US Supreme Court upholds state divorce revocation statute

Many states have laws providing that life insurance designations in favor of spouses are revoked automatically by a divorce.  The policy reasoning behind the laws is that many people simply fail to make a new designation after the divorce, but do not really want their ex-spouse to have the money.  For example, the owner of the policy may get remarried, have kids, and yet the money may still be designated to the ex-spouse by simple neglect. The state laws are designed to remedy this situation, while often providing that the ex-spouse can still receive the money if the divorce decree so provides or if there is a re designation of the ex spouse after the divorce.

These laws have been the subject of various challenges over the years.  Federal courts have consistently ruled that such laws are ineffective for ERISA policies, which include most policies obtained through an employer.  Or for military SGLI or VGLI policies. The reasoning is that federal plan administrators are obligated to pay the designated beneficiaries and state laws that attempt to interfere with the designations are preempted by federal law.

In  Sveen v. Melin the United State Supreme Court dealt with a different argument.  Mark Sveen and Kaye Melin were married in 1997 and Sveen purchased a life insurance policy, naming Melin as the primary beneficiary and designating his two children from a prior marriage as contingent beneficiaries. The Sveen–Melin marriage ended in 2007 and the divorce decree made no mention of the insurance policy.  

Sveen did not make a new beneficiary designations. After he died in 2011, Melin and the Sveen children made competing claims to the insurance proceeds. The Sveens argued that under Minnesota's revocation-on-divorce law, their father's divorce canceled Melin's beneficiary designation, leaving them as the rightful recipients. Melin claimed that because the law did not exist when the policy was purchased and she was named as the primary beneficiary, applying the later-enacted law to the policy violates the Constitution's Contracts Clause. The District Court awarded the insurance money to the Sveens, but the Eighth Circuit reversed, holding that the retroactive application of Minnesota's law violates the Contracts Clause.

The Contracts Clause of the US Constitution restricts the power of States to disrupt contractual arrangements. It provides that “[n]o state shall ... pass any ... Law impairing the Obligation of Contracts.” Article 1, Section 10. The major problem with the Minnesota law was that it applied to life insurance policies purchased before the law's adoption. 

Despite its potential retroactive application, the Supreme Court ruled that Minnesota's law did not violate the Contracts Clause. The Supreme Court found that that law did not substantially impair the relationship created by the life insurance contract between the policy owner and the insurance company. Most people reasonably do not want an ex-spouse to receive the benefits. And people expect that a divorce decree will alter previous property expectations. The court found it important that the insured could still leave the money to their former spouse if they so wanted.  All they had to do was notify the insurance company after the divorce, to effectively re designate the former spouse as the beneficiary.

The Court summarized:

The Minnesota statute places no greater obligation on a contracting party—while imposing a lesser penalty for noncompliance. Even supposing an insured wants his life insurance to benefit his ex-spouse, filing a change-of-beneficiary form with an insurance company is as “easy” as, say, providing a landowner with notice or recording a deed. Here too, with only “minimal” effort, a person can “safeguard” his contractual preferences. And here too, if he does not “wish to abandon his old rights and accept the new,” he need only “say so in writing.” . What’s more, if the worst happens—if he wants his ex-spouse to stay as beneficiary but does not send in his form—the consequence pales in comparison with the losses incurred in our earlier cases. When a person ignored a recording obligation, for example, he could forfeit the sum total of his contractual rights—just ask the plaintiffs in Jackson and Vance. But when a policyholder in Minnesota does not redesignate his ex-spouse as beneficiary, his right to insurance does not lapse; the upshot is just that his contingent beneficiaries (here, his children) receive the money. That redirection of proceeds is not nothing; but under our precedents, it gives the policyholder—who, again, could have “easily” and entirely escaped the law’s effect—no right to complain of a Contracts Clause violation

State laws differ on the implications of divorce on life insurance designations.  It is always important to contact a lawyer to review the particular state laws at issue.  And to determine if state law even applies or is preempted by federal law.

Fifth Circuit affirms denial of negligence claim

A common question I get from clients is can we sue the life insurance company for filing the interpleader instead of just paying me?  My typical answer is "no" under most circumstances. The law provides substantial cover for a life insurance company to file an interpleader and let a court decide the proper beneficiary.  This is the common process of a prudent life insurance company. 

 In Berry v. Banner, the Fifth Circuit Court of appeals affirmed this concept.  The underlying facts were that the insured had a policy governed by state law.  He designated his then wife as the beneficiary.  They were divorced in 2005 in Oklahoma.  The divorce decree specified that he would maintain her as the beneficiary of the Banner Life policy. The ex-wife sent a copy of the divorce decree to Banner, who put it in its file.

