The opinion of the court was delivered by: Honorable B. Lynn Winmill Chief U. S. District Judge
MEMORANDUM DECISION AND ORDER ON SUMMARY JUDGMENT MOTIONS
The Court has before it cross-motions for summary judgment. Plaintiff Danielle Weekes moves for summary judgment of her breach of contract claim (Dkt. 16). Defendant Ohio National Life Assurance Corporation cross-moves for summary judgment of all plaintiff's claims (Dkt. 22). The Court heard argument on November 21, 2011 and now issues its decision.
This litigation arose because plaintiff's husband died while he had two separate life insurance policies in place. Ohio National denied coverage under its policy, contending that Mr. Weekes was required to terminate his other life insurance before the Ohio National policy became effective. There is no such condition precedent in the contract, however, and the Court finds no grounds to support a rescission of the policy. The Court will therefore grant plaintiff's motion for partial summary judgment on the breach of contract claim. Ohio National, on the other hand, is entitled to summary judgment of plaintiff's bad faith and fraud claims.
On October 27, 2009, Bart Weekes applied for life insurance with Ohio National. Life Ins. App., Ex. B to Hilverda Aff. (Dkt. 16-4), at 2. One section of the application, entitled "Other Coverage/Replacement Information," asks about other life insurance policies:
a. Do you have or are you applying for other life insurance?
b. Will proposed policy replace or cause change in any existing policy? If either 6a or 6b is answered "Yes" list all types of insurance below, and indicate whether the proposed policy will replace or cause change in any existing policy.
Directly below these questions are several blank lines with column headings prompting the applicant to provide additional information. Mr. Weekes filled in the blank lines as follows -- with the italicized text representing the handwritten responses:
Company or Source Type of Insurance Amount of Insurance Will it Be Replaced? Replacement Date Beneficial Life UL 2,000,000 [x] Yes [ ] No -
These answers correctly reflect the fact that Mr. Weekes had a $2 million universal life insurance policy with Beneficial Life Insurance Company. See Hansen Aff., Ex. D to Hilverda Aff. (Dkt. 16-6) ¶¶ 5, 10. At the time he filled out this application, Weekes intended to replace his Beneficial Life insurance policy and roll the value of that existing policy into a new policy. Id. ¶ 10. This type of exchange is referred to in the industry as a 1035 exchange, in reference to the Internal Revenue Code section governing such transactions. See I.R.C. § 1035 (governing "certain exchanges of insurance policies").
On November 20, 2009 -- a few weeks after Mr. Weekes completed the
application -- an employee from agent David Hansen's*fn2
office informed Ohio National that there was no cash
surrender value in the "other UL policy that is being replaced, so
this is not a 1035 exchange." Ohio Nat'l AWD History, Ex. B to
Hilverda Aff. (Dkt. 16-4), at 259. By that time, Hansen had learned
that the Beneficial Policy had no surrender value to Mr. Weekes.
Hansen Aff. ¶ 10. So he gave what he considered to be common sense
advice to Mr. Weekes -- rather than waste "paid-up" insurance, he
advised Mr. Weekes to simply
stop paying the premiums on the Beneficial policy and let it lapse in
due time for non-payment. Id. ("Because there was no surrender value
in the Beneficial policy I instructed Bart to just let the policy
lapse and not make any further premium payments. I knew and told Bart
that the Beneficial policy would lapse in due time for non-payment. In
my opinion that is a practical and acceptable way to replace a
A few days later, on November 23, Ohio National sent an email to Hansen: "[W]e can offer up to $2,000,000 life at preferred. This assumes replacement of the Beneficial Life UL policy. Should we approve?" Hansen's office responded the same day, "Yes please!!!!!" Spears Aff. (Dkt. 22-4) ¶ 8 and Ex. D thereto. Ohio National issued the policy that same day and delivered it to Weekes on November 25, 2009. See Ex. A to Hilverda Aff. (Dkt. 16-3) ¶ 9.
On November 26, 2009, Ohio National's underwriting department emailed Hansen asking him to verify, among other things, whether the policy would involve a 1035 exchange:
The application submitted indicates you will be doing a replacement. Please submit the required replacement form 5486-ID. [¶] Please submit the required Ohio National Client Replacement Information form 6487. [¶] Please verify if the above policy will involve a 1035 exchange.
Dkt. 16-4 at ON000205. See Nov. 26, 2009
Thereafter, on December 8, 2009, Mr. Weekes signed a Request for Policy Surrender form, which directs Beneficial Life to "cancel the above listed policy and send a check for the full surrender amount to . . . Ohio National . . . ." Id. at ON000254.
Weekes then sent this form to Ohio National, although it is unclear why he did so because at that point, both contracting parties were aware there would be no 1035 exchange. It appears this form was sent as part of a larger submittal because at around the same time, Mr. Weekes sent amended responses to other parts of the application.*fn3 See Hansen Aff, attached as Ex. D to Affidavit of Counsel (Dkt. 16-6) ¶ 10 ("Bart signed the appropriate forms including a surrender form which was sent at some point by my office to Ohio National."). Ohio National did not do anything with the surrender form; it says it could not use these forms to surrender the policy, ...