U. S. Supreme Court Allows Minnesota to Change An Insurance Contract by Statute

Statute Causes Beneficiary Designation to be Voided by Divorce

Live insurance contracts contain – as their main purpose – a beneficiary designation advising the insurer who the insured wishes to be paid upon the insured’ death. The designation is an essential part of the insurance contract. The Contracts Clause of the U.S. Constitution categorically prohibits states from passing “any . . . Law impairing the Obligation of Contracts.” Art. I, §10, cl. 1 (emphasis added).  Minnesota law provides that “the dissolution or annulment of a marriage revokes any revocable . . . beneficiary designation . . . made by an individual to the individual’s former spouse,” Minn. Stat. 524.2–804. If an insurance policyholder does not want that result, he may rename the ex-spouse as beneficiary.

In Ashley Sveen, Et Al. v. Kaye Melin, No. 16-1432, Supreme Court Of The United States (June 11, 2018) a Contracts Clause argument arose because, in 2002, Minnesota enacted a statute establishing one a default rule that “the dissolution or annulment of a marriage revokes any revocable . . . beneficiary designation . . . made by an individual to the individual’s former spouse.” Minn. Stat. §524.2-804, subd. 1.

Under the statute, if one spouse has made the other the beneficiary of a life insurance policy or similar asset, their divorce automatically revokes that designation so that the insurance proceeds will instead go to the contingent beneficiary or the policyholder’s estate upon his death. The law does this on the theory that the policyholder would want that result. But if he does not, he may rename the ex-spouse as beneficiary.

FACTS

Mark Sveen and respondent Kaye Melin were married in 1997. The next year, Sveen purchased a life insurance policy, naming Melin as the primary beneficiary and designating his two children from a prior marriage, petitioners Ashley and Antone Sveen, as contingent beneficiaries. The Sveen-Melin marriage ended in 2007, but the divorce decree made no mention of the insurance policy and Sveen took no action to revise his beneficiary designations. After Sveen passed away in 2011, Melin and the Sveen children made competing claims to the insurance proceeds.

The Sveens argued that under Minnesota’s revocation-on-divorce law, their father’s divorce canceled Melin’s beneficiary designation, leaving them as the rightful recipients. Melin claimed that because the law did not exist when the policy was purchased and she was named as the primary beneficiary, applying the later-enacted law to the policy violates the Constitution’s Contracts Clause. The District Court awarded the insurance money to the Sveens, but the Eighth Circuit reversed, holding that the retroactive application of Minnesota’s law violates the Contracts Clause.

DECISION

The majority of the Supreme Court concluded that the retroactive application of Minnesota’s statute does not violate the Contracts Clause. That Clause restricts the power of States to disrupt contractual arrangements, but it does not prohibit all laws affecting pre-existing contracts. The two-step test for determining when such a law crosses the constitutional line first asks whether the state law has operated as a substantial impairment of a contractual relationship. In answering that question, the Court has considered the extent to which the law undermines the contractual bargain, interferes with a party’s reasonable expectations, and prevents the party from safeguarding or reinstating his rights. If such factors show a substantial impairment, the inquiry turns to whether the state law is drawn in an “appropriate” and “reasonable” way to advance “a significant and legitimate public purpose.”

Three aspects of Minnesota’s law, taken together, show that the law does not substantially impair pre-existing contractual arrangements. First, the law is designed to reflect a policyholder’s intent—and so to support, rather than impair, the contractual scheme. It applies a prevalent legislative presumption that a divorcee would not want his former partner to benefit from his life insurance policy and other will substitutes.

The Court made the assumption that the law often honors, not undermines, the intent of the only contracting party to care about the beneficiary term. Second, the law is unlikely to disturb any policyholder’s expectations at the time of contracting, because an insured cannot reasonably rely on a beneficiary designation staying in place after a divorce. If the law’s presumption about what an insured wants after divorcing is wrong, the insured may overthrow it simply by sending a change-of-beneficiary form to his insurer.

