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W. Earl Gaerte Irrevocable Trust v. National Life Insurance Co.

United States District Court, N.D. Indiana, South Bend Division

June 5, 2015

W. EARL GAERTE IRREVOCABLE TRUST THE, Joseph E. Gaerte, Trustee, Plaintiff,


PHILIP P. SIMON, Chief District Judge.

In 1995, The W. Earl Gaerte Irrevocable Trust obtained a life insurance policy on the life of Mr. Gaerte. The cash value of the policy grew steadily over time, and by 2010 it exceeded $400, 000. It was that year that the Trust signed a second agreement with the insurer, Defendant National Life Insurance Company, which would allow the Trust to stop paying premiums on the life insurance policy in return for accepting a lower cash payout for the policy. The parties call this a "Paid Up Insurance Agreement." But there was a hitch; isn't there always? It seems that the Trust in 2006 had assigned the policy to a bank as collateral for a loan, and no one told the bank that the value of the policy was being reduced to an amount less than what the Trust owed the bank. So after Mr. Gaerte passed away, the bank came knocking for the full amount of what it was owed on its loan, and for whatever reason, National Life paid that full amount to the bank. Since what was owed and paid to the bank exceeded the value of the loan, there was nothing left for the Trust.

The Trust then sued National Life for breach of contract, claiming that the fact that National Life paid more to the bank than the policy was worth proves that the policy was worth more than the "paid-up" amount agreed to by the Trust and National Life. Therefore, according to the Trust, it is entitled to the full amount of the policy (minus what was paid to the bank).

The parties have filed cross motions for summary judgment. In essence, the Trust claims that (1) the paid-up agreement was invalid from the get-go because the bank never signed it, as required; and (2) National Life is estopped from claiming the policy was worth only the paid-up amount when it paid more than that to the bank. (DE 17) National Life's principle argument is that the Trust is estopped from claiming that the paid-up agreement is invalid because it behaved as though the agreement was in effect, most tellingly by stopping its premium payments for almost a year before Mr. Gaerte passed away. (DE 19) For the reasons discussed below, I agree with National Life's position and will therefore GRANT its motion for summary judgment (DE 19) and DENY the Trust's motion (DE 17).


The parties agree on the events leading up to this lawsuit. Here's what happened: in 1995, Earl Gaerte purchased a life insurance policy from National Life with a face value of $750, 000, appointing his namesake trust as its beneficiary. In 2006, Gaerte's business needed a loan, so the Trust assigned the policy to 1st Source Bank as collateral for a loan of approximately $500, 000. In 2010, the Trust's insurance advisor requested to convert the policy to a reduced paid up policy. Essentially this means that the Trust was agreeing to reduce Mr. Gaerte's death benefit in exchange for stopping its premium payments. So instead of receiving $750, 000 upon Mr. Gaerte's death, the Trust would receive whatever the policy was worth at the time that the premium payments stopped. In other words, the Trust elected to stop paying any more money into the policy and would instead, upon Mr. Gaerte's death, take whatever it had paid into the policy before executing the paid-up agreement.

Upon the insurance advisor's request, National Life sent the forms to the Trust that were needed to convert the policy to paid-up. In February 2011, Joseph Gaerte, as Trustee of the Trust, executed the Request for Paid Up Insurance with National Life. (For ease of reference I will call this the "agreement.") The form also included a place for the Assignee (here, the Bank) to sign and stated that "[t]his form must be signed by the owner and agent, as well as assignee and irrevocable beneficiary, when applicable." (DE 23-2) The Bank never signed the form and no evidence in the record indicates that it was ever informed about this agreement. At that time, the total paid-up value of the policy was around $400, 000. The Trust had stopped making its premium payments on October 30, 2010 and so the paid-up agreement became retroactively effective as of November 10, 2010.

Mr. Gaerte passed away in August 2011. In February 2012, National Life paid approximately $500, 000 to the Bank to satisfy the assignment even though the value of the policy was much less than that amount. The Trust received nothing since the amount of proceeds available from the policy was less than the amount the Trust owed to the Bank.

In August 2013, the Trust filed suit against National Life for breach of contract. As noted, the parties have now filed cross-motions for summary judgment. The Trust claims that the paid-up agreement is invalid because it was never signed by the Bank. It also claims that National Life should be estopped from claiming that the policy was worth only about $400, 000 at the time of Mr. Gaerte's death since it paid about $500, 000 to the Bank. The Trust therefore seeks the approximately $250, 000 it alleges remains on the policy (assuming its original value of $750, 000). National Life, on the other hand, claims the Trust should be estopped from challenging the validity of the paid-up agreement because it stopped making its premium payments, as allowed under the agreement, and therefore already reaped the benefit of its bargain. According to National Life, anything else would be a windfall.


Summary judgment is proper "if the pleadings, depositions, answers to interrogatories, and admissions on file, together with the affidavits, if any, show that there is no genuine issue of material fact and the moving party is entitled to a judgment as a matter of law." Fed.R.Civ.P. 56(c). A genuine dispute about a material fact exists only if the evidence is such that a reasonable jury could return a verdict for the non-moving party. Celotex Corp. v. Catrett, 477 U.S. 317, 323-24 (1986). As the parties agree, there is no dispute here about what happened. Instead, this dispute centers on the legal implications of what happened. In other words, there is no issue of material fact, making this dispute well-suited for summary judgment.

Validity of the Paid-Up Agreement

Indiana courts interpret insurance policies in the same way as any other contract. Eli Lilly & Co. v. Home Ins. Co., 482 N.E.2d 467, 470 (Ind. 1985). The components of a valid contract are "offer, acceptance, consideration, and a meeting of the minds of the contracting parties." Conwell v. Gray Loon Outdoor Mktg. Group, Inc., 906 N.E.2d 805, 812-13 (Ind. 2009). The parties do not dispute the first three components - offer, acceptance, and consideration - are present in the paid-up agreement. Where the parties disagree is whether there was a meeting of the minds as to what conditions, if any, had to be satisfied prior to the paid-up agreement taking effect.

The Trust claims that it believed that the paid-up agreement would not go into effect until the Bank signed off on the agreement. National Life counters that the Trust must have understood that the agreement went into effect once it executed the agreement because the Trust stopped making its premium ...

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