How to Contest Life Insurance Beneficiary Designations

It is possible to contest the beneficiary of a life insurance policy after the death of the insured in a variety of situations.  Here are some ways in which a life insurance beneficiary can be challenged.

Grounds to Contest a Life Insurance Beneficiary Designation

1. Forgery.  This is the easiest and most straightforward way in which to contest the life insurance beneficiary designation.  If an unscrupulous family member, neighbor or caregiver obtains a form to change the beneficiary designation and simply forges the signature of the policy owner, the change is null and void – even after the life insurance death benefit is paid out.  Of course, the forgery has to be pretty blatant to be successful. We have seen numerous instances where potential litigants insist that a signature is a forgery, but where it is not obvious to us.
2.  Lack of Capacity.  In order to effectuate a change to a beneficiary designation on a life insurance policy, the owner of the life insurance policy must have the mental capacity to make the change.  If the owner of the policy did not have capacity, the change to the beneficiary designation can be undone.  Of course, a fairly high level of proof will be required.  It is difficult (although not impossible) to claim lack of capacity without a prior diagnosis of dementia or similar disease of the mind.
3. Undue Influence / Fraud / Trickery.  A change to the beneficiary designation can be undone if undue influence, fraud, or trickery can be established.  This is the category where we see the largest number of potential challenges to life insurance beneficiary changes.  In a typical case, the life insurance policy is left in equal shares to the owner’s children.  Due to the unscrupulous acts of one of the children, that child, through coercion, is able to force the owner to make a change.
4. Divorce.  Even if the beneficiary designation lists an ex spouse as the beneficiary, the laws of many states will treat the ex-spouse as having already passed away, nullifying the beneficiary designation in favor of the ex-spouse.  For example, Florida law, at Section 732.703, cancels many of the beneficiary designations on non probate assets such as life insurance that still name the ex-spouse as the beneficiary.
5. Slayer Statute. If the named beneficiary kills the insured person, the beneficiary is not entitled to receive the insurance death benefit.  For example, Florida law, at Section 732.802(3), provides as follows: “A named beneficiary of a bond, life insurance policy, or other contractual arrangement who unlawfully and intentionally kills the principal obligee or the person upon whose life the policy is issued is not entitled to any benefit under the bond, policy, or other contractual arrangement; and it becomes payable as though the killer had predeceased the decedent.”
6. Unjust Enrichment.  In rare situations, if someone pays of the premiums on the life insurance policy and is “supposed” to be the beneficiary of the policy but for some reason is not, the law of unjust enrichment can assign the death benefits to the person who paid for the policy.

Litigation of Life Insurance Beneficiary Designations

ERISA

The Employee Retirement Income Security Act of 1974 (ERISA) is a federal law that sets minimum standards for most voluntarily established retirement and health plans in private industry to provide protection for individuals in these plans.  Some private sector employers offer life insurance benefits to their employees, and the life insurance benefit may be governed by the ERISA rules.  An employee or beneficiary of an employee has the right to challenge how the employer is operating an ERISA governed plan, including a life insurance benefit.

Requirement of Administrative Appeal Process

One of the important rules of claiming benefits under an ERISA plan is to follow the rules set forth by the plan, so long as the rules are compliant with ERISA.  Under ERISA, a plan administrator is permitted to require claimants to go through administrative appeals prior to filing a lawsuit.  Failure to follow these rules can result in a lawsuit claiming the benefits to be dismissed on procedural grounds.  If your lawsuit is dismissed on procedural grounds, you lose the ability to challenge the denial of life insurance benefits under ERISA before your case even really starts.

In Orr v. Assurant Employee Benefits, 786 F.3d 596 (7^th Cir. 2015), the employee died, and his beneficiaries claimed life insurance benefits under a group life insurance plan governed by ERISA.  The benefits were originally denied under the terms of the plan, because the employee allegedly died in an accident while intoxicated.   The terms of the plan required two levels of administrative appeals.  The beneficiaries did not engage in both administrative remedies, and filed suit.  The administrator advised plaintiffs of the two required appeals, and specifically stated that the failure to complete both reviews could result in dismissal of a lawsuit.

The court first rejected plaintiffs’ argument that they had pursued two appeals, and concluded that they had not exhausted their administrative remedies. The court also found that exhaustion would not have been futile.

