into a Deposit Administration Contract involving a substantial funding to the Purchase Payment Fund with a guarantee of returning cash at the termination of the contract because it was part of the philosophy of the Company not to enter into a contract that would require, at some ascertained future time, a large cash refund. This was based largely upon the intent to assume only long term obligations in which there can be a reasonable estimate of the cash requirements over the intervening years. If they were to have contracts outstanding in any volume, that could call for an immediate large cash disbursement, then they would be subject to a demand that did not fit into the investment situation. Comparing this with individual annuity contracts, the cash surrender value can and should be built into the premium structure as an anticipated percentage of the total contracts outstanding.
Counsel for the Plaintiffs brought out that the ten percent termination fee was a penalty for terminating even though no money was going to be given back. The penalty was because it was changing the purpose and intent of the Contract which was to provide benefits for the employees in accordance with the terms of the Plan.
I. FINDINGS OF FACT.
1. Prior to the issuance of the Deposit Administration Contract, the subject matter of this suit, the Plaintiff had entered into agreements with the Defendants whereby benefits in the form of individual deferred annuity contracts and life insurance policies were provided to establish the pension benefits of certain of the Township's employees.
2. These policies were owned by the Township, were subject to its direction and control, and contained the privilege to exchange or surrender said policies for their cash values.
3. On April 24, 1970, upon the recommendation of the Defendant's Pittsburgh Agent, J. J. Markotan, the Township changed the form of funding its Pension Plan by making application for a group annuity contract and the Defendant responded by issuing the Deposit Administration Contract, the subject of this suit.
4. Under this Agreement the individual annuities previously held by the Township were, in fact, surrendered and their reserve values applied to cover the initial cost of the substituted plan.
5. On June 30, 1972, the Stowe Township Board of Commissioners notified the Defendant that in accordance with the termination provision of the Deposit Administration Contract (Contract), the Township was terminating the Agreement.
6. On October 25, 1972, after previous letters of August 4, 1972 and August 17, 1972, a specific demand was made under Section I-2 of the Contract for a settlement to be made from the 90% of the Purchase Payment Fund to be applied toward the purchase of the individual paid-up annuity policies and that the policies issued be single premium deferred annuities to be apportioned equally between the listed Participants.
7. The Defendant resisted the Township's demands on the basis that the Deposit Administration Contract failed to provide for cash surrender values for the annuities and continued to the time of trial to contest the right of the Township to receive annuities with paid-up cash surrender values or to receive any cash, offering only to provide paid-up life deferred annuity policies.
8. Although the Plaintiff was the previous owner of annuity policies issued by the Defendant containing cash surrender values, upon the Defendant Company's suggestion, the Deposit Administration Contract was substituted. There was no explanation by the Company as to the material changes affected under the new agreement, including the loss of cash surrender values to the plaintiff.
From the testimony presented at the hearing, although very sketchy,
the Court can only come to the conclusion that there was a substantial change made in the type of policy which the Defendant issued for the purpose of funding the Plaintiff's various pension funds, with no explanation of the changes being given.
The Plaintiff has cited to this Court numerous cases involving changes in policies. For example, Schock v. Penn Township Mutual Fire Insurance Association, 148 Pa. Super. 77, 24 A.2d 741 (1942). In that case the plaintiff had owned a fire insurance policy for a ten year term and upon expiration, the insurance company sent another ten year policy without notifying the plaintiff that a change had been inserted whereby there was a reduced coverage as compared to the previous policy. The Court held that the plaintiff was entitled to full coverage finding that the insurance company had an affirmative obligation to make its intentions evident to its insured to whatever extent it intended to alter the terms of the agreement. Having failed to do so, the Plaintiff's recovery rights were construed as identical to those of the previous policy. The Court further held that the failure to read or study the new policy on the part of the insured was no defense to the neglect of the insurer to notify the insured of the alternations in the policy. See also, Bauman v. Royal Indemnity Co., 36 N.J. 12, 174 A.2d 585 (1961) where at page 592 the following appears:
". . . common fairness as well as legal duty dictated that it call the lessened coverage to the attention of the insureds so that they might suitably protect themselves."
To the same effect, Old Overholt v. Reliance Ins. Co. of Philadelphia, 319 Pa. 340, 179 A. 554 (1935); Burson v. Fire Ass'n. of Philadelphia, 136 Pa. 267, 20 A. 401 (1890).
