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Supreme Court Eyes State Moves to Cut Life Beneficiary Knots

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The U.S. Supreme Court is considering a life insurance beneficiary designation case that could affect how much ability states have to change the effects of insurance policies — and, possibly, many other types of contracts — retroactively.

The court today heard oral arguments in connection with Ashley Sveen et al. v. Kaye Melin and Metropolitan Life Insurance Co. (Case Number 16-1432), a case involving a Minnesota law that determines what happens to the life insurance beneficiary designation for a spouse when a couple gets divorced.

(Related: John McLaughlin’s Estate Gets an Annuity Decision)

Justice Ruth Bader Ginsburg suggested that the outcome of the case could affect state laws that, for example, retroactively change the “status of adopted children to make them, for all purposes, the same as biological children.”

Justice Samuel Alito asked about “slayer statutes” — laws that block a life insurance beneficiary who kills the insured from collecting the death benefits. He wondered whether the outcome of Sveen v. Kaye could keep from states from applying slayer statutes to life insurance policies in-force before the statutes were enacted.

The justices did not talk about insurance products other than life insurance, or about life insurance matters other than life insurance beneficiary designations, but it’s possible that a ruling on Sveen v. Kaye could also affect states’ ability to change the effects of other types of contracts — such as disability insurance policies, annuity contracts or general nondisclosure agreements — that are already in force when new laws or regulations are adopted.

Shay Dvoretzky, the lawyer who appeared on behalf of  Kaye Melin, acknowledged during his closing arguments that one challenge would be helping the court resolve the case in a narrow way “that wouldn’t open some of the parade of horribles that some members of the court have been concerned about.”

The History

Mark Sveen, a home builder, bought a permanent life insurance policy in 1997 and married Kaye Melin a few months later. In 1998, he named her to be his primary beneficiary.

In 2002, Minnesota tried to prevent the kinds of life insurance benefits problems families affected by divorce often face by adopting a “revocation on divorce” law. The law states that, when two spouses divorce, the divorce cancels all of the couple’s beneficiary designations for non-probate assets, such as life insurance policies and retirement accounts, unless the divorced spouses ask to keep the designations in place.

Sveen and Melin divorced in 2007.

Sveen died in 2011, at the age of 46.

Melin said that she and Sveen had an oral agreement that he would continue to make her the beneficiary of the life insurance policy, but lawyers for Melin, and for Mark Veen’s children from another marriage, never introduced any written documents showing Mark Veen’s intentions for the life insurance policy.

Metropolitan Life, a unit of MetLife Inc., asked the U.S. District Court for the District of Minnesota to decide who should get the death benefits.

The district court accepted the argument that Minnesota’s revocation on divorce law applied. The district court ruled in favor of Mark Veen’s children.

The 8th U.S. Circuit Court of Appeals rejected the lower court ruling. The appeals court argued that the Contracts Clause of the U.S. Constitution, which forbids states from interfering with contractual rights retroactively, should block the Minnesota revocation-on-divorce law, and a similar law in effect in Oklahoma. That court found that retroactive revocation-on-divorce laws interfere with policyholders’ rights.

The Oral Arguments

Justices implied several times that the case seemed to be more about bad divorce legal work than anything else.

“In most cases, I think, where there’s a lot of property, the insurance will be on the table and they’ll talk about it,” Justice Anthony Kennedy said.  “Your case applies to really small divorces, I think.”

Adam Unikowsky, a lawyer who appeared on behalf of Sveen’s children, said that the courts have held that marriage contracts are different from other types of contracts for Contracts Clause purposes, and that the courts have never used the Contracts Clause to keep states from trying to legislate on the subject of divorce.

Dvoretzky argued that states like Minnesota are simply trying to make the laws governing life insurance and retirement account beneficiary designations more like the laws that govern wills, not trying to exercise unrestrained police power to change insurance contracts retroactively.

“I think that the first important principle is that this is a divorce case,” Dvoretzky said. “The court isn’t reaching out and interfering with private relationships. The statute only comes into effect when people come to the court and invest the court with jurisdiction to divide their assets.”

A copy of the transcript for the oral arguments is available here.

Women’s Rights

David Barrett of Boies Schiller Flexner wrote, in a brief filed on behalf of 14 women’s rights groups, that his clients believe the revocation-on-divorce laws hurt older women, because wives tend to earn less than women and reach retirement age with fewer assets.

“Revocation-on-divorce laws actually penalize women who get married,” Barrett said in a written comment on the case. “The laws automatically deny married women their status as beneficiaries, but they leave intact the beneficiary designations made by unmarried couples.”

— Read Beneficiary Designations: 4 Reasons Why They May Be Out of Date on ThinkAdvisor.

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