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REL: 09/19/2008

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SUPREME COURT OF ALABAMA
SPECIAL TERM, 2008 _________________________ 1061535 _________________________ AmerUs Life Insurance Company v. Bobby Ray Smith et al. Appeal from St. Clair Circuit Court (CV-02-304) LYONS, Justice. AmerUs Life Insurance Company appeals from the trial

court's order denying its postjudgment motion for a judgment as a matter of law ("JML"), a new trial, or a remittitur. The

trial court refused to set aside or modify a judgment entered

1061535 on a jury verdict in favor of Bobby Ray Smith; Martha Smith, as trustee of the Bobby Ray Smith Family Trust; 1 and Precision Husky Corporation (hereinafter sometimes referred to as "the insureds"). We reverse and render a JML in favor of AmerUs.

I. Factual Background and Procedural History In 1987, Carl Edward Jeffrey, an agent for Central Life Assurance Company (the predecessor corporation of AmerUs), contacted Bobby Ray Smith to solicit Smith's purchase of life insurance. Jeffrey, an independent agent, represented a

number of insurance companies, but he wrote the majority of his insurance policies through Central Life. Jeffrey was a

member of the church where Smith served as the minister; Smith also operated his own business. When Smith met with Jeffrey

to discuss purchasing life insurance, Smith already had a $3,000,000 life-insurance policy issued by Principal Mutual Life Insurance Company, which he canceled when he subsequently purchased insurance from Jeffrey. The Principal Mutual policy

was issued at a standard rating and was pledged to a bank as security for a loan made by one of Smith's businesses. Smith

The complaint named as a plaintiff the Bobby Ray Smith Family Trust. Martha Smith, in her capacity as the trustee, was later substituted as a plaintiff in place of the trust. 2

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1061535 says that Jeffrey told him that he could provide him a better policy than the Principal Mutual policy and that Jeffrey

showed him a written projection illustrating a $3,000,000 policy to be issued by Central Life that extended until Smith was 95 years old; Smith was then 53 years old. Smith says

that Jeffrey represented to him that the policy would last for 42 years, that the annual premium would be $42,840, and that the annual premium would remain level for the entire 42 years. Smith completed an application dated January 6, 1987, for a policy with a death benefit of $3,500,000, which Jeffrey

submitted to Central Life.

Central Life agreed to issue the

policy, but stated in a letter to Jeffrey that because of Smith's medical history, the policy would be issued with a class "C" rating. the policy to Jeffrey then amended the application for the requested coverage to $500,000.

reduce

Jeffrey submitted another application dated March 24, 1987, for a $3,000,000 policy. Pursuant to the applications, Central Life issued two policies insuring Smith's life. The first policy, issued on

April 14, 1987, had a death benefit of $500,000 ("the small policy"). The second policy, issued on May 19, 1987, had a

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1061535 death benefit of $3,000,000 ("the large policy"). Both

policies were issued with a class "C" rating.

Smith says that

Jeffrey did not tell him that the policies did not have a standard rating or explain to him the meaning of a class "C" rating and that Jeffrey did not provide an amended

illustration to show how the policy projections might differ from the original projections Jeffrey had showed him if the policy rating. had a class "C" rating as compared to a standard

The rating class, a class "C," appeared on the face

of the policies. Both policies issued to Smith by Central Life were

flexible-premium adjustable life-insurance policies, known in the insurance industry as universal life-insurance policies. Both the premium and the death benefit are flexible in a universal life-insurance policy. Smith's policies provided AmerUs states that a

for the payment of a "planned premium."

planned premium is the product of a discussion between the agent and the client as to the amount of the premium the client wishes to pay for the policy. The premium is set in a

range, with a minimum premium at the low range and a maximum premium at the high range.

