The U.S. Supreme Court, in an opinion delivered by Justice Sonia Sotomayor, unanimously held that states cannot override federal life insurance policy beneficiary designations. The case of Hillman v. Maretta1 centered on a Virginia statute that gives a federal employee’s widow or widower a cause of action against an ex-spouse who is the named beneficiary on the decedent’s life insurance policy. The Supreme Court decided that the Federal Employees’ Group Life Insurance Act of 1954 (FEGLIA)2 preempts the Virginia statute; therefore, named beneficiaries, including an ex-spouse in this case, take precedence over the equitable interests of the employee’s widow. The Virginia statute conflicts with Congress’ intent under FEGLIA to ensure that a duly named beneficiary receives insurance proceeds and to honor an employee’s beneficiary designations. Hillman v. Maretta illustrates the importance of keeping beneficiary designations current so that insurance proceeds go to the intended beneficiary.

FEGLIA established a life insurance program whereby a federal employee may designate one or more beneficiaries to receive insurance proceeds after his or her death.3 Through the U.S. Office of Personnel Management (OPM), federal employees entered into a life insurance contract with the Metropolitan Life Insurance Company for this coverage.4

FEGLIA established an order of payment for federal death benefits.5 First, life insurance benefits go to the beneficiary designated by the federal employee on a signed and witnessed document received by OPM before the employee’s death.6 A federal employee holds an absolute right to change a beneficiary at any time without consent or notification to prior beneficiaries.7 Second, if no designated beneficiary exists, benefits are paid to the widow or widower of the employee.8 Third, if no widow or widower exists, benefits are paid in the following order: 1) to the employee’s child or children and descendants of the employee’s deceased child or children; 2) to the employee’s parents or their survivors; 3) to the executor or administrator of the employee’s estate; and 4) to other next of kin.9

In 1998, Congress amended FEGLIA to create a limited exception to an employee’s unrestricted right of designation whereby if OPM receives a court decree of divorce, annulment, or legal separation, the court decree or related court order or agreement overrides the employee’s designation or statutory order of precedence.10 For this limited exception to be valid, however, OPM or the employing agency requires receipt of the court decree, order, or agreement prior to the insured employee’s death.11

FEGLIA expressly includes a preemption provision that states, “The provisions of any contract under [FEGLIA] which relate to the nature or extent of coverage or benefits (including payments with respect to benefits) shall supersede and preempt any law of any State … .”12

Virginia enacted a statute that conflicts with FEGLIA.13 The statute revokes the beneficial interest of an ex-spouse and gives the widow or widower the right to sue to recover against an ex-spouse who receives the decedent’s insurance proceeds under the federal statute. The federal courts held that FEGLIA preempts this Virginia statute granting the right to sue. Virginia courts, along with those in some other states, held that granting such a right is not preempted.

The Virginia statute (hereinafter “Virginia code”) makes the ex-spouse liable for the life insurance proceeds to the widow or widower (or whoever would have received such proceeds under the law were it not for the beneficiary designation).14 Section A of the code provides that a divorce or annulment “revokes” a “beneficiary designation contained in a then existing written contract owned by one party that provides for the payment of any death benefit to the other party.”15 Payment from a life insurance contract is considered a death benefit.16

Regarding any death benefit, the Virginia code makes a further provision if Section A of the code regarding the revocation of the beneficiary designation due to divorce or annulment is preempted by federal law. In this case, pursuant to Section D of the code, an ex-spouse who accrues a death benefit from a deceased ex-spouse is personally liable for the amount of the benefit to the person who would have been entitled to it were the Virginia statute not preempted by federal law.17

In 1996, when Warren Hillman married Judy Maretta, he named Maretta as the beneficiary under his Federal Employees’ Group Life Insurance (FEGLI) policy.18 Two years later, Hillman and Maretta divorced. In 1998, Hillman married Jacqueline.19 Ten years later, Warren Hillman died.20 Despite his divorce and subsequent remarriage, he never changed the designated beneficiary under his FEGLI policy from Maretta to his current wife, Jacqueline.21 After Warren Hillman’s death, Jacqueline Hillman filed a claim through OPM to obtain the proceeds from her husband’s life insurance policy. The FEGLI administrator informed her that Maretta was the named beneficiary under the policy; therefore, the life insurance proceeds would accrue to Maretta.22 Maretta then filed a claim with OPM and collected life insurance proceeds of nearly $125,000.23

Jacqueline Hillman sued in the Virginia Circuit Court claiming that Maretta was liable under Section D of the Virginia code for turning over the proceeds from Warren Hillman’s FEGLI policy. Although the parties agreed that FEGLIA preempts Section A of the Virginia code, Maretta argued that FEGLIA also preempts Section D; therefore, the life insurance proceeds were hers to keep. The Virginia Circuit Court disagreed with Maretta’s argument and granted summary judgment in favor of Jacqueline Hillman, stating that Maretta was liable to Jacqueline Hillman for the life insurance proceeds.

