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.

Here is an interesting issue, not yet resolved by the Pennsylvania courts: whether the proceeds of a life insurance death benefit may be counted as a marital asset. Here’s the story:

Let’s say that husband and wife are separated, and one of them dies. If the grounds for divorce existed prior to the death (i.e., both spouses filed their affidavits of consent, or they were separated two years prior to the death), the divorce action does not abate. The deceased spouse’s estate becomes a party to the divorce action, which must go on to its conclusion. If the deceased spouse was insured under a life insurance policy (let’s say a whole life or universal policy, which has cash value), then someone is going to receive a death benefit.

Perhaps the surviving spouse was named as the death beneficiary before the spouses were separated. The divorce court might have even entered an order compelling the now-deceased spouse to name the surviving spouse as the beneficiary under the life insurance policy. (We will discuss the other possibility – that the deceased spouse named someone other than the surviving spouse as beneficiary – another time.) 

The death benefit of a life insurance policy is usually greater than its cash value. (For a whole life or universal life policy, the cash value is equal to the excess premiums that were paid over the cost of term insurance; the excess premiums accumulate, and the insurance company invests them for the benefit of the policy owner.)  In a divorce case where whole or universal life insurance is a marital asset, the asset value is generally equal to the cash value less any policy loans. But now that a spouse is dead, there is no cash value. There is only the proceeds of the life insurance death benefit, which likely exceed the cash value. Is the death benefit a marital asset?

It might depend on what our law means by the word “acquired.” You see, property acquired prior to separation is marital property unless it falls into one of the statutory exclusions. The policy itself was acquired during the marriage, but the death benefit was not acquired until after separation (which would make it separate property). In the case of a personal injury settlement or verdict, our law says that the property is “acquired” when the settlement agreement is signed or the judge enters the verdict, even if the injury occurred prior to separation. The post-separation settlement or verdict does not “relate back” to the pre-separation injury under our law, so it is not marital property.

But there is a problem. If we treat life insurance proceeds like personal injury settlements, then a marital asset (the cash value) has disappeared and there is no marital asset to replace it.

Property which is received in exchange for marital property is, generally, marital property. For instance, if a divorcing couple owns a bank account, and after separation, someone withdraws money to buy a TV, the TV is marital property. So a life insurance policy could be viewed as a lottery ticket that was purchased prior to separation, and its proceeds would be deemed to be property received in exchange for marital property, which is still marital property.

What if the deceased spouse named someone other than the surviving spouse as a beneficiary? The analysis becomes even more troublesome, because now we have to balance the interests of the surviving spouse against the interests of a third party. If we decide that the life insurance proceeds are entirely non-marital, then the marital estate may be diminished. But if we decide the proceeds are marital, a third party’s property rights are impaired. As I mentioned, the courts have not yet resolved this matter.