Two years later, he submitted a change of beneficiary form to Banner, seeking to designate a friend as beneficiary under the plan. Banner processed the change of beneficiary.  He died two years later.

Both the ex-wife and designated beneficiary friend filed claims with Banner Life. Banner decided to pay neither while competing claims were pending. The friend filed suit to enforce the designation in her favor.  The insurance company removed the suit and sought interpleader in the United States District Court for the Western District of Texas.  The district court found the ex-wife was entitled to the policy proceeds because of the divorce decree. 

Not satisfied, the ex wife sought damages from Banner Life for negligence in not paying her. She contended the insurance company should have never accepted and processed the later attempted designation, because it had knowledge of the divorce decree.  The Fifth Circuit agreed with the district court that such claim is unfounded:

"First, a number of Viney's factual allegations underlying that claim are based on nothing more than Banner's “failure to resolve its investigation in [Viney's] favor and pay out the life insurance proceeds to [her].”  Any claim for a breach of the duty of good faith and fair dealing under these facts is barred under the interpleader because it is not “truly independent of who was entitled to the life insurance proceeds.”  “To allow [Banner] to be exposed to liability under these circumstances would run counter to the very idea behind the interpleader remedy—namely, that a ‘stakeholder [should] not [be] obliged at his peril to determine which claimant has the better claim.

Second, under Oklahoma law, “[t]he tort of breach of a duty to deal fairly with an insured is an intentional tort and as such requires conduct by an insurer to be willful, malicious, or oppressive for the purposes of delaying or avoiding payment of the insured's claim.”  Though Viney alleged that Banner failed to adequately investigate its records prior to changing the beneficiary, she also alleged that Banner was not aware of that mistake until Viney made her claim to the Policy proceeds. Banner could not have committed an intentional tort, willfully and maliciously, if Banner was not even aware of the mistake at the time of the change."

On a relative basis, the ex wife had a plausible claim that the life insurance company was negligent.  This case emphasizes how far the courts will typically go to provide safe harbor to a life insurance company that seeks cover through the interpleader process. 

J. Michael YoungComment
Arkansas Supreme Court finds for spouse

In Primerica Life Insurance v. Wilson, the Arkansas Supreme Court affirmed a jury's decision to award the life insurance benefits to the spouse of the insured. As set out in the decision, the basic facts were:

The record reflects that in November 1987, Gary purchased a life insurance policy from Primerica in the amount of $100,000. He also purchased a spouse rider and a child rider. At the time, Gary was married to Mary Jane, and he named her the primary beneficiary, with his daughter being the contingent beneficiary. Gary and Mary Jane divorced in March 1993. Gary then married Ronda in July 1994. They were married for nine years, before Gary died from Lou Gehrig's disease on July 25, 2003.

In August 1996, while Gary was paying his life insurance premium, he commented to Ronda: “Well, I guess I need to change the beneficiary on my policy, since I'm going to keep you.” Gary then asked Ronda to get him the telephone, and he called Primerica. Ronda heard Gary say that he was divorced and remarried, and that he needed to change the beneficiary on his policy. She said that he also stated that he needed to change the spouse rider and child rider.

A few weeks later, Gary received a policy-change application from Primerica. On that form, he listed Ronda as his new spouse. According to Ronda, who was present when he filled out the form, Gary noticed that there was no specific beneficiary form, so he wrote on the front page of the policy-change application “change name of spouse & change name of child rider.”

The White County jury decided that the widow was entitled to the proceeds, not the ex-wife. The Arkansas Supreme Court affirmed that decision under the doctrine of substantial compliance.  In doing so, the Arkansas Supreme Court rejected the ex-wife's contention that the jury should not have considered the insured's statements regarding wanting his current wife to have the benefits. The court explained:

These statements evidenced Gary's belief that Ronda was the beneficiary of his life insurance policy and his intention that she be entitled to the proceeds of that policy. Generally speaking, statements of a declarant's belief are not admissible under Rule 803 unless the statements relate to the execution, revocation, identification, or terms of the declarant's will. This court has recognized that provisions in life insurance contracts with reference to beneficiaries or changes in beneficiaries are in the nature of a last will and testament and, therefore, “are construed in accordance with the rules applicable to the construction of wills.”

This is an example of a person who was not the officially designated beneficiary receiving the policy proceeds.  Anyone involved in a life insurance beneficiary interpleader dispute should consult with a lawyer experienced in handling such matters.

J. Michael YoungComment
Federal court interpleader jurisdiction

In Mudd v. Yarbrough, Judge Bunning of the United States District Court, Eastern District of Kentucky, considered a challenge to the court's jurisdiction. The decision involved a Servicemember's Group Life Insurance Policy, SGLI. 

