Who Gets the Insurance Proceeds, the Widow or the Ex-Spouse?

Poor Ted Brown. Luckless in love, and doomed to have his own death set off a struggle between his former wife and the new wife he left behind.

I rarely blog about federal cases, but this one is probably worth talking about because it touches on a practice that is ever so typical in the world of divorced spouses. USAble Life v. Brown, Case No. 2:08-CV-442-WKW [WO]  (M.D. Ala. March 24, 2009). Ted died in July, 2007, leaving his divorced wife Noreen and his new wife Judy. Judy was the stated beneficiary of his life insurance, but Ted’s and Noreen’s divorce decree had this language in it:

The Husband shall provide for the use and benefit of the Wife, life coverage on his life of not less than Eighty Five Thousand & No/100 Dollars ($ 85,000) death benefits. The Husband shall name the Wife as trustee and shall provide the Wife proof of continuing coverage at reasonable intervals, and shall take no action so as to diminish or encumber the death benefits payable thereunder. This provision constitutes the Husband’s consent for the release of such information to Wife in the event he fails to provide it.

Sound familiar? I can’t tell you whether I cribbed from the lawyer who wrote that or the lawyer cribbed from me, but it’s nearly identical to the language that appears in countless divorce decrees that I and hundreds of other divorce lawyers have written, in Alabama and elsewhere.

Noreen (the divorced wife) filed a claim for the insurance policy, even though it emerged that Ted had changed the policy on her and had named Judy as the beneficiary. Judy filed a claim too, of course, which prompted the insurance company to bring an interpleader action depositing the face amount of the policy, $79,000, with the court. An interpleader action is one commenced by a person or entity that knows it owes money but is uncertain which party is entitled to that money. In legal terms, the insurance company was saying “Here’s the money, judge; we don’t want to have to pay it twice, so you sort it out.”

Judy’s claim was based on the fact that Ted had a valid life insurance policy and named her as his beneficiary. Noreen’s claim was first that the language from her divorce decree with Ted created a “vested equitable interest” in the life insurance proceeds so that any subsequent change of beneficiary would be ineffective. Later, her theory morphed into one that the divorce decree amounted to a Qualified Domestic Relations Order (QDRO).

The federal district court initially stated that the insurance policy is covered by ERISA (federal law governing group employee benefit plans) and that ERISA makes it clear that Judy’s claim is valid. The court acknowledged, however, that if the language in the divorce decree amounted to a QDRO, Noreen’s claim would take precedence. So this case is all about whether the language in the divorce decree amounted to a QDRO.

The court compared the divorce decree language to the statutory requirements for a QDRO. It pointed out, for example, that a QDRO must clearly specify the name and last known mailing address of the participant (Ted) and the alternate payee (Noreen), that it must state the amount or percentage of the benefit to be paid to Noreen, that it must specify the number of payments or period to which it applied, and that it must specify the plan to which it applies. This last requirement was the problem. Note that the divorce decree language didn’t specify a policy or issuing company to be governed by the language; in fact, it seemed to contemplate that Ted could use whatever policy he wanted to satisfy the requirement.”There is no reference to a participant [Ted] who is under a plan, nor to any sort of a “current plan,” nor to any insurance policy that contemplates the one under which benefits are claimed now.” And, said the court, on the one specific requirement stated in the language, a face amount of $85,000, the divorce decree language didn’t match Ted’s policy, which had a face amount of $75,000.

The court denied Noreen’s motion for summary judgment and granted judgment in Judy’s favor.

Now here’s the question this opinion prompts: what would happen if the language in the decree DID contain all the elements of a QDRO? It wouldn’t be so outlandish for a decree to state the policy number and the issuing company and say that Ted has to keep this particular policy in place for Noreen. If it did, and the insurance company had no knowledge of it, would it still be binding on the insurance company?

As we often do, let’s look at this decision on the ground. The opinion seems well-reasoned; no quarrel there. Noreen’s lawyer did what he or she could; that language is almost identical to what I and many other lawyers would use. As harsh as it sounds, the problem here seems to be Noreen herself. Either out of trust, negligence, or exhaustion, she let this go by and didn’t insist that Ted comply with the divorce decree by providing proof of continuing insurance coverage. Some might say that Noreen’s lawyer should have been more aggressive in forcing her to deal with it, but I can tell you from my experience that lawyers like to be compensated for their time, and clients in general have NO interest in compensating divorce lawyers for their time after the divorce is finished for issues about which the client has not already expressed concern.

Noreens of the world take note: as the Kingston Trio said in their hit song about the Boston Metropolitan Transit Authority, “this could happen to you.”