GENERALLY, A FAILURE TO EXHAUST ADMINISTRATIVE REMEDIES WILL BE EXCUSED IN FEW LIMITED CIRCUMSTANCES—WHEN RESORT TO ADMINISTRATIVE REMEDIES WOULD BE FUTILE, GALLEGOS V. MOUNT SINAI MED. CTR., 210 F.3D 803, 808 (7TH CIR. 2000), WHEN THE REMEDY PROVIDED IS INADEQUATE, ID., OR WHERE THERE IS A LACK OF ACCESS TO MEANINGFUL REVIEW PROCEDURES, SCHORSCH V. RELIANCE STANDARD LIFE INS. CO., 693 F.3D 734, 739 (7TH CIR. 2012). THE ORRS DO NOT CLAIM THAT FURTHER PURSUIT OF ADMINISTRATIVE REVIEW WOULD HAVE BEEN FUTILE, THAT THE ADMINISTRATIVE REMEDY SOUGHT IS INADEQUATE, OR THAT THEY WERE DENIED ACCESS TO MEANINGFUL REVIEW PROCEDURES.

The court also rejected plaintiffs’ “novel grounds” to excuse the exhaustion requirement. As the Court explained, where the appeal procedure is clearly spelled out, a misinterpretation of their obligations cannot excuse a failure to exhaust.  Unfortunately, the deceased’s beneficiaries were not give a full opportunity to challenge the denial of the life insurance benefit.  Had they been afforded the ability to mount a substantive challenge, the might have been able to receive the life insurance benefits.

Technical Defect

In Am Gen Life Ins Co v OHM, (11th Cir. 2023), 22-10220, the Decedent named his daughter as the 100% beneficiary of his life insurance policy initially, O.H.M.  The Decedent then divorced O.H.M.’s mother and married Lisa.  The Decedent attempted to change the beneficiary designation on the policy by naming Lisa as 75% primary beneficiary, and O.H.M. as 25% primary beneficiary.  He also listed O.H.M. and Lisa’s child from another relationship as “fifty percent contingent beneficiaries.”

The new primary beneficiaries were clear:  O.H.M. and Lisa, 75%/25%.  But the contingent beneficiaries were not clear, so the insurance company sent the Decedent a letter, as follows:

We are unable to complete your request until such time as the item(s) below have been resolved: • Separate parties should be assigned for primary and contingent beneficiary designations. • Please provide the relationship of the new contingent beneficiary [redacted] to the insured. Please complete, sign, and date the enclosed change form(s) and return it to our office.

As is often the case in these disputes, the Decedent did not respond and then died.  The insurance company took the position that the new beneficiary designation was rejected and the previous one should be followed, giving O.H.M. all of the death benefit.  Although the opinion does not explain Lisa’s argument, it was surely that, even though the contingent beneficiary portion of the new form may have been defective, the primary beneficiary portion was clear and compliant and should have been followed.

In rejecting Lisa’s position, the Court reasoned as follows:

Under Florida law, an insured’s right to change the beneficiary of a life insurance policy depends on the terms of the policy. McDaniel v. Liberty Nat’l Life Ins., 722 So.2d 865, 866 (Fla. Dist. Ct. App. 1998). The insured must strictly comply with the terms of the policy to effectuate a change in the beneficiary. Id. The doctrine of strict compliance exists to protect the insurer, and only the insurer may waive it. Miller v. Gulf Life Ins., 12 So.2d 127, 130 (Fla. 1942).

Lisa argues that the decedent’s 2009 beneficiary request controls because the decedent strictly complied with the terms of his policy governing changes of beneficiary. The relevant policy provision provided:

While this policy is in force the owner may change the beneficiary or ownership by written notice to us. When  we record the change, it will take effect as of the date the owner signed the notice, subject to any payment we make or other action we take before recording.

Florida law requires that we read the phrase “subject to any payment we make or other action we take before recording” “as creating some objectively reasonable standard.” See O’Brien, 44 So.3d at 1278-79 (interpreting the similar phrase “Your request must be in writing and in a form that meets our needs”). In other words, any such “other action” must be “objectively reasonable.” This reading allows the insurer to protect itself from liability when faced with a defective beneficiary request. Cf. id. (“If a policy holder submitted a beneficiary change form that named ‘John Smith of New York’ as a new beneficiary, it would not be feasible for [the insurer] to act on the request without additional identifying information.”). In such cases, strict compliance with the policy may require the insured to respond appropriately in curing any defects.

