The opinion of the court was delivered by: Chin, U.S. District Judge
In 1987, plaintiff Ladislaus Von Hoffmann ("Von Hoffmann") purchased
$30 million worth of "vanishing premium" life insurance from defendant
The Prudential Insurance Company of America ("Prudential") Defendant
Alexander & Alexander, Inc. ("A & A") was the broker. Premiums were to
"vanish" after seven years because the first seven years worth of
premiums were expected to generate sufficient dividends to eliminate the
need for Von Hoffmann to pay any further premiums. Prudential and A & A
were careful to provide disclaimers; they advised Von Hoffmann that the
seven-year premium feature was based on expected investment returns and
that they could not guarantee future performance. They specifically noted
that if investments did not perform as predicted, additional premiums
would be required. They provided illustrations to show how the process
would work, and represented that actual dividends paid on life insurance
policies had exceeded the illustrated dividends for the prior twenty
In fact, the premiums did not "vanish" after seven years, and to date
the cost of the policies has exceeded the originally projected premiums
by more than $3.3 million. Von Hoffmann and his wife, Beatrix Von
Hoffmann (the "Von Hoffmanns"), brought this action for, inter alia,
common law fraud, alleging that Prudential and A & A engaged in a scheme
of marketing fraud. The Von Hoffmanns' claims against Prudential have
been settled, but plaintiffs' claims against A & A remain. A & A moves
pursuant to Fed.R.Civ.P. 56 for summary judgment dismissing plaintiffs'
claims for common law fraud, negligent misrepresentation, negligence,
and violation of New York Insurance Law § 2123. A & A also moves to
cross-claims for indemnification and contribution as moot.
Although certain of the Von Hoffmanns' claims are time barred and must
be dismissed, their principal claims, including the claim of fraud,
survive, for a reasonable jury could find that A & A failed to disclose a
critical fact — Prudential had changed its methodology for
calculating dividends, and thus the twenty-year history of dividends
touted by A & A and Prudential was no longer applicable. Although A & A and
Prudential had provided certain disclaimers, including a statement that
future dividend rates could not be guaranteed, a reasonable jury could
surely find that the failure to disclose the change in methodology
constituted a material omission. Accordingly, A & A's motion for summary
judgment is granted in part and denied in part. A & A motion to dismiss
Prudential's cross-claims for indemnification and contribution is
granted, as it has not been opposed.
The facts set forth below are drawn from the parties' motion papers and
supporting materials, and are construed in the light most favorable to
the Von Hoffmanns for purposes of this motion.
In 1986, Von Hoffmann sold one of his businesses, Omicron Holdings,
Inc., which carried three life insurance policies on his life totaling
$50,000,000. (Von Hoffmann Decl. ¶ 2). In deciding what to do with
the policies once the business was sold, Von Hoffmann had his company's
controller, Albert Lopez, consult with A & A, the insurance broker Von
Hoffmann had relied on since 1977. (Id. ¶¶ 1-3). Under this
arrangement, Von Hoffmann retained authority over whether to purchase a
policy, and Lopez relayed any information or documents he received from
A & A to Von Hoffmann. (Id. ¶ 3).
Concerned with cost, Von Hoffmann advised A & A that he wanted to pay the
premiums on any policy he purchased as quickly as possible. (Id. ¶ 5;
Lopez Decl. ¶ 5). A & A responded that a single-premium policy was not
feasible. (Von Hoffmann Decl. ¶ 5). Instead, A & A encouraged Von
Hoffmann to purchase whole life policies with a "vanishing premium" or
"abbreviated payment plan" option, where Von Hoffmann would make only
seven cash premium payments, and after that, the premiums would "vanish"
or "abbreviate."*fn1 (Id. ¶ 6; Am. Compl. ¶ 47; Lopez Decl.
¶ 6). Between December 1986 and June 1987, A & A provided
"illustrations" concerning the policies, i.e., written promotional
material used to "illustrate" how a policy would perform, which Lopez
delivered to Von Hoffmann. (Lopez Decl. ¶ 7). Von Hoffmann asserts
that each illustration was accompanied by either a cover letter or fax
cover sheet representing that premiums would "abbreviate" in seven
years. (Von Hoffmann Decl. ¶ 8; Lopez Decl. ¶ 7)
In 1987, Von Hoffmann "question[ed A & A] about the credibility of
Prudential's dividend scales," whether the illustrated dividends were
likely to be paid, and if so, what the basis was for such expectation.