ANALYSIS

The Contracts Clause restricts the power of States to disrupt contractual arrangements. It provides that “[n]o state shall . . . pass any . . . Law impairing the Obligation of Contracts.” U. S. Const., Art. I, §10, cl. 1. The origins of the Clause lie in legislation enacted after the Revolutionary War to relieve debtors of their obligations to creditors.

The Minnesota statute furthers the policyholder’s intent. Legislative presumptions about divorce are now especially prevalent—probably because they accurately reflect the intent of most divorcing parties. Although there are exceptions, most divorcees do not aspire to enrich their former partners.

The Minnesota statute places no greater obligation on a contracting party—while imposing a lesser penalty for noncompliance. Even supposing an insured wants his life insurance to benefit his ex-spouse, filing a change-of-beneficiary form with an insurance company is as “easy” as, say, providing a landowner with notice or recording a deed.

JUSTICE GORSUCH, dissenting.

Although he was unable to convince other justices, Justice Gorsuch noted, logically, that Minnesota’s statute automatically alters life insurance policies upon divorce to remove a former spouse as beneficiary. Minnesota wants to apply its law retroactively to policies purchased before the statute’s adoption. The Court of Appeals held that this violated the Contracts Clause, which guarantees people the right to rely on the law as it existed when their contracts were made.

When it comes to legislation affecting contracts, the Constitution hardens the presumption of prospectivity into a mandate. The Contracts Clause categorically prohibits states from passing “any . . . Law impairing the Obligation of Contracts.” Art. I, §10, cl. 1 (emphasis added).

No one pays life insurance premiums for the joy of it. Or even for the pleasure of knowing that the insurance company will eventually have to cough up money to someone. As the Court concedes, the choice of beneficiary is the “‘whole point.'” So when a state alters life insurance contracts by undoing their beneficiary designations it surely “substantially impairs” them and changes the intent of a person unable to complain, the dead insured.

Kaye Melin testified that, despite their divorce, she and the decedent, Mark Sveen, agreed (repeatedly) to keep each other as the primary beneficiaries in their respective life insurance policies. Ms. Melin noted that they adopted this arrangement not only because they remained friends but because they paid the policy premiums from their joint checking account.

We must respect that line found in the text of the Constitution, not elide it. Indeed, our precedent teaches that if remedial changes are just disguised efforts at impairing obligations they will violate the Constitution too.

The judicial power to declare a law unconstitutional should never be lightly invoked. But the law before us cannot survive an encounter with even the breeziest of Contracts Clause tests. It substantially impairs life insurance contracts by retroactively revising their key term.

ZALMA OPINION

Although the Supreme Court has ruled that the people of Minnesota are too ignorant to change beneficiaries on their life insurance policies after a divorce – rather than smart enough to care for the ex-spouse – the contract of insurance is changed retroactively by statute which, to me, and Justice Gorsuch, clearly violates the Contracts clause. The statute should be changed and the state should recognize the wisdom of their citizens.


© 2018 – Barry Zalma

This article, and all of the blog posts on this site, digest and summarize cases published by courts of the various states and the United States.  The court decisions have been modified from the actual language of the court decisions, were condensed for ease of reading, and convey the opinions of the author regarding each case.

Barry Zalma, Esq., CFE, now limits his practice to service as an insurance consultant  specializing in insurance coverage, insurance claims handling, insurance bad faith and insurance fraud almost equally for insurers and policyholders. He also serves as an arbitrator or mediator for insurance related disputes. He practiced law in California for more than 44 years as an insurance coverage and claims handling lawyer and more than 50 years in the insurance business. He is available at http://www.zalma.com and zalma@zalma.com.

Mr. Zalma is the first recipient of the first annual Claims Magazine/ACE Legend Award.

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About Barry Zalma

An insurance coverage and claims handling author, consultant and expert witness with more than 48 years of practical and court room experience.
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