The insurer provided the decedent with written notice that identified (a) how the beneficiary request was defective and (b) how to resolve the defects. It even provided him with the necessary form along with instructions for filling it out. Because the decedent neither responded to the notice nor inquired as to the status of his filing in the ten years that followed, we conclude that the decedent did not strictly comply with the terms of the policy.

Unjust Enrichment

In Kowalski v. Jackson National, from the Southern District of Florida, the death benefit was directed in favor the person making the premium payments under an unjust enrichment theory, at the expense of the Estate.  The unjust enrichment theory can be the best way around technical defenses to the payment of the death benefit to the more deserving party.

[B]ecause the Estate was not a party to the contract at issue, equitable principles do not preclude Kowalski’s unjust enrichment claim against the Estate. Indeed, Wilson’s citation of United States Life Insurance Co. v. Logus Manufacturing Corp., 845 F. Supp. 2d 1303 (S.D. Fla. 2012), supports this result. Wilson cites Logus for the proposition that “equitable arguments” cannot “trump the express terms of the contract agreed to by the parties because to hold otherwise would rewrite the contract for the parties.” 845 F. Supp. 2d at 1315. As the Court has stated repeatedly, however, the Estate was not a party to the contract at issue in this case. Moreover, as discussed in Logus, the doctrine of strict compliance “exists to protect the insurance company.” Id. at 1314. Thus, the fact that this Court has previously found that Kowalski did not strictly comply with the policy’s terms for making herself the policy’s beneficiary does not preclude her equitable unjust enrichment claim against the Estate, a non-party to the contract.

STOLI

Stranger-originated life insurance (STOLI) is a scheme pursuant to which someone purchases life insurance on the life of another for whom the purchaser does not have an insurable interest on the life of the insured.  In a common variant of the scheme, a trust set up by the insured will purchase and own the insurance policy for a period of time, with the premiums paid by a third-party lender in the form of a secured loan.  After the passage of a few years, the policy will be sold to the lender in exchange for cancellation of the loan and a substantial payment to the person on whose life the insurance was taken out. 

Various STOLI schemes were widespread throughout the country during the 2000’s, and many states enacted legislation to outlaw the practice.  Florida in particular saw widespread STOLI plans being sold, often marketed through seminars to seniors looking to supplement their income.  

STOLI arrangements are illegal in most states, including Florida.  In a recent case of first impression from the Florida Supreme Court, the Court was required to address the illegality of STOLI, on the one hand, and the two-year life insurance incontestability limitation, on the other.

In Wells Fargo v. Pruco Life Insurance Company, (Fla. 2016), two policies were at issue, one insuring Mr. Berger, and the other Mrs. Guild.  Regarding the Berger policy, it was undisputed that the policy was issued pursuant to a STOLI arrangement.  As explained by the Court:

Throughout 2005 and 2006, Arlene and Richard Berger attended financial planning seminars at which they were told that they could obtain “free life insurance.” The Bergers talked with insurance salesman Stephen Brasner, who arranged for them to participate in his STOLI scheme by obtaining (1) financing for the payment of premiums from a third-party lender and (2) a fraudulent financial report listing Arlene Berger’s net worth as $15.9 million and her annual income as $245,000. Brasner then applied to Pruco for a $10 million insurance policy on the life of Arlene Berger, naming her husband Richard as beneficiary.

The policy premiums were financed by a third party lender.  At some point, the policy was put into a trust.  Two years and one month after the policy was purchased, the policy was tendered to the lender in exchange for a payment of $173,000 to Mr. Berger.  The policy was then sold to a client of Wells Fargo.

What Is An Insurable Interest?

Under Florida law, a person purchasing insurance on the life of another must have an insurance interest in the life of that person.  An insurance interest is defined to include” 

the interest of “[a]n individual . . . in the life, body, and health of another person to whom the individual is closely related by blood or by law and in whom the individual has a substantial interest engendered by love and affection.”  Fla. Stat. 627.404(2)(b)2.

The trial court below refused to dismiss the claim that the policy in question was an illegal STOLI policy:

Plaintiff’s allegations here, if proven, would show that there was an agreement prior to the issuance of the Berger Policy to assign the policy to an entity without an insurable interest in Ms. Berger’s life. Such facts would demonstrate that the Berger Policy was not procured in good faith, and that there was therefore no valid insurable interest.  Pruco Life Ins. Co. v. Brasner, 2011 U.S. Dist. LEXIS 1598 (S.D. Fla. Jan. 7, 2011).

