Ex-Wife gets Husband’s Employer-Based Life Insurance Benefit after Divorce

by Brian Vertz on September 21, 2009

Note: this decision was originally published on April 17, 2009, reaching a different result. It was re-argued en banc, and the final decision issued on August 21, 2009.

If you haven’t read the Pennsylvania Superior Court’s recent decision en banc in Estate of Sauers (2009), start with the dissenting opinion. The facts were simple: the husband did not change the beneficiary of his employer-based life insurance policy after his divorce. He died. The plan administrator honored the beneficiary designation and paid the $40,000 in life insurance benefit to the ex-wife. The husband’s estate sued the ex-wife to recover the proceeds under § 6111.2 of the Probate Estates and Fiduciaries Code. That law says that a beneficiary designation in favor of an ex-spouse is automatically revoked upon divorce unless the designation was clearly intended to survive the divorce. The ex-wife tried to dismiss the estate’s lawsuit against her but failed. When the trial court refused to dismiss the suit, the ex-wife took an appeal. The Superior Court initially reversed the trial court’s order, but after reargument en banc, affirmed the trial court’s order allowing the estate to seek recovery of the proceeds from the ex-wife.

In her dissenting opinion, Judge Mary Jane Bowes of the Superior Court dissected § 6111.2 to see whether it was pre-empted by ERISA, the federal law that governs employee benefits like pensions and life insurance. She identified three distinct clauses in the state law: (1) a redesignation clause (which revokes beneficiary designations); (2) a prior restraint clause (which protects the plan if it pays the ex-spouse); and (3) a remedy clause (which makes the ex-spouse liable to anyone who should have received the benefit). Judge Bowes concluded that the first and second clauses were pre-empted by federal law, but the third clause was not.

The majority held that state law was not pre-empted. Like the dissenter, the majority of the Superior Court cited Egelhoff (2001), a Washington Supreme Court decision holding that Washington’s redesignation statute was pre-empted by ERISA.

In this author’s opinion, the only material distinction between Egelhoff and this case was that the ex-wife in Egelhoff received a pension and life insurance proceeds. In Egelhoff, the Washington Supreme Court held that its redesignation statute conflicted with ERISA’s mandate requiring plans to make payments to beneficiaries “designated by a participant or by the terms of the plan.” Accordingly, the state law was pre-empted by federal law.

The majority in Sauers never really considered the redesignation clause in the first sentence of Pennsylvania’s statute. They skipped directly to the second sentence, which protects plans from liability if they pay the “wrong” person. The majority held: “Plan documents continue to control the administration, and the objective of a national uniform administrative format is maintained.” In other words, there is no conflict with federal law because plans cannot be penalized for paying the designated beneficiary contrary to state law. 

The majority acknowledged that a law which requires payment of benefits into court or to a person who is not the plan beneficiary would conflict with ERISA. Yet, the majority did not consider the first sentence of § 6111.2, which provides: “any designation in favor of his former spouse . . . shall become ineffective for all purposes….” Perhaps the majority overlooked this sentence because it did not contain the word “revoke.”

The majority compared § 6111.2 to the QDRO provisions of ERISA, which are an exception to the anti-alienation provisions of ERISA. Yet, a QDRO is authorized by federal law, not state law. The U.S. Supreme Court has not recognized an exception to ERISA that is based on state law.

The majority also noted that the Western District’s decision in Metropolitan Life v. Walsh (1995)(holding § 6111.2 was pre-empted by ERISA) was not precedential in state court. Yet, the majority made no attempt to distinguish Met Life or its rationale.

Curiously, the majority’s opinion began with the proposition that there are three forms of federal pre-emption. The majority correctly held that express pre-emption was an issue in this case, but never examined the other two forms of pre-emption. Having found that Pennsylvania’s law was not expressly pre-empted, the majority never considered whether it might be pre-empted under one of the two other branches.

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