Tennessee Supreme Court Holds That Insurer is Entitled to Rely Upon Facially Valid Order of Financial Guardianship Despite Deficiencies
In Hood v. Jenkins, et al., No. E2011-02749-SC-R11-CV, 2013 Tenn. LEXIS 1009 (Tenn. Dec. 19, 2013), a minor beneficiary of a $100,000 life insurance policy, filed suit against his financial guardian and the insurance company after the guardian misappropriated the insurance proceeds. The trial court entered judgments in favor of the minor against both the guardian and the insurance company. The Tennessee Court of Appeals affirmed, holding that the insurance company breached its contractual duties by entrusting the proceeds to the guardian. The insurance company appealed to the Tennessee Supreme Court, arguing that it could not be held liable to the minor because it had relied upon a juvenile court order of guardianship. The Tennessee Supreme Court agreed, holding that the insurer acted in good faith when it relied upon a facially valid court order establishing a financial guardianship to pay out the life insurance proceeds. Therefore, the insurer could not be liable for breach of contract.
In Hood, Erik Hood (“Erik”) was 16 years old when his father died. Hood’s father had named Erik as the sole beneficiary of a $100,000 life insurance policy previously issued by The Old Line Life Insurance Company of America (“Old Line”). In the following month, Old Line received a “Proof of Death Claimant’s Statement” signed by Erik, notifying Old Line of the father’s death and requesting a lump sum payment of the life insurance proceeds. Pursuant to the terms of the policy, the claims examiner who processed the claim requested a death certificate and a copy of the insurance policy. Upon learning the beneficiary was a minor, the claims examiner also requested the financial guardianship papers for the minor beneficiary. Thereafter, the claims examiner received a court order appointing Erik’s half-sister, Casey Jenkins (“Casey”), as “Guardian of the Person of Erik Hood’s Financial Responsibility” with the consent of Erik and his mother.
Because the word “Financial” was handwritten, the claims examiner faxed the documents to the juvenile court clerk for Grainger County and requested documentation that the financial guardianship was valid. In response, the claims examiner received a certified copy of the document, signed by the clerk and the juvenile court judge stating that the order was a true and perfect copy of the original order. As a result, the claims examiner issued a check in the amount of $100,854.88, which included interest from the date of death, made payable to the guardian for the benefit of the minor beneficiary. The insurance proceeds were deposited into a joint bank account in the names of Casey and Erik. Within eight months, the entire account was depleted.
Erik filed suit against Casey for misappropriating the insurance proceeds. He also filed suit against the insurer for breaching its duty to Erik, a third party beneficiary of the policy, by releasing the insurance proceeds to Casey “without confirming that she was properly appointed and duly authorized to act as the guardian over his finances,” and by failing to investigate whether Casey had met “all statutory requirements of the guardianship laws in Tennessee.
Casey did not respond to the complaint and the trial court entered a default judgment against her. In its Answer, Old Line asserted several affirmative defenses, including that it was entitled to rely upon the order of the juvenile court in disbursing the insurance proceeds to the guardian and that it acted in good faith when it disbursed the proceeds.
The evidence showed that Old Line met the terms of the policy which required that Old Line obtain a completed claim form signed by Erik as beneficiary, and a completed copy of the death certificate. Although the policy did not contain a provision relating to minor beneficiaries, the instructions in the “Proof of Death Claimant’s Statement,” which was to be completed by the beneficiary, provided that in the case of a minor beneficiary, “the Statement had to be completed by the legally appointed guardian of the Estate of the minor, and an official certificate of the guardian’s appointment had to be furnished.”
Erik did not dispute that Old Line had received documentation of Casey’s appointment as financial guardian. However, Erik argued that Casey had failed to meet certain statutory requirements for the creation of a proper financial guardianship. Because the juvenile court failed to comply with the statutory requirements for awarding financial guardianship, Erik argued that Casey was not a properly appointed guardian. Erik further argued that Old Line breached its contract because it had the obligation to independently confirm that the requirements of guardianship law had been met.
The trial court found in Erik’s favor and awarded him a judgment against Old Line for $86,842.37, which represented $100,854.88 less funds expended at the behest of Erik. The trial court also awarded Old Line a judgment in the same amount for its cross-claim against Casey. Lastly, the court awarded a default judgment to Erik against Casey for $100,000.
The court of appeals affirmed the judgment, holding that the order of guardianship was “woefully deficient” in that it failed to comply with the relevant guardianship statutes. Therefore, Casey was not a properly appointed guardian. As a result, the court of appeals held that Old Line had breached its contractual duty to Eric as the beneficiary of the insurance policy. Because a “reasonably prudent investigation would have revealed that the order was ineffective for purposes of establishing Casey as Erik’s legally appointed financial guardian,” the appellate court further held that Old Line failed to act in good faith when it distributed the proceeds to Casey.
The Tennessee Supreme Court reversed the judgment against Old Line, holding that while the juvenile court order was “woefully deficient” and the juvenile court judge failed to assure compliance with several of the statutory requirements, it could not agree that the order was not an effective order of guardianship, or that Old Line breached its contract by relying upon the order authorizing disbursement of the insurance proceeds. Instead, the Supreme Court held that “Old Line was not only entitled to rely upon the facially valid order of financial guardianship but that the evidence also established that, prior to payment, Old Line acted in good faith by conducting an investigation into the adequacy of the documentation in the juvenile court judgment.”