ON APPEAL FROM THE UNITED STATES DISTRICT COURT FOR THE WESTERN DISTRICT OF PENNSYLVANIA. (D.C. Civil Action No. 73-44).
Aldisert, Adams and Hunter, Circuit Judges.
The issue presented on this appeal is whether the plaintiff made out a prima facie case to reform a group annuity contract. We conclude that insufficient evidence was produced by plaintiff to sustain the finding of reformation, and consequently vacate the judgment of the district court, 372 F. Supp. 433.
To secure retirement benefits for its municipal employees and commissioners, plaintiff Stowe Township, prior to 1970, entered into a series of individual deferred annuity policies with the defendant Standard Life Insurance Company of Indiana. Each individual annuity policy contained, inter alia, a provision for cash surrender value on termination.
In 1970, an agent of Standard Life, Mr. Markotan, recommended a new group contract of the deposit administration type to replace the individual policies as a means of funding and implementing Stowe's retirement plan. Stowe thereupon entered into the group annuity contract which is the basis of the present action. Under the group contract, Stowe deposited funds with Standard Life and, subject to certain adjustments to the pool of money thus created, Standard Life was to provide individual annuities to Stowe's employees and commissioners as their retirements occurred.*fn1 The new group contract explicitly did not grant cash value on termination. When the new group plan became effective, the individual policies were cancelled and reserve monies under the individual contracts were applied to the new group fund.
In 1972 Stowe terminated its group contract with Standard Life, and demanded that, pursuant to the termination clause,*fn2 Standard Life issue individual paid-up deferred annuity policies for named municipal personnel. Also, as part of its demand, Stowe insisted that the new individual policies "have cash values the same as previously issued policies of the same type."*fn3 In response to Stowe's demand, and in conformity with the terms of the group contract, Standard Life agreed to issue paid-up deferred annuities, but refused to include a provision for cash surrender value.
Maintaining that the group contract should be either construed or reformed to provide for policies with cash surrender value clauses, Stowe filed suit in the Common Pleas Court of Allegheny County. Based on diversity of citizenship, the suit was removed to the United States District Court for the Western District of Pennsylvania. 28 U.S.C. §§ 1332, 1441 (b), 1446. Both parties concede that the law of Pennsylvania governs the dispute.
The district court held before trial that the group contract as written did not include a right to cash surrender values upon termination, nor did Pennsylvania law superimpose such a provision onto a contract of this sort. Neither party has questioned this holding. Accordingly, to create a cash surrender value provision in the group contract would require a reformation of the group contract. The principal thrust of Stowe's position was that the insurance agent had proposed the group contract to Stowe as a change in its manner of funding retirement benefits. In its pretrial narrative, Stowe alleged that Standard Life had made assurances that the value and costs of the new group plan would be at least as attractive to Stowe as the individual policies it replaced. Also, Stowe asserted that under these circumstances Standard Life had a duty -- which it had breached -- to advise Stowe that the group contract would not carry cash surrender values upon termination. In effect, Stowe contended that the group contract should be reformed to incorporate the cash surrender provisions from the previous individual contracts.
In response, Standard Life insisted that no such duty to explain existed where, as here, a group contract embodying a wholly new concept of administering and funding a retirement program was substituted for a series of individual annuity contracts. The situation presented here, claimed Standard, was not a renewal.
At the non-jury trial that ensued, Stowe presented as its sole witness Mr. Bash, President of Standard Life, and interrogated him as on cross-examination. On the issue of advice by Standard Life to Stowe regarding the absence of cash ...