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1061535 Each of Smith's policies advised: policy carefully." "Please read your

Each policy also contained a provision

giving the insured 20 days to examine the policy and allowing the policy to be canceled "for any reason within 20 days after you receive it." Smith stated that when he received the large

policy, he looked at the declarations page, but that he did not otherwise read the policy. He also said that after

Jeffrey delivered the policies to him, Jeffrey never told him that Central Life had not been able to provide a policy with the premium amount and the guaranteed period he and Jeffrey had discussed. Smith further stated that he never received

any information from any source informing him that the policy terms as conveyed to him by Jeffrey were wrong. The cover page of each policy describes it as a "FLEXIBLE PREMIUM ADJUSTABLE LIFE POLICY." The schedule of benefits and

premiums reflects a "planned premium" and a "payment period" of 42 years. The annual planned premium under the large The annual planned premium under the Each policy also contained the

policy was $42,840.

small policy was $5,739.96. following disclaimer:

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1061535 "THIS POLICY MAY END BEFORE THE INSURED REACHES AGE 95 IF SUBSEQUENT PREMIUMS ARE NOT SUFFICIENT TO CONTINUE THIS POLICY IN FORCE UNTIL THAT TIME." Approximately a year after Central Life issued the large policy, Smith talked with Jeffrey about increasing its

coverage to $3,500,000.

Smith says that Jeffrey told him that

he could obtain the additional coverage without any change in the planned premium. Smith also says that Jeffrey did not

tell him that the additional $500,000 in coverage would result in an increase in the cost of insurance that would be deducted from the policy values. Smith then had the coverage on the

large policy increased to $3,500,000. When the policies a were issued, in which and Southern Smith held Comfort a 50%

Conversions, interest,

Inc.,

company small

owned

the

policy,

Precision

Husky

Corporation, the company in which Smith held a 100% interest, owned the large policy. policy it owned. Each company paid the premiums on the Comfort transferred the small

Southern

policy to Precision Husky in 1991.

On December 29, 1993, The next

Precision Husky transferred both policies to Smith.

day, he transferred ownership of both policies to his wife, Martha Smith, as trustee of the Bobby Ray Smith Family Trust.

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1061535 Thereafter, policies. Central Life sent annual statements concerning both Bobby Ray Smith paid the premiums on both

policies, which Smith acknowledged receiving. statements reflected, as

The annual

early as 1988, that if only the

planned premiums were paid, the policies would terminate well before Smith reached age 95. For example, the 1991 annual

statement for the large policy advised that it would terminate in October 2004 if only the planned premiums were paid. Smith

denied having read any of the annual statements, but admitted that if he had read them, he would have seen that if only the planned premiums were paid, the policies would lapse well before he reached age 95. Smith suffered a heart attack in

1989 and thereafter was unable to obtain other insurance to replace the policies. Smith testified that because he had

become uninsurable, any information concerning the policies that he received after 1989 was irrelevant to him. In 1991, George Brooks, another Central Life agent,

called on Smith to solicit his insurance business. an agent for Central Life from 1984 until 2005.

Brooks was

Smith stated

that he understood that Jeffrey was no longer associated with

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1061535 Central Life and that Brooks had "inherited" Jeffrey's files. Brooks testified that he and Jeffrey were both employed as "career agents" with Central Life, which meant that the agent did the majority of his business with Central Life and

received from the company health insurance and retirement-plan contributions. just a Brooks said that a career agent was more than agent, with the right to complete

soliciting

applications, sign them as a licensed agent, and turn them in to the company for acceptance. binding A career agent, he said, had

authority that was higher than that of a typical

insurance broker. Brooks reviewed Smith's insurance file, which included the small policy and the large policy, as well as the

illustration that Jeffrey had used in his original sale of the policies to Smith. policy with a That illustration was premised upon a death benefit, a $42,800 annual

$3,000,000

premium, and an interest rate of 8.5% projected to age 95. The illustration was based upon the assumption that the policy would be issued at a standard rate, but the policy was in fact issued at a higher class "C" rate because of Smith's health conditions. Brooks testified that the effect of the higher

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1061535 class "C" rating was a 75% increase in the underlying cost-ofinsurance expense. After reviewing Smith's insurance file,

