January 13, 2012 – The Supreme Judicial Court has affirmed the award of damages, prejudgment interest, punitive damages, attorney’s fees and costs totaling over $1.5m against a Massachusetts life insurance agent, Frederick V. McMenimen, III. The court also reversed the judgment dismissing the G.L. c. 93A claims against three subsidiaries of Nationwide Life Insurance Company of America and remanded that case to the Superior Court for trial.
Samuel Pietropaolo, Sr., (Sam, Sr.) retired from the Revere school system in 1997, and used a substantial portion of his retirement benefits to the upkeep of a life insurance policy that he purchased in 1998 through his nephew, Frederick V. McMenimen, III, an insurance agent who apparently claimed he was an expert in insuring public sector retirees. Mr. McMenimen advised Sam, Sr. and his wife that they should choose a retirement plan that would forgo death benefits in favor of higher lifetime distributions, and use the difference to fund a life insurance policy on Sam Sr.’s life for $500,000 that would provide better death benefits than the Commonwealth’s plan. Based upon this advice Sam Sr.’s wife signed a waiver of her survivorship rights on the understanding that she would receive a $500,000 distribution from the life insurance trust should Sam Sr. predecease her.
Mr. McMenimen allegedly advised Sam, Sr. that had been approved for $500,000 of coverage and that he should cancel two other policies and use the cash surrender value of the latter policy towards payments on a new Provident Mutual policy (Now Nationwide).
In fact, Provident Mutual never approved any such $500,000 policy because of medical underwriting issues. Mr. McMenimen nevertheless told Provident Mutual to issue a $200,000 policy with a premium 250 per cent higher than the standard rate apparently without the consent or knowledge of Sam, Jr.
The insurance company sent the insured correct notice after correct notice about the policy for six years
The jury heard that Sam, Sr. and his wife received a letter from Provident Mutual informing them that the application for a $500,000 policy had been declined and that they received repeated, accurate policy statements, first from Provident Mutual, and later from Nationwide, reflecting the $200,000 death benefit. However, they claimed that they credited Mr. McMenimen’s explanations that the $200,000 figure was just a base component and that a secondary benefit in the policy would make up the difference.
Sam Sr. finally received a telephone call from a Nationwide agent who had been newly assigned to handle the policy who insisted that the policy provided death benefits of only $200,000. After another year of questions and explanations from Mr. McMenimen Sam, Jr. and his wife filed suit in 2004, just about six years after the policy was issued.
The jury trial
After a a twelve-day jury trial the jury found that (1) Mr. McMenimen made an intentional misrepresentation regarding the $500,000 death benefit; (2) Mr. McMenimen was negligent with regard to obtaining a $500,000 death benefit on Sam Sr.’s life; but that (3) the plaintiffs themselves were only 18% comparatively negligent. The jury awarded a total of $300,000 in damages. This amount would be subject to approximately six years prejudgment interest at 12% of about $220,000.
However, there was a claim of unfair and deceptive business practices under G.L. c. 93A, §9. On this claim the judge trebled the damages by adding $600,000 to the jury verdict and awarded attorney’s fees of just over $363,000.
Points for Agents from the Court’s Decision
This case has some rulings and statements by the Supreme Judicial Court that are both expressed and implied that relate to agency risk management. There is, however, a real question whether some of the Supreme Judicial Court’s ruling will be limited to the very specific and uncommon facts of this particular case. Mr. McMenimen had attempted twice during the pendency of the case to seek extraordinary relief from the Supreme Judicial Court. The second time the Supreme Judicial Court denied his petition it took the very unusual step of ordering that any appeal from a Superior Court judgment would bypass the Appeals Court and go directly to the high court.
1. Court rules on special statute regarding life insurance and annuity rescission
G.L.c. 175, §181 is a unique statute that gives insureds “… under any policy of life … or … annuity… contract who was induced to procure it by any action in violation of this section by an officer or agent of the company issuing or executing it may recover from such company all premiums paid on such policy or contract …, in an action brought within two years after the date of issue thereof.
