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MUTUAL LIFE INSURANCE COMPANY OF NEW YORK v. ESTATE OF RAY LAMAR WESSON

NOVEMBER 12, 1987

MUTUAL LIFE INSURANCE COMPANY OF NEW YORK
v.
ESTATE OF RAY LAMAR WESSON, M.D., DECEASED, BY EMOGENE HALL, ADMINISTRATRIX AND AS GUARDIAN OF RAY LAMAR WESSON, JR., ALLISON LYNN WESSON, DAVE NEWTON WESSON AND JASON MANNING WESSON, MINORS; CORPORATE PLANNING, LTD.; AND W. A. WIMBERLY



EN BANC.

ROY NOBLE LEE, CHIEF JUSTICE, FOR THE COURT:

The administratrix of the estate of Dr. Ray Lamar Wesson, deceased, [Wesson] joined by the guardian of Dr. Wesson's four minor children, filed suit in the Circuit Court of Jackson County against Mutual Life Insurance Company of New York [hereinafter MONY], Corporate Planning, Ltd., and W. A. Wimberly for the sum of eighty-seven thousand one hundred thirty-six dollars ($87,136.00), face value of an insurance policy covering the life of Dr. Wesson and for punitive damages resulting from the insurance company's bad faith in declining to pay the policy amount. Corporate Planning, Ltd. and W. A. Wimberly, alleged to be agents of MONY, filed a cross-claim against MONY for damages, actual and punitive, for loss of business and injury to reputation. At the end of the trial, the lower court granted a peremptory instruction in favor of the latter two defendants on the claim against them by Wesson.

The jury returned a verdict for Wesson against MONY in the sum of $87,136.00, actual damages, and eight million dollars ($8,000,000) in punitive damages; and a verdict in favor of Corporate Planning, Ltd. and W. A. Wimberly against

 MONY in the sum of three hundred fifty thousand dollars ($350,000). MONY has appealed from the judgments.

 I.

 This discussion under Part I relates to the suit of Wesson against MONY.

 Facts

 In early 1974, Dr. Ray Lamar Wesson and Dr. Jerry Adkins organized the Surgical Clinic of Biloxi, P.A., a professional corporation. Through the advice and assistance of W. A. Wimberly and Corporate Planning, Ltd., his company, agents of MONY, the Surgical Clinic set up a retirement plan by forming a pension trust retirement plan designating Drs. Wesson and Adkins as trustees. The second company formed and owned by Wimberly, i.e., Corporate Investments, sold a MONY whole life insurance policy through the pension trust retirement fund to the Surgical Clinic insuring the life of Dr. Wesson.

 The insurance policy was dated February 1, 1974, for a face amount of $87,136.00. Wimberly, as MONY's field underwriter, submitted the special class-employee policy application of Dr. Wesson to MONY, which application became a part of the policy. Question 9 of the application, together with the answer, follows:

 9. Auto. Prem. Loan provision operative if available? Yes X No _

 The Automatic Premium Loan provision referred to in Question 9 is set forth on page 11 of the insurance policy:

 AUTOMATIC LOAN TO PAY PREMIUMS (Subject to conditions specified below) - This provision shall become operative if requested in the application for this Policy or whenever written request is received by the Company at its Home Office before any premium is in default beyond the grace period. It shall become inoperative, as to premiums not yet paid, upon (a) receipt by the Company at its Home Office of written request to that effect or (b) election of an Optional Benefit on Lapse within the grace period.

 While this provision is operative and the loan value is at least as great as the total unpaid premium plus any existing indebtedness, each

 premium for this Policy due and not otherwise paid will be paid by automatic loan on the last day of the grace period. However, a premium shall not be paid by automatic loan if all premiums due during the twelve policy month interval prior to the due date of such premium have been paid by automatic loan and no payment toward indebtedness under this Policy has been made during such interval or during the grace period of such premium.

 Further, Endorsement #73500 was issued by MONY with the Wesson policy which strengthened insured's rights in connection with the original Automatic Premium Loan (APL) provision, and provided in pertinent part:

 Automatic Loan to Pay Premiums - This provision shall become operative if requested in the application for this Policy or whenever written request is received by the Company at its Home Office before any premium is in default beyond the grace period.

