What is substantial compliance in a life insurance beneficiary designation?

A common issue we see in many ERISA life insurance beneficiary disputes we handle involves an allegation that an insured attempted to change a beneficiary designation before they died. This may seem cut and dried: the insured either did or did not send in the change form.  But the issue is not necessarily black and white.  Maybe the insured did not send in the right form.  Maybe it was just a letter.  Maybe it was just a phone call. Maybe the form was left on the desk of the insured's home office and never actually mailed before the insured died. Maybe the form was not filled out according to the insurance company's satisfaction. Maybe the form was filled out perfectly, but the insurance company had not processed the change before the insured died.

Most states have developed a doctrine of "substantial compliance" to evaluate a designation that has not been fully accepted and processed by the insurance company.  Federal courts generally also recognize the doctrine in regard to disputes over ERISA life insurance policies. 

The actual wording of the substantial compliance doctrine varies by state and by federal circuit, but generally the doctrine will enforce an attempted beneficiary change if the insured substantially complies with the insurance policy's change of beneficiary provisions.  What constitutes substantial compliance can vary based on the facts of the case and the wording of the actual policy at issue.  Many policies are not exactly clear and detailed in regard to beneficiary designations.  

In a very recent decision, Judge Tharp of the Northern District of Illinois found that an insured's filling out the form designating a new beneficiary was not sufficient when there was no evidence he actually trued to submit the form to the insurance company. 

On the other hand, a guardian was later appointed for the insured.  The guardian did not use the form approved by the insurance company.  However, she did write a letter to the insurance company requesting a new beneficiary and followed up with a phone call. The court found substantial compliance even though the guardian did not use the right form or even reference the specific policy or ERISA plan by name or number.

These cases are very fact-specific and outcomes are not necessarily predictable. Therefore, anyone facing the prospect of a beneficiary dispute should contact a lawyer with experience in evaluating ERISA life insurance disputes. 

Utah federal court approves insurance company's fees

Federal law allows an insurance company to file an interpleader if there is a dispute over the proper beneficiary of an ERISA life insurance policy. The typical procedure is for the insurance company to file the interpleader and, once the claimants appear, file a motion to deposit the policy proceeds in the registry of the court.  As part of that process, the insurance company will typically ask the court to dismiss the insurance company and to award its fees and expenses in filing the interpleader.

Often, the contestants can agree with the insurance company on the amount of fees.  I have found that many insurers will agree to substantially limit or reduce the fees they are seeking. This is particularly if the contestants agree to the insurance company depositing the funds and being released with prejudice.

One or both parties claiming the proceeds may seek to pursue a claim against the insurance company.  But such claims should be asserted only with great care, as the policy proceeds can be reduced significantly if the insurance company has to defend a claim.  Given the favor given to the interpleader process as something of a "safe harbor," claims based simply on side being disgruntled because the insurance company did not chose them as the rightful beneficiary are unlikely to succeed.

In Life Insurance Company of North America v. Wagner, et al, (2016 WL 3014663) the contesting parties suggested the fees sought by the insurance company's lawyers was "a little high."  To protect the policy proceeds as much as possible, Judge David Sam of the Central Division of Utah required the insurance company's lawyers to submit evidence in support of the fee request.  The court approved the attorney's fees after the insurance company trimmed the request by about 10%.

The decision itself is not particularly interesting.  But it emphasizes that courts will award reasonable and necessary attorney's fees to an insurance company that files an interpleader to determine the proper beneficiary of policy proceeds. 

Michigan federal court rules in favor of ex spouse

In Metropolitan Life Ins. v. Blevins, Judge Hood of the Eastern District of Michigan evaluated a dispute between a former spouse and a widow over ERISA life insurance benefits. The insurance company, Metlife, filed an interpleader after facing competing claims to the policy benefits.

The decedent, a long time employee of General Motors, had named his ex wife as beneficiary in 1977.  They were divorced in 1992. The divorce decree provided that he would maintain the ex wife "as irrevocable beneficiary on all existing life, endowment or annuity policies of insurance" until their child reached age 19 1/2.

The decedent passed away in 2014. The widow argued that the beneficiary designation in favor of the ex wife was effectively superseded by the divorce decree.  Her reasoning was that the decree provided that the ex wife was only entitled to benefits until the child reached the age condition, which had been met long ago.  

