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Rosenburg v. Lincoln American Life Insurance Co.

decided: August 28, 1989.


Appeal from the United States District Court for the Southern District of Illinois. No. 87-C-5202 -- William L. Beatty, Judge.

Bauer, Chief Judge, Easterbrook, Circuit Judge, and Will, Senior District Judge.*fn*

Author: Will

WILL, Senior District Judge

David and Melia Rosenburg, plaintiffs, brought this action against Lincoln American Life Insurance Company ("Lincoln"), defendant, alleging that Lincoln contracted to provide life insurance for them and their children and that Lincoln engaged in unreasonable and vexatious conduct in denying their claim for benefits following the death of one of their children. The plaintiffs also alleged that Lincoln engaged in fraud during the insurance application process. Federal jurisdiction is based on diversity -- the plaintiffs are Illinois residents and Lincoln is a Delaware corporation with its principal place of business in Indiana.*fn1

Lincoln moved for a directed verdict during the trial. Its motion was granted as to the plaintiffs' fraud allegations but denied as to their breach of contract claim and allegations of unreasonable and vexatious conduct. The jury returned a special verdict in favor of the plaintiffs, finding that an insurance contract existed and that Lincoln's refusal to pay was unreasonable and vexatious. The district court entered judgment in favor of the plaintiffs and awarded damages as found by the jury. The district court also awarded costs, fees and a penalty based on Lincoln's unreasonable and vexatious conduct, pursuant to ILL. REV.STAT. ch. 73, para. 767(1) (1986).

Lincoln's motion for judgment notwithstanding the verdict ("JNOV") on the plaintiffs' breach of contract and unreasonable and vexatious conduct claims was denied. Lincoln's motion for a mistrial based on alleged inflammatory and prejudicial statements made by the plaintiffs' attorney was also denied.

Lincoln appeals from the denial of its motion for JNOV and further claims that certain evidence was erroneously admitted and other evidence was overly prejudicial, so that it was denied a fair trial, and that its tendered jury instructions were unreasonably rejected. After oral argument, the plaintiffs filed a motion for attorney's fees and costs incurred in opposing Lincoln's appeal. We affirm the judgment below and grant the plaintiffs' motion for fees and costs.


David Rosenburg was and presumably still is a police officer for Granite City, Illinois. He and his wife Melia had three children, one of whom, Desiree, was born on July 9, 1985 with a heart defect which required surgery when she was six months old. As far as we know, their other children were relatively healthy.

On September 4, 1984, Kevin Wedmore, a Lincoln agent, sent a letter to Joe Miklovic, who was the comptroller for Granite City, regarding a life insurance program (the Municipal Employees Insurance Program) offered by Lincoln to city employees, elected officials and their dependents. The letter stated that $10,000 term insurance policies were "guarantee issue" regardless of the group participation level. In other words, policies would issue to all employees who applied, regardless of the number of eligible employees who applied for insurance under the program.

In October 1984, Wedmore, then a Vice-President of Conseco, Inc., Lincoln's parent company, attended the Illinois Municipal League Conference in Chicago. While there, he spoke with Joe Miklovic about the insurance program and Miklovic told Wedmore to talk to him in the spring after the mayoral election. Wedmore contacted Miklovic in April 1985 and a date was set for Lincoln to present its program to the Granite City insurance committee.

A presentation was given to the city council by Wedmore and Frank Adelman. According to Wedmore, the city council was told that the issuance of policies would be guaranteed (no under-writing) provided that 40% of the employees and elected officials participated. Premiums would be deducted from employees' paychecks and forwarded to Lincoln via the Granite City Payroll Department. Miklovic testified at trial, however, that a 40% requirement was not mentioned at either presentation and that Adelman indicated that no physical exams were required. As previously noted, Wedmore's letter to Miklovic indicated that the insurance policies were "guarantee issue" regardless of the number of eligible employees who applied for insurance.

In late July 1985, Wally Sheridan, another Lincoln agent, made presentations to various Granite City departments during which, according to the testimony of Lincoln agent Charles Roberson, a 40% minimum participation was disclosed. In addition, according to Roberson, it was also disclosed that the issuance of policies for dependents was not guaranteed.

Connich Koch, Granite City Payroll Supervisor, attended one of the presentations. She testified that the Lincoln agent said that if people signed up that day, they and their family would be insured at that moment and no medical exams would be required, even for those with medical problems. According to Koch, the agent said that if employees waited until next month to sign up, insurance coverage probably would not be guaranteed without an exam. She also testified that there was no mention of a 40% minimum participation.

A presentation was made by Lincoln to the Granite City police department on July 23, 1985. David Rosenburg did not attend. Later that day, however, Rosenburg was approached by Paul John, a Lincoln sales agent. John testified that he explained the insurance program to Rosenburg, including a 40% minimum participation for guarantee issue policies. Rosenburg testified that a 40% minimum participation was not discussed and that John said that no medical exams were required for guaranteed insurance.

Rosenburg also testified that he initially told John that he was not interested because, with the exception of his daughter Desiree, he and his family already had insurance. He explained his daughter's medical problems and indicated that it had been impossible to get insurance for her. According to Rosenburg, John said that Lincoln's policy was different and that Desiree's application could not be refused.

