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Am. Coll. of Surg. v. Lumber. Mut. Cas. Co.





Appeal from the Circuit Court of Cook County; the Hon. James T. Felt, Judge, presiding.


Plaintiff, American College of Surgeons (hereinafter ACS), filed a breach of contract action against defendant Lumbermens Mutual Casualty Company (hereinafter LMC) alleging that defendant agreed to return to plaintiff "retention reserves" in the form of dividends for a period of 10 years after the policies terminated. ACS cancelled its policies in 1974 and, shortly thereafter, defendant informed ACS that its obligation to return reserves was only for a 20-month period after termination.

The trial court submitted to the jury the questions whether there was a contract, whether it met the requirements of the Statute of Frauds, and whether there was a breach by the defendant. The jury returned a verdict for plaintiff and awarded it $1,732,669 in damages. The trial court, which earlier had reserved ruling on defendant's motion for a directed verdict, entered judgment notwithstanding the verdict (n.o.v.) for the defendant and, in the alternative, granted defendant's motion for a new trial on the issue of damages. Defendant's alternative motion for a new trial on all issues was denied.

ACS appealed from the order setting aside the jury's verdict and entering judgment n.o.v. in favor of LMC and the alternative order granting LMC a new trial on the issue of damages. LMC filed a cross-appeal from the order denying its alternative motion for new trial on all issues.

The issues presented are: (1) whether it was error for the trial court to set aside the jury's verdict for the plaintiff and to enter judgment n.o.v. for defendant; (2) whether it was error for the trial court to conditionally grant a new trial on the issue of damages; and (3) whether it was error for the trial court to deny defendant's motion for a new trial on all issues.

This case presents a historical review of the inception, underwriting, and administration of the mass marketing of insurance policies. In the 1950's, the insurance industry was emerging from what now appears to be a rather primitive method of having an insurance company agent or salesman sell a policy to a customer on an individual basis. A new breed of entrepreneur emerged that became known as the "Administrator." He sought out large groups of potential insurance purchasers through their professional, trade, or craft associations, determined their insurance needs, and tailored a program to fit their requirements. Armed with this potential group sale, the Administrator shopped various insurance companies for the best deal in terms of benefits and cost. Ideally, everyone would benefit. The group members purchased insurance at lower prices than they could individually. Insurance companies that underwrote the group program benefited because they could put a block of business on the books at a lower acquisition cost per policy. Associations benefited by providing an additional service for their members, and the Administrator earned a fee or commission.

The Administrator sells the association on the idea of offering such a program and, if successful, "markets" the program among the members to induce them to place their insurance through the program. The Administrator receives the applications and the premiums, sends them on to the insurance company-underwriter, and ultimately returns certificates of insurance to the participating members. For these functions, the Administrator receives a commission on the premiums collected.

The insurance company-underwriter negotiates with the Administrator and the association with respect to the benefits and premium rates, and issues a "Master Benefits Policy" to the association. Upon receipt of applications for insurance from the Administrator, the insurance company determines whether to accept the applicant within the range of premiums and benefits defined in the master policy and issues a "Certificate of Insurance" for return to the association member. Out of the gross premium, the insurance company pays the Administrator's commission, pays its own out-of-pocket expenses, and invests the remainder, called "reserves," in income-producing securities. From the reserves and the investment income derived therefrom, the insurance company pays all claims under the policies, and, absent any agreement to the contrary, keeps any remainder as profit for itself.

Although the benefits of group insurance were obvious, the main concern of the insurance company-underwriter was fixing a premium that would be attractive to the group and profitable to the company. On the other hand, the association group was concerned with protecting its members against unreasonably high premiums and excessive profits by the Administrator and the insurance company-underwriter.