Judge Hood agreed that the decree could preempt ERISA to the extent it was a Qualified Domestic Relations Order (QDRO). A QDRO must meet the following requirements:

1) the name and the last known mailing address, if any, of the participant and the name and mailing address of each alternate payee covered by the order;

2) the amount of percentage of the participant’s benefits to be paid by the plan to each such alternate payee, or the manner in which such amount or percentage is to be determined;

3) the number of payments or period to which such order applies, and

4) each plan to which such order applies. 

Judge Hood found that the decree did qualify as a QDRO under a "substantial compliance" view.  However, she ultimately ruled in favor in favor of the ex wife:

The express language of the Judgment of Divorce only states that the decedent “shall continue to name Plaintiff, LAURA G. BLEVINS, as irrevocable beneficiary on all existing life, endowment or annuity policies of insurance until the minor child of the parties reach the age of majority, graduate from high school, but in no [t] [sic] event past their 19 1/2 birthday.”  This language only shows that the decedent maintain Leckemby as an irrevocable beneficiary until the youngest child reached the age of 19 1/2. The language was most likely intended to protect the minor children, but this language does not provide a clear intent to revoke the beneficiary status of Leckemby after the youngest child reached the age of 19 1/2.

 Whether a divorce decree meets the requirements to qualify as a QDRO is highly fact intensive. If you are facing an ERISA beneficiary dispute, you should consult with an attorney experienced in handling these cases. 

Life insurers squeezed by law rates

Life insurance rates have generally declined, as mortality rates in the 40-65 age range have decreased.  That has particularly impacted term life  rates, as it is people in that age bracket most likely to maintain term insurance, either through ERISA employer group plans or individually. 

As this Wall Street Journal article notes, life insurance companies make their money by rates of return on the premiums they receive, along with using sophisticated actuarial models to determine the chances of paying out death benefits.  But low rates have complicated the assumptions:

In another sign of the toll of low rates, MetLife in January announced plans to divest itself of a chunk of its life-insurance operations, some of them highly rate-sensitive. One Wall Street analyst called it a “bad bank” for growth-challenged products.

Fortunately for employees seeking term life insurance through their employer, the fallout will primarily impact whole life and long term care policy owners. 

Virginia federal court rules against ex spouse

In Metropolitan Life Insurance Company v. Gorman-Hubka, Judge Ellis of the Eastern District of Virginia considered a beneficiary dispute between the ex spouse and the sisters of the decedent. The insurance company, Metlife, filed the interpleader in federal court after receiving rival claims to the policy benefits.

The decedent had named his ex wife as beneficiary, prior to their divorce. The parties disputed whether he made substantial efforts to naming her again as the beneficiary after the divorce.

The court first analyzed whether ERISA applied to the policy.  As in most life insurance beneficiary disputes, this analysis was critical.  Virginia law would automatically revoke any designation in favor of an ex spouse made prior to the divorce.  However, federal law would preempt the Virginia statute if the policy was covered by ERISA. 

Examining the details of the policy, Judge Ellis found that the policy was not covered by ERISA.  Therefore, Virginia law applied and the designation in favor of the ex spouse was automatically revoked by the divorce. 

However, that was not the end of the case.  The ex spouse contended that the insured had intended to designate her again after the divorce, but was allegedly told by a representative of Metlife during a phone call that he did not need to do anything to keep the ex spouse as the beneficiary. It turned out that guidance was misleading.  But the court was not persuaded that the insured took all reasonable steps necessary to designate his ex wife after the divorce. Therefore, the decedent's sisters prevailed.

California federal court rules that ERISA does not apply when company owners the only plan participants

In Capital One, N.A. v. Saks (No. CV 13–06411 SJO), Judge Otera of the Federal Central District of California considered a life insurance beneficiary dispute. Like most interpleader disputes in either state or federal court, the first issue involved whether the life insurance policy was governed by ERISA.

ERISA typically applies when life insurance is obtained as a benefit of employment. Employee retirement savings are typically considered part of ERISA pension benefit plans, whereas employee life insurance are considered ERISA welfare benefits. In order to fall  under ERISA, the plan must be (1) a plan, fund or program, (2) established or maintained, (3) by an employer or employee organization, (4) for the purpose of providing benefits (5) to participants or their beneficiaries. 29 U .S.C. § 1002(1).

