Take-Away: The U.S. Supreme Court just upheld a state statute that retroactively revoked the life insurance beneficiary designation where the insured’s former spouse was the named primary beneficiary. The statute was challenged by a former spouse who claimed that the statute violated the Constitution’s Contracts Clause, which deprived her of her right to receive the death benefit. In effect, the Supreme Court’s decision validated the constitutionality of Michigan’s statute that provides for the automatic revocation of a beneficiary designation (or governing instrument) when the spouses divorce. Sveen et. al. v. Melin, 584 US (2018).

Background: Michigan’s Estates and Protected Individuals Code (EPIC) provides that the effect of a judgment of divorce revokes the designation of the former spouse as a beneficiary. Specifically the statute provides that the “…the divorce or annulment of a marriage does all of the following: Revokes a disposition or appointment of property made by a divorced individual to his or her former spouse in a governing instrument.” [MCL 700.2807(1)(a)(i).] A governing instrument includes in its definition a life insurance or annuity policy. [MCL 700.1104(m) and MCL 700.2806(d).] Thus, upon the entry of the judgment of divorce, the former spouse is automatically removed as the designated beneficiary of the life insurance policy that insures the other spouse, whenever that policy was put into effect.  The challenge was made under a comparable Minnesota statute, almost identical to Michigan’s statute, on the grounds that the retroactive application of the statute that removed the former spouse as the designated primary beneficiary of her late former husband’s life insurance policy was a violation of the US Constitution’s Contracts Clause which prohibits states from passing laws that interfere with existing contractual rights. [U.S. Const. Art. I, Section 10, cl.1.- ‘No State shall …pass any…law impairing the Obligation of Contracts….’]

Context: This case involved the long recognized the validity of statutory provisions that revoke or modify testamentary instruments as a result of a divorce, like a Will. But a life insurance policy is not technically a testamentary instrument- it is a contract; therefore the retroactive application of the state statute must pass constitutional muster under the Contracts Clause of the Constitution.

Facts: In the Minnesota case the spouses were married in 1997. A year later the husband took out a life insurance policy on his life and he named his wife as the primary beneficiary of the policy; his children from a prior marriage were named as the contingent beneficiaries. Four years later Minnesota passed its statute that is comparable to Michigan’s automatic revocation statute. The parties later divorced, but the husband made no changes to the insurance policy’s beneficiary designation. The husband died in 2011. His children from the prior marriage claimed the policy’s death benefit. The former wife (their step-mother) claimed the death benefit, arguing that the Minnesota statute, which was applied retroactively to the then existing policy beneficiary designation, was a violation of the Constitution’s Contracts Clause. She claimed that the law passed after the policy was acquired interfered with its operation by changing an express term of the contract: the beneficiary designation.

Supreme Court Decision: The Court, in an 8 -1 decision, found that the statute did not operate as a substantial impairment of a contract relationship. While it acknowledged that the law changed how the insurance contract operated, it did not impair the contract itself. It found the  statute furthered the intent of the contract by supplementing the presumed intent of most policyholders under such circumstances. It also found that a policyholder cannot reasonably rely on beneficiary designations remaining unchanged in the event of a divorce, which thus weakened any argument for protections under the Contracts Clause. Finally, the Court noted that the policyholder can always change the beneficiary designation following the divorce by submitting a new beneficiary designation to the insurance company, concluding that statutes that enable a party to protect the party’s contractual rights from operation of the statute with minimal effort ‘have always passed constitutional muster.’ Thus, the Court viewed the statute, which was applied retroactively,  as one that ‘often honors, not undermines, the intent of the only contracting party to care about the beneficiary term.’ [Opinion at 9.]

Uniform Probate Code: Both the Michigan and Minnesota statutes are premised on the Uniform Probate Code Section 2-804(b)-(f). This UPC provision reflects the idea that a typical divorce spouse would not want their former spouse to benefit, and that the failure to change the beneficiary designation is likely caused by ‘inattention not intention.’ As such, the statutes are based upon the presumed intent of the policy or contract holder.

Governing Instruments: It is important to keep in mind that  Michigan’s revocation-on-divorce statute covers all governing instruments, not just life insurance or annuity policies. Governing instruments includes beneficiary designations associated with IRAs, PODs,  TOD’s, powers of appointment, and ‘similar benefit plans’ (which unfortunately is not further defined to provide much guidance.) Not covered by this revocation-on-divorce statute is a beneficiary designation associated with a qualified plan retirement account, like a 401(k) plan, or a death benefit like a group term insurance benefit under an employee welfare plan, both of which are preempted by ERISA and which requires that the plan participant affirmatively change the beneficiary designation of his/her account in the qualified or welfare plan after the divorce.

Conclusion: While the Supreme Court’s decision is not all that surprising, it resolved one lingering question that had troubled many courts. Michigan’s revocation-on-divorce statutes that apply to Wills, trusts, and other non-testamentary transfers are constitutional and they do not violate the Constitution’s Contracts Clause.