(Pls.' 56.1 Statement ¶ 28; Von Hoffmann Decl. ¶ 10). A & A
responded by letter dated June 12, 1987, enclosing a marketing brochure
and other materials intended to "support the strong record of Prudential
over a very long period of time." (Lopez Decl. Ex. 6). These
illustrations explained that the policyholder would make only seven
out-of-pocket cash premium payments, and that the remaining premium
payments were to be paid out of funds accumulated in the policies. (Von
Hoffmann Decl. ¶ 12; Lopez Decl. ¶¶ 10, 12). In addition, they
showed that Prudential's actual dividends on life insurance policies had
exceeded the illustrated dividends for the previous twenty years. (Von
Hoffmann Decl. ¶ 10; Lopez Decl. ¶ 13 & Ex. 6). The illustrations
also stated that premium payments were required for every year of the
policy, and that "Annual payments are assumed." (Von Hoffmann Decl. ¶
12; Lopez Decl. Ex. 6). A & A did not disclose that the illustrated
dividends for the twenty-year period were based on an outdated method of
crediting dividends that was no longer applicable. (Pls.' Opp'n Summ. J.
at 3-4). A & A did not disclose that similar results could not be expected
under the new method of crediting dividends.
Von Hoffmann claims that A & A withheld information from him, including a
particular five-page illustration concerning his policies. (Id.).
Specifically, Von Hoffmann claims that even though A & A received the
complete five-page illustration from Prudential, A & A always removed page
five (and also erased the page numbers) before forwarding the
illustrations to Von Hoffmann. (Pls.' Opp'n Summ. J. at 3; Lopez Decl
¶ 17). Page five was entitled "Explanation of the Abbreviated Payment
Plan," and disclosed that cash premium payments might be required for
more years than illustrated. (Pls.' Opp'n Summ. J. at 3). Von Hoffmann
also claims that A & A removed page three on a number of occasions. (Id.).
Page three stated that "Annual payments are assumed," and also, that
dividend amounts are "not guarantees or estimates for the future" and
illustrated dividends are "likely to change as current interest rates
change." (Lopez Decl. Ex. 6). Von Hoffmann admits that he received page
three on this occasion, however, included with the illustrations attached
to A & A's June 12, 1987 letter. (Pls.' 56.1 Statement ¶ 57; Lopez
Decl. Ex. 6).
Based on A & A's advice, Von Hoffmann decided to convert the three life
insurance policies that Omicron Holdings, Inc. had carried on his life
into whole life insurance trusts for his daughters worth $30 million.
(Von Hoffmann Decl. ¶ 3). The Von Hoffmanns signed the insurance
applications in July of 1987 and the policies were issued in August of
1987 (id, ¶ 11), creating two life insurance trusts with Mrs. Von
Hoffmann as trustee. (Id. ¶ 3). Von Hoffmann acknowledges that the
front covers of both policies state that "Premiums are payable throughout
the Insured's lifetime." (Id. ¶ 12 & Ex. 1). In addition, the
policies provide that the policy and the application form the entire
contract, and that modifications may only be made by a Prudential officer
in writing. (Von Hoffmann Decl. Ex. 1). Von Hoffmann asserts, however,
that on the applications for the policies, A & A typed "Abbreviated Payment
Plan" under the section entitled "State any special request." (Id. ¶
13 & Ex. 1; Lopez Decl. ¶ 16). Von Hoffmann understood this phrase as
referring to the illustrations he received, which showed that annual
premiums would vanish after seven premium payments were made. (Von
Hoffmann Decl. ¶ 13).
Prudential also attached a cover letter and a form called the
"Abbreviated Payment Plan Authorization" with the illustrations. (Lopez
Decl. ¶ 17 & Ex. 8). The letter informed Von Hoffmann that "[b]ased
on [prudential's] projections, [the Von Hoffmanns'] policies will have
the premiums `vanish' or `abbreviate' after seven annual payments."
