By Pat Murphy
The Daily Record Newswire
It’s fair to assume Warren Hillman never intended that the proceeds of his federal employee life insurance policy would go to his ex-wife when he died unexpectedly in 2008.
But whatever Warren intended doesn’t matter. That’s because the U.S. Supreme Court has decided that the only thing that matters is that he did not change his beneficiary designation after his 1998 divorce.
A unanimous court decided June 3 that the Federal Employees’ Group Life Insurance Act (FEGLIA) preempts a Virginia law that would have allowed Hillman’s second wife, Jacqueline Hillman, to sue to recover life insurance proceeds paid to Warren’s ex-wife, Judy A. Maretta.
“In short, where a beneficiary has been duly named, the insurance proceeds she is owed under FEGLIA cannot be allocated to another person by operation of state law,” wrote Justice Sonia M. Sotomayor in Hillman v. Maretta.
The decision makes clear that employees must keep their beneficiary designations up to date, and lawyers who fail to advise clients accordingly could open themselves up to professional liability.
“Lawyers need to know that failure to tell your client to change beneficiary designations immediately may be a malpractice issue,” said Gregg Herman, a family lawyer at Loeb & Herman in Milwaukee.
One of Maretta’s lawyers, Steffen N. Johnson, called the decision a “resounding victory” for preemption and the rights of federal employees.
“Warren Hillman had 10 years after he made his beneficiary designation to change it if he had wanted to,” said Johnson, a partner at Winston & Strawn in Washington.
While Johnson argued the case before the U.S. Supreme Court, he credits his co-counsel, George O. Peterson, for laying the groundwork for the victory.
Both lawyers said that Hillman might be a good predictor for how the court will rule should it finally confront a similar preemption issue in an ERISA case.
FEGLIA is an $824 billion program that provides low-cost group life insurance to hundreds of thousands of federal employees.
The Act provides that an employee may designate a beneficiary to receive the proceeds of his life insurance at the time of his death.
The court’s decision in Hillman upholds a 2012 Virginia Supreme Court ruling that allowed Maretta to keep $125,000 in life insurance proceeds that she received as the designated beneficiary of Warren Hillman’s FEGLIA policy.
In 1996, Warren named Maretta his beneficiary around the time of their marriage. Warren and Maretta divorced in 1998.
Four years later, Warren married Jacqueline. Warren died unexpectedly in 2008, without removing Maretta as the named beneficiary of his life insurance policy. As a consequence, the policy’s administrator refused to pay the proceeds to Jacqueline, instead paying the $125,000 benefit to Maretta.
Jacqueline sued Maretta in state court, claiming she was entitled to recover the policy proceeds by operation of two state laws.
One Virginia statute automatically revokes a beneficiary designation in any contract that provides a death benefit to a former spouse when there has been a change in the decedent’s marital status. A second statute makes a former spouse personally liable for distributions when federal law preempts the automatic revocation of beneficiary designations. A Virginia state court applied the state law to find
Maretta liable to Jacqueline for the FEGLIA policy proceeds.
But the Virginia Supreme Court held that the state’s personal liability statute was preempted. And the U.S. Supreme Court agreed.
The high court said that giving effect to the Virginia law would frustrate the scheme created by Congress under FEGLIA, which gives highest priority to an insured’s designated beneficiary.
“It makes no difference whether state law requires the transfer of the proceeds … or creates a cause of action … that enables another person to receive the proceeds upon filing an action in state court,” Sotomayor wrote. “In either case, state law displaces the beneficiary selected by the insured in accordance with FEGLIA and places someone else in her stead.”
Estate planning attorney Daniel H. Ruttenberg, who represented Jacqueline, is concerned that the court’s ruling will lead to harsh results.
“The significance of this decision is that states are not going to be able to protect the interests of surviving spouses or children,” said Ruttenberg, of SmolenPlevy in Vienna, Va. “The life insurance proceeds are going to go strictly to the designated beneficiary.”
Ruttenberg said the court in Hillman failed to account for the real-life problems that the state law was intended to address.
“I see these mistakes all the time,” Ruttenberg said. “Generally, when people get through a divorce, they’re exhausted. A lot of times they don’t follow through by dotting the i’s and crossing the t’s. In cases such as this, there is no longer a remedy.”
But Johnson said that the Virginia law itself is based on a faulty assumption.
“The law just makes an across-the-board assumption that, if you get a divorce, you necessarily don’t want your life insurance benefits going to your ex-spouse,” said Johnson. “Many times you have children involved. The bottom line is that the federal law rests on the assumption that the designation of the employee is the paramount concern.”
Herman said Hillman is a common sense decision that places the onus of determining beneficiaries directly where it ought to be: on the individual federal employee.
“It’s so simple to change the beneficiary designation,” said Herman, who explained that as a matter of good practice he promptly informs his clients in writing of the need to immediately update beneficiary designations in the event of divorce.
Peterson, who practices at Peterson Saylor, PLC in Fairfax, Va., said that the U.S. Supreme Court felt compelled to hear his client’s case because federal and state courts have been divided on the issue of preemption under FEGLIA. He said 12 states have enacted laws similar to the Virginia laws at issue in Hillman, including Massachusetts, Michigan and Wisconsin.
And while the Alabama Supreme Court reached the same conclusion as the Virginia Supreme Court, a number of other state courts have ruled that FEGLIA does not preempt the type of lawsuit brought by Jacqueline Hillman.
Herman said he was not surprised by the court’s ruling.
“The beneficiary designation is based on the federal law, so the state law cannot override federal law,” said Herman, who noted that, under Hillman, similar Wisconsin statutes are likewise preempted in FEGLIA cases.
“We have a statute that says beneficiaries are changed upon the entry of the divorce,” Herman said. “I’ve always told my clients not to rely on it.”
In addition to settling the preemption issue once and for all in the FEGLIA context, Peterson and Johnson agreed that the decision could be a good indicator of how the Supreme Court will rule if it eventually addresses a similar preemption issue under ERISA.
“There are definitely some similarities between the statutes,” Johnson said. “It also has implications for cases under the Federal Employees Health Benefits Act.”
Herman said he would bet the court would rule the same way in an ERISA case.
But Ruttenberg said it would be a mistake to read too much into the decision.
According to Ruttenberg, unlike FEGLIA, ERISA doesn’t have a statutory order of precedence for beneficiaries, instead generally requiring participants to comply with individual plan terms in making
beneficiary designations.
“I believe that the court, when it comes to ERISA, will allow states to supplement federal law,” Ruttenberg said.
Undaunted by such arguments, Peterson said he is currently working to obtain certiorari in a case that raises the issue of ERISA preemption left open by the court in its 2009 decision in Kennedy v. Plan Administer for DuPont Savings & Investment Plan (555 U.S. 285).
In that case, the court held that a waiver in a divorce decree was insufficient to divest an ex-spouse of an interest in a pension.
Regardless, the case teaches a clear lesson, according to Ruttenberg.
“If anything is to be learned from this case, it is to make sure that your estate plan is up to date, and that doesn’t just mean having a will done,” he said. “It means following through with all your beneficiary
designations.”
––––––––––––––––––––
Subscribe to the Legal News!
http://legalnews.com/Home/Subscription
Full access to public notices, articles, columns, archives, statistics, calendar and more
Day Pass Only $4.95!
One-County $80/year
Three-County & Full Pass also available
