Martz v. Union Labor Life Ins. Co.

• Decision Date: 25 October 1983
• Docket Number: No. 82 C 20083.,82 C 20083.
• Citation: 573 F. Supp. 580
• Parties: Herbert E. MARTZ, Plaintiff, v. The UNION LABOR LIFE INSURANCE COMPANY, Defendant.
• Court: U.S. District Court — Northern District of Illinois

573 F. Supp. 580

Herbert E. MARTZ, Plaintiff, v. The UNION LABOR LIFE INSURANCE COMPANY, Defendant.

No. 82 C 20083.

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

October 25, 1983.

Albert Manus, Freeport, Ill., for plaintiff.

James B. Davidson, Joseph J. Hasman, Peterson, Ross, Schloerb & Seidel, Chicago, Ill., David Connolly, Thomas Laughlin, Connolly, Hickey & Oliver, Rockford, Ill., for defendant.

ORDER

ROSZKOWSKI, District Judge.

Before the court are cross-motions for summary judgment filed by the plaintiff, Herbert E. Martz, and the defendant, The Union Labor Life Insurance Company. For the reasons stated herein, the plaintiff's motion for summary judgment is granted and the defendant's motion for summary judgment is denied.

Jurisdiction is invoked pursuant to 28 U.S.C. § 1332. Plaintiff is a resident of Illinois, and the defendant is a Maryland corporation authorized to do business in Illinois. The matter in controversy, exclusive of interest and costs, exceeds the sum of Ten Thousand Dollars ($10,000).

The undisputed facts are as follows.

The plaintiff, Herbert E. Martz, was a member of the Central Laborers Union. As a union member, plaintiff was insured by the Union Labor Life Insurance Company under a group policy. The policy covered medical and hospital bills up to a maximum of $100,000 per calendar year.

Termination or modification of the policy was provided for under the policy terms, which stated:

TERMINATION AND CHANGE OF POLICY ...

On any premium due date the Policy-holder may terminate this Policy or, subject to the Company's approval, may modify, amend or change the provisions, terms and conditions of this Policy. The Company's written consent shall be required to make any such modification, amendment or change, but the consent of any insured Person or any other Person referred to in this Policy shall not be required to effect such termination or any modification, amendment or change of this Policy.

In early August 1980, Donald Dippold, Executive Administrator of the union's welfare fund, began to look for ways to reduce the costs of the insurance plan. He contacted Richard Falcone, Union Labor Insurance Company's Midwest Regional Manager of Claims and Service. Falcone suggested a subrogation provision for containing the cost of premiums, and Dippold requested that Falcone outline, in writing, his suggestions regarding the subrogation provision. Falcone then wrote a letter to Dippold recommending the adoption of the subrogation provision. Falcone attached an executed copy of Union Labor's standard subrogation provision rider. The rider provided:

SUBROGATION. The Company shall be subrogated to the extent of any benefits paid under this Contract, to the proceeds of any settlement or judgment effected against a third party and resulting from the exercise of any rights of recovery which the Person may have against any person or organization. The Person claiming benefits under this Policy shall execute and deliver such instruments and take such other action as the Company may require to implement this provision. The Person shall do nothing to prejudice the rights given the Company by this provision without its consent.

The Trustees of the Central Laborers Union Welfare Fund met on October 28, 1980 to consider the subrogation provision. At this meeting the trustees reviewed and unanimously voted to amend the policy to include the subrogation provision. The Rider adopted stated that the subrogation provision was to be effective on and after October 28, 1980.

A little less than a month later, a freight train struck the plaintiff as he was driving his pick-up truck near Lena, Illinois. He suffered severe injuries, was hospitalized, and was treated by various doctors.

After the plaintiff was injured, two actions were taken regarding the insurance policy. First, on December 9, 1980, the trustees of the union's fund formally signed the subrogation rider which was approved in the October 28, 1980 meeting. Second, in mid-December, union members were given notice that the insurance policy had been modified through the addition of the subrogation provision. It is undisputed that the plaintiff received his notice on December 18, 1980.

After incurring medical and hospital costs, the plaintiff filed claims with the insurer. The insurer paid claims amounting to approximately $44,750.00. The insurer then requested the plaintiff to sign a subrogation agreement, authorizing them to proceed against the railroad involved in the accident. Plaintiff refused, contending that the insurer had no right to subrogation. Upon plaintiff's refusal, the insurer immediately ceased paying plaintiff's medical and hospital bills.

