The Supreme Court recently held that federal law pre-empts state law that attempts to reallocate proceeds accruing to the designated beneficiary of a federal life insurance policy. Hillman v. Maretta, 133 S. Ct. 1943 (2013) involved a dispute over proceeds between the named beneficiary of a Federal Employees’ Group Life Insurance (FEGLI) life insurance policy and the widow of the policy holder. FEGLI was enacted by Congress to provide low-cost group life insurance to Federal employees. Individuals enrolled in this program receive coverage through a contract between the program administrator and Metropolitan Life Insurance Company. FEGLI sets forth a specific “order of precedence” for the payment of insurance proceeds upon the death of a covered employee. Per this order of precedence, the proceeds accrue to the beneficiary or beneficiaries designated by the employee. If no beneficiary is designated, the proceeds accrue to the surviving spouse; absent a spouse, the proceeds accrue to the children and their descendants, and so on.
In 1996, a federal employee designated his then wife Judy Maretta as beneficiary of his FEGLI policy. In 1998, the employee and Maretta divorced. Four years after the divorce, the employee married Jacqueline Hillman. Hillman and the employee had been married for six years at the time of his death. At no point before the employee’s death, did he change the beneficiary designation of his FEGLI policy. Maretta then filed a claim for benefits under the policy and collected $124,558.03 in insurance proceeds. Hillman sued in Virginia Circuit Court.
In the lawsuit, Hillman sought relief under Section 20-111.1 of the Virginia Code. Section 20-111.1(A) purported to revoke the beneficiary designation in a life insurance contract in the event of divorce and Section 20-111.1(D) purported to make a former spouse “personally liable” for the insurance proceeds to the person who would have received them following the revocation of the beneficiary designation. Hillman claimed that Maretta was liable to her for the proceeds of her deceased husband’s life insurance policy. Maretta argued that Virginia law is pre-empted by federal law, which in effect allowed her to retain the insurance proceeds. In granting summary judgment to Hillman, Virginia Circuit Court found that Maretta was liable for the proceeds she collected under her ex-husband’s insurance policy. Virginia Supreme Court reversed and entered judgment for Maretta after finding that FEGLI mandated that insurance proceeds should be paid to the named beneficiary. In reversing the lower court, Virginia Supreme Court concluded that the relevant provisions of the Virginia Code are pre-empted by federal law.
The Supreme Court granted certiorari to resolve the issue of “whether FEGLI pre-empts a rule of state law that automatically assigns an interest in the proceeds of a FEGLI policy to a person other than the named beneficiary or grants that person a right to recover such proceeds.” In a rare 9-0 decision, the Court held that under conflict pre-emption principles, state law cannot allocate insurance proceeds to a third party where a beneficiary has been duly named in a FEGLI policy. Justice Sotomayor delivered the opinion of the Court; Justices Thomas and Alito filed concurring opinions.
In limiting its analysis to traditional conflict pre-emption principles, the Court stated that this case raised questions of whether Section 20-111.1(D) is an obstacle to the purposes and objectives of Congress. The Court first explained that the purpose of Congress in establishing a specific order of precedence under FEGLI was to ensure that a federal employee’s named beneficiary receives life insurance proceeds. In fact, Congress was clear in directing that the proceeds belong to the named beneficiary only. The Court then concluded that Section D interferes with Congress’s purpose because it directs that the proceeds belong to someone other than the named beneficiary and allows recovery by a third party.
The Court was not persuaded by the policy argument that many employees possibly neglect to update their beneficiary designations after a change in marital status, and therefore, the state legislature could have thought a default rule regarding insurance proceeds aligned better with a policy holder’s intentions. The Court stated that Congress had unmistakably refused to draw inferences about employees’ probable intentions. On the contrary, Congress established a “clear and predictable procedure” for the accrual of insurance proceeds and employees should be able to rely on this procedure that their chosen beneficiary will be able to receive and use these proceeds. Therefore, in affirming Virginia Supreme Court, the Court held that Section D of the Virginia Code is pre-empted by federal law.
While Hillman involved interpretation of FEGLI, there are valuable lessons to be learned from the Court’s holding in the context of ERISA. Section D of the Virginia Code was a rejoinder to Egelhoff v. Egelhoff, 532 U.S. 141 (2001), where the Court had held that ERISA expressly pre-empts a statute similar to Section 20-111.1(A). The Virginia legislature attempted to circumvent ERISA by creating a post-distribution cause of action under Section D in favor of a non-beneficiary. Because of the Court’s conclusion that Section D interferes with Congress’s purpose in enacting FEGLI, plan administrators and beneficiaries facing similar challenges in the context of ERISA could make successful arguments under the purposes and objectives principles of federal pre-emption law. In addition, the rationale behind the Court’s holding in Hillman can be used to rebut policy arguments in favor of post-distribution equitable remedies. The need for clear and predictable procedures for distribution of proceeds appears to trump the need to draw inferences as to possible intended beneficiaries.