On Maretta’s appeal, the Virginia Supreme Court reversed the Virginia Circuit Court’s decision and entered judgment for Maretta.24 The Virginia Supreme Court held that Congress intended for a named FEGLI beneficiary to receive life insurance proceeds without the threat of having such proceeds subject to third-party recovery under state law.25

Several state courts, including those in Indiana, Mississippi, and Missouri, have held that FEGLIA does not preempt state equitable claims of nondesignated beneficiaries to receive the decedent’s life insurance benefits.26 Conversely, the First, Second, and Tenth Circuit Courts of Appeals27 agreed with the Virginia Circuit Court’s holding that FEGLIA does preempt any claims of nondesignated beneficiaries for the decedent’s life insurance proceeds. The U.S. Supreme Court granted certiorari to settle the conflicting sets of decisions and decide whether FEGLIA preempts a state law that automatically assigns an interest in insurance proceeds to an individual other than the named beneficiary of a FEGLI policy or grants such individual a right to recover such proceeds against the named beneficiary.28

Congress has express power to preempt state law under the Supremacy Clause of the U.S. Constitution.29 Federal law generally preempts state law to the extent a conflict occurs when the objectives of both the federal law and the state law cannot be achieved.30 The Supreme Court noted that there is a presumption against federal preemption of state laws governing domestic relations issues, unless these state laws conflict with federal law.31

The Supreme Court relied on two previous cases concerning the interplay between federal insurance statutes requiring the distribution of policy proceeds to a named beneficiary and state laws compelling a different distribution of proceeds. The case of Wissner v. Wissner32 addressed whether the National Service Life Insurance Act of 1940 (NSLIA)33 preempted California marital property law. Congress enacted NSLIA to provide a “uniform and comprehensive system of life insurance for members and veterans of the armed forces of the United States.”34 The California court granted a decedent’s insurance proceeds to his widow as community property under state law, even though the decedent’s mother was the named beneficiary. The U.S. Supreme Court reversed on the grounds that NSLIA preempted the widow from recovering the life insurance proceeds.35 The Supreme Court reasoned that NSLIA explicitly stated that the insured individual had the right to designate a beneficiary or beneficiaries of the insurance proceeds and had the right to change such beneficiary or beneficiaries.36 The Supreme Court further reasoned that since Congress was clear in specifying that insurance proceeds go to the named beneficiary and no one else, the California court erred in giving such proceeds to the widow rather than decedent’s mother, who was the named beneficiary.37

The second case the Supreme Court relied on was Ridgway v. Ridgway,38 which dealt with the conflict between the federal Servicemen’s Group Life Insurance Act of 1965 (SGLIA)39 and a Maine court’s decision imposing a constructive trust on insurance proceeds paid to a service member’s widow.40 The widow was the named beneficiary on the policy, but the Maine court ordered the proceeds to be paid to the decedent’s first wife as specified in the divorce decree.41 The Supreme Court in Ridgway relied on the Wissner decision in stating that SGLIA preempted the constructive trust imposed by the Maine court.42 The Court held that SGLIA gave the insured service member the right to name a beneficiary and to change a beneficiary at any time by communicating such change in writing to the proper office.43 It also held that Congress made an unqualified directive that benefits be paid to the properly designated beneficiary.44

In Hillman, the Supreme Court decided that FEGLIA is similar to NSLIA and SGLIA.45 The Court held that FEGLIA specifically gives highest priority to the designated beneficiary of the insured.46 In addition, the Court held that, similar to SGLIA, FEGLIA requires insurance proceeds to be paid to the designated beneficiary before any other potential recipient.47 Based on this clear order of priority, the Supreme Court held, Congress was explicit that insurance “proceeds belong to no one other than the named beneficiary.”48

The Supreme Court’s interpretation of the significance of the beneficiary designation in FEGLIA led to the holding that Section D of the Virginia code interferes with Congress’ priorities by creating a cause of action for a third-party recovery of insurance proceeds.49 The Court held that, in essence, the Virginia statute implies that proceeds could belong to someone other than the named beneficiary.50 Allowing a third-party claim against the named beneficiary, the Court held, thwarts Congress’ guarantee that a named beneficiary actually receive the proceeds.51

The Supreme Court recognized that the failure of many federal employees to change their beneficiary designations after a change in marital status is a reasonable basis for a different policy.52 The Supreme Court noted that most individuals prefer to provide insurance proceeds to a widow or widower rather than a named beneficiary on an old insurance contract.53 Finally, the Court held that a conflict between a beneficiary designation in a FEGLI contract that predates a designation in a more recent contract also argues in favor of having an alternative policy.54

