After a decades-long drought, the Supreme Court recently decided a case involving the Contracts Clause of the Constitution. You might not recall that provision because it is so rarely invoked in modern-day litigation (due to how it has been construed). It provides that “[n]o state shall . . . pass . . . any Law impairing the Obligation of Contracts.” U.S. Const. art I, § 10, cl. 1. Given that many class action suits involve contracts with consumers and state laws applicable thereto, I thought this case was worthy of mention on my blog.

Sveen v. Melin involved a Minnesota statute providing that a divorce automatically revokes a prior beneficiary designation by the insured under a life insurance policy that designated the former spouse as a beneficiary. The ex-spouse whose rights were divested by the statute argued that applying the statute to a life insurance policy that was issued and beneficiary designation that was executed before the statute was enacted was a violation of the Contracts Clause. The Eighth Circuit found a violation of the Contracts Clause. But the Supreme Court reversed, in an 8-1 decision by Justice Kagan.

The Court’s test for whether the Contracts Clause applies has two parts: (1) whether the state law affects a “substantial impairment” of the contractual relationship, taking into account whether it “undermines the contractual bargain, interferes with a party’s reasonable expectations, and prevents the party from safeguarding or reinstating his rights”; and (2) “whether the state law is drawn in an ‘appropriate’ and ‘reasonable’ way to advance ‘a significant and legitimate public purpose.’” (Slip opinion, at 7.)

In Sveen, the Court found no “substantial impairment” because the Minnesota law was “designed to reflect a policyholder’s intent,” was “unlikely to disturb any policyholder’s expectations,” and “supplies a mere default rule.” (Id. at 7-8.) The Court reasoned that most people who get divorced generally do not want to maintain their former spouse as the beneficiary of their life insurance policy (unless otherwise agreed or ordered by the court in the divorce settlement, which were carveouts in the Minnesota statute). And it would be quite easy to reestablish prior intent simply by re-executing another beneficiary designation form. Justice Kagan described this as a mere “paperwork obligation” of the type the Court had long held does not violate the Contracts Clause.

Justice Gorsuch was the sole dissenter. He argued that there was a “substantial impairment” here because the designation of the beneficiary is the “whole point” of a life insurance policy. It appears that he also would have been inclined to change the Court’s prior precedent because the requirement of a “substantial impairment” seems inconsistent with the text of the Contracts Clause and some indications of its original purpose. He noted that “Many critics have raised serious objections” to the Court’s Contracts Clause jurisprudence, citing several law review articles, and “[t]hey deserve a thoughtful reply, if not in this case then in another.” (Gorsuch, J., dissenting, at 4.) He also would have found the second part of the test not satisfied in this case because there are various other means by which a state could achieve its goal of informing people of their right to change the beneficiary following a divorce without retroactively changing the contract.

To make this case more interesting for what I deal with on a regular basis, let’s turn things around a bit. The Court’s principles presumably work both ways. From the insurer’s perspective, it’s fairly common for an insurance statute to be contrary to the insurer’s intent and interfere with the insurer’s reasonable expectations under preexisting policies. Is that enough to move the analysis to the second part of the Contracts Clause test? And if so, would the Court consider abandoning or modifying the second part of its test to reform its jurisprudence closer to the original meaning of the clause? (See footnote 2 of the Court’s opinion, finding that the Court did not need to reach that issue here.) Justice Gorsuch’s dissent makes it pretty clear that he would grant certiorari to take those issues up in the right case. Would there be four justices willing to take such a case?

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