Ex-Wife Loses Out on Life Insurance Proceeds: Headache Remains for Insurance Companies

Bradley Arant Boult Cummings LLP

Bradley Arant Boult Cummings LLP

In an unfortunately all-too-American scenario, Mark and Kaye married in 1997 and divorced 10 years later. But events that took place while Mark and Kaye were still married would eventually be up for consideration by the Supreme Court.

While still married, in 1998 Mark purchased a life insurance policy and named Kaye as the primary beneficiary; Mark’s kids from his first marriage, Ashely and Antone, were named as secondary beneficiaries. Before Mark and Kaye divorced in 2007, the State of Minnesota enacted a revocation-on-divorce statute in 2002 that provided that “the dissolution or annulment of a marriage revokes any revocable [] disposition, beneficiary designation, or appointment of property made by an individual to the individual’s former spouse in a governing instrument” (Minn. Stat. 524.2-804).  Before Mark died, he had made no effort to change the designation of Kaye as the beneficiary on his life insurance policy. So as Mark’s former wife and his kids from the prior marriage lined up to fight over the life insurance death benefit, the question invariably arose:  What impact will Minnesota’s divorce statute have on Mark’s policy since (1) the statute was not in effect at the time Mark purchased the policy and named Kaye as beneficiary, but (2) the statute was in effect at the time of the divorce and Mark made no effort to remove Kaye as beneficiary.

The trial court awarded the policy proceeds to the children. The Court of Appeals reversed, awarding the proceeds to Kaye because it perceived the divorce statute to be an unconstitutional violation of the Contracts Clause of the Constitution. In an 8-to-1 opinion released this month, the USSC upheld the Minnesota law finding no violation of the contracts clause. The result: Mark’s children get the money pursuant to the Minnesota statute. Also, the result: the continuation of a 50-state compliance headache for insurance companies.

To simplify the logistics, insurance companies must locate the named beneficiary, determine the named beneficiary’s relationship with the insured, determine whether the parties are divorced or were ever divorced, review the divorce decree to determine whether the insurance policy was specifically allocated and, if not, comply with the applicable state’s revocation-on-divorce statute.

Plus, compliance and what constitutes compliance can vary by state. While revocation-upon-divorce statutes are commonplace, they are far from uniform, and the downside is big. Failure to comply with the applicable revocation-on-divorce statute can result in liability on behalf of the company. In many states, liability hinges on notice to the insurer (see e.g., Tex. Fam. Code Ann. § 9.301; see also Ala. Code § 30-4-17(f)). However, what constitutes notice is unclear and varies by state. Does constructive notice count? Or is actual notice required?  Also unclear is what happens when the owner of the policy is also the beneficiary. Does the revocation-on-divorce statute apply in that case? Some state statutes address this issue, and some do not. Likewise, all revocation-on-divorce statues have ways in which its application can be avoided, such as where the parties remarry or where the insured’s intent can be shown through other evidence.

On the whole, insurance companies should be okay with the Sveen opinion as they should have already been complying with any divorce statutes on the books. While the Supreme Court failed to eliminate the 50-state compliance headache altogether, it certainly did not make matters worse for insurance companies. This blog begins a series of blog posts that will address this issue and the particulars of revocation-on-divorce statutes nationwide. I’ll be covering these statutes on a state-by-state basis and addressing some global issues, such as notice, ERISA preemption, and insurer liability. If there is a specific state you are interested in or a global question that needs to be addressed, please submit your comments.

DISCLAIMER: Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

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