Wilkes ex rel. Mason v. Phoenix Home

• Decision Date: 18 July 2006
• Parties: Andrea D. WILKES, David H. Ehrenwerth and Charles K. Clark, As Trustees of the Mark E. and Myrna L. MASON Irrevocable Trust, Mark E. Mason and Myrna L. Mason, v. PHOENIX HOME LIFE MUTUAL INSURANCE COMPANY, A Corporation and Balanced Equities, Inc., A Corporation. Appeal of Phoenix Home Life Mutual Insurance Company, A Corporation.
• Court: Pennsylvania Supreme Court

Page 366

902 A.2d 366

Andrea D. WILKES, David H. Ehrenwerth and Charles K. Clark, As Trustees of the Mark E. and Myrna L. MASON Irrevocable Trust, Mark E. Mason and Myrna L. Mason, v. PHOENIX HOME LIFE MUTUAL INSURANCE COMPANY, A Corporation and Balanced Equities, Inc., A Corporation.

Appeal of Phoenix Home Life Mutual Insurance Company, A Corporation.

Supreme Court of Pennsylvania.

Argued September 12, 2005.

Decided July 18, 2006.

COPYRIGHT MATERIAL OMITTED

John P. Edgar, Jeffrey G. Weil, Philadelphia, for Phoenix Home Life Mutual Ins. Co.

Joseph Leibowics, Robert L. Byer, Pittsburgh, David L. McClenahan, Paul Joseph Berks, for Andrea D. Wilkes, et al.

CAPPY, C.J., CASTILLE, NEWMAN, SAYLOR, EAKIN, BAER, JJ.

OPINION

Justice CASTILLE.

The primary issue on appeal is whether appellees Andrea D. Wilkes, David H. Ehrenwerth, and Charles K. Clark, trustees of the Mark E. and Myrna L. Mason Irrevocable Trust, and Mark E. Mason and Myrna L. Mason (collectively "appellees"), are barred by the doctrine of res judicata from bringing suit in Pennsylvania against appellant, Phoenix Home Life Mutual Insurance Company ("appellant" or "Phoenix"), due to an out-of-state class action settlement in New York. The Court of Common Pleas of Allegheny County granted summary judgment for Phoenix and dismissed appellees' suit, finding that since appellees had not opted out of a class action settlement filed in New York state court against appellant concerning the failure of some of its insurance policies to perform as promised, res judicata barred appellees from subsequently bringing suit against appellant in Pennsylvania on the same matter. On appeal, however, the Superior Court found that the class action notice apprising appellees of the New York settlement was constitutionally inadequate and reversed the trial court. This Court granted further review to determine the res judicata effect of the New York class action settlement, including the question of whether the class action settlement notice was constitutionally adequate. For the following reasons, we find that the Superior Court's decision was in error and, accordingly, we reverse that order and reinstate the trial court order granting Phoenix summary judgment.

In the late 1980s, Mark E. Mason and Myrna L. Mason ("the Masons") established a trust to purchase $7 million in life insurance that would enable the Masons' children to pay estate taxes without having to dispose of any illiquid portion of their estate. Andrea D. Wilkes, eldest daughter of the Masons, David Ehrenwerth, lawyer for the Masons, and Charles K. Clark, accountant for the Masons (collectively "Trustees"), were selected as the trustees for the trust. The Masons desired a policy where the premiums would diminish over time and, eventually, cease altogether at Mr. Mason's retirement, a point when the Masons would welcome fewer financial obligations.

Shortly after creating the trust, the Masons contacted independent insurance agent/broker Sander Lenenberg,¹ an acquaintance of the Masons since the 1970s, to obtain such a policy. Lenenberg suggested that the Masons purchase a whole life insurance second-to-die policy from appellant called a "Survivorship Life Protector" ("SLP"), with a rider referred to as "Optionterm," that would function as annual term insurance. Appellant advertised the proposed policy with phrases such as "quick pay," "rapid pay," and "vanishing premium." Theoretically under this plan, after premium payments had been made for fifteen years, the policy would produce enough dividends and paid-up additions² to obviate the need for further out-of-pocket premium payments. The targeted death-benefit value of the policy at the death of the second-to-die (i.e., Mark or Myrna) was $7 million. The proposed whole life insurance portion of the policy consisted of nearly $4.1 million, with the "Optionterm" rider contributing approximately an additional $2.9 million. Based on Lenenberg's projections, the base annual premium cost for the first five years would be $80,813, with the last of such payments required in 1993. The premium payments would then decline to $60,813 through 1999, and would diminish to $40,813 until the last premium payment in 2003. No premium payments would be owed after 2003. Lenenberg's projections did not illustrate any payment scenario to demonstrate what effect the first death of either Mark or Myrna Mason would have on the premiums.