In the 1950's, when the association group business first started, the practice of association policyholders' seeking to limit the Administrator's commissions or insurance company's profits did not exist because no one realized that such programs would become so profitable; however, large association policyholders, such as ACS, began to make demands to limit profits so that the cost of the insurance would be reduced. During the 1960's and 1970's, agreements limiting commissions and insurance company profits and providing for refunds of any surplus or excess reserves to policyholders began to appear. Such arrangements became commonly known in the insurance industry as "retention basis underwriting" or "retention and dividend agreements."

"Excess reserves" or "surplus" in a program are distinguished from "claim reserves." The "claim reserves" are the portion of premium income which, according to the insurance company's actuarial department, must be set aside to pay presently pending and future claims. The claim reserves are counted as being already among the "losses" under the program, even though the money has not yet been actually paid out. "Excess reserves," "surplus," or "contingency reserves" are the amounts remaining that are not considered necessary to pay present or expected claims.

"Retention" is the percentage of premium that by agreement is set aside to cover insurance company out-of-pocket expenses, including commissions paid, plus a certain percentage called the "insurance charge," in order to provide an agreed-upon profit margin for the insurance company. The insurance company's investment of the reserves remained an important source of its income in addition to the insurance charge.

Such retention and dividend agreements were negotiated and entered into through correspondence, memoranda, and accounting reports, and have never been written into the master policies themselves. Even when such a "retention and dividend" agreement existed, the master policies have continued to cover only insurance matters such as premium rates and the definitions of the benefits and exclusions under the policy.

ACS is a not-for-profit corporation headquartered in Chicago, whose members are 46,000 physicians who practice surgery throughout the world. LMC is an Illinois insurance corporation organized under the Illinois Insurance Code. It is headquartered in the Chicago area and is part of what is known as "The Kemper Group" of companies.

In the early 1950's, insurance administrator Charles O. Finley sold the ACS on the concept of offering its members a group insurance program. This initial program was underwritten by another carrier. The program was switched to LMC in 1956. Three types of coverage were available to ACS members: (1) disability income protection; (2) major hospital expenses; and (3) accidental death and dismemberment (AD&D). Under the program, ACS was the master policyholder for the benefit of its participating members. The premiums generated in the ACS/LMC program rose to over $5 million per year and totaled over $68 million from its inception with LMC in 1956 until termination in 1974.

By 1961, ACS became concerned about its insurance costs. It requested LMC to provide a special report on commissions, expenses, and profits for the year ending September 30, 1961. To analyze the reports and to negotiate a reduction in costs with Finley and LMC, ACS hired Harold W. Torgerson, professor of finance at Northwestern University, as its agent and consultant. Professor Torgerson had previously represented other medical associations in negotiations with insurance companies, including LMC.

During 1962, Professor Torgerson had a series of meetings with representatives of LMC. In May 1962, Torgerson met with Finley and four officers of LMC. They discussed increasing the major hospital premium, reducing Finley's and LMC's charges, and Finley's and Torgerson's suggestion that any "surplus" or "excess reserves" should be recognized as the property of ACS and paid to ACS at some future date or in the event of cancellation.

The parties reached an agreement that all calculations concerning reserves would be made as of the date of the program's inception, and the parties agreed on profit margins. On January 2, 1963, LMC made a written presentation of how the calculations of dividends would be made and entitled the document, "Illustrative Dividend Projections for years ending Dec. 31, 1962 through 1965." Ultimately, all the elements of the retention and dividend agreement were incorporated into the so-called "Experience for Dividend" report that was valued as of January 1, 1964. It is these "Experience for Dividend" reports that form the basis for ACS's claim that LMC agreed that ACS owned the reserves because the reports contain formulas for both the calculation and distribution of the dividends.

LMC presented these reports at each of eight succeeding annual insurance meetings with ACS. Professor Torgerson testified that ACS had agreed to an increase of its premiums, resulting in greater reserves, because ACS assumed that it owned the reserves. Relying on the annual "Experience for Dividend" reports, ACS renewed its policies yearly.