 After receiving Dr. Wesson's application, MONY's Jackson, Mississippi, office forwarded it to the main office in New York, where Annie Kimmerle, an Installation Specialist in MONY's pension trust department, reviewed the application and sent it to the Policy Issue Department, with instructions that Dr. Wesson's policy be issued without APL. Kimmerle later testified that, although the application requested APL, she was aware of MONY's policy regarding APL and instructed Policy Issue accordingly. MONY was relying on an interpretation of non-transferability Endorsement #64540 that it negated the effect of the APL provision. The endorsement in Dr. Wesson's policy read:

 Neither the insured nor the beneficiary may sell, assign, discount, pledge or encumber any interests in this policy except to or through the Mutual Life Insurance Company of New York, and then only in accordance with the right conferred upon him or her under the terms of the Policy.

 As a result of Kimmerle's instructions, Policy Issue coded its computer to reflect a" O "under the APL column in its master message printout (computer) to show that APL was not in that policy. Kimmerle then sent a memo to Don Coatsworth, office supervisor of the Jackson office, informing him of MONY's decision not to honor the APL request. Wimberly denied that this information was ever relayed from Coatsworth to him. The policy was then sent to Wimberly, who forwarded it

 to Dr. Wesson at the Surgical Clinic. Wimberly received a data card for his records, which card indicated that no APL was provided.

 At trial, several pension trust policies, other than the Wesson policy, were introduced in evidence and they reflected that APL was requested in their applications, but no instructions were sent by Kimmerle to the Policy Issue Department. Notwithstanding that absence, the master message printout of those policies was coded" O "for the APL as was Dr. Wesson's policy.

 After issue of Dr. Wesson's policy, MONY altered its Special Class-Employee Application to delete Question 9 relating to the offer of APL to the insured. Subsequently, MONY became aware that the Endorsement #64540, mentioned above, did not negate the effect of a requested APL in a pension trust policy. This became clear as early as October 21, 1976, in an interoffice memorandum from Pauline Dana-Bashian to Mary Martini advising her that the non-transferrability Endorsement #64540 does not negate APL. Also, on October 27, 1976, Joan Rapp of MONY's Policy Forms Department, sent a memo to Don Coe of MONY's Sales Department, advising him that, although the policy application was changed in 1974, some policies still include APL and that" these issues are not endorsed to make APL inoperative. "

 On September 16, 1975, Lou Roth, Vice President and Chief Actuary of MONY, sent a memo to Rudy Vadala, Vice President and department head of MONY's Office Operations Department, wherein he set out that the Actuarial Department did not believe in selling the APL option; that if an insured is on the verge of lapse, MONY should inform him of his rights to continue the policy under APL; and that MONY should have a program of informing agencies and policyholders of the rights under the APL provision only when lapse or surrender seems imminent, and not on a massive scale to all policyholders.

 When MONY learned of the ineffectiveness of the non-transferrability endorsement #64540 in 1976, it was also apprised of a situation where a large number of pension trust policies had been coded in the computer to indicate that APL was operative. The code number appearing in the APL column of the master message print (computer printout) would have to be a number other than" O "to indicate an operative APL provision. A memo from Delores Hart, Supervisor of MONY's Field Relations Program, to Yolanda Boytell, head of MONY's Quality Control Department, dated September 14, 1976, indicated that this was taking place:

 APL's on Pension Trust and Profit Sharing Plans. Issue has been allowing APLs on Pension Trust and qualified profit sharing plans except for Master Annuity per Dot McCarthy and the Pension and Profit Sharing Manual. APL is not available on any Pension Trust and qualified plans. (I don't know about non-qualified). That's in parenthesis. Peg Hess will talk with Carolyn Beltnap and Dot to change their rules. Also, the Special Class Application (since 1974) do not ask if APL is wanted. However, what can we do to prevent APLs from processing on policies which allowed APLs which shouldn't be allowed? And, how and who corrects the ones which are incorrect at present? Please let me know what will happen with these. Seems that this is no small thing. Thanks, Dot.

 MONY assigned Mary Martini the project of investigating and rectifying the problem. *fn1

 In a memo by Mary Martini to Don Raves, Sales Department, February 9, 1977, she estimated that 25,000 pension trust policies having APL provisions might be involved in the investigation. Her investigation revealed that pension trust and profit-sharing polices issued prior to May, 1974, were issued with APL, if requested on the application. After learning from Pauline Dana-Bashian's memo of October 21, 1976, that the current non-transferrability endorsement had no negative effect on APL provisions, Martini drafted sample letters to inform current policyholders of their operative APL provision, and its possible IRS implications. However, the letters were never sent to the policyholders, and the project was terminated.