After the insured servicemember's death, Prudential determined that his beneficiary designation was unclear. The servicemember's mother filed suit in the federal court in Kentucky claiming the benefits.  Prudential then filed an interpleader to have the court determine the proper recipient of the benefits. 

The court determined that it was proper for Prudential to file the interpleader,  because of competing claims to the benefits  made by the servicemember's mother, ex-wife, and estate.  The court found that Prudential was legitimately concerned it might face multiple liability if it did not pursue the interpleader.

Regarding proper subject matter jurisdiction, the court pointed to the requirements of 28 USC §  1335 Interpleader:

  • the amount of the controversy is over $500
  • two or more adverse claimants of diverse citizenship
  • the disputed funds must be deposited into the court's registry.

The court found the requirements were met. Prudential deposited the $400,000 policy proceeds into the court registry.  One claimant resided in Florida, the other in South Carolina.  Therefore, there was minimal diversity. 

Because of the low threshold for the policy amount and the minimal diversity requirement, I find that many life insurance beneficiary dispute interpleaders are filed in federal court.  


J. Michael YoungComment
Court admonishes beneficiary claimant to hire an attorney

An individual in an interpleader beneficiary dispute may be tempted to save on costs by representing themselves in court. This can have devastating consequences for a claim that may be worth hundreds of thousands of dollars.

An example is found in a case pending in the United States District Court, Middle District of Pennsylvania: Howerton v. Kandarian, et al. In that case, a pro se party violated the court's Standing Practice Order, by filing a “Request for Documents and Discovery Material.”

In response, Magistrate Judge Arbuckle noted that "the task of federal litigation is a daunting one" and the party was proceeding pro se "at his own peril."  noting that the policy benefits at issue were $268,000, enough to "justify the involvement of an attorney with the necessary skill and experience to guide Mr. Howerton through the minefield that is federal civil litigation."  Judge Arbuckle urged the pro se party to seek the guidance of counsel. 

J. Michael YoungComment
Sixth Circuit upholds ERISA breach of fiduciary duty award

The Employee Retirement Income Security Act of 1974 is better known as ERISA.  It was enacted by Congress to protect retirement and welfare benefit plans, such as employer provided life insurance. 

Unfortunately, the courts have interpreted ERISA in ways that typically favor insurance companies and employers over the rights of employees.  A common problem I see is employees who believe they are covered for a particular life insurance plan.  That belief is often well founded, because their employer tells them they are covered and deducts premium payments!

At times, the insurance company will audit a claim and decide that the employee should never have received the coverage at issue. ERISA plans are governed by detailed plan provisions.  Possibly, the employee did not meet qualifications of work status, maybe they did not work enough, maybe they did not sign the right paperwork, etc.

These denials can be frustrating and extremely unfair, because the employer may have assured the employee of the coverage and also made premium deductions from the employees paychecks.  Unfortunately, courts are often not sympathetic to the fundamental unfairness of denying coverage ever existed, despite the employee's payment of premiums and good faith belief they had the coverage.  As a consequence, courts have provided minimal checks on the power of insurers to deny claims, particularly as ERISA does not provide an employee/beneficiary with a right to a jury trial. 

A ray of light comes from the Eastern District of Michigan, as affirmed by the Sixth Circuit court of appeals. Loo v. Church's Chicken involved a claim by a life insurance beneficiary to supplemental life insurance benefits.  As is common with many employers, Church's offered employees "basic" coverage at one times annually salary as a base benefit, paid for by the company. The employee in this case also elected to get employee-paid elective supplemental life insurance, ultimately four times her annual salary.

Church's self-administered the ERISA life insurance plan, even though Reliance Standard Life Insurance Company ultimately paid claims.  Thus, Church's was “responsible for ensuring that coverage elections (including any required proof of good health) are processed in accordance with the terms and conditions of the applicable policy and that premium remittances are accurate and timely."

The plan required that an employee submit an evidence of insurability form. But Church's processed her request anyway, and deducted the premiums for the elective supplemental coverage.  Thus, the employee believed she had coverage.

After the employee got sick and died, Reliance denied the claim for the supplemental benefits, because the employee did not submit the evidence of insurability. I have seen numerous such cases over the years and the courts typically allow the ERISA insurer to not pay if the coverage conditions are not met.  In this case, the court did dismiss the claims against Reliance.

But the court here noted that Church's was responsible for administering the life insurance plan. It then found that Church's breached its ERISA fiduciary duty to administer the group life-insurance policy in the sole interest of the insured employees and their beneficiaries. The misrepresentation was that the employee was covered for the supplemental benefits, as evidenced by the deductions from her pay check. The court found:

"Fiduciaries are liable when their misrepresentations cause an employee to be inadequately informed in her decision whether to pursue benefits. . . Because Church’s misrepresented her coverage level, [she] lost the opportunity to obtain the coverage she wanted through another channel, such as on the individual market for life insurance."

