United States District Court, Northern District of Illinois, E.D
December 23, 1982
EVALUATION SYSTEMS, INC., PLAINTIFF,
AETNA LIFE INSURANCE COMPANY, DEFENDANT. AETNA LIFE INSURANCE COMPANY, COUNTERPLAINTIFF, V. EVALUATION SYSTEMS, INC. AND VRENI NAESS, COUNTERDEFENDANTS.
The opinion of the court was delivered by: Shadur, District Judge.
MEMORANDUM OPINION AND ORDER
Evaluation Systems, Inc. ("Evaluation Systems") sues Aetna Life
Insurance Company ("Aetna"), seeking recovery of (1) $75,000 in
insurance proceeds (Count I) and (2) statutory damages under
Illinois Insurance Code § 155 (Ill.Rev.Stat. ch. 73, § 767) for
Aetna's "vexatious and unreasonable" refusal to pay (Count II).
Two motions have been submitted and briefed by the parties:
1. Aetna's under Fed.R.Civ.P. ("Rule") 12(b)(6) to dismiss
Complaint Count II; and
2. Evaluation Systems' under Rule 9(c) to strike Aetna's
Answer to Complaint ¶¶ 10 and 12.
For the reasons stated in this memorandum opinion and order,
Aetna's motion is denied and Evaluation Systems' is granted.
On November 20, 1979 Aetna issued to Evaluation Systems as
beneficiary a $75,000
policy (the "Policy") insuring the life of one of the
Evaluation Systems partners, Per L. Naess ("Naess"). No
question exists as to the propriety of Evaluation Systems'
annual premium payments ($516.75 and $563.25, respectively) for
the first two years of coverage. For the next year (beginning
November 20, 1981), however, Evaluation Systems mistakenly
again paid $563.25 rather than the $613.50 called for by the
Aetna received and cashed the $563.25 check. It then sent
Evaluation Systems a December 1, 1981 form letter:
Thank you for your payment of $563.25. To pay the current
premium due, an additional payment of $50.25 is needed.
Enclosed is a self-addressed envelope for your convenience.
Once we receive your additional payment, we will apply your
checks to pay your November premium due of $613.50.
If we can be of any further assistance, please contact us.
Unfortunately the letter was mailed to Evaluation Systems' old
address (the one listed in the Policy application).*fn3
Consequently the letter never reached Evaluation Systems, but
was returned to Aetna with the statement "Moved 3 yrs. ago"
written on the envelope.
At that point Aetna made no further effort to locate Evaluation
Systems, which (from the incomplete information now before the
Court) had apparently relocated from Chicago to a Chicago
suburb. Instead Aetna mailed the original letter to Naess,
whose home address had also been listed in the Policy
application. In response Naess' wife Vreni wrote Aetna December
15, 1981 that one of the three Evaluation Systems partners had
previously ousted the other two (including Naess) from the
company. She asked whether "any regulation on your books"
prevented continuation of insurance under those circumstances.
Aetna's next move (two months later) was to send a "Notice of
Lapse" to the same former Evaluation Systems address it had
already been told was wrong by the postal authorities. Its
February 19, 1982 letter read in part:
The annual premium of $613.50 due November 20, 1981 was not
received by us within the time allowed for payment.
Consequently, protection has ceased in accordance with the
terms of the policy.
Not surprisingly, this letter too never reached Evaluation
On the same date Aetna sent the second letter, it mailed a
$563.25 refund check to a different (but also incorrect)
address that had been provided Aetna by its Chicago office.
Nothing about any claimed lapse accompanied the check. Rather
the nonnegotiable stub attached to the check read:
Due to the partnership being dissolved we are refunding
As was the case with the two letters, Evaluation Systems never
received the refund check.
Sometime before June 1, 1982 "an oral inquiry was made by the
owner [Evaluation Systems] concerning the lapse of the policy"
(Aetna Counterclaim ¶ 14, admitted by
Evaluation Systems).*fn5 By a June 10, 1982 letter to
Evaluation Systems' correct address, an Aetna official outlined
the course of events already described in this opinion. That
letter concluded by saying a stop payment had been placed on
the uncashed February 19 check, and a replacement check would
be sent to Evaluation Systems in about three weeks.
But Naess had just died one day before the June 10 letter.
Evaluation Systems of course refused to accept the replacement
premium refund check (issued by Aetna June 15, 1982). It
furnished Aetna with the requisite notice and proof of Naess's
death and requested payment of its $75,000 claim.