In 1989, the Trustees purchased the SLP policy with the "Optionterm" rider. The policy summary showed that the face value of the whole life insurance was $4,117,647, and the "target face amount" of the "Optionterm" rider was $2,882,353. Insurance Policy Summary Schedule at 2. The total annual premium was listed at $80,813.23. Id. The policy also described how dividends generated by the policy could be used to reduce premiums and purchase paid-up additions. Id. at 9.

In 1994, the Trustees received a notice from Phoenix that the upcoming premium payment for the insurance policy was $80,813. Because the Trustees expected that the premium payments would reduce to $60,813 in 1994, Ehrenwerth wrote Phoenix inquiring about the discrepancy. Appellant responded by letter in April of that year:

The proposals used in determining the "Quick Pay" date project dividends based on our current interest sensitive dividend scale and are neither guaranteed nor estimates of the future. Actual dividends payable may vary and will depend, to a greater extent than in the past on Phoenix Home Life's earnings on new investments.

Phoenix Letter to Trustees, April 22, 1994. The letter also provided a new illustration showing that the premium payments would last until the twenty-third year of the policy (as opposed to the fifteenth year) and decline at a slower rate than initially expected. The Trustees then contacted Lenenberg about this letter and, subsequently, appellant reissued a new illustration conforming to the original proposal from 1989. Appellant provided the Trustees with more illustrations in June of 1994 that also matched their original expectations. None of the illustrations that appellant provided the Trustees in 1994, however, included and accounted for a first-to-die death scenario.

In January of 1995, an attorney working with Ehrenwerth's firm requested that Lenenberg review the policy and make projections that assumed dividends would be reduced by one and two percentage points. Phoenix later provided several illustrations in response to Lenenberg's inquiry on behalf of the Masons and the Trustees, but again none of the illustrations included a first-to-die death scenario. In March of 1995, Ehrenwerth contacted Lenenberg to inquire why the Trustees had received a notice stating that an additional $5,584.41 was owed on the policy, when Lenenberg had previously indicated that a payment of $60,813 would be sufficient for 1995. Because there were not enough paid-up additions in 1995 to account for the premium expenses in excess of the payment that the Trustees had made for that year, the Trustees took a loan on the policy, as suggested by Phoenix, to cover the balance due. In February and March of 1996, appellant produced additional illustrations to show how the premium payments would change if the Masons altered their out-of-pocket premium payments for a few years. Again, no death scenario was reflected in the charts provided.

In August or September of 1996, the Trustees received a notice concerning a proposed settlement of a New York state court case involving a nationwide class action against appellant, Michels v. Phoenix Home Life Mutual Ins. Co., Index No. 5318-95 (N.Y. Sup.Ct. Albany Cty.1995). A cover-letter accompanied the notice, which stated that policyholders of policies purchased between 1980 and 1995 were affected, and also stated that the proposed settlement included an offset benefit for "Optionterm" policies.³ The letter also outlined the two proposed settlement options for affected policyholders: either alternative dispute resolution ("ADR") or General Policy Relief (which is what appellees ultimately received).⁴ Class members were encouraged in the letter to pursue further information: "If you have questions after reviewing this information, you can reach us at a special toll-free number we have set up with class counsel to answer your questions relating to the settlement, 1-800-556-8533." Cover Letter for Michels Proposed Settlement, at 1. Also, the date of the final hearing to approve settlement, November 8, 1996, was provided. Id. at 2.

A four-page question and answer brochure was included with the class action notice and it summarized the details concerning the claims which were made in the suit and how policyholders would be affected by the settlement. The brochure explicitly noted that vanishing premium policies were implicated in the class plaintiffs' claims and that an offset for "Optionterm" policies automatically would be awarded in the settlement.⁵ The "Optionterm" charge offset was delineated as follows:

Class members will automatically receive the Optionterm Charge Offset if they (1) have in-force whole life policies with Optionterm riders and (2) do not elect to submit a claim to the ADR Process. Optionterm coverage is term insurance generally paid for by dividends. In some cases, dividends may in the future be insufficient to maintain coverage, and certain out-of-pocket payments may be required. If your policy has an Optionterm rider, the Optionterm Charge Offset will eliminate your out-of-pocket costs during the first two years for which an out-of-pocket outlay is required. (Class members will have the option of deferring the offset to the second and third years if they wish.)

Question and Answer Brochure for Michels Proposed Settlement, at 3. The brochure also provided the toll-free number established by class counsel to answer questions that any policyholder had with respect to the suit.

The settlement notice...