This Sixth Circuit decision should be referenced when an administrator leads an employee to believe they have a certain life insurance coverage. 

Ohio court on evidence of intent

Veach v. Chuchanis (2014 WL 2998982) is a decision by an intermediate court of appeals reviewing Ohio law regarding an insured's efforts to change a beneficiary designation.  However, like in many life insurance beneficiary disputes, the efforts fell short of the insurance company's technical requirements.

Sentry Life Insurance company issued the policy to the insured in 1991. At the time, the insured designated Chuchanis as her primary beneficiary, with Veach as the contingent beneficiary. In 1998 she married Lytle.  She sent a letter to Sentry stating she wanted to change her primary beneficiary to her husband. She asked that Sentry send her confirmation of the change. 

Instead of a confirmation, Sentry sent a reply that stated, in pertinent part: “Enclosed is the form that is needed to change the beneficiary designations on your life insurance policy .”  The insured did not return the form.  Lytle died in 2000.  

The insured died in 2013. Chuchanis claimed the benefits because he contended he was still the officially designated beneficiary and that the insured had told friends over the years that she still wanted him to receive the benefits.  Veach countered that the insured's failure to complete and return Sentry’s change of beneficiary form was waived because she expressed her intent to remove Chuchanis as the primary beneficiary in the 1998 letter. Because Chuchanis was effectively removed, Veach claimed he should receive the money as the undisputed contingent beneficiary. 

In response to the competing claims, Sentry filed an interpleader lawsuit. The lawsuit named Chuchanis, and Veach as parties and asked the court to determine the proper beneficiary. 

The trial court found for Chuchanis as a matter of law, holding that under the doctrine of "substantial compliance" there was no evidence that the insured actually completed the change form removing Chuchanis and attempted to return it to Sentry.  The trial court did not consider as evidence of intent the insured's 1998 letter.

The Ohio court of appeals disagreed with the trial court's reasoning.  It held that, under Ohio precedent, a life insurance company waives technical requirements of a beneficiary change when it files an interpleader suit.  Therefore, in that context, the test should not be "substantial compliance" with such requirements, but what was the insured's “clearly expressed intent”  regarding the proper beneficiary.  The court of appeals returned the case to the trial court so it could hold a trial on the issue of the policyholder's “clearly expressed intent” regarding her beneficiary. 

J. Michael YoungComment
Alabama court rules in favor of designated beneficiary

In Aderholt v. Aderholt (2016 WL 7321570), the Alabama Supreme Court upheld the trial court's award of $150,000 in policy benefits to the designated beneficiary. The dispute was between the deceased's mother and ex-wife.

The deceased had designated his ex-wife as the policy beneficiary while they were married.  They divorced eleven years later. The 2004 divorce decree provided that he would pay her alimony of $500 per month for 15 years.  The decree also provided:

“Each party shall retain ownership of their own life insurance policies. [Sandra] shall remain as the sole beneficiary on [Bobby’s] whole-life-insurance policy through Alfa which has a death benefit of $150,000.00. He shall maintain this insurance and maintain her as the beneficiary for a period of fifteen (15) years.”

He complied with the divorce judgment, maintaining the ex-wife as the beneficiary of the policy and paying her $500 per month in alimony until he died on December 12, 2014. 

After he died, the deceased's mother argued that the ex-wife should not receive the life insurance benefit. Her argument was that the divorce judgment had required her son to maintain his ex-wife as the beneficiary for 15 years because the policy was intended to secure the 15 years of monthly $500 alimony-in-gross payments, not to function as an award in itself.  In her view, the ex-wife was entitled to, at most, the remaining unpaid alimony-in-gross payments, which she claimed totaled $28,500.  Anything beyond that should belong to the deceased's estate.

The ex-wife countered that she was the designated beneficiary and should be paid as such. And the divorce decree required her to be the beneficiary for at least 15 years. 

The Alabama court agreed with the ex-wife's argument. The court conceded that Alabama state and federal courts have, under certain circumstances, disregarded a party’s presumptive contractual rights to the proceeds of a life-insurance policy in order to do equity and to prevent unjust enrichment. However, in this case the court found no compelling evidence that the deceased wanted someone beside his ex-wife to receive the entire policy benefit. Under the facts of the case, the court was unwilling to presume the deceased would not have wanted his ex-wife to receive only the portion of the benefits securing the remaining alimony obligation.

Note that the facts in every case are different, as are the laws of each state. Please consult an experienced life insurance beneficiary dispute lawyer. 

OneJ. Michael YoungComment