To make the plot thicker, on July 21, 1982 counsel for Vreni
Naess wrote Aetna requesting payment of the insurance proceeds
to his client. That letter asserted (1) Evaluation Systems had
offered in the fall of 1980 to let the Naess family take over
the policy and substitute Vreni Naess as beneficiary, (2) that
offer had been accepted and Aetna had been so notified and (3)
the Naess family had tendered a premium payment and executed
Aetna's change of beneficiary form.
To date Aetna has refused to pay either Evaluation Systems or
Vreni Naess any insurance proceeds. After Evaluation Systems
brought this action against Aetna, Aetna filed a counterclaim
against both Evaluation Systems and Vreni Naess as
administratrix of Naess's estate. It seeks a declaratory
judgment that Evaluation Systems' failure to pay the full
annual premium relieved Aetna of any obligation to pay the
insurance proceeds to either counterdefendant.
Complaint Count II
Illinois Insurance Code § 155 ("Section 155") provides:
In any action by or against a company wherein there is in issue
the liability of a company on a policy or policies of insurance
or the amount of the loss payable thereunder, or for an
unreasonable delay in settling a claim, and it appears to the
court that such action or delay is vexatious and unreasonable,
the court may allow as part of the taxable costs in the action
reasonable attorney fees, other costs, plus an amount not to
exceed any one of the following amounts:
(a) 25% of the amount which the court or jury finds such party
is entitled to recover against the company, exclusive of all
(c) the excess of the amount which the court or jury finds such
party is entitled to recover, exclusive of costs, over the
amount, if any, which the company offered to pay in settlement
of the claim prior to the action.
Complaint Count II charges Aetna's refusal to pay the $75,000
claim was "vexatious and unreasonable" because Aetna lacked any
legal justification for doing so. Evaluation Systems' argument
to that effect rests on the following asserted interplay of
Policy provisions and Illinois case law:
1. Under the Policy's "Premiums and Reinstatement" section:
Premiums may be paid annually, semiannually, quarterly, or
with Aetna's consent, monthly at the rates in effect on the
Date of Issue. A change to any such frequency will take
effect when Aetna accepts the premium for the changed
frequency. If any premium is not paid when due or within the
grace period [31 days], this policy will terminate, subject
to the sections of this policy entitled "Reinstatement."
Evaluation Systems could unilaterally alter the frequency of
premium payments from an annual to a semi-annual or quarterly
2. Illinois authorities unanimously hold — as a matter of law
— an insurance company "accepts" a premium check by retaining
its proceeds for a significant period. Any subsequent refund
of the premium will not undercut the finding of acceptance.
3. By immediately negotiating the $563.25 premium check and
then retaining the proceeds for a number of months, Aetna
"accepted" the partial premium payment. It therefore became
obligated to provide coverage for that portion of the Policy
year (beginning November 20, 1981) equal to the ratio of the
partial payment to the annual premium charge of $613.50. Such
coverage extended well beyond the date Naess died.
Aetna's Motion To Dismiss contends Count II fails to disclose
any "vexatious and unreasonable" conduct on its part because:
1. There is no allegation of any bad faith or sinister
motivations underlying Aetna's refusal to pay Evaluation
2. All the facts as to Aetna's acceptance of the partial
premium payment confirm the reasonableness of its refusal to
Neither argument renders Count II legally deficient.
Aetna's first contention requires a review of the statutory and
case law developments that led to the current version of
Section 155. Originally the section made insurers whose refusal
to pay a claim was "vexatious and without reasonable cause"
liable only for "reasonable attorney fees" not to exceed any
of three prescribed amounts (the first and third ceiling
amounts were identical to subparagraphs (a) and (c) in the
current statute, while the second maximum amount was only
Without even addressing the preemptive implications of the
statutory remedy, the Fifth District Appellate Court recognized
an independent tort action against insurers for breach of their
implied duty of good faith and fair dealing. Ledingham v. Blue
Cross Plan for Hospital Care, 29 Ill. App.3d 339,
330 N.E.2d 540 (5th Dist. 1975). Ledingham has had a mixed reception in
the other Illinois Appellate districts. Both the First and
Third Districts have disapproved of Ledingham, concluding the
original Section 155 foreclosed any judicial enhancement (via
common law tort remedy) of recovery for vexatious delay.
Tobolt v. Allstate Insurance Co., 75 Ill. App.3d 57, 30
Ill.Dec. 824, 393 N.E.2d 1171 (1st Dist. 1979); Debolt v.
