Failure to Comply With a Court Order to Maintain Insurance
Quite often, spouses fail to comply with court orders or agreements concerning the maintenance of life insurance. The failure can take a number of forms: canceling the life insurance in existence at the time of divorce, substituting another policy, or changing beneficiaries on an existing policy. When the policies in existence at the time of death differ from those in existence at the time of the decree, provided nothing in the decree or support agreement provides to the contrary, most courts have concluded that the spouse or child who was designated the beneficiary in the decree or agreement is entitled to recover the proceeds in a replacement policy.
For example, in Pernick v. Brandt, 201 Mich. App. 293, 506 N.W.2d 243 (1993), a divorce decree obligated the husband to maintain $50,000 in life insurance and to name his wife the beneficiary of the policy. At the time of the divorce, the husband did not own any life insurance. The husband initially complied with the decree by obtaining a $50,000 policy. Two years later he canceled the policy. The following year he purchased a $100,000 policy and named his new wife as the beneficiary. The court agreed that the first wife could claim an equitable interest in the after-acquired policy, although the court remanded the claim to determine if the second wife had a superior equitable interest in the proceeds. But see Greenberg v. Greenberg, 264 Cal. App. 2d 896, 71 Cal. Rptr. 38 (1968) (second wife given status of bona fide purchaser of replacement policy where she had no knowledge of insurance mandate in divorce decree and had paid all premiums in exchange for having her and son named as beneficiaries).
In SMA Life Assurance Co. v. Piller, 846 F.2d 916 (3d Cir. 1988), the court entered an order during the pendency of the divorce action that obligated the husband to designate his children as the beneficiaries of all current life insurance policies. After that initial order was entered, the husband obtained another policy and designated his girlfriend as the beneficiary, without notifying the court of his actions. Without objection by the husband, the court entered the final decree of divorce that obligated the husband to maintain the children as beneficiaries on all present policies. Id. at 919. The court concluded that despite the fact that the after-acquired policy was not in existence at the time the initial order was entered, it was a presently owned policy at the time the final decree was entered, thereby creating a vested right in the children to the proceeds. But see Rau v. Rau, 429 So. 2d 593 (Ala. Civ. App. 1982) (court refused to impose a constructive trust on the proceeds of a replacement policy since the new policy was not in existence at the time of the decree and there was no evidence to suggest that the replacement policy was intended to defraud the children or the court).
Usually, a former spouse learns of the insured’s failure to comply with a court order or agreement to maintain life insurance only after the insured’s death. If knowledge of a violation is acquired prior to death, the former spouse may seek compliance by use of the court’s contempt powers. Graham v. Graham, 481 So. 2d 903 (Ala. Civ. App. 1985); Chandler v. Ratcliffe, 248 Ga. 700, 285 S.E.2d 694 (1982). Once the insured has died, however, the usual remedy available to the former spouse or children is to seek to impose a constructive trust on the proceeds. The extent of the interest on which a trust may be imposed will depend on the extent of the obligation of the insured spouse.
When knowledge of the insured’s failure to comply comes after death, the usual remedy requested is the imposition of a constructive trust.
Complications may arise in imposing a constructive trust depending on the party holding the proceeds at the time of the equitable action. When the proceeds are still in the hands of the insurer, an interpleader action may be filed in which both claimants assert their various claims to the proceeds. More troubling is when the proceeds have already been tendered to the designated beneficiary and the former spouse or child of the insured attempts to recoup the funds. In Richetti v. Sanzo, Civil Action No. 11760, 1994.DE.9 (Del. Jan. 5, 1994), the court permitted the imposition of a constructive trust on the proceeds of several insurance policies paid to the decedent’s second wife. The divorce decree with his first wife obligated the husband to name his first wife as the beneficiary of a $15,000 life insurance policy. One year after the divorce, the husband removed the first wife as the beneficiary and named his two minor sons as the beneficiaries of the policy. During this time, he continually reassured his former wife that she was properly designated as the recipient of the policy. The husband then remarried and acquired several other policies naming his second wife as the beneficiary. Upon the husband’s death, the court concluded that it was proper to impose a constructive trust on the proceeds of the policies acquired after the divorce which named the second wife as the beneficiary. The court concluded that it would be inequitable to allow the second wife to retain property at the expense of the first wife.
Resources & Tools
COBRA -- COBRA, which is the Consolidated Omnibus Budget Reconciliation Act, guarantees that all individuals who are covered by medical insurance have the right to continue coverage for a monthly fee if employment or marital status changes. A nonemployee spouse in a terminated marriage is entitled to COBRA coverage at his or her own cost for up to thirty-six months.
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