In this case, Judge Oetera considered a circumstance where the small business was owned by a formerly married couple.  There was a plan established by the small company, for the purpose of providing benefits. However, the available evidence was that the company had no employees except for the owners.   

ERISA defines a “participant” as “any employee or former employee of an employer, or any member or former member of an employee organization, who is or may become eligible to receive a benefit of any type from an employee benefit plan which covers employees of such employer or members of such organization, or whose beneficiaries may be eligible to receive any such benefit.” 29 U.S .C. § 1002(7). “The term ‘employee’ means any individual employed by an employer.” 29 U.S.C. § 1002(6).

In order to clarify these definitions, the Secretary of Labor promulgated the following definition of "employee:"  (1) An individual and his or her spouse shall not be deemed to be employees with respect to trade or business, whether incorporated or unincorporated, which is wholly owned by the individual or by the individual and his or her spouse, and (2) A partner in a partnership and his or her spouse shall not be deemed to be employees with respect to the partnership. 29 C.F.R § 2510.3(c)(1)-(2).

Because of this definition of employee, the federal district court in California found that the particular plan was not governed by ERISA. The only "employees" participating in the plan were the married couple who were the sole owners of the company.

ERISA life insurance benefit attorneys


An interpleader is the proper method to resolve an ERISA beneficiary dispute

An ERISA plan administrator, usually an insurance company, may face competing claims to group life insurance benefits.  The insurance company may investigate the dispute and make payment to whom it determines to be the proper beneficiary. 

However, that exposes the administrator to a lawsuit from the disgruntled claimant.  A court might well agree with the administrator's decision, particularly given the wide discretion typically allowed ERISA fiduciaries.  However, that exposes the insurance company to significant risk, including legal expenses in defending the claim.  Worse, a court could determine that the insurance company made the wrong decision. The insurance company would be forced to pay the benefits twice and the employee(s) who made the decision to pay would likely be fired.

Courts recognize this dilemma and allow ERISA administrators the to file what is known as an interpleader lawsuit. As the 9th Circuit Court of Appeals in California has stated:

interpleader provides a process by which a party may “join all other claimants as adverse parties when their claims are such that the stakeholder may be exposed to multiple liability. . . Interpleader's primary purpose is not to compensate, but rather to protect stakeholders from multiple liability as well as from the expense of multiple litigation.  

Aetna Life Insurance Co. v. Bayona, 223 F.3d 1030, 1033 (9th Cir.2000).

Designated beneficiaries are often frustrated by what they consider a "frivolous" contest and want to sue the insurance company for filing the interpleader, instead of just paying them the policy benefit.  However, ERISA preempts state law remedies and federal judges will typically give the insurance company the benefit of doubt regarding the bona fides of a contest.  After all, the aim of the interpleader process is to have the court, not the insurance company, determine if a dispute is bona fide.

Federal law allows the insurance company to deduct its attorney's fees from the interplead funds upon court approval. This is yet another reason why it makes sense for the insurance company/administrator to resolve a dispute via interpleader. I've found that most insurance companies are reasonable in limiting the fees they seek to deduct from the policy, particularly if the contestants agree early in the suit to release the insurance company.

Federal court enforces beneficiary designation over divorce decree

ERISA generally overrides or "preempts" state laws, decrees, rulings, etc. An exception includes certain divorce decrees dividing spousal property that are "qualified domestic relations orders," commonly known as QDROs. 

In QuikTrip Corp. v. Javaher, (No. 14–CV–674–JHP–PJC) Judge Payne of the U.S. District Court for the Northern District of Oklahoma, considered a conflict between a divorce decree and a later beneficiary designation.  A 2011 divorce decree provided that a QuickTrip employee was to "maintain current beneficiaries," including his ex-wife, of life insurance policies. His ex-wife was the primary beneficiary of the ERISA policy at the time of the divorce However, in 2014 the employee changed the primary beneficiary of that policy to his fiancee.  He died a week later.

The Court held that the divorce decree did not qualify as a QDRO and did not prevent the employee from changing the primary beneficiary of that ERISA policy. The Court found that the divorce decree did not specifically reference the life insurance policy at issue or the prior designation in favor of the ex-wife.