TORT TRIAL AND INSURANCE PRACTICE: Life Insurance Benefits after Divorce

Vol. 30 No. 6

By

Joan O. Vorster (jvorster@mirickoconnell.com) is a partner with Mirick, O’Connell, DeMallie & Lougee, LLP, in Worcester, Massachusetts. Courtney Cruz (ccruz@mirickoconnell.com) is an associate with Mirick O’Connell.

In a situation where a deceased’s widow and ex-spouse both claim entitlement to life insurance provided pursuant to an employee welfare benefit plan governed by the Employee Retirement Income Security Act (ERISA), a qualified domestic relations order (QDRO) is the key to determining the rightful beneficiary.

For example, Husband divorces Wife, and their divorce decree states that Husband’s life insurance coverage from the group policy provided by his employer shall be maintained for “Wife.” Husband marries Second Wife and changes the beneficiary form to name “Second Wife” as the beneficiary of his life insurance. Husband dies, and Wife and Second Wife claim to be the appropriate beneficiary. If the divorce decree is a QDRO, Wife will receive the benefit; if the decree is not a QDRO, Second Wife will receive the benefit.

DRO vs. QDRO. A domestic relations order (DRO) is defined as “any judgment, decree, or order (including approval of a property settlement agreement) which (I) relates to the provision of child support, alimony payments, or marital property rights to a spouse, former spouse, child, or other dependent of a participant, and (II) is made pursuant to a State domestic relations law.” 29 U.S.C. 1056(d)(3)(B)(ii). A state authority, generally a court, must issue a judgment, order, or decree to formally approve a property settlement agreement before it can be a DRO under ERISA. A property settlement simply agreed to and signed by the parties is not a DRO.

A QDRO creates or recognizes the existence of an alternate payee’s right to receive, or assigns to an alternate payee the right to receive, all or a part of a participant’s benefits. Only a spouse, former spouse, child, or other dependent of a participant can be an alternate payee. In order to be deemed “qualified,” a DRO must clearly specify (1) the name and last known mailing address of the participant and the name and mailing address of each alternate payee covered by the order; (2) the amount or percentage of the participant’s benefits to be paid by the plan to each 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. A QDRO may be included as part of a divorce decree or court-approved property settlement or issued as a separate judgment, decree, or order without affecting its qualified status.

Under ERISA, a QDRO also may not require a plan to provide: (1) any type of benefit or option not provided under the plan, (2) increased benefits, or (3) payment of benefits to an alternate payee required to be paid to another alternate payee under a previous QDRO.

Beneficiary determinations. ERISA contains an anti-alienation provision, which does not apply if a DRO is determined to be a QDRO. Under this limited exception, a participant’s benefits under a pension plan may be assigned to an alternate payee pursuant to a QDRO.

A good example of the analysis undertaken to determine if a DRO is a QDRO is set forth in Metropolitan Life Insurance Co. v. Drainville, No. 07-427ML, 2009 WL 2208111 (D.R.I. July 23, 2009), where the court found that the divorce settlement agreement and decree constituted a valid QDRO and qualified as an exception to ERISA’s general prohibition against assignment or alienation of an employee benefit plan. In Drainville, the marital settlement agreement made the couple’s two children equal beneficiaries of their respective life insurance policies. The husband remarried, and he executed a beneficiary form designating the second wife as the primary beneficiary of this policy and the two children as the alternate beneficiaries. After he died, his widow filed a claim for the policy proceeds. The insurance company filed an interpleader action.

The court examined the factors outlined in 29 U.S.C. 1056(d)(3)(C). First, the DRO included the names of the participants but not their mailing addresses. Because the children were minors at the time of the settlement agreement, the court determined that the lack of a mailing address was not fatal to the qualification of the order. Next, the order specified that the children would remain the primary beneficiaries under the life insurance policy “in equal shares.” The court found that the provision designating the division of policy proceeds was unambiguous and met the requirements of the statute. The agreement also referenced the couple’s two children and provided that the parties would continue to maintain the life insurance coverage as specified until the youngest child’s 22nd birthday. As such, the period to which the order applied was definite. Finally, the order clearly specified each plan to which the order applies. The agreement referred to “each party’s life insurance which is currently provided through each party’s employment by New England Telephone Company” and specified the face amount of coverage. The court determined that the agreement was sufficiently specific and met all the requirements of the statute to constitute a QDRO.

Interpleader. Generally, if a plan fiduciary treats an order as a QDRO and distributes the benefits in accordance with that order, the obligations of the plan and its fiduciaries to the affected participants and alternate payees with respect to the distribution will be treated as discharged. However, if it is not clear that the DRO is a QDRO, and the parties to the competing claims cannot agree on distribution of the benefits, then the plan fiduciary should consider interpleader.

The primary test for determining the propriety of an interpleader complaint and discharging the stakeholder is whether the stakeholder legitimately fears multiple liability directed against a single fund. To properly invoke interpleader jurisdiction, there must exist a limited fund or some specific identifiable property as to which the claimants and stakeholder need the protection of one lawsuit.

An interpleader action may be brought in federal court pursuant to two different, yet overlapping, procedures. “Statutory interpleader” is governed by 28 U.S.C. 1335, 1397, and 2361. “Rule interpleader” is governed by Federal Rule of Civil Procedure 22.

Numerous courts have approved the use of interpleader in cases involving competing claims of entitlement to ERISA benefits. Although interpleader is a viable option when there is a legitimate question as to which party is the rightful beneficiary to a life insurance policy, some courts have expressed the expectation that the plan fiduciary attempt to make a beneficiary determination before resorting to interpleader.

In addition, if the plan documents give the plan fiduciary the authority to determine the rightful beneficiary if one has not been designated, some courts have held that the plan fiduciary should make a determination of the rightful beneficiary before resorting to interpleader. The court will then review the plan fiduciary’s decision to determine if it was an abuse of discretion.

Declaratory judgment actions. A widow, ex-spouse, beneficiary, or plan fiduciary may also file an action for declaratory judgment to establish the proper beneficiary of a life insurance policy provided as an employee welfare benefit plan. In Metropolitan Life Insurance Co. v. Leich-Brannan, 812 F. Supp. 2d 729 (E.D. Va. 2011), MetLife filed an action seeking a declaratory judgment as to the proper beneficiary when, after having paid benefits to the widow and two children, MetLife received a letter from the former spouse claiming that she was the proper beneficiary. The court noted that “declaratory judgment actions are numbingly common vehicles to resolve insurance disputes.”

ABA TORT TRIAL AND INSURANCE PRACTICE SECTION

This article is an abridged and edited version of one that originally appeared on page 48 of The Brief, Summer 2013 (42:4).

For more information or to obtain a copy of the periodical in which the full article appears, please call the ABA Service Center at 800/285-2221.

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