 Wesson's Death

 On March 14, 1980, Dr. Wesson, along with his wife, died as a result of a plane crash in Poland, while accompanying the United States Amateur boxing team en route to a match against the Polish team. At the time of his death, the premium, which was due February 1, 1980, had not been paid. After being informed of Wesson's death, Wimberly contacted Emmie Holt at MONY's Jackson office to inquire about the status of the policy since the February 1, 1980, premium was unpaid. She relayed the request to MONY's home office in New York, and on March 26, 1980, MONY's New York office sent a TELEX message to Holt stating," Since two premiums are due and unpaid and no APL provision was provided for, the policy will be lapsed to reduced paid up ($3,687.00). "

 The grandmother of the Wesson children, beneficiaries of their father's policy, employed Attorney Clyde H. Gunn in the matter, and he contacted MONY on March 24, 1980, advising of Dr. Wesson's death and requesting a claims form. In May, 1980, Attorney Gunn sent in the claims form and copy of the policy to MONY and on June 2, 1980, MONY sent four form letters to its Jackson office informing them that the policy was lapsed to reduced paid-up value of $3,687.00. Attorney Gunn made demand for the full face amount on July 10, 1980, to which MONY replied on August 5, 1980, giving the same explanation as stated hereinabove. The Wessons filed suit against MONY on August 30, 1982.

 In denying the claim MONY relied only on the master message print (computer printout). This modus operandi of MONY in evaluating a claim was uncontradicted. Although the master message print indicated that an APL provision was not in Dr. Wesson's policy, the testimony showed that only the application of Dr. Wesson listed the beneficiaries, and claims personnel referred to it at the time the claim was filed to ascertain the beneficiaries. Question and answer #9 indicating APL was on the application. *fn2

 Between the time of Dr. Wesson's death and the filing of suit, in early 1981, MONY unilaterally altered its computer to reflect a" 0 "for APL in its master message print on all tax qualified whole life policies. After suit was filed and discovery had, this action was found out. MONY then attempted to rectify the situation by identifying the policies which had requested APL, changing its computer to reflect such, and notifying policyholders of the risk they run of having their plans lose their tax-exempt status.

 As a result of this investigation, MONY discovered fifty (50) death claims involving tax-sheltered policies, with eight (8) of those 50 being paid on a reduced paid-up basis. Of those eight, two, including Dr. Wesson, requested APL. The other policy was then paid in the full amount of its face value. Of the pension trust policies still in force, MONY discovered 1,614 policies which requested APL and were originally coded in its computer reflecting such, but were unilaterally changed to indicate no APL in 1981. MONY also discovered 182 policies wherein APL was requested but coded at issuance to indicate no APL. If Dr. Wesson had lived, his policy would have fallen into this latter category.

 MONY discovered the existence of the APL provision in Dr. Wesson's policy just prior to the due date of its answer to the complaint. MONY was served with the complaint December 2, 1982. MONY notified local counsel in Jackson,

 Mississippi, of the complaint, telling him it was a simple lapse case and that he should defend it vigorously. Marion Marable, the person making contact with local counsel, relied upon the information contained in the master message print, notwithstanding that, at that time, the file was in his possession containing the complete policy. MONY's local counsel, while reviewing the policy with MONY personnel at its Jackson office, discovered the inclusion of the APL provision in the policy and MONY was notified of this by local counsel on October 11, 1982. MONY filed an answer, denying liability, but, on December 15, 1982, amended its answer, admitted liability and paid the face value of the policy, with interest, into court.

 As a result of the suit, MONY took certain corrective measures. Also, it now requires its death claims personnel to review the application when evaluating a death claim.

 Issues

 A.

 FAILURE TO GRANT MONY'S MOTION FOR DIRECTED VERDICT, REQUEST FOR PEREMPTORY INSTRUCTION, AND MOTION FOR JUDGMENT NOTWITHSTANDING THE VERDICT.

 MONY contends, under this assignment, that (1) there was no intentional refusal on its part to pay the Wesson claim; (2) MONY had no actual knowledge nor lack of arguable reason when it denied the claim; and (3) therefore, punitive damages were inappropriate.

 The case we consider today is commonly characterized as a" bad faith insurance claim, "viz, where an insurance company declines payment of a known, legitimate claim under an insurance policy without justifiable reason. Since Standard Life Ins. Co. of Indiana v. Veal, 354 So.2d 239 (Miss. 1977), there have been at least sixteen (16) bad faith cases decided by this Court, involving the question of whether or not they were proper cases for the submission of the punitive damages issue to the jury. Thus, in the case sub judice, we are not travelling an undefined trail, but, rather, a well-marked highway. The phrase" arguable reason "for denying a claim excluding punitive damage liability first appeared in Veal and has been argued in most of the cases since that decision. For instance:

 In Travelers' Indemnity Co. v. Weatherbee, 368 So. 2d 829 (Miss. 1979), the Court held a punitive damage

 instruction was proper and that the evidence was sufficient to support the verdict for damages thereunder arising from the intentional withholding of the contents coverage, a gross breach, the equivalent of an independent tort.

