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Insurer Had No Duty To Prevent Life Insurance Policy From Lapsing, Did Not Breach Contract, Says Federal Appeals Court

Blogs, Life Insurance

A federal appeals court last week affirmed summary judgment for insurer Transamerica Life Insurance Company, in a case where a claimant alleged that she should not have been allowed to let the insurance policy lapse.

In Yarnell v. Transamerica Life Ins. Co., No. 10-5367 (6th Cir. Aug. 17, 2011), plaintiff Laura Yarnell filed a complaint in Tennessee state court alleging that Transamerica breached its contract with her when it denied her claim to her husband’s life insurance benefits.

After Transamerica removed the case to the United States District Court for the Eastern District of Tennessee on the basis of diversity jurisdiction, Yarnell filed an amended complaint adding SunTrust Securities, Inc. and SunTrust Annuities, Inc. (“SunTrust”) as defendants, and asserting negligence claims against both Transamerica and SunTrust.

The district court – construing the complaint as bringing negligence and breach of contract claims against both defendants – granted Transamerica’s and SunTrust’s motions to dismiss the negligence claim, dismissing all claims against SunTrust, and granted Transamerica’s motion for summary judgment, dismissing all remaining breach of contract claims against Transamerica.

Yarnell appealed the dismissals.

The gist of Yarnell’s argument was that Transamerica and SunTrust were negligent in hiring and training their employees and in failing to institute policies and procedures to prevent insurance policies from lapsing. She also alleged that Transamerica and SunTrust failed to notify the Yarnell’s that a grace period had begun as required by the policy and that their refusal to pay policy benefits was “without cause.”

On the negligence claims, the Sixth Circuit Court of Appeals reviewed the governing agreements and concluded that there were no provisions imposing a duty on the defendants to see to it that the policy did not lapse. “Absent a duty to Appellant, Transamerica and SunTrust are not liable under a negligence theory,” the court said. The appeals court also affirmed the district court’s decision concerning the breach of contract claims.