Brooks stated that he concluded that the large policy would not extend for 42 years at the premium quoted by Jeffrey and that Jeffrey's representation to Smith that the policy would pay a $3,500,000 death benefit with a stable premium for 42 years was not accurate. Likewise, Brooks concluded that the

small policy also would not extend for 42 years at the premium quoted by Jeffrey. During discussions in early 1991, Smith asked Brooks to obtain copies of the annual statements on the large policy and the small policy. to Smith. Brooks The did 1990 so, sending copies of the that

statements

statements

reflected

payment of the annual planned premium of $5,739.96 on the small policy would carry the policy only to December 2003 (approximately 26 years) and payment of the annual planned premium of $42,840 on the large policy would carry the policy only to November 2004 (approximately 27 years). Brooks also

provided Smith with illustrations showing that a policy with a life-insurance benefit of $3.5 million based upon a

projected premium of $42,000 per year would not extend to age

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1061535 95. Brooks testified that, based on these illustrations, the

annual statements, and other information, he informed Smith that his policies would not extend to age 95 with the level premiums quoted by Jeffrey. Smith said that Brooks told him

that he might "have a problem down the road" and that he did not think that either policy would extend for 42 years without increasing the planned premiums. According to Brooks, Smith

was concerned and seemed surprised when Brooks advised him that the premiums on the large policy and the small policy would not remain level for 42 years. Smith testified that he

never would have purchased the policies if he had thought there would be a problem "down the road." Brooks stated that after advising Smith that the policies would not maintain coverage for 42 years at the fixed annual premiums as Jeffrey had represented, he discussed with Smith the options available to him: discontinuing the policies,

seeking a lesser death benefit for the same premiums, paying higher premiums, or asking Central Life to lower the rating on the policies from a class "C" rating to a standard rating. Brooks testified that Smith seemed to understand the problems and his various options. Brooks tried to secure other

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1061535 insurance for Smith, but he was unsuccessful in obtaining coverage at a rate acceptable to Smith. Smith stated that he

then made the judgment call to continue paying the premiums on the policies and to see how long they would last. According

to Smith, the policies actually extended another 10 years after he made that decision. Smith said that he had trusted

Jeffrey and had believed what Jeffrey had told him but that he did not believe what Brooks told him because he thought Brooks was just trying to sell him some insurance. In 2001, Smith had additional discussions with Brooks. Brooks said that he informed Smith at that time that his policies would lapse within a few months, perhaps as long as a year. By then, AmerUs had acquired Central Life. Smith

obtained legal counsel, who drafted a letter dated September 16, 2002, for Smith to send to AmerUs stating that he had been told his monthly premium payment on the large policy would not change for the life of the policy and that unless AmerUs agreed to continue the large policy in effect at the same premium he had been paying, he could not continue to maintain the policy. On September 25, AmerUs responded to Smith's

letter, advising him that the premiums were not sufficient to

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1061535 cover the cost of insurance and that the cash value had fallen below the amount necessary to sustain the payment of the premiums. AmerUs further advised Smith that in order to keep

the large policy from lapsing, a payment of $24,905.75 would be required by October 12, 2002. Smith did not make any

further premium payments, and both policies lapsed in October 2002. The insureds sued AmerUs, Jeffrey, and the Jeffrey The

Planning Group, Inc. (a corporation owned by Jeffrey). complaint fraudulent defendants, alleged claims of fraudulent breach of

misrepresentation, contract and as to all

suppression, and a claim

and of

negligent

wanton

hiring, AmerUs

training, or supervision of Jeffrey as to AmerUs.

answered the complaint, denying the allegations, denying any agency relationship with Jeffrey, a and asserting various

affirmative defense.

defenses,

including

statute-of-limitations

Neither Jeffrey nor Jeffrey Planning ever answered

the complaint. AmerUs then filed a motion for a summary judgment. One

of its arguments was that the insureds' claims were barred by res judicata or collateral estoppel because of the settlement

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1061535 of a class action against AmerUs in which the insureds were members of the class. The trial court denied the motion, but

allowed AmerUs to petition this Court for permission to appeal pursuant to Rule 5, Ala. R. App. P. This Court allowed the

interlocutory appeal and affirmed the trial court's order denying the summary-judgment were not motion, barred concluding by the that the

insureds' settlement.

claims

class-action

AmerUs Life Ins. Co. v. Smith, 937 So. 2d 510 The case then proceeded to a jury trial.

