Wednesday, July 25, 2007

Claim against insurance sold as investment can proceed

Toy v. Metropolitan Life Insurance Co., A.2d ----, 2007 WL 2048931 (Pa.)

Toy sued MetLife and a sales rep, Bob Martini, for bad faith under Pennsylvania’s statute governing bad faith by insurance companies and for unfair trade practices under state consumer protection law. In 1992, Toy wanted to plan for retirement. She met with Martini, who pitched MetLife’s 50/50 Savings Plan to her as a savings vehicle that would generate approximately $100,000 when she reached 65 if she put in $50 a month. He also told her that life insurance was part of the plan. At his urging, she completed an “Application for Life Insurance.” She then received a policy from MetLife with a cover sheet indicating she’d received life insurance in the face amount of $31,544 as of 1992. The cover sheet also stated that she had 10 days to return the policy and get a refund. On page 4, the policy stated a guaranteed cash value at age 65 of $11,008.86. The policy contained an integration clause and stated that sales representatives had no authority to change any contract terms.

Toy only looked at the cover sheet, and subsequently paid $1,400 in premiums. Two years later, she found out about a Florida class action against MetLife and stopped making premium payments. She sued, alleging that defendants misrepresented the policy as a savings/investment vehicle in order to reap the premiums and fees, which were higher for life insurance than for annuities and similar retirement products.

A majority of the Pennsylvania Supreme Court ruled that the state’s bad faith insurance statute covered only bad faith in refusing to pay third- or first-party claims, not bad faith in inducing insureds to become insureds. The Court also held that justifiable reliance was an element of Toy’s consumer protection claims, but a majority concluded that a jury could find such justifiable reliance on these facts. The key question was whether the parol evidence rule precluded Toy from relying on Martini’s alleged misrepresentations, which contradicted those in the insurance contract. In other words, are insureds required to read the written contract, such that no consumer protection claim is available to those who fail to do so and therefore fail to see the differences between the contract and the earlier claims about the contract?

The majority concluded that Toy’s claims alleged fraud in the execution of the contract, triggering an exception to the parol evidence rule. A partial dissent would have found Toy’s claims to concern fraud in the inducement, which is not an exception to the parol evidence rule because it would swallow that rule. The majority generally agreed with this concern, but construed Toy’s claim as one that Martini misrepresented that savings plan features would be part of the contract. That is fraud in the execution, since Toy alleged that she was mistaken as to the actual terms of the agreement because of Martini’s fraud.

The dissent argued vigorously that such an expansive reading of fraud in the execution turns it into fraud in the inducement. “[T]he parol evidence rule subsumes an objective to promote certainty and stability of contract, and to place some reasonable limitations on the litigation exposure of the business community and others, by investing contracting parties with an obligation to read their written agreements and abide by clear terms, short of an allegation of fraud of a sort that would not be obvious from the face of the integrated agreement, and/or in the absence of circumstances in which reading the written agreement would not be reasonable.” Misrepresentations about actual terms of the contract, the dissent thought, should generally be treated as fraud in the inducement if the real terms are clear and apparent and parties have the ability to review those terms.

Defendants also argued that, regardless, Toy’s failure to read the policy prevents her from showing justifiable reliance as a matter of law. But the court pointed out that such a holding would essentially remove the fraud in the excecution exception to the parol evidence rule. Consumers have no general duty to investigate the falsity of misrepresentations (though known or obvious falsity cannot justifiably be relied upon). “[A] party who engages in intentional fraud should be made to answer to the party he defrauded, even if the latter was less than diligent in protecting himself in the conduct of his affairs.” Toy was under no duty to read the policy.

Moreover, the majority concluded that the falsity of Martini’s misrepresentations was not obvious, given the cover sheet. Justifiable reliance is a question of fact; given that Toy claimed that Martini told her that there was a life insurance component to the product she bought, she might have thought that the face amount referred only to the life insurance component and not the overall value of the product.

The dissent disagreed with this as well. The application she filled out was an “Application for Life Insurance” that identifed her as the “Proposed Insured,” contained medical data, and listed other insurance-related provisions. The dissent would not have excused her from failing to read both the application and the policy in reliance on Martini’s representations. The dissent expressed concern for protecting consumers, and didn’t want to require them “to study detailed policy terms at length in circumstances in which they could reasonably expect that coverage would be available.” But here Toy testified that she didn’t think she was getting insurance; Toy’s belief that she was investing in a savings plan was simply unreasonable “when the only application that she signed was one for life insurance, and the policy that she received was, on its face, materially out of sync with her asserted expectation.” The broader pattern of alleged fraud by MetLife in selling insurance as a savings vehicle, the dissent believed, could be addressed by the state insurance commissioner.

Both the majority and the dissent acknowledge that the line between fraud in inducement and fraud in execution is a fine one. There is simply an irreducible tension between protecting parties from fraud and ensuring certainty by enforcing integrated written contracts. Given the disparity in knowledge and sophistication between individual consumers and large insurance companies, I don’t think the majority was wrong to draw the line as it did, despite the obvious costs to the scope of the parol evidence rule.

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