How Long Does An Insurance Company Have To Contest The Issuance of A Life Insurance Policy?

Florida law provides that an insurance company has two years to contest the issuance of a life insurance policy, if the policy was obtained through a violation of the insurance contract or was otherwise illegal.  Florida Statute 627.455 provides:

Every insurance contract shall provide that the policy shall be incontestable  after it has been in force during the lifetime of the insured for a period of 2 years from its date of issue except for nonpayment of premiums and except, at the option of the insurer, as to provisions relative to benefits in event of disability and as to provisions which grant additional insurance specifically against death by accident or accidental means. 

Here, the policy was transferred just after the two year incontestability period (perhaps to avoid scrutiny by the insurance company during the two year period).  The Florida Supreme Court was tasked with determining whether a policy, illegal from inception, could nevertheless not be challenged where the challenge took place after the two-year window.

The Florida Supreme Court upheld the validity of the policy, reasoning:

While the Berger and Guild policies were procured in furtherance of STOLI schemes, the incontestability statute, section 627.455, by its plain language does not authorize a belated challenge to a policy, which has the required insurable interest as the result of a STOLI scheme.

The point of a STOLI scheme is for the insured to work with an investor to create the insurable interest necessary, hold the policy until the two-year contestability period expires, and then transfer the policy as permitted by section 627.422 to an investor who would not have had the insurable interest required to procure the policy in the first place. Thus, as a result of STOLI schemes, life insurance policies like the Berger and Guild policies, which at their inception named members of the insureds’ immediate family as beneficiaries, have the insurable interest required by section 627.404.

Accordingly, under the plain language of section 627.455, a policy that has the required insurable interest at its inception, even where that interest is created as the result of a STOLI scheme, is incontestable after two years.

FAQ

What if a life insurance beneficiary designation is left blank or not filled out?

If the life insurance beneficiary designation is left blank, the death benefit is paid pursuant to the life insurance contract.  The vast majority of life insurance contracts indicate that, if there is no beneficiary entered, the life insurance proceeds will be paid the decedent’s probate estate, and thus subject to the plan of distribution of the probate estate.  In other words, a will or the laws of intestacy will apply, and the probate court will order the distribution of the life insurance.

What if the named beneficiary of a life insurance policy is dead?

If the named beneficiary is dead, did the death occur before or after the death of the insured?  If the beneficiary died before the insured, the death benefit will be paid to a contingent (also known as secondary) beneficiary.  For examples, in a typical young family situation, the spouse is listed as the primary beneficiary, and the children are listed as the secondary beneficiaries.  If there is no secondary beneficiary, the death benefit is paid pursuant to the life insurance contract, which typically pays the death benefit to the decedent’s probate estate.

If the named beneficiary dies after the insured, but before the death benefit is paid, the named beneficiary will have already vested in the death benefit, and the death benefit will be paid to the estate of the named beneficiary.

What if the named beneficiary of a life insurance policy cannot be located?

If the named beneficiary is known to be an actual person and is believed to be alive, but just cannot be found, the insurance company will typically hold the death benefit proceeds until the named beneficiary appears.  In some situations, however, the named beneficiary might be a fictitious person, or could be ambiguous such that it is uncertain who the named beneficiary is.

In such a situation, the probate estate of the deceased or the life insurance company could file a lawsuit to ask the court to determine who the proper beneficiary is, or to ask the court to declare that there is no beneficiary named, in which case the life insurance proceeds would be paid to the probate estate of the deceased, normally.

What if the named beneficiary of a life insurance policy is a charity that does not exist?

Under a concept known as cy pres, a court in some states can substitute one charity in place of another.  The cy pres doctrine would require the probate court to find a charity as close as possible in mission and scope as the charity that no longer exists.  A common situation is where the insured, for example a resident of Las Vegas, names a charity, such as “Dog and Cat Rescue of Nevada,” where no such charity exists.  “Dog and Cat Rescue of Las Vegas” exists, as well as “Animal Rescue of Nevada.”

Typically, a court would determine who should receive the death benefit, after notice to all possible candidates and an opportunity to participate in the proceedings.  Helpful evidence could be, for example, that the decedent had made annual gifts to “Dog and Cat Rescue of Las Vegas,” or named “Dog and Cat Rescue of Las Vegas” in other testamentary documents, such as a will.  The probate court would ultimately determine the recipient of the life insurance.