The statute is tripped by “… any written or oral misrepresentation or misleading representation in respect to the terms, benefits or privileges of any policy of insurance or any annuity or pure endowment contract, or any written or oral incomplete or misleading comparison of any such policy or contract or of any of the terms, benefits or privileges thereof with any other such policy or contract or any of the terms, benefits or privileges thereof, …” A lot of the litigation revolved around whether the statute created immunity for agents and left only the company liable or whether agents or brokers could be liable for the recovery of premiums if anything misleading occurred in the sale of the policy and whether this statute was the only way an insured could sue for policy fraud involving life insurance or annuties. The Supreme Judicial Court ruled:
• The statute does not provide a civil remedy against persons or entities other than an insurance company. The civil remedy provided by § 181, is limited to recovery “from such company” (emphasis in decision).
• The statute does not immunize insurance agents and employees of insurance companies from any civil liability for misrepresentations in the sale of insurance.
• Rescission under the statute is not the sole and exclusive civil remedy against insurance companies for anyone claiming that they were induced to purchase life insurance by fraud.
2. Fiduciary relationship and claiming special expertise as an “insurance specialist, consultant or counselor”
In many professional liability claims brought against insurance agents there is a claim that the insured and the agent had a fiduciary relationship. If such a relationship is found the rules change dramatically as a matter of law in favor of the insured.
In Massachusetts the relationship between an insurance broker and the insured is not normally thought to be fiduciary in nature as “…liability as a fiduciary is not readily imposed on insurance agents and brokers in Massachusetts.” In this case the court found such a relationship. The court found that Mr. McMenimen had “held himself out … as an expert in insuring public sector retirees.”
Any agency or agent should be careful about as “hold[ing] [itself] out as an insurance specialist, consultant or counselor.” If any agency has the expertise it may be a good marketing tool. But if the assertion is essentially “puffing” there could be real liability and license problems if an insured can show that the representations led to what one court called “ “[a]n expanded agency agreement, arrangement or relationship, sufficient to require a greater duty from the agent,…”
It should also be noted that beyond the claimed expertise the court found the familial relationship between the parties was also a telling factor: “the plaintiffs here were not negotiating an arms-length transaction with a party against whom they knew they had adverse pecuniary interests. Instead, they were working with a trusted family member whom they had specifically sought out for unbiased advice.”
3. Failure to disclose carrier relationships as evidence of misrepresentation
Mr. McMenimen argued, based upon the legal principle that a plaintiff cannot sue for a misrepresentation “if he knows that it is false or its falsity is obvious to him.”’ The final application for insurance and the policy illustration both stated the $200,000 death benefit such that Mr. McMenimen argued even a cursory glance at either of these documents would have made the falsity of his representations obvious.
In rejecting this argument the Supreme Judicial Court stated that while Mr. McMenimen had “concocted an elaborate explanation why the Provident Mutual policy documents reflected a $200,000 death benefit, …” They also focused on the fact that “McMenimen failed to disclose his relationship with Provident Mutual to the plaintiffs”
Apparently, the court believed that this failure to disclose and an earlier statement ascribed to Mr. McMenimen with regard to some earlier policies sold to the plaintiffs that were admissible evidence supporting the misrepresentation claims. The earlier statement by the court was that:
“[Mr.] McMenimen did not disclose his relationship with either [Mutual of New York and John Hancock] to the plaintiffs, instead telling them that he was an independent broker who would look for the best deal across multiple firms.”
If one substitutes the words “independent agent” for “independent broker” in the final phrase above, you have a statement that is commonly used in the American Agency System. “I am an independent agent and I work for you to get the best deal.”
In the usual property and casualty situation this issue may not arise as carriers have adopted agency compensation statements as a result of the brokerage scandals in New York and elsewhere several years ago. But in uncommon situations with a potentially litigious account one may wish to be doubly clear about the agency relationship and who is paying the freight.