Washington Nat. Ins. Co. v. Administrators

• Decision Date: 14 September 1993
• Docket Number: 92-3367,Nos. 92-3366,s. 92-3366
• Citation: 2 F.3d 192
• Parties: WASHINGTON NATIONAL INSURANCE COMPANY, Plaintiff-Appellant, Cross-Appellee, v. The ADMINISTRATORS, a sole proprietorship, and Robert J. Hoefer, Defendants-Appellees, Cross-Appellants.
• Court: U.S. Court of Appeals — Seventh Circuit

Page 192

2 F.3d 192

WASHINGTON NATIONAL INSURANCE COMPANY, Plaintiff-Appellant Cross-Appellee, v. The ADMINISTRATORS, a sole proprietorship, and Robert J Hoefer, Defendants-Appellees, Cross-Appellants.

Nos. 92-3366, 92-3367.

United States Court of Appeals Seventh Circuit.

Argued April 26, 1993.

Decided Aug. 4, 1993.

Rehearing Denied Sept. 14, 1993.

Roderick A. Palmore (argued), Brian W. Lewis, David M. Simon, Wildman, Harrold, Allen & Dixon, Chicago, Il, for plaintiff-appellee.

Deborah Schmitt Bussert, Christopher J. Stuart, Much, Shelist, Freed, Denenberg & Ament, Chicago, Il, William G. Deck, Paul W. Deck, Jr. (argued), Deck & Deck, Sioux City, IA, for defendants-appellants.

Before CUDAHY and EASTERBROOK, Circuit Judges, and EISELE, Senior District Judge. ^*

EASTERBROOK, Circuit Judge.

For more than two decades, Washington National Insurance Company (WNIC) underwrote group life and health insurance for members of the Iowa Grain and Feed Association (IGFA). The IGFA had many members and sub-groups. Each constituent unit of the IGFA had to be identified and its risks assessed. Shifting membership created difficulties in collecting the proper premium and handling claims. WNIC engaged The Administrators, a proprietorship through which Robert J. Hoefer does business, to handle all contact with the IGFA and its members. Hoefer and his staff were to negotiate with each unit, bill and collect premiums, establish the eligibility of claimants, pay valid claims, and keep records of all these activities. In exchange, Hoefer was to receive 6.5% of WNIC's gross premiums from the IGFA. (Because The Administrators is a proprietorship, we drop separate reference to it.)

To make money, WNIC needed premiums sufficient to cover the costs of health and death benefits plus Hoefer's fees. Hoefer wanted to keep premiums low in order to maximize the number of persons who opted into the group plan. His compensation as a percentage of the gross led Hoefer to want higher aggregate billings, which could be accomplished by selling more policies at stable rates. Hoefer's desire to maximize gross revenues, contrasted with WNIC's desire to maximize net profits, put them on a collision course when the costs of medical care began to rise rapidly in the late 1980s and the IGFA business became unprofitable for WNIC.

After a period of increasing friction about the appropriate level of premiums, characterized by an episode in which Hoefer stalked out of a meeting rather than discuss a possible increase in rates, the two parties reached an agreement in September 1989 to increase health insurance rates by 25% and life insurance premiums from 43cents to 54cents per $1,000 of coverage. WNIC's receipts rose by only 3%, which Hoefer attributed to a combination of price guarantees (the new rate could not go into effect until the guarantee periods expired) and some units' decisions to drop coverage rather than pay the additional premium. Because WNIC did not deal directly with the IGFA and its constituent groups, it took Hoefer's word. The business remained unprofitable, and WNIC concluded that rates had to be increased further. Discussions between WNIC and Hoefer produced an agreement in May 1990 to implement a new system of risk classifications. Units within the IGFA with a history of higher claims were to be assessed substantially higher premiums. Hoefer was responsible for classifying the units by risk and implementing the new rates effective June 1, 1990, for some units and July 1, 1990, for the rest.

For a second time, WNIC saw only a minuscule increase in total receipts. Hoefer offered the same explanation. This time WNIC did not believe it. WNIC interpreted a set of tables attached to a letter of August 14, 1990, as proof of Hoefer's failure to implement the scheduled increases. On August 28, 1990, WNIC sent the IGFA a letter terminating all policies, explaining in part:

It is apparent that The Administrators failed to implement the agreed upon renewal action in June. Although the amount of delinquency appears to be substantial, the exact amount cannot be determined without the monthly enrollment by unit for June.

Since full premium payment was not made by August 1, 1990, Washington National considers the premium to be delinquent.

