Life Insurance Beneficiary

The story of Mark Sveen and Kaye Melin is (at least according to Mark’s children, Ashley and Antone) a familiar one. After the couple married in 1997, Mark named Kaye as the primary beneficiary of his life-insurance policy. A decade later, they divorced, but Mark never changed the designation on his insurance. This meant that when he died in 2011, Kaye was still his beneficiary – much to the chagrin of the children, adults by that time, who claimed that they should get the money. A federal trial court in Minnesota agreed with the children, relying on a 2002 state law that provides that a divorce automatically nullifies the designation of a former spouse as the beneficiary of a life-insurance policy. The U.S. Court of Appeals for the 8th Circuit overturned the trial court’s decision. It reasoned that the Minnesota law would violate the Constitution’s contracts clause, which bars states from enacting any laws “impairing the obligation of contracts,” in cases – like these – in which the beneficiary was designated before the law was enacted. Next week the Supreme Court will hear oral argument in the case, which could affect the validity of similar laws in as many as 28 other states.

In their brief in the Supreme Court, Mark’s children defend the Minnesota law as part and parcel of the state’s authority to regulate divorces. They add that the law does not implicate the real purpose of the contracts clause: to prevent special-interest groups from using the political process to get out of contracts that they don’t like.

But in any event, the children continue, the statute cannot violate the contracts clause because it does not “impair” any “obligations.” The insurer has to pay out the proceeds of the policy no matter what; it is just a question of who gets the money, which has nothing to do with the insurer’s contract with anyone. Even if there were some kind of “impairment,” they add, it still would not violate the contracts clause because it is not “substantial”: If Mark wanted to keep Kaye as his beneficiary, they reason, he could easily have done so by sending in a form to the insurance company to make that clear.

The revocation-on-divorce statute, the children emphasize, is really just a default rule that recognizes that most “people who get divorced do not intend for their ex-spouse to remain as their beneficiaries” and avoids uncertainty and litigation about whether the beneficiary designation was actually revoked. They point out that Kaye isn’t arguing that the revocation-on-divorce law affects her own rights under the contracts clause; instead, she contends that it affects Mark’s right to have the money go to her. “For all we know,” the children suggest, their father never changed his beneficiary designation because he knew that he didn’t have to – the revocation-on-demand statute would do it automatically.

Kaye offers a very different view of the contracts clause, describing it as “absolute: it forbids any state law that impairs the obligations of contracts.” She swings for the fences, urging the justices to “restore the plain meaning and original understanding of the clause,” which would dictate a ruling for her because the law interfered with the insurer’s obligations to Mark.

But at a minimum, she argues, the court should put private contracts like Mark’s life-insurance policy on the same footing as public contracts, banning impairments to private contracts “when a ‘more moderate course will serve” the state’s purposes “equally well.” And here, she says, if Minnesota wanted to protect “inattentive divorcés who forget to remove their former spouse as a beneficiary,” it could have done so “in a host of less intrusive ways.” For example, the state could require all divorce decrees to contain a prominent warning that the divorce could affect the former spouses’ beneficiary designations, which would prompt the policyholder to consider whether the other spouse should remain the beneficiary. Or, Kaye continues, the state could require courts to confirm that parties to a divorce have reviewed their beneficiary designations and made any changes that are necessary. But, Kaye observes, Minnesota doesn’t seem to think that the law is particularly important, because it opted not to participate in the case to defend the law. Nor did any of the other states with similar laws file “friend of the court” briefs supporting Mark’s children.

Even under the Supreme Court’s current jurisprudence, Kaye concludes, the revocation-on-divorce statute still violates the contracts clause because it did substantially impair Mark’s contract with the insurer. The “whole point of a life-insurance policy,” she tells the justices, is to ensure that the proceeds go to the designated beneficiary – but the Minnesota law obstructs that. And it doesn’t matter that the policy was a contract between Mark and the insurer, she stresses: “An insurance contract payable to a third party is a classic third-party beneficiary contract, subject to all the normal rules of contracts.”

Kaye also pushes back against the children’s premise that the revocation-on-divorce statute is simply a default rule to put into effect what the policyholder would have intended if he had thought about it. She suggests that a policyholder may actually want a former spouse to remain the beneficiary and receive the money despite their divorce – for example, to provide money for the couple’s children. Indeed, in her case, she tells the justices, she had argued in the lower courts that Mark and she had agreed to leave the beneficiary designation in place after their divorce; Mark was the beneficiary on her life-insurance policy, and she hadn’t changed that before he died. And they would have had no reason to believe that a different result would ensue, because the Minnesota laws in effect when Mark bought his policy and made Kaye his beneficiary made clear that, even if the couple divorced, Kaye would still receive the proceeds of the policy when Mark died unless he specifically changed his beneficiary. If the logic behind the revocation-on-divorce statute is that a policyholder who gets divorced just hasn’t gotten around to changing his beneficiary, she emphasizes, “the legislature can’t expect those same individuals to know that the law has changed and exercise their theoretical right to re-designate their former beneficiary.”

Mark’s children warn that a ruling for Kaye would open a Pandora’s box of undesirable consequences. For example, they argue, requiring state divorce courts to apply the law that was in effect when Mark bought the policy could result “in marital assets being subject to a checkerboard of laws in divorce.” And a decision that struck down the revocation-on-divorce law might also invalidate other state laws, including the “slayer” statutes that prevent murderers from receiving proceeds of victims’ insurance policies. States have often expanded the scope of these laws – for example, to bar perpetrators of elder abuse from receiving life-insurance proceeds after their victims die.

Kaye downplays these potential concerns, noting that (unlike the law here) slayer statutes and similar laws “are all clearly tied to legitimate public interests” – such as not giving a murderer or abuser the money from his victim. Will the justices find this distinction persuasive? And will any of them – particularly the court’s newest justice, Neil Gorsuch – show any interest in what Kaye describes as the “original understanding” of the contracts clause? We’ll know more after next week’s oral argument.