Divorce is a prevalent part of American society. It’s often stressful, financially burdensome, and full of disputes – of which life insurance is a frequent danger zone.
The divorce / life insurance debate was recently thrust back into the limelight in the case of Sveen v. Melin, after Kaye Melin sought to claim benefits on the life insurance policy of her deceased ex-spouse, Mark Sveen.
Melin was named the primary beneficiary on Sveen’s life insurance policy, which he purchased one year after their marriage in 1997. His two children from a previous marriage were named as contingent beneficiaries. According to Court documents, when Melin and Sveen divorced in 2007, Sveen made no action to revise his beneficiary designations, which left Melin open to claim benefits on his policy upon his death four years later.
However, Sveen’s children made competing insurance claims and took the dispute to court, citing the 2002 Minnesota law that revokes the life insurance benefits of a spouse upon divorce. The District Court opted in their favor, before the 11th Circuit Court of Appeals reversed the decision saying the 2002 law should not retroactively apply to the 1997 marriage, because it violates the Constitution’s Contracts Clause.
On Monday, the Supreme Court decided the matter once and for all, with an 8-1 vote to uphold the 2002 Minnesota law. Associate Justice of the Supreme Court Elena Kagan shot down the 11th Circuit’ decision, arguing the law does not substantially impair pre-existing contractual arrangements.
"This decision is a win for practical reason at a time (post-divorce) when reason does not always hold. Rarely do divorcing spouses wish to maintain insurance or other benefits for their ex-spouses unless obligated to do so in a divorce agreement,” said Eido Walny, founder and managing attorney at Walny Legal Group. “For those instances when the exception arises, the Minnesota law offers the ability to re-affirm such an election. But in a lot of other cases, the Court has given the families of divorced spouses a get-out-of-jail-free opportunity when changing beneficiaries has been overlooked.
“This case is a good reminder that divorce does not end when the judge says so. The Sveen case does not address Federal beneficiary designations (such as designations on ERISA accounts) which are not affected by state law. Instead, clients are well advised to review all of their financial and estate paperwork (including wills and trusts) to make sure that their beneficiary elections are current and comply with their wishes.”
The Sveen v. Melin case revolved around a Constitutional query of the legality of the 2002 Minnesota law, which states automatic beneficiary revocation-on-divorce statute on the theory that the statute is intended to reflect a policyholder’s presumed intent. The 11th Circuit Court of Appeals and Justice Gorsuch said it violates the Contracts Clause of the Constitution, which says states may not pass laws that impair the obligations of contracts.
"The Court ruled in favor of Sveen’s children. In their decision, the Court cites policyholder intent as a primary reason for the ruling. Mark could have made an affirmation of his wish for Kaye to receive the proceeds of the policy, but he never did. It is likely, then, that he relied on the legislation to enact his will for him,” Walny added.
Caroline Krauss-Browne, co-chair and partner in the Matrimonial & Family Law practice at Blank Rome, LLP, commented: “The majority held that the statute at issue does not substantially impair a pre-existing contractual arrangement as the policyholder could have easily updated his beneficiary designation and renamed the ex-wife after their divorce was final. The insured’s failure to change the beneficiary designation after a divorce is more likely the result of neglect than choice. And that means the Minnesota statute often honors, not undermines, the intent of the only contracting party to care about the beneficiary term.
“This decision is an example of the ‘it’s obvious, dude’ approach to the battle between Constitutional and Family law – we just don’t believe that anyone would pick their ex-wife over their kids so we’re going to assume he was lazy or uninformed and correct this obvious error for him. How could it be otherwise?”
