Life Insurance Beneficiary Disputes
Many of the life insurance cases we handle involve disputes regarding who should receive the benefits.
Beneficiary disputes can be complex. In order to understand how these disputes work, it’s important to understand how a beneficiary is designated, what can lead to a dispute, and how designations can be challenged.
How beneficiaries are designated
Life insurance is considered a “non-testamentary asset”, because the proceeds are not controlled by a will.
Instead, the life insurance policy is a contract between the person who purchases the policy and the insurance company. Unlike most insurance, the policy isn’t for the person who purchases it - it’s for the benefit of a third party, like a spouse or child.
Who receives the policy benefits isn’t determined by a will. The owner of the policy names who will benefit from the policy, which is usually defined in the insurance contract - not a will. The person named (or designated) in the policy is called the beneficiary. This beneficiary will receive the life insurance payout upon the insured's death.
However, a designation may fail or be successfully challenged for various reasons.
Why designations fail
A policy holder will get divorced but forget to change the policy designation from the prior spouse.
It can be proven that the benefits were promised or pledged to someone other than the named beneficiary or the insured made efforts to change the designation.
The named beneficiary may have done something to prevent their recovery of the policy proceeds.
The insured will attempt to change a designation, but fails to do so in the manner prescribed by the insurance company. The insurance company may reject the effort and ask the insured to make the designation on the form and in the manner required by the company.
Under Texas law, a beneficiary designation is effective if it is in “substantial compliance” with the insurance company’s procedure, which has been defined as the insured’s doing all that he could reasonably have done to effect a change.
Federal courts apply a similar standard in ERISA cases.
In disputed cases, the insurance company will often seek a ruling from a court to determine the rightful beneficiary.
Beneficiary designations can be challenged on the basis that the insured either lacked the mental capacity to make the designation or was unduly influenced to do so. The evidence necessary to prove such claims is very similar to that in a traditional will contest.
A key issue to determine is whether Texas or federal law applies to the controversy.
Most policies are purchased by individuals through an agent, but many are purchased through an employer with group coverage.
Federal law, through ERISA, will often apply if the policy was purchased through an employer. In such cases, you need an attorney experienced in handling ERISA cases.
We have handled beneficiary disputes pertaining to individually purchased policies, ERISA group policies, SGLI military policies, and FEGLI federal employee policies.
An insurance policy is considered a contract and not a testamentary instrument. However, the analysis of mental capacity is similar. Thus, the legal standards for determining the existence of mental capacity for the purposes of executing a will or deed are substantially the same as the mental capacity for executing a contract.
Sufficient mental capacity to contract in Texas involves showing that the contracting party appreciated the effect of what they were doing and understood the nature and consequences of their acts and the business they were transacting. Mental capacity, or lack thereof, may be shown by circumstantial evidence, including: (1) a person's outward conduct, “manifesting an inward and causing condition;” (2) any pre-existing external circumstances tending to produce a special mental condition; and (3) the prior or subsequent existence of a mental condition from which a person's mental capacity (or incapacity) at the time in question may be inferred. As a general rule, the question of whether a person, at the time of contracting, knows or understands the nature and consequences of their actions is a question of fact.
Undue influence is typically proven with circumstantial evidence. When identifying undue influence, Texas courts consider various factors, including: 1) the nature of the relationship between the victim, the contestant, and the alleged influencer; 2) whether the alleged influencer had the opportunity to exert influence; 3) the circumstances surrounding the drafting and execution of the document; 4) whether the alleged influencer had a fraudulent motive; and 5) whether there had been habitual subjection of the victim to the control of another.
Undue influence and lack of capacity are separate theories for overturning a beneficiary designation. However, weakness of mind and body is considered a material factor in determining whether a person was in a condition to be susceptible to undue influence.
Undue influence claims may be difficult to defend in beneficiary designation disputes. Unlike with a will, there are typically no particular formalities required for a beneficiary designation. There may not even be an actual signature, with many larger insurance companies moving toward online designations. With an online designation, it is very possible a family member, trusted friend, or housekeeper could have access to the insured’s password and make an online designation without the insured’s consent or even knowledge.
Federal courts will typically borrow from the law of forum state to evaluate undue influence and capacity claims.
It’s important to take action now
Sometimes a beneficiary dispute can be resolved before it heads to court. If you are involved in such a dispute, please contact Texas Life Insurance Lawyers as soon as possible.
Consultations are free and confidential.
This article was written by Texas Life Insurance Lawyer J. Michael Young.
Mr. Young is a recognized authority in handling life insurance disputes.
You can read more about this topic in an article he has published on the Dallas Bar Association website: Recognizing Life Insurance Beneficiary Disputes.