Woman Finds Husband’s Lapsed Life Insurance Policy Can’t Be Resurrected

The U.S. District Court for the Northern District of Illinois recently held that a lapsed life insurance policy could not be reinstated after the death of the insured, despite an alleged representation by the insurer’s agent that it would be.

Laura Stewart, the insured’s surviving wife in Stewart v. Northwestern Mutual Life Insurance Co., 2016 U.S. Dist. Lexis 51270 (N.D. Ill.), was represented by Michael J. Malatesta of the Malatesta Law Offices LLC. Paul Heaton of Godfrey & Kahn S.C. in Milwaukee represented the insurer, Northwestern Mutual. Brian J. Riordan of Clausen, Miller P.C. represented Michael Bartenhagen, described as the company’s sales agent.

Northwestern Mutual issued David Stewart a life insurance policy in 2004 worth $500,000. He made monthly payments throughout the years, but by June of 2012, he fell behind. The insurer sent him a warning that he needed to pay in full by July 11, 2012, or his policy would lapse. When he failed to make the payment, the company terminated the policy.

By letter, dated Aug. 16, 2012, Northwestern Mutual notified Stewart that he could reinstate the policy by making all payments by Sept. 9, but that thereafter, to reinstate it, Stewart may have to submit to a medical examination. On Sept. 5, Stewart died without having made payment.

Four days later, Laura Stewart read the letters from the company and, according to her complaint, received a call from Bartenhagen, the company’s agent. According to her complaint, he told her that if he could stop by and pick up a check for the balance owed, the policy would be reinstated. She provided him a check, and within the next few days, the company cashed it.

About two weeks later, however, Northwestern Mutual called and told her that her claim for benefits would not be honored. It then sent her a letter denying coverage and also a check for what she paid.

Laura Stewart filed suit in November 2015 asserting four counts. One was for breach of contract. A second was pursuant to an Illinois statute, 215 ILCS 5/357.5, which provides that if a renewal premium is not paid on time but the insurer thereafter accepts payment without requiring an application for reinstatement, the policy is reinstated. A third count was based on promissory estoppel. And the fourth was for breach of fiduciary duty.

Following removal to federal court, the defendants moved to dismiss.

Breach Of Contract

In an opinion by U.S. District Judge Matthew F. Kennelly, the district court granted the motion. He initially addressed the claim for breach of contract, stating that Northwestern Mutual could not have breached the insurance policy unless it had been reinstated. Based on Bartenhagen’s alleged statement, Laura Stewart claimed that the policy was reinstated, in part because the company had waived its right to declare the policy lapsed.

Kennelly observed, however, that Stewart’s contention that Bartenhagen spoke on behalf of the company when stating that policy would be reinstated, was based on her theory that he was vested with apparent authority. Apparent authority, said Kennelly, depends on the acts of the alleged principal, not those of the alleged agent.

And nowhere in the complaint did Stewart allege words or conduct by Northwestern Mutual that Bartenhagen had the authority to waive the company’s rights under the contract. David Stewart’s insurance application, moreover, stated that no agent was authorized to make or alter contracts or waive rights of the company.

Waiver also could not be based on Northwestern Mutual’s negotiation of Laura Stewart’s check, because Illinois law requires more than that, according to Kennelly. In Nieder v. Jackson National Life Insurance Co., 2011 U.S.Dist Lexis 93586 (N.D. Ill. 2011), for example, the court found that, for waiver to occur, the insurer must not only negotiate the check, but also hold it for a considerable time or otherwise manifest its intention to reinstate the policy. Those circumstances were not present here.

As part of her waiver argument, and as a separate argument, Stewart relied on Section 357.5 of the Illinois Insurance Code, concerning Northwestern Mutual’s acceptance of her payment. Kennelly found, however, that the section, as set forth in the code, did not apply to life insurance policies. But even if it did, he said that case law interpreting it requires more than the receipt and automatic negotiation by the insurer of the late payment, and that is all that occurred here.

Other Counts

The promissory estoppel count required, according to Kennelly, that the plaintiff establish that she relied on the defendant’s promise to her detriment. In general, he said that this theory provides a means to enforce promises unsupported by consideration, but it is not intended to give a party to a negotiated contract a second bite at the apple in case the plaintiff’s contract theory fails.

While the defendants here maintained that the terms of the contract controlled, Stewart argued that no contract existed at the time she was induced to pay the past-due premiums, and that, in any event, any contract was between her late husband and Northwestern Mutual.

Kennelly disagreed. He said that the lapse of the insurance policy did not render it void ab initio. In addition, he found it impossible to reconcile Stewart’s position that she was a third-party beneficiary to the contract with her claim for promissory estoppel. Her promissory estoppel argument therefore failed.

Finally, Stewart argued that Bartenhagen violated his fiduciary duty by inducing her to issue a check for past-due premiums and by failing to notify her within a reasonable time of the policy’s lapsing. Kennelly noted, however, that while Illinois law imposed fiduciary duties on brokers or agents acting on behalf of insureds, such duties have not been imposed upon the insurer’s agents with regard to their dealings with customers of the insurer.

Stewart’s complaint, moreover, did not allege that Bartenhagen was her or her husband’s agent. Nor did the promises he made after David Stewart’s death create a fiduciary relationship or undermine any promise made by the company. Thus, Northwestern Mutual denied her claim, not because Bartenhagen failed to act in Laura Stewart’s best interests, but because her husband was uninsurable at the time she attempted to reinstate his policy. Her fiduciary duty claim therefore had no merit.

The court, therefore, granted the defendants’ motion to dismiss, and, as a result, Stewart was not entitled to benefits.

Key Points

• An insurer retains a contract right to enforce reinstatement limitations under a life insurance policy, even after the policy lapses.
• Section 357.5 of the Insurance Code, concerning an insurer’s acceptance of payment following a default in payment by its insured, does not apply to life insurance policies.
• A promissory estoppel theory of liability cannot be maintained simultaneously with a third-party beneficiary theory of liability.
• No fiduciary relationship exists between an insurer’s agent and the insured.