A letter the same date notified Hoefer of the termination and the rationale. WNIC added: "If you have documentation to prove that our calculations are in error and the premium paid was the correct premium due, please forward that documentation to us immediately." Hoefer did not attempt to show WNIC that the agreement concerning higher premiums had been implemented. Instead of supplying evidence, Hoefer refused to show WNIC any documents, leaving the insurer in the dark about what he had done and even how many insureds there were. WNIC finally obtained a judicial order compelling Hoefer to permit Ernst & Young to audit his records. This audit revealed shortfalls in Hoefer's billings and collections. A letter of October 2, 1990, formally discharged Hoefer, effective October 31. The IGFA's coverage continued until early 1991, by agreement with Iowa's insurance regulators.

WNIC filed this action under the diversity jurisdiction, seeking to recover the premium shortfall from Hoefer on the ground that he was obliged by contract to collect the higher amount. Hoefer filed counterclaims, contending that WNIC broke its own contractual commitments and libeled him in the letter to the IGFA terminating the policies. During discovery it became clear that Hoefer had not implemented the higher life insurance rates and that the collection of higher premiums for health insurance was spotty. According to Hoefer, the failure to change the life insurance rates was a regrettable administrative lapse. As for the health insurance rates, Hoefer insisted that his discretion to set risk classes explained the lack of increase for some units, that guarantees prevented increases for other units, and that any remaining shortfall had been authorized orally by senior managers of WNIC.

A jury resolved all disputes against WNIC. Answering special interrogatories, the jury concluded that Hoefer is not responsible to WNIC for the shortfall in premium. The jury concluded that WNIC broke its contracts by discharging Hoefer and awarded compensatory damages of $1,085,200. Finally, the jury concluded that the letter sent to the IGFA was defamatory and awarded $100,000 in compensatory and $500,000 in punitive damages. The district judge granted WNIC judgment notwithstanding the verdict on Hoefer's contract claim, ruling that because the principal contract lacked a stated duration, WNIC could dispense with Hoefer's services at will. A separate contract, called the Supplemental Agreement, had a stated term, but the district judge held that this agreement was implicitly contingent on the continued provision of services under the main contract. The court entered judgment on the remainder of the verdict, and both sides have appealed. We begin with defamation.

I

WNIC's letter to the IGFA explained that the policies were being canceled because the IGFA was not paying the higher premium that WNIC had established. Accusing an intermediary of selling a product for too little is not defamatory--at least not from the customers' point of view! Most middlemen struggle to acquire reputations for selling at rock-bottom prices. But Randy S. Allman, executive president of the IGFA and the recipient of the letter, testified that a darker thought crossed his mind. Allman knew that the IGFA had paid Hoefer's bills promptly and fully. If, as Allman believed, Hoefer was billing the correct amount, then WNIC's failure to receive the correct premium must mean that Hoefer or a member of his staff was embezzling.

According to WNIC, the letter it sent to the IGFA is absolutely privileged under Illinois law. Insurers are required to explain to their insureds precisely why they are changing or canceling policies. In order to facilitate candid communication, Illinois has created an absolute privilege. 215 Ill.Comp.Stat. Sec. 5/143.18 ("There shall be no liability on the part of and no cause of action of any nature shall arise against any [insurer] ... for any statement made ... in any written notice of cancellation or nonrenewal, or any other communications, oral or written, specifying the reasons for cancellation or nonrenewal, or for the providing of information pertaining thereto."). See also International Administrators, Inc. v. Life Insurance Co. of North America, 753 F.2d 1373, 1379 (7th Cir.1985) (construing this statute). If Illinois law applies, the defamation claim is untenable.

WNIC's headquarters are in Illinois, and it sent the letter from that state. As its name suggests, the IGFA is located in Iowa. The district judge concluded that Iowa law governs the defamation claim, because the letter's sting was felt in that state, where Hoefer does business. Illinois law supplies the choice-of-law rules, given the location of the forum. Klaxon Co. v. Stentor Electric Manufacturing Co., 313 U.S. 487, 61 S.Ct. 1020, 85 L.Ed. 1477 (1941). And Illinois follows the "most significant relationship" approach in defamation cases. Ferguson v. Kasbohm, 131 Ill.App.3d 424, 86 Ill.Dec. 605, 475 N.E.2d 984 (1st Dist.1985). This means, as we recognized in International Administrators, that the Illinois privilege does not follow communications broadcast into other states. The "most" significant element of defamation is the injury, as the old rule of lex loci delicti always insisted. That WNIC is free to say anything it pleases when explaining to customers in Illinois why it is terminating their coverage does not imply that it has an equivalent privilege throughout the nation. Other states may have, and enforce, their own rules for what must, may, or may not be communicated to policyholders.

Iowa does not afford insurers an absolute privilege. It does, however, give them a...