE OF FUTURE RESULTS.
On July 11, 1984, Hartmann applied for the 90-Life policy recommended by Koppen. In his application, Hartmann requested that dividends be used to purchase paid-up additions. The application stated, above Hartmann's signature, that "[n]o agent is authorized to make or alter contracts or to waive any of the Company's rights or requirements." Hartmann admitted in his deposition that nothing in the policy application indicated that he would have to make only three premium payments.
Hartmann received a copy of his insurance contract on or about August 10, 1984.5 The cover states that NWM "agrees to pay the benefits provided in this policy, subject to its terms and conditions." The policy states that the policyholder should read it carefully, and that the policyholder can return the policy "for any reason within ten days after it was received" for a full refund. It also states that
In 1986, while Hartmann's policy was in force, Koppen provided Hartmann with an "in-force ledger" describing how his policy would perform under the 1986 dividend scale.6 According to the ledger, Hartmann would have only $14,104 of paid up insurance after making premium payments for three years. Under the 1986 dividend scale it would have taken 13 more years of cash premium payments, until 1999, before Hartmann would have $150,000 of paid up insurance.
At his deposition, Hartmann stated that he understood from Koppen's oral representations that he was required to pay premiums for three years, and that he would be "stupid" if he failed to live up to "what [he] viewed as being a three-year commitment, a three-year contract." Hartmann conceded that if he did not pay the premiums for three years, he expected that the policy would not perform as he claims he was promised...
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