Mutual of Omaha, 56 Ill. App.3d 111, 13 Ill.Dec. 656,
371 N.E.2d 373 (3d Dist. 1978). Tobolt also found the 1977
amendment to Section 155 (its current version) also manifested
a legislative intent to preempt the field.*fn7 However the
Fourth District has endorsed the availability of Ledingham's
tort remedy in cases to which the amended Section 155 cannot be
retroactively applied (it has not yet ruled whether the present
Section 155 has preemptive effect). Lynch v. Mid-America Fire
& Marine, 94 Ill. App.3d 21, 49 Ill.Dec. 567, 418 N.E.2d 421
(4th Dist. 1981). And the Second District has said a tort
remedy for compensatory damages may lie despite Section 155.
Hoffman v. Allstate Insurance Co., 85 Ill. App.3d 631, 40
Ill.Dec. 925, 407 N.E.2d 156 (2d Dist. 1980).
Obviously the Ledingham tort avoided the exceedingly narrow
scope of sanctions imposed by original Section 155. It may even
have been devised for that purpose. There is a difference of
view as to its continued viability.*fn8 But whether or not
does, the significant fact for current purposes is that the
gravamens of the two offenses differ markedly.
Under the tort theory the insurer's bad intent is an essential
component of its actionable conduct. See Ledingham, 29 Ill.
App.3d at 345-46, 330 N.E.2d at 545 (tort consists of
"threatened and actual bad faith refusals to make payments
under the policy, maliciously employed by [the insurer] in
concert with false and threatening communications directed to
[the beneficiary] for the purpose of causing him to surrender
his policy or disadvantageously settle a nonexistent dispute")
(quoting Fletcher v. Western National Life Insurance Co.,
10 Cal.App.3d 376, 401, 89 Cal.Rptr. 78, 93 (1970)). By contrast
Section 155 appears to focus on the objective reasonableness of
the insurer's refusal to pay. Use of the word "unreasonable"
itself suggests the applicability of an objective standard. As
for "vexatious," it too is defined in Black's Law Dictionary
(5th ed. 1979) as "Without reasonable or probable cause or
In that light, and with all reasonable inferences drawn in its
favor, Count II withstands Aetna's motion to dismiss. It is
certainly arguable from the Policy terms that once Aetna
"accepts" a partial premium payment that exceeds a quarterly
premium, it is contractually bound to provide coverage for the
corresponding portion of the Policy year.*fn10 Controlling
Illinois authorities have all inferred acceptance from the
1. retention of the premium check for three or more weeks;
2. eventual cashing of the check; and
3. only a later refunding of the payment.
See, e.g., Van Hulle v. State Farm Mutual Automobile Insurance
Co., 44 Ill.2d 227, 231-32, 254 N.E.2d 457, 460-61 (1969);
Krumwiede v. Bankers Life & Casualty Co., 95 Ill. App.3d 861,
864, 51 Ill.Dec. 331, 333, 420 N.E.2d 745, 747 (3d Dist. 1981).
A fortiori Aetna accepted the $563.25 premium check by cashing
it immediately and retaining the proceeds for some three months
before attempting to refund the payment.
This is not the time to resolve open factual issues — or legal
issues that might be posed by resolution of any facts adversely
to Evaluation Systems. Under favorable inferences drawn from
the facts alleged in Count II, Aetna's refusal to pay
Evaluation Systems could be viewed as lacking legal foundation
and hence as "vexatious and unreasonable."*fn11
While Count II's underlying claim survives Rule 12(b)(6)
attack, its prayer for relief is partially defective.
Evaluation Systems seeks (1) $75,000 in insurance proceeds, (2)
reasonable attorney fees and (3) an additional amount equal to
25% of the $75,000 insurance claim. That last item exceeds the
$5,000 ceiling set by Section 155. It is accordingly stricken
and replaced by a request for $5,000.
Complaint ¶¶ 10 and 12 allege Evaluation Systems duly complied
with every condition of the Policy. In response Aetna's Answer
asserts a general denial.
Evaluation Systems says that general denial contravenes Rule
In pleading the performance or occurrence of conditions
precedent, it is sufficient to aver generally that all
conditions precedent have been performed or have occurred. A
denial of performance or occurrence shall be made specifically
and with particularity.
Aetna counters that the particular basis for the general denial
— Evaluation Systems' failure to pay the full annual premium in
advance — is set forth in its answers to other Complaint
paragraphs. That response is unpersuasive, for Evaluation
Systems is entitled to be apprised "specifically and with
particularity" whether or not Aetna claims any other
deficiencies in Evaluation Systems' performance under the
Policy. Aetna's answers to the two paragraphs must be stricken.
Aetna's motion to dismiss Complaint Count II is denied, but the
prayer for relief in that Count is modified to the extent
stated in this opinion. Aetna's answers to Complaint ¶¶ 10 and
12 are stricken. It is ordered to file amended answers to those
paragraphs and to answer Count II on or before December 30,