by J. Michael Young
Life insurance is a contract between the insured policyholder and the insurance company. Payment of insurance benefits is controlled by the policy terms and the insured’s designation of beneficiary. However, at times, someone other than the named beneficiary may have a viable claim to policy benefits. Examples include disputes involving current or ex-spouses, the insured’s possible lack of capacity, undue influence on the insured to change a designation or the insured’s imperfect efforts to change a beneficiary designation.
Texas or Federal Law?
The first step in analyzing a beneficiary dispute is determining whether Texas or Federal law applies. This can be complex, but generally Texas law applies unless the insured obtained the policy through an employer. If the insurance was obtained as a benefit of employment, it is likely that it will be a policy governed by a federal law commonly referred to as ERISA (Employee Retirement Income Security Act of 1974).
ERISA generally preempts state laws, particularly regarding claims for policy benefits. It generally overrides Texas law recognizing a community property interest of a spouse in the policy, as well as the Texas Family Code provision that effectively voids beneficiary designations in favor of an ex-spouse. ERISA favors strict adherence to plan documents to aid predictability and uniformity for the benefit of the plan administrator. However, the Supreme Court has left open the possibility that a competing claimant could bring suit against the designated beneficiary after the beneficiary receives the policy benefits.
The Ex-Spouse as Beneficiary
In Texas, a divorce generally operates to revoke a prior beneficiary designation in favor of an ex-spouse. Texas Family Code § 9.301. Exceptions in the statute are limited and courts have been reluctant to find equitable exceptions.
The Spouse’s Community Property Claim
The current spouse may obtain the policy proceeds if the designation of an ex-spouse is invalidated under the Texas Family Code. Another scenario is when the policy designates a third party who is not the current spouse or an ex-spouse. This commonly occurs if the couple has separated but not divorced.
Texas is a community property state. Assets earned or acquired by either spouse during marriage are presumed to be community property. This applies to marriages dissolved by death, as well as by divorce. Under Texas law, a surviving spouse may have a claim for constructive fraud when an insurance policy was purchased with community funds for the benefit of a person outside the community.
Capacity and Undue Influence
Beneficiary designations can be challenged on the basis that the insured either lacked the mental capacity to make the designation or was unduly influenced to do so. The evidence necessary to prove such claims is very similar to that in a traditional will contest, although the capacity required to make a designation is theoretically greater than the capacity to make a will.
As noted, when ERISA applies, state laws are preempted. However, capacity and undue influence claims are still possible because they are not attacks on the designation based on reference to external documents or state laws regarding designations. Instead, they are attacks on the validity of the designation document itself. Note, however, that ERISA does not allow for jury trials, so a judge will be the finder of fact for such claims.
The Attempted Beneficiary Change
Sometimes, the insured will attempt to change a designation, but fails to do so in the manner prescribed by the insurance company. The insurance company may reject the effort and ask the insured to make the designation on the form and in the manner required by the company. Under Texas law, a beneficiary designation is effective if it is in “substantial compliance” with the insurance company’s procedure, which has been defined as the insured’s doing all that he could reasonably have done to effect a change. Federal courts apply a similar standard in ERISA cases.
J. Michael Young is an attorney at Sanders, O’Hanlon, Motley & Young. He can be reached at email@example.com.