The Substantial Compliance Test: What Happens When the Insured Meant to Change His or Her Beneficiary, But Did Not Follow the Life Insurance Policy’s Procedures

What happens in life insurance policy litigation when an insured intended to change the beneficiary of his or her policy from an ex-spouse to a current spouse, but did not correctly fill out and/or submit all the necessary paperwork before his or her death? Can the current spouse make a successful claim to the life insurance policy proceeds?  Or, can the ex-spouse prevail by arguing that the insured cannot change his or her beneficiary without following all of the life insurance policy’s procedures?

In the Sixth Circuit (the circuit which includes Tennessee), courts will usually recognize a change in beneficiary even when the insured did not “strictly comply” with all of the life insurance policy’s rules on how to designate a new beneficiary.  Still, courts will not award proceeds to a current spouse if he or she can do no more than show that the insured merely intended to designate a new beneficiary.  The general rule in the Sixth Circuit, and in Tennessee state courts, is that the insured must be in “substantial compliance” with the terms of the life insurance policy for the beneficiary change to be effective.

The courts in the Sixth Circuit have admitted that there is no easy definition for the term “substantial compliance.” Making matters even more confusing, courts in the Sixth Circuit usually, but not always, apply the substantial compliance test in examining an insured’s flawed beneficiary designation for life insurance policies governed by ERISA.  That complexity aside, this much is clear: If the intended beneficiary seeks to collect policy proceeds, he or she will have to establish that the insured completed several critical steps in designating a new beneficiary.

A helpful case to examine is Aetna Life Ins. Co. v. Weatherford (6th Cir. 1991).  In that case, the federal district court ruled that the insured’s widow was entitled to collect the proceeds to his policy because “he took affirmative steps during his life to change the beneficiary of his life insurance from his former wife to his current wife.”  According to the district court, this “sufficiently meets the substantial compliance test.”  The Sixth Circuit, however, overruled the lower court noting that it was clear that the insured “did not do all he could to comply with the provisions of the policy.”

Weatherford had plenty of facts for both parties to use to argue their points: The widow had been married to the insured for three years, and the ex-wife had been married to him for 28 years.  The insured completed and signed a form applicable to his employer’s other benefit plans, besides life insurance, showing that he wanted to change his beneficiary from his first wife to his second wife, but never submitted this form to his employer.  The form was discovered in his briefcase after his death.

The insured in the Weatherford case did sign one of his insurer’s forms indicating that he wanted to change his beneficiary; however, he failed to designate a beneficiary or to obtain a witness’s signature on the form he signed. Most importantly, he did not mail this paperwork to his insurer.  Moreover, the insured’s purported holographic will succinctly stated that his ex-wife had “received all she should ever receive.” Although the insured’s will apparently did not make any reference to his life insurance policy, it did state that the insured’s widow should receive “(e)verything else.”

In overruling the lower court and awarding the policy proceeds to the insured’s ex-wife, the court held that “a mere unexecuted intention on the part of an insured to change his beneficiary is not enough.”  Citing a similar case, the court stated that “the failure of the insured to send the form to the company has no reasonable explanation which would invoke the equitable powers of the court.”

Short of flawlessly executing all the paperwork and ensuring that it is provided to the appropriate entity, what is enough for the insured to be in substantial compliance with an insurer’s rules to effectuate a change in beneficiary?  Courts have found substantial compliance when the insured merely made technical errors in completing beneficiary change forms.  For instance, in Metropolitan Life Ins. Co. v. Boyd (W.D. Kentucky 2005),  the court found that the insured substantially complied with the relevant policy procedures when he entered the wrong social security number for the new beneficiary and had a typographical error in the percentage designated for that beneficiary.

In an ideal world, the insured would make no mistakes in completing a change of beneficiary form for a life insurance policy.  When mistakes do occur, it is not always clear whether the prior or intended beneficiary has a superior right to the policy’s proceeds.  If you have questions about whether you have beneficiary rights, consult with an experienced life insurance attorney.



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