In 1970, ACS learned of a controversy regarding the ownership of reserves between LMC and another medical association. Torgerson testified that he asked Vernon Lauberstein, underwriting manager of LMC, whether that dispute affected ACS in any way. Lauberstein responded that ACS owned the reserves and, therefore, was not affected. Lauberstein testified that he did not recall the conversation.

In 1971, ACS asked LMC to combine the reserves from the AD&D policy with those of the major hospital and disability income protection policies. Until that time, the AD&D policy was in a "pool" with others insured by LMC. In "pooled basis" underwriting, there is no commitment by the insurer to limit its profits or to return any excess reserves to the insured. Torgerson testified that ACS wanted the AD&D out of the pool so that it could own the reserves. LMC agreed, but a dispute arose about the amount of money to be taken out of the pool. James O. Peterson, an assistant vice-president of LMC, wrote in a letter in 1972 to Robert C. Happ, ACS's comptroller, that stated in part: "Unlike your Disability and Major Hospital programs, up until now, the AD&D program has been pooled with that of other associations." The conclusion that ACS drew is that the reserves of the other two policies belonged to ACS.

On June 29, 1972, Peterson wrote another letter to Happ that refined the proposal. The letter read in part that: "All three of your programs will be combined for dividend evaluation and investment income credits." The proposal was ratified by both parties. Peterson testified that LMC had prepared professional group plans that outlined a 20-month payout period that was not reported to ACS. In contrast, the annual "Experience for Dividend" reports that were presented to ACS did not contain any reference to a 20-month period.

Theodore J. Kowalchuk, an expert on group insurance matters, appeared on behalf of ACS. He testified that the illustrative and actual "Experience for Dividend" reports from 1963 to 1976, and the 1972 correspondence combining the AD&D policies with the others on a retention basis, expressed an agreement whereby LMC would return excess reserves to ACS under a formula over a period of 10 years after termination. LMC, in turn, argues that the formula shows merely a method of calculation and is not a statement that ACS owned the reserves or that they were to be paid out over a 10-year period. LMC did not present any expert witnesses.

The disintegrating relationship between the parties ended at the annual insurance meeting on January 30, 1974, when C. Rollins Hanlon, executive director of ACS, announced that ACS was exercising its right to end the policies on their anniversary dates — April 1, May 1, and June 1, 1974. A year later, January 21, 1975, Peterson brought Happ the first post-termination "Experience for Dividend" report dated January 1, 1975. Peterson also told Happ that LMC would not pay dividends after January 1, 1976. After LMC refused to provide any more information for the years 1977 and beyond, plaintiff filed suit.



• 1 The Code of Civil Procedure provides that relief heretofore sought by a reserved motion for directed verdict or motion for judgment n.o.v. must be sought in a single post-trial motion. (Ill. Rev. Stat. 1983, ch. 110, par. 2-1202(b).) The grounds for relief sought by either motion are the same.

In Pedrick v. Peoria & Eastern R.R. Co. (1967), 37 Ill.2d 494, 229 N.E.2d 504, our supreme court established a single standard for directing verdicts and entering judgments n.o.v.: "In our judgment verdicts ought to be directed and judgments n.o.v. entered only in those cases in which all of the evidence, when viewed in its aspect most favorable to the opponent, so overwhelmingly favors movant that no contrary verdict based on that evidence could ever stand." 37 Ill.2d 494, 510, 229 N.E.2d 504.

Defendant's post-trial motion, insofar as it seeks a judgment n.o.v., presents the issue of whether all the evidence, when viewed in the aspect most favorable to the plaintiff, so overwhelmingly favors defendant that no contrary verdict based on that evidence could ever stand.