(Ala. 2006).

On the first day of trial, the insureds moved for the entry of a default The judgment court against orally Jeffrey and Jeffrey

Planning. motion.

trial

granted never

the been

insureds' properly

Contending

that

Jeffrey

had

served, AmerUs sought to have the default judgment set aside. The trial court then set aside the default judgment and placed the insureds' claims against Jeffrey and Jeffrey Planning on its administrative docket. Thereafter, the trial court, ex

mero motu, ordered a separate trial for Jeffrey and Jeffrey Planning pursuant to Rule 42, Ala. R. Civ. P. The case was tried on the insureds' fraud claims and breach-of-contract claim against AmerUs. During the trial,

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1061535 the insureds introduced evidence that Smith had paid a total of $648,075.27 in premiums on the large policy and a total of $80,128.24 in premiums on the small policy. They also

introduced schedules reflecting their calculations of interest Smith could have earned on the amount Smith had paid in

premiums.

Smith testified as to his mental anguish, stating

only that when he received the letter from AmerUs in 2002, it gave him a "terrible feeling." at the conclusion of the of the AmerUs filed motions for a JML evidence court and at the both

insureds' the

conclusion motions. After

case,

but

trial

denied

all

evidence

had

been

presented,

Smith

and

Precision Husky moved to amend their complaint to add as a plaintiff Martha Smith, as trustee of the Bobby Ray Smith Family Trust, stating that the purpose of the amendment was "to simply specify that the trust is suing through Martha Smith, as the Trustee of the Bobby Ray Smith Trust." The

trial court allowed the amendment over AmerUs's objection. The court refused to reopen the case to permit AmerUs to question the newly added plaintiff, but allowed the insureds to place Martha Smith's 11-page deposition into the record.

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1061535 The jury returned a verdict in favor of the insureds, awarding compensatory damages of $2,500,000 and punitive

damages of $4,000,000. 2

The trial court entered a judgment on

the verdict and certified the judgment as final pursuant to Rule 54(b), Ala. R. Civ. P. AmerUs filed a postjudgment The trial

motion for a JML, a new trial, or a remittitur. court denied the motion. AmerUs then appealed.

II. Standard of Review The dispositive issue in this case is whether AmerUs is entitled to a JML. This Court's standard of review on a

motion for a JML is well settled: "When reviewing a ruling on a motion for a JML, this Court uses the same standard the trial court used initially in deciding whether to grant or deny the motion for a JML. Palm Harbor Homes, Inc. v. The court charged the jury on both the fraud claims and the breach-of-contract claim. The jury was specifically instructed that it could not return a verdict on the fraud claims and the breach-of-contract claim and was told that punitive damages could be awarded only on the fraud counts. AmerUs concluded that the jury's verdict awarding both compensatory and punitive damages necessarily indicated that it found in favor of the plaintiffs solely on the fraud causes of action. We agree. Indeed, AmerUs, after referring to the trial court's instruction and the resulting jury verdict for both compensatory and punitive damages, stated in its principal brief that it would present arguments primarily relating to the fraud claims. Smith, in his principal brief, mentions the breach-of-contract claim having been included in the initial complaint but does not thereafter refer to it. 15
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1061535 Crawford, 689 So. 2d 3 (Ala. 1997). Regarding questions of fact, the ultimate question is whether the nonmovant has presented sufficient evidence to allow the case to be submitted to the jury for a factual resolution. Carter v. Henderson, 598 So. 2d 1350 (Ala. 1992). The nonmovant must have presented substantial evidence in order to withstand a motion for a JML. See

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