(Lopez Decl. Ex. 8). It also explained that the enclosed "authorization
to proceed on [the Abbreviated Payment Plan] basis will be sent to the
trustee when the eighth premium is due." (Id.). The authorization itself
provided that Prudential would begin paying premiums on the policies by
"surrendering paid-up additional coverage and/or withdrawing accumulated
dividends" when it determined that the dividends would be sufficient to
pay future premiums. (Id.). It also stated that continuation of the
present rates "is not guaranteed" (Id.). Finally, the authorization
explained that if Prudential determined that dividend accumulation and
the cash value of paid-up additional coverage were not sufficient to pay
a premium when due, the agreement would end. (Id.). Lopez states that he
asked A & A about the meaning and effect of the explanatory notes and
authorization form, and that A & A assured him that these items were
"boilerplate," i.e., automatically generated whenever a policy was
issued. (Id. ¶ 17) Lopez reported this information to Von Hoffmann.
On or about January 8, 1992, A & A first informed Von Hoffmann, in
writing, that ten premium cash payments would be required on his policy
instead of seven. (Von Hoffmann Decl. ¶ 14; Lopez Decl. ¶ 21 &
Ex. 10). Von Hoffmann requested an explanation. (Von Hoffmann Decl.
¶ 14). By letter dated February 5, 1992, Prudential provided detailed
information regarding the major elements of the dividend formula, as well
as information concerning "the recent dividend changes." (Defs.' 56.1
Statement Ex. 19). In his letter to A & A of March 4, 1992, Von Hoffmann
acknowledged receipt of this information, and posed additional questions
concerning whether to continue his payments under the policies. (Id. Ex.
20). Von Hoffmann also requested a meeting with a representative from
Prudential, and on April 24, 1992, Jim Avery met with Von Hoffmann in his
home. (Von Hoffmann Decl. ¶ 17).
Avery testified that, at the meeting, Von Hoffmann asked numerous
questions regarding "why dividends had done what they had done on his
policy" and that "[h]e wanted to understand the investment generation
method." (Avery Dep. 46:5-8). Avery also testified that he and Von
Hoffmann "went through tremendous detailed conversations about
dividends, dividend determination, how to view this, investment
generation, company policy, who determines dividends." (Id. at
47:12-17). Avery stated that Von Hoffmann "quite frankly, drilled me for
two and a half hours nonstop." (Id.).
Von Hoffmann admits he understood that the exact amount of future
dividends was not guaranteed, and that interest rates in the economy were
not guaranteed. (Pls.' 56.1 Statement ¶ 54). He claims that he
believed, however, that the illustrated dividends for his policy were
"actuarially sound," which he based, in part, on Prudential's history of
paying high dividends. (Id.) He also admits that he "may have suspected
there was a risk that more than seven cash payments might be needed."
(Id. ¶ 55). He claims that he did not know, however, that the
dividend payments could decrease to the extent that the abbreviated
payment plan could not be sustained. (Von Hoffmann Decl. ¶ 9). He also
claims that A & A did not inform him that Prudential had recently changed
its method of calculating dividends to a new method that was much more
volatile. (Id. ¶ 10). He also contends that Prudential and A & A
refused to provide specific information as to how Prudential credited
dividends to its policies and A & A and Prudential also did not explain the
differences between the new and old methods for crediting dividends or
their effect on the dividend illustrations. (Id. ¶¶ 15-16)
From 1992 through 1995, Lopez and Von Hoffmann exchanged correspondence
with A & A and Prudential, whereby Von Hoffmann sought further explanation
as to why his policies did not abbreviate. (Id. ¶ 19). He states that
he received little information in response. (Id.) In the summer of 1996,
Von Hoffmann received a copy of a report entitled "The Multi-state Life
Insurance Task Force and Multi-State Market Conduct Examination of The
Prudential Insurance Company of America" (the "Task Force Report"),
drafted by the Examiners of The Multi-state Life Insurance Task Force
From Several State Departments of Insurance and other State Regulatory
Agencies. (Id. ¶ 20 & Ex. 2). The report revealed, among other
things, that Prudential had "changed its method of allocating interest to
dividends," making transactions appear more beneficial to customers.
(Id. Ex. 2). It also reported that some of ...