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HOFFMANN v. PRUDENTIAL INS. CO. OF AMERICA

May 21, 2002

LADISLAUS VON HOFFMANN AND BEATRIX VON HOFFMANN, TRUSTEE UNDER 1987 VON HOFFMANN INSURANCE TRUST AND 1987 VON HOFFMANN TRUST II, PLAINTIFFS,
V.
THE PRUDENTIAL INSURANCE COMPANY OF AMERICA AND ALEXANDER & ALEXANDER, INC., DEFENDANTS.



The opinion of the court was delivered by: Chin, U.S. District Judge

  OPINION

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 years.

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 dismiss Prudential's 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.

BACKGROUND

A. Facts

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)

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. (Id.)

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 ...


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