Rosenburg called John On July 24th, the next day, saying that he wanted to apply for insurance. John came to Rosenburg's office with four applications, one for Rosenburg and one for each of his three children. Rosenburg supplied information to John, who filled out the applications, including medical histories of Rosenburg and his children. Rosenburg then signed the applications and a payroll deduction card.

Charles Roberson was also present at this meeting and he represented himself as John's supervisor (although he identified himself at trial on direct examination as a general agent). Rosenburg testified that Roberson confirmed that the insurance was guaranteed without regard to medical history and that a physical exam was not needed. In addition, Rosenburg testified that he asked both John and Roberson what would happen if he signed that day and something immediately happened to Desiree. According to Rosenburg, they said she would be covered. Ailene Shaw, a Lincoln Administrative Assistant, testified that the company was aware that agents had represented that Lincoln was providing guaranteed coverage to dependents in other cities and had compiled a list of cities where such "misrepresentations" had occurred.

Questions 11 and 12 on the applications signed by Rosenburg were to be answered only if one was applying for simplified underwriting but were to be omitted if one was applying for guarantee issue. Although Mr. Rosenburg testified that no representative explained the difference between simplified writing or guarantee issue or mentioned a 40% participation requirement, answers were filled out for questions 11 and 12. However, as previously noted, Rosenburg answered questions asked by John, and John filled out the application forms.

The next paragraph on the applications contained the following sentence in bold type: "The effective date of coverage will be the date of approval at the Home Office, subject to valid payment of the first premium." The plaintiffs' applications were forwarded to Lincoln's Home Office and Desiree Rosenburg's application was reviewed by Barbara Williams, a Lincoln underwriter. Williams ordered a medical report from Desiree's doctor, Dr. Thomas Martin. The report was received on August 29, 1985. After reviewing the report and based on underwriting manuals, Williams denied Desiree's application and the Rosenburgs received a rejection letter for Desiree on September 5, 1985, based on her medical history. Mr. Rosenburg then called Lincoln and was told that the coverage for dependents was not guaranteed and that any coverage for employees was only guaranteed if 40% of the eligible employees participated. According to Mr. Rosenburg, Ms. Williams indicated to him that Lincoln's agent, John, had apparently misrepresented the policy to him.*fn2

Before the Rosenburgs received a rejection letter, the Granite City Payroll Department withheld the first month's premium for all four policies from Mr. Rosenburg's paycheck. On October 17, 1985, Karen Fleck, a Lincoln salary savings specialist, sent a refund check representing the premium for Desiree's application ($4.33) to the Rosenburgs, treating it as an overpayment on Mr. Rosenburg's three other policies. However, the Granite City Payroll Department withheld the $4.33 for Desiree's application from Mr. Rosenburg's account for the next two months until Connie Koch received notice from Lincoln to discontinue deducting a premium for her application from his paycheck. Mr. Rosenburg did not cash the three premium refund checks. Desiree Rosenburg died on November 22, 1985. The Rosenburg's subsequent claim for insurance benefits was denied.

Lincoln moved in limine to exclude testimony regarding previous statements made by Miklovic and John. The motion was denied. During the trial, Lincoln objected to several allegedly prejudicial or inflammatory statements made by the plaintiffs' counsel and many objections were sustained. The district court directed the jury to disregard portions of the plaintiffs' counsel's opening statement in which he said that Rosenburg talked to twenty-nine people who allegedly had heard misrepresentations by Lincoln agents. These persons did not testify although, as previously noted, several witnesses who did testify stated that the terms of insurance were misrepresented. The plaintiffs' attorney also made a closing statement which was objected to at various points but the objections were overruled.

Following the jury's verdict, judgment was entered for the plaintiffs and damages were assessed (by the jury) at $12,112.00, the value of the life insurance policy. Pursuant to ILL.REV.STAT. ch. 73, para. 767(1) (1986), the plaintiffs moved for an award of attorney's fees, costs and a penalty for Lincoln's unreasonable and vexatious refusal to pay. The district court awarded the plaintiffs costs of $2,951.75, $10,065.00 in attorney's fees and $3,028.00, the maximum penalty in this case.*fn3


This is a diversity case and there is no dispute that Illinois law applies for issues involving state substantive law.*fn4 The state standard is applied for reviewing the lower court's denial of a motion for JNOV. Kessinger v. GREFCO, Inc., 875 F.2d 153, 156 (7th Cir. 1989). Under Illinois law, JNOV may be granted "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." Daniels v. Standard Oil Realty Corp., 145 Ill. App. 3d 363, 495 N.E.2d 1019, 1022, 99 Ill. Dec. 284 (Ill.App.Ct. 1986) (citing Pedrick v. Peoria and E. R.R. Co., 37 Ill. 2d 494, 229 N.E.2d 504, 513-14 (Ill.App.Ct. 1967)). The district court's determination that Lincoln received a fair trial despite allegedly prejudicial comments by the plaintiffs' counsel "is a matter of federal procedure not governed by state law or practice." General Foam Fabricators, Inc. v. Tenneco Chemicals, Inc., 695 F.2d 281, 288 (7th ...

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