The Defendant argues that the Plaintiff has not met the burden of proof set forth in the above cases in that they were all based on reformation of an insurance policy when an alternation in the coverage was made in the course of an apparent renewal. They contend that in order to reform the Contract the Plaintiff must prove by clear and convincing evidence: (and have totally failed to do so) (1) mutual mistake of the parties; (2) unilateral mistake by one party coupled with fraud on the part of the other party; or, (3) the terms of the preceding agreement which the contract was intended to embody. The defendant relied on the law as set forth in Seaboard Radio Broadcasting Corp. v. Yassky, 176 Pa. Super. 453, 107 A.2d 618 (1954); Marmon Philadelphia Company v. Blocksom, 103 Pa. Super. 542, 157 A. 510 (1931), and Armstrong County Building and Loan Ass'n. v. Guffey, 132 Pa. Super. 19, 200 A. 160 (1938). They further state that these elements are specifically required for reformation of insurance policies in Pennsylvania under the principles of law as set forth in Equitable Life Assur. Soc. v. Saurman, 126 Pa. Super. 184, 190 A. 422 (1937); and Boyce v. Hamburg-Bremen Fire Ins. Co., 24 Pa. Super. 589 (1904). Thus, the Defendant would have this Court limit the rule with respect to the duty on the Company to notify of changes to those situations where the contract was a renewal of an earlier contract and where the insurance company failed to notify the insured that the new policy contained different terms from the policy being renewed. But in this, the Court believes, the Defendant has misconstrued where the duty lies.
Under the evidence in the case, while there was not a renewal, there was a complete substitution of a new concept of funding of the Pension Funds represented to the Township by the Insurance Company to be adequate to the stated purposes of the Funds. Where the policies contained the prior provision for cash surrender values and the new policy did not, there was a substantial change made in the relationship between the Plaintiff and the Defendant.
The evidence here revealed that prior to the execution of the Contract in suit, the Township had purchased a number of individual life insurance policies and individual annuities for certain of its employees from the Defendant Company. These were individual policies, each issued on a specific employee and contained cash surrender values. All these individual policies on the different employees were "cancelled" and the reserves attributable to them were used as purchase payment deposits under the Contract in suit. While the entire thrust of the change in funding was to do away with the old policies and annuity contracts and to cover the pensions and benefits which they contained for the employees through the Deposit Administration Contract, and while this could in no sense be called a renewal or extension of an existing policy, there was a very definite continuation of the relationship between the Plaintiff and the Defendant which required the differences and distinctions between these contracts to be explained to the Plaintiff. It is clear from the testimony that no such explanation was made.
The Defendant contends that the Plaintiff failed to meet the burden of proving that the Insurance Company did not notify the purchaser of the difference between the old policies and the new policies. (The difference in question, of course, was that the new contracts did not provide for cash surrender values for the paid-up annuities to be furnished on termination of the Contract.) It is true that the Plaintiff did not call anyone to give testimony other than the President of the Defendant Company, who said in effect that he did not know what his agent may or may not have said. The Plaintiff did not call the Commissioners to show that the explanation of the change had not been made. But it is just as true that the Defendant, although its agent was present in court, chose to rest its case without offering any testimony. We do have on the record in the letter of August 17, 1972, (attached to the Complaint) the fact that the Board of Commissioners had made two former requests for liquidation of the contract on defendant company, and the tender of such requests shows no such explanation that the paid-up annuities would have no cash surrender value. The only inference that the Court can draw with the limited record before it is that no explanation of this change was made to the Plaintiff or its representatives.
We, therefore, find that the Plaintiff is entitled to paid-up annuity contracts and, thus, it is not necessary that we reach the contention of the Plaintiff that if the contract was not construed to require paid-up annuity contracts then that such contracts would be contrary to public policy.
However, having reached the conclusion that the Plaintiff was entitled to contracts calling for a paid-up cash surrender value, the matter before us still poses some difficulty because of the testimony of the President of the Defendant Company presented in the Plaintiff's case when called for the purpose of cross-examination. At that time he stated that the issuance of such policies would be completely contrary to the method of operation of the Defendant Company. It would seem that under the Plaintiff's own testimony, the most equitable solution is a return of the money which has been deposited with the Insurance Company, specifically the Purchase Payment Fund less the amount of the termination provision of 10%, that amount to bear interest at 6% per annum from October 25, 1972 until paid.
An appropriate order will be entered.