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Country Life Insurance Co. v. St. Paul Surplus Lines Insurance Co.

March 27, 2006

COUNTRY LIFE INSURANCE COMPANY, AN ILLINOIS CORPORATION, COUNTRY INVESTORS LIFE ASSURANCE COMPANY, AND COUNTRY MUTUAL INSURANCE COMPANY, AN ILLINOIS CORPORATION, PLAINTIFFS,
v.
ST. PAUL SURPLUS LINES INSURANCE COMPANY AND FEDERAL INSURANCE COMPANY, DEFENDANTS.



The opinion of the court was delivered by: Michael M. Mihm United States District Judge

ORDER

This matter is now before the Court on Motions for Summary Judgment by Defendant St. Paul Surplus Lines Insurance Company ("St. Paul") and Defendant Federal Insurance Company ("Federal") (hereinafter referred to collectively as "Defendants"). For the reasons set forth below, St. Paul's Motion for Summary Judgment [#139] is DENIED, and Federal's Motion for Summary Judgment [#148] is DENIED.

BACKGROUND

Plaintiffs Country Life Insurance Company, Country Investors Life Assurance Company, and Country Mutual Insurance Company (collectively referred to as "Country") are insurance companies headquartered in Bloomington, Illinois. Country Life does not sell life insurance products through its own employees. Instead, agents under contract with Country Life sell its life insurance products. Country Life enters into Agent's Agreements with these agents which provide that the agent is an independent contractor. In the 1990s, Country had established a network of approximately 1,200 career agents operating out of more than 800 agency offices. These agents were managed through a network of agency managers and other personnel and were provided with extensive training by Country.

From 1996 to 1999, Country Life and Country Mutual purchased Insurance Company Professional Liability Coverage from three insurers, namely Defendants St. Paul Surplus Lines Insurance Company ("St. Paul"), Federal Insurance Company ("Federal"), and Agricultural Excess and Surplus Insurance Company ("AESIC"). From August 20, 1996, through and including August 20, 1999, Country was insured under AESIC's policy number ICL2067727 with a $10,000,000 aggregate limit for the three-year policy term in excess of a $1,000,000 self-insured retention per claim. For the same policy period, Country purchased a policy from St. Paul with a $10,000,000 aggregate excess of $1,000,000 self-insured retention for the policy period under policy number SIO5500276. Country also purchased a policy from Federal for $10,000,000 aggregate per policy year excess of $20,000,000 for the policy period excess of $1,000,000 self-insured retention per claim under policy number 7022-84-97. Both the St. Paul and Federal policies follow the form of the AESIC policy.

On February 9, 1998, a class action complaint captioned Duckworth v. Country Life Insurance Company, et al., Case No. 98-1046 was filed in the Circuit Court of Cook County, Illinois, alleging that at Country Life's direction:

a. Sales agents represented to customers with pre-existing policies that the accumulated dividends and interest of such policies were sufficient to fund additional policies with substantially greater coverage, and that so long as the customer paid the modest premium on the existing policy, there would be "no additional cost" to the policyholder.

b. Sales agents represented to prospective new customers who had no outstanding policies that premiums on their insurance policies would be paid out of the accumulated dividends and interest generated by such policies, thereby causing the premiums to "disappear" after a limited number of years; and

c. Sales agents represented to customers seeking to build the equivalent of a savings account that certain amounts of premiums would generate huge values in the future and guarantee them a "projected monthly income" for a specified, "certain" number of years.

The Complaint further contended that these sales practices were deceptive because "customers were led to believe that regardless of whether interest or dividend rates fluctuated, the policies would generate sufficient funds to either pay for the premiums on the second policy, or to enable the premiums to 'disappear' after the period of years represented" and that "[c]ustomers were not informed of the substantial risks associated with these 'insurance' policies." The Duckworth plaintiffs alleged that their injuries arose "from a deceptive scheme conceived and implemented by Country Life" with the goal of increasing revenues and profitability from the payment of additional policy premiums. Specifically, "[t]o induce new customers to purchase life insurance policies, starting in the 1980's, Country Life instructed agents to represent that premiums on new policies would 'disappear' or 'vanish' after a certain number of years because interest and/or dividends generated by those policies would be more than sufficient to sustain them." The Complaint also maintains that Country "provided training sessions for agents in the disappearing premium technique and other deceptive practices." The Complaint alleged causes of action for violation of the Consumer Fraud and Deceptive Business Practices Act and the Uniform Deceptive Trade Practices Act, negligent misrepresentation, common law fraud, and breach of contract. The Complaint sought actual damages, exemplary or punitive damages, costs, fees, and prejudgment interest.

On May 18, 1998, a second class action complaint with similar allegations based on "disappearing" or "vanishing" premiums was filed against Country. Lopez v. Country Life Insurance Company, Case No. 98-1153, was filed in this Court. On December 8, 1998, Country received another complaint captioned Reyes v. Country Life Insurance Company that had been filed in the Cook County Circuit Court on November 25, 1998. These complaints also made allegations related to the "vanishing premium" theory and contended that there had been a company-wide fraudulent common course of conduct and deceptive sales scheme that "knowingly and recklessly manipulated its disappearing premium policy illustrations to artificially enhance the illustrated policy performance through a variety of insupportable assumptions and actuarial devices" and "used its artificially inflated dividends as a pretext to sell new disappearing premium policies and other life insurance products to existing Country Life policyholders." The Lopez and Reyes complaints alleged causes of action for fraud, breach of contract, negligent misrepresentation, violation of the Consumer Fraud and Deceptive Business Practices Act and the Uniform Deceptive Trade Practices Act, and fraudulent inducement. In addition, the Reyes complaint included causes of action for negligent training and supervision and breach of fiduciary duty.

The Duckworth and Reyes cases were consolidated in the Cook County Circuit Court, and the parties began to explore the possibility of settlement. On March 30, 2000, Country entered into a Stipulation of Settlement which addressed the claims asserted in the three cases and provided for the dismissal of the Lopez case with prejudice. The settlement applied to a class of persons who "have or had an ownership interest in one or more whole life and universal life insurance policies issued by Country Life in the United States from January 1, 1982 through May 31, 1998" and included the release of all claims pertaining to Country's insurance sales practices. On April 6, 2000, the Settlement received preliminary approval and notice was sent to the class. Following a fairness hearing on August 10, 2000, and approval by the court, the parties proceeded with the provisions of the Settlement.

Country submitted documentation to St. Paul and Federal advising that AESIC had paid the policy limits for the cost of the litigation and settlement of the vanishing premium litigation, informing them of costs exceeding the coverage under the AESIC policy, and requesting reimbursement. St. Paul has refused to reimburse Country as requested based on its assertion that the vanishing premium litigation and settlement is not covered by its policy. Federal reserved its rights under the policies via letters dated April 13, 1998, August 17, 1998, November 20, 1998, and March 11, 1999.

On July 9, 2003, Country brought this suit seeking damages for breach of contract, as well as a declaration that St. Paul and Federal are obligated to reimburse Country for the losses it suffered in connection with the vanishing premium litigation and settlement. St. Paul and Federal have now moved ...


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