Plaintiff then commenced this action seeking a declaratory judgment that the subrogation provision has no binding legal effect upon him. Plaintiff raises four contentions: 1) that the subrogation provision was not adopted in accordance with the Master Plan's procedures for amending the policy; 2) the modification, if valid, did not take effect until December 9, 1980, the day the rider was signed; 3) prior notice of any change to the insured is required by law and plaintiff did not receive notice of the modification until December 18, 1980; and 4) The Rider's subrogation language had not been approved by the Illinois Department of Insurance and is therefore invalid.

Plaintiff seeks a declaration that the subrogation provision has no binding effect upon him and a ruling that the defendant must pay plaintiff's hospital and medical bills.

The plaintiff also seeks attorney's fees, costs and statutory penalties under Ill.Rev. Stat. ch. 73 § 767 (1981). Section 767 permits recovery of fees, costs, and penalties when an insurer has vexatiously refused to pay benefits under an insurance policy. Plaintiff contends that defendant's decision to cease payment of his hospital bills after he had refused to sign the subrogation authorization constitutes willful and vexatious conduct.

Both parties, alleging that there are no material issues of fact, have moved for summary judgment on the liability issue. The plaintiff claims he is entitled to judgment for the four reasons set forth in his complaint; the defendant, in turn, contends that the amendment to the policy was lawfully adopted and is therefore binding on the plaintiff.

Federal Rule of Civil Procedure 56 provides that a summary judgment shall be rendered if "no genuine issue as to any material fact" exists. The Court in Rigsby v. Mutual of New York, 331 F.2d 353, 354 (10th Cir.1964), held that when the "only issue was the application of the provisions of the insurance contract" use of summary judgment is proper. Here, where the court can resolve the legal questions raised by reference to the contract and established principles of law, summary judgment is appropriate.

Because consideration of the notice issue resolves the liability question, the Court will address the notice issue first.

A. Notice

The majority of jurisdictions in this country require notice¹ to the insured employee before the employer or the group insurer can cancel or modify benefits under a group policy. The Kansas Supreme Court, in adopting this majority rule, observed that:

It is clear that in other jurisdictions the weight of authority holds that without reasonable notice to the contributing employee, neither the employer nor the insurance company may cancel or modify the benefits under a group insurance before liability has attached so as to deprive the employee or his beneficiary of rights under the policy.

Ogden v. Continental Casualty Company, 208 Kan. 806, 494 P.2d 1169 (1972) (emphasis supplied). Legal commentators have also noted the prevalence of the majority rule. See 68 A.L.R.2d 249, Cancellation or Modification of Master Policy As Termination of Coverage Under Group Policy, § 12 (1959).²

The majority position is grounded upon two policy considerations. First, there is a recognition that the insured employee, if not a party to the insurance contract, at the very least has significant rights under the policy which should be protected. In Fagan v. John Hancock Mutual Life Insurance Company, 200 F.Supp. 142 (D.Kan. 1961), the court applied the majority rule, in part, because:

although deceased was not a party to the insurance contract, he did have rights under it. For example, he could designate beneficiaries. He could also convert to an individual policy within thirty-one days after termination of coverage under the group policy. The weight of the authority is that notice must be given the employee of any modification of the contract which affects his rights.

Id. at 144. (emphasis supplied). And where the employee contributes to the cost of the group policy, the courts have been especially diligent in requiring notice of any change affecting rights under the policy. In Ogden, supra, the Kansas Supreme Court reasoned that:

where the employee pays a portion of the premiums he has valuable rights in the policy and therefore notice should be given him of any modification of the contract which might effect those rights.

Ogden, 494 F.2d at 1172.

Second, the notice requirement allows the insured to exercise conversion rights or to obtain alternative coverage so that no gap in protection arises. The Pennsylvania and Alabama Supreme Courts have required notice to the insured:

So that he may timely exercise any conversion privilege which may be available to him under the terms of the policy or, where such privilege is not given, in order that he may reasonably obtain similar insurance protection on his own account elsewhere.

Harrison Insurance Co. of North America, 294 Ala. 387, 318 So.2d 253, 258 (Ala. 1975) quoting Poch v. Equitable Life Assurance Society, 343 Pa. 119, 22 A.2d 590 (1941).

A minority of jurisdictions, in contrast, hold that an employer may validly cancel or modify a master group policy without notice to the insured employee. E.g. Kimbal v....