 In Aetna Cas. & Surety Co. v. Steele, 373 So.2d 797 (Miss. 1979), the Court held there was an arguable reason to not pay the claim of appellee, and, under the ruling cases cited, punitive damages and attorney's fees are not proper.

 In Standard Life Ins. Co. of Indiana v. Veal, 354 So.2d 239 (Miss. 1977), the defendant failed to honor the legitimate claim filed following the death of plaintiff's wife and there was no reason whatever to justify its action. Punitive damages were proper.

 In Reserve Life Ins. Co. v. McGee, 444 So.2d 803 (Miss. 1984), the Court held that where the evidence constituted disputed facts as to whether or not a certain situation existed, then the issue should be submitted to the jury on punitive damages.

 In National Life & Accident Co. v. Miller, 484 So. 2d 329 (Miss. 1985), the Court said:

 Where these agents fail to correctly record Mrs. Miller's responses on the application and then further failed to bring that error to the attention of the claims department and, in fact, misrepresented the extent of their knowledge, it cannot be said that a jury would not be justified in finding that those agents' actions amounted to willfulness or such gross negligence as to amount to reckless disregard of the Millers' rights.

 In Weems v. American Security Ins. Co., 486 So.2d 1222 (Miss. 1986), the Court said:

 The absence of an arguable reason, however, does not lead inexorably to an assessment of punitive damages. This is because, as said above, the substantive test for awarding punitive damages is the same in bad faith refusal cases as in any other case where punitive damages are sought. That test requires the plaintiff to show some willful or malicious wrong or the gross or reckless disregard for the rights of others. (Citations omitted).

 Weems, 486 So.2d at 1226-27.

 Following close upon the heels of Weems, Aetna Cas. & Surety Co. v. Day, 487 So.2d 830, 832 (Miss. 1986), the Court held:

 To recover punitive damage from an insurer for amounts over and above policy benefits an insured must prove by a preponderance of the evidence either (1) that the insurer acted with malice, or (2) that the insurer acted with gross negligence or reckless disregard for the rights of others.

 From the facts stated hereinbefore, it cannot be contended seriously that MONY had an arguable reason or a legitimate reason or a justifiable reason (all three amount to the same) for denying the Wesson death claim. Finally, after all pleadings were filed, MONY amended its answer and paid into the registry of the court the sum of $87,136.00, the face amount of the policy. The issue of punitive damages was properly submitted to the jury as to whether or not there was a gross or reckless disregard by MONY to the rights of Wesson and others. We reject the argument of MONY that a unilateral mistake on the part of MONY gives it a proper reason for declining to pay the Wesson claim and that it had no actual knowledge as to the APL provision in the Wesson policy. MONY's contention that it is guilty of only simple negligence is overwhelmingly rebutted by the following occurrences:

 (1) the intentional coding in accordance with its policies and procedures into its computers of no APL, although requested by Wesson through Wimberly in his policy;

 (2) the failure to rectify the coding once it was discovered by MONY in 1976 that endorsement #64540 did not abrogate the APL provision in such policies as Dr. Wesson's;

 (3) this was not an isolated incident, but, rather, involved a large number of policies;

 (4) in 1980, the denial of the Wesson claim based on a review of the master message print only, specifically in light of its past action and acquired knowledge with regard to APL in its computer;

 (5) the failure of MONY personnel to review the policy when deciding whether to pay a claim; and

 (6) the denial of liability in its answer at a time that MONY was on notice as to the APL's existence. Richards v. Allstate Ins. Co., 693 F.2d 502 (5th Cir. 1982).

 We hold that the question of punitive damages was correctly submitted to the jury, and we reject MONY's first contention.

 B. - C.

 PLAINTIFF'S DUTY TO DEAL IN GOOD FAITH. IMPROPER INTRODUCTION OF FINANCIAL STATEMENT. *fn3

 MONY contends that there was error for the trial judge to strike its defense that the attorneys for the Wesson Estate had failed to deal with MONY in good faith and to mitigate damages. Even so, MONY did introduce some evidence with an assertion that there was bad faith on the part of the insured, and the Court instructed the jury," The law imposes upon both parties to a contract the duty to deal with each other fairly and in good faith . . . . "Early, appellant made its determination that no APL existed in the Wesson policy and denied the claim long before the letter of July 10, 1980, was sent by Attorney Gunn. This suit brought to light many MONY practices which could have resulted in more wrongful denials of death claims and resulted in subsequent proper payment ...


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