Nevertheless, the Supreme Court unanimously held that Congress established a clear and predictable procedure by respecting a federal employee’s right to designate a beneficiary rather than allowing state courts and survivors to draw inferences about the employee’s intent.55 The Supreme Court noted that the federal employee had freedom of choice in selecting a beneficiary and that such designation will be honored.56 FEGLIA explicitly provides that any proceeds that would be paid to a designated beneficiary under the normal order of precedence could be paid to another person based on the terms of a court order or decree of divorce, annulment, or legal separation.57 However, this change in precedence would only apply if such court order or decree were received by the employing agency before the employee’s death.58

Interestingly, the Uniform Probate Code (UPC), which has been adopted in its entirety by 16 states, explicitly addresses the revocation of probate and nonprobate transfers by divorce.59 In particular relevance to the Hillman case, when the UPC or any section of the UPC is preempted by federal law with respect to proceeds or other benefits bestowed upon an ex-spouse, the ex-spouse is obligated to return the proceeds or other benefits received or is personally liable for these to the person who would have been entitled to them were the UPC or any section of the UPC not preempted.60

The holding in the Hillman case directly contradicts, and thus preempts, § 2-804(h)(2) of the current amended version of the UPC; therefore, the ex-spouse is neither obligated to return any proceeds or other benefits received nor personally liable to the widow or widower for them.

Conclusion
Hillman v. Maretta illustrates the importance of keeping beneficiary forms and designations up to date. When certain life events occur, such as marriage, divorce, death of a spouse, or birth of a child, it is crucial that your clients file amended forms that spell out clearly who they want as their designated beneficiary or beneficiaries. Your clients’ loved ones may be saved from the unfortunate fate of losing insurance proceeds if an insurance policy is purchased individually or through a private employer rather than through a government program. Even so, this case highlights the pitfalls of leaving this matter to chance. Even if states have laws meant to protect against an insured’s failure to designate a beneficiary, those laws are subject to preemption by federal law and proceeds could end up in the hands of an unintended beneficiary. 

Citations
1 133 S. Ct. 1943 (2013).

2 5 U.S.C. § 8701 et seq. (2015).

3 5 U.S.C. § 8705(a).

4 5 U.S.C. § 8709.

5 5 U.S.C. § 8705(a).

6 Id.

7 5 C.F.R. § 870.802(f) (2015).

8 5 U.S.C. § 8705(a).

9 Id.

10 5 U.S.C. § 8705(e)(1)(2).

11 Id.

12 5 U.S.C. 8709(d)(1).

13 Va. Code Ann. § 20-111.1(D) (West 2012).

14 Id.

15 Va. Code Ann. § 20-111.1(A).

16 Va. Code Ann. § 20-111.1(B).

17 Va. Code Ann. § 20-111.1(D).

18 Hillman, 133 S. Ct. at 1949.

19 Id.

20 Id.

21 Id.

22 Id.

23 Id.

24 Hillman v. Maretta, 83 Va. 34, 46, 722 S.E.2d 32, 38 (2012).

25 Hillman, 83 Va. at 44–46, 722 S.E.2d at 36–38.

26 See Hardy v. Hardy, 963 N.E.2d 470 (Ind. 2012); McCord v. Spradling, 830 So. 2d 1188 (Miss. 2002); Kidd v. Pritzel, 821 S.W.2d (Mo. App. 1991).

27 See Metropolitan Life Ins. Co. v. Zaldivar, 413 F.3d 119 (1st Cir. 2005); Metropolitan Life Ins. Co. v. Sullivan, 96 F.3d 18 (2d Cir. 1996); Metropolitan Life Ins. Co. v. McMorris, 786 F.2d 379 (10th Cir. 1986).

28 Hillman, 133 S. Ct. at 1949.

29 U.S. Const. art. VI, cl. 2.

30 Hillman, 133 S. Ct. at 1950.

31 Id.

32 338 U.S. 655, 70 S. Ct. 398 (1950).

33 38 U.S.C. § 701 et seq. (2015).

34 Wissner, 338 U.S. at 658.

35 Id.

36 Id.

37 Id. at 659.

38 454 U.S. 46, 102 S. Ct. 49 (1981).

39 38 U.S.C. § 1965 et seq. (2015).

40 Ridgway, 454 U.S. at 52, 102 S. Ct. at 49-50.

41 Id.

42 Id. at 55.

43 Id. at 56.

44 Id. at 57.

45 133 S. Ct. at 1951.

46 Id.

47 Id.

48 Id. at 1952 (emphasis added).

49 Id.

50 Id.

51 Id.

52 Id.

53 Id.

54 Id.

55 Id.

56 Id.

57 5 U.S.C. § 8705(e)(1).

58 5 U.S.C. § 8705(e)(2).

59 Unif. Prob. Code § 2-804 (2010).

60 Unif. Prob. Code § 2-804(h)(2).