• 2 The trial court may not substitute its judgment for that of the jury merely because "the trial judge believes a different conclusion would be more reasonable." (Bank of Marion v. Robert "Chick" Fritz, Inc. (1974), 57 Ill.2d 120, 126, 311 N.E.2d 138.) In Duffek v. Vanderhei (1980), 81 Ill. App.3d 1078, 401 N.E.2d 1145, the trial court's grant of judgment n.o.v. was reversed because there was evidence in the record which, if believed, could support the jury's verdict. (81 Ill. App.3d 1078, 1087, 401 N.E.2d 1145.) Similarly, in its reversal of a directed verdict, the Illinois Supreme Court stated: "In our judgment the evidence in this case is not such that a verdict for plaintiff could never stand * * *." (Mort v. Walter (1983), 98 Ill.2d 391, 398, 457 N.E.2d 18.) In Robinson v. Wieboldt Stores, Inc. (1982), 104 Ill. App.3d 1021, 433 N.E.2d 1005, this court held: "For defendant to be awarded judgment notwithstanding the verdict, it must be proved that plaintiff's assertions could never amount to [what plaintiff claims]." 104 Ill. App.3d 1021, 1024, 433 N.E.2d 1005.

For the judgment n.o.v. entered by the trial court in this case to be upheld, the evidence for plaintiff, viewed in the aspect most favorable to plaintiff, must be such that the jury verdict "could never stand" and "plaintiff's assertions could never amount to" the contract claimed to exist between the parties.


• 3 Applying the Pedrick rule, we conclude that there is sufficient evidence to support the verdict of the jury in favor of plaintiff for $1,732,669.

We are dealing with a business relationship commencing in 1956 and ending in 1974. Unlike most business transactions involving substantial sums of money, this one was not evidenced by a formal structured writing that is commonplace in the business community. This exception is explained by the fact that this was a new and developing area in the insurance industry that had not yet evolved to a point that it could be relegated to a standard type of agreement. At oral argument, we were told that today this type of transaction is handled by a routine writing.

The question, therefore, is whether in the light of the circumstances existing at the time, there was a basis for the jury's finding that a sufficient written agreement existed to justify a recovery by the plaintiff.

Defendant contends that no agreement existed to transfer ownership of the reserves to ACS and to calculate these reserves for a period of 10 years after termination of the program. It characterizes plaintiff's proof as "mere fluff" and states that "Plaintiff works with mirrors."

On the other hand, plaintiff contends that the writings admitted in evidence have such probative value that "[n]o clearer example of written offer and written acceptance could be found in any textbook on the Law of Contracts."

Each party claims that the opposing briefs are permeated with "obfuscation." This is a complex case in the sense that it involves technical terms that are unique to certain segments of the insurance industry; however, it is not a complicated case when these terms are defined by individuals who are experts in the field.

There was competent evidence presented to the jury to show that in 1956, plaintiff and defendant commenced their business relationship. Three types of policies were involved: (1) disability income protection; (2) major hospital expenses; and (3) accidental death and dismemberment (AD&D). All three policies were written on a "pooled" basis. This meant that all of the reserves that were not expended and all income from investment of the reserves were the property of LMC. Because this resulted in excessive profits to LMC, a change was made in 1964.

In that year, the disability income protection and major medical were changed to a "retention basis, dividend plan" that was retroactive to the inception of the deal in 1956. This meant that ACS, rather than LMC, would own the reserves. The AD&D remained on a pooled basis. Annual financial reports were submitted to ACS by LMC consistent with this change.

In 1972, the AD&D policy was added to the retention basis dividend plan. This combined all of the policies and related back to the inception of the deal.

The policies were always written on an annual basis. In January of each year, the parties met to review the recent and prospective experience of the three programs and to make appropriate adjustments and plans. When the excessive profits were ascertained in 1962, the disability and medical policies were put on a retention basis dividend plan when plaintiff indicated it would take its business to another company.

Again, in the early 1970's, when a large surplus was building up under the AD&D policy, discussions began at the suggestion of Professor Torgerson to take the AD&D out of the LMC pool and put it on the dividend and retention basis. When James O. Peterson, an officer of LMC, did not move fast enough, ACS considered moving its business. Prior to taking such action, J.S. Kemper, Jr., president ...

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