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Cen. States Joint Bd v. Cont. Assur. Co.





Appeal from the Circuit Court of Cook County; the Hon. Anthony J. Scotillo, Judge, presiding.


Defendant, Continental Assurance Company, appeals from the trial court's judgment which rescinded a pension funding insurance contract, GP-9331, defendant issued to plaintiff, Central States Joint Board and Allied Organizations Staff Pension Plan and Trust. Defendant was also ordered to pay to plaintiffs the sum of $1,651,973.61 which represents the book value, as of May 21, 1982, of plaintiff's pension plan held under the policy. Two issues are presented for review: (1) whether the trial court's decision was against the manifest weight of the evidence and contrary to the law; and (2) whether the trial court erroneously excluded testimony at trial based upon the attorney-client privilege.

The following facts are pertinent to this appeal. In 1958, defendant issued plaintiff a group insurance policy, GP-1013, which provided for life insurance and retirement benefits for plaintiff's employees. The policy permitted retiring participants to receive their benefits in the form of lump-sum cash payments, or in the form of a monthly annuity purchased out of the pension fund. The cost for the program was based solely on advance funding payouts by plaintiff to defendant. Whenever the amount of monthly payments made by plaintiff was not sufficient to maintain adequate funding of the plan, plaintiff was required to deposit additional large amounts of money. Defendant and plaintiff participated in several meetings during 1971 to discuss the rising cost of the plan due to plaintiff's amendments to the plan to increase participants' benefits. Several participants, upon retirement, elected the lump-sum cash payment in early 1973 requiring plaintiff to pay approximately $750,000 into the plan between May 1972 and April 1973. In June 1972, defendant expressed concern over the depletion of the fund and suggested to plaintiff some ways in which the plan could be changed, including altering the cash payment option. Plaintiff did not at that time, however, agree to change the plan.

On January 28, 1974, Leroy Gebhart (defendant's account representative) met with John Serpico (plaintiff's president), Millard Grauer (an insurance consultant and advisor employed by plaintiff) and Dan Terlap (plaintiff's secretary-treasurer). Joseph B. Cicero, plaintiff's in-house counsel at that time, testified that he was also present at the meeting; however, none of the others verified his attendance. The topic of the meeting was the revision of the pension plan. Serpico testified at trial that there were five changes which he wanted Gebhart to make in the plan, one being that he wanted the cash payment eliminated "because anything that would put a drain on the fund, I wanted to eliminate." The other changes were: eliminating the 2% employee contribution; allowing a widow's pension; making early retirement less attractive; and changing the benefit formula. At trial, Serpico testified that all five changes were effected and that he had not asked Gebhart to draft the new plan so as to eliminate provisions providing for the withdrawal of sums to fully purchase annuities.

On March 12, 1974, plaintiff submitted to defendant a signed application to revise GP-1013 to provide retirement benefits from a plan of group ordinary life insurance with a side fund to a plan of group single premium annuities with a group annuity fund. As the result of this application, defendant issued GP-9331 effective April 1, 1974. The provision for a cash lump-sum retirement payment was deleted. Serpico testified that he read only the first part of the proposed revision to check for changes and skipped Part II entitled "Provisions & Administration of the Contract." Paragraph 13 in that section provided that "[a]s of a Participant's Effective Annuity Date, a sum shall be withdrawn from the Fund and shall be applied to purchase the amount of annuity to which such Participant is entitled under the provisions of Part I of this Contract." The former policy also contained this option; however, testimony at trial indicated that no annuities had ever been purchased under it.

Plaintiff contends in its brief, and Serpico testified at trial, that it was not until September 1978 when it received a letter from defendant's account manager regarding a participant's benefits, that it became aware of the annuity purchase provision. However, exhibits included in the record indicate that in August of 1977, Serpico had conveyed to Grauer, the insurance consultant, that he did not want to have annuities purchased, and that Serpico had requested a change of policies to one that did not provide for full purchase of benefits at retirement. Plaintiff likens defendant's ability to withdraw a sum of money out of the fund to purchase annuities to the objectionable cash payment portion of the previous contract, the only difference being that instead of plaintiff's employee getting the lump-sum cash payment, defendant would receive it. After plaintiff inquired as to whether it could sever its relationship with defendant and was told that it could only do so at the penalty provided for in the contract, plaintiff filed this suit in equity for rescission.

After hearing all the evidence and reviewing the numerous exhibits during a bench trial, the trial court found that:

"* * * the plaintiff has established by clear and convincing evidence that the defendant did not comply with the instructions of the plaintiff in connection with the formation of the contract; that the defendant had a fiduciary duty to disclose the material facts, not merely eliminating the lump sum cash payout and inserting a provision to purchase an annuity instead would not resolve the basic problem the plaintiff was concerned with; and that the failure to disclose this information was a fraudulent misrepresentation of material facts known to the defendant at the time they were made and concealed, not disclosed for the purpose of inducing plaintiff to enter into the contract and who, after having done so, was harmed."

The court thereupon entered judgment on behalf of plaintiff rescinding the contract and ordering defendant to transfer the amount of monies ($1,651,973.61) held under the contract without reduction of adjustment for any investment loss, the penalty provided for in the contract.


• 1 Defendant proffers several arguments in support of its contention that the trial court erred in granting the rescission of the insurance contract. It is well settled that a court of review will reverse the judgment of a trial court, which was in a superior position to evaluate the credibility of witnesses and the weight of their testimony, only where the findings are against the manifest weight of the evidence. (Schranz v. I.L. Grossman, Inc. (1980), 90 Ill. App.3d 507, 521, 412 N.E.2d 1378.) After reviewing the record in this case and the applicable law, we conclude that the trial court's findings are against the manifest weight of the evidence and must be reversed.


Plaintiff successfully argued to the trial court that defendant's alleged nondisclosure of the annuity purchase provision resulted in fraudulent nondisclosure of a material term of the contract. Plaintiff claimed that if it had known that this provision was there, it would not have entered into the contract. After defendant was instructed by plaintiff that it wanted to eliminate the cash drain problem, plaintiff claims that defendant should not have included a provision in the new contract which would allow for a lump-sum cash withdrawal to purchase annuities in full. Of course, the cash lump-sum payment direct to retirees was eliminated.

• 2 In order to constitute fraud which would invalidate a contract, a misrepresentation must be one of a material fact, made for the purpose of inducing the other party to act, must be known by the maker to be false, but must be reasonably believed and must be relied upon by the other party. (Shanahan v. Schindler (1978), 63 Ill. App.3d 82, 93, 379 N.E.2d 1307, appeal denied (1978), 71 Ill.2d 621.) Illinois courts> have recognized a cause of action for fraud which consists of concealment of an existing material fact when accompanied by scienter, deception and injury. (Perlman v. Time, Inc. (1978), 64 Ill. App.3d 190, 195, 380 N.E.2d 1040; Skidmore v. Johnson (1948), 334 Ill. App. 347, 360, 79 N.E.2d 762, appeal denied (1948), 400 Ill. 628.) To establish fraud, the concealment must have been done with an intention to deceive and under circumstances creating a duty to ...

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