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.