When I was a child, my mother constantly reminded me of the so-called “5 P’s”: Prior Preparation Prevents Poor Performance. In other words, if you do your homework or practice ahead of time, you’re going to perform much better than if you just try to wing it. I certainly put that theory to the test several times on exams and quickly learned that Mom was 100% right (as with most things…)
A recent case not only demonstrates the 5 P’s in action, but illustrates them in the context of the frequent intersection of employee benefits and family law. In UNUM Life Ins. Co. of Am. v. Brookshire, 2015 U.S. Dist. LEXIS 175403 (D.S.C. 2015), the United States District Court for the District of South Carolina considered a case where UNUM, the insurer of a life insurance plan sponsored by an employer, filed an “interpleader” action against the potential claimants to the life insurance proceeds. An interpleader action is where a party knows that it owes money or property to someone, but isn’t sure who. To prevent having inconsistent court results, the owner of the money/property will file an interpleader action against all the claimants to bring them together in one court setting, deposit the money/property in court, and let the claimants fight it out.
This is exactly what happened in Brookshire. UNUM deposited the life insurance proceeds at stake ($165,000) into the court and filed suit against the deceased’s girlfriend, ex-wife, minor child, and brother, all of whom claimed they were entitled to some portion of the insurance proceeds. Interpleader actions typically proceed in two phases: in the first phase, the court determines whether the interpleader is the correct way to resolve the dispute. In the second phase, the court determines which of the claimants to the money/property is actually entitled to it.
The court first held that the interpleader action was the correct way to resolve the dispute over who owned the life insurance proceeds. The court noted that the decedent had filled out a beneficiary designation form stating that his current girlfriend should be entitled to 50% of the life insurance proceeds, with his brother and minor son entitled to 25% each. However, the decedent’s ex-wife submitted a divorce decree stating that the decedent was to maintain his workplace life insurance policy with the ex-wife as sole beneficiary.
The court determined that under the circumstances because there were multiple claimants for the insurance proceeds and it did not appear UNUM had any other liability to any defendant, interpleader was proper. The court also awarded UNUM $2,464 in costs and attorney’s fees. While the court gave all the claimants the chance to object or otherwise respond to UNUM’s request for attorneys’ fees and costs, no claimant provided a full response, citing legal authority or making other arguments as to why attorneys’ fees and costs should not be awarded. The court did not reach the question of who ultimately would receive the life insurance proceeds.
So where do the 5 P’s fit in with this case? As you may have guessed, the overarching lesson is that prior practice (in the form of clarity about who would get the insurance proceeds) would prevent poor performance (litigation over the proceeds with the potential result that they may not go to the person the decedent truly wanted). Because the life insurance was obtained by the decedent through his employer, it is governed by the Employee Retirement Income Security Act (“ERISA”), a federal law that governs retirement benefits (such as a 401(k) or pension plan) health insurance, disability insurance (long-term and oftentimes short-term as well), severance benefits, and life insurance benefits where the benefit is obtained through an employer. It is very common that because many valuable benefits are obtained through employers (health, life and retirement), ERISA will often come into play when considering family law issues.
Here are some of the specific take-aways from the Brookshire decision:
- Are your plan documents all up to date with respect to the correct beneficiaries? This applies not only to life insurance, but also to retirement plans, accidental death and dismemberment, or any other type of benefit that may be passed on to others. In the Brookshire case, the life insurance policies at issue totaled $165,000, a significant sum that the decedent likely would not want going to an unintended beneficiary.
- Make sure to keep up-to-date and accurate copies of all beneficiary designations in an easy-to-find place, and provide instructions to friends/family about where to find these materials so they can be easily located.
- Pay attention to court proceedings and consider legal counsel if you need help. In the Brookshire case, the court awarded the insurance company attorneys’ fees and costs for filing the interpleader action. While this is certainly not improper, had the claimants responded and asked the court not to do so—perhaps noting that the recovery would be diminished as a result—the court may have declined to award attorneys’ fees, leaving more for the beneficiaries.
- If you are in a divorce or separation proceeding, make sure you have appropriate documentation to ensure you get what was promised. In Brookshire, the court did not yet decide who would be entitled to the life insurance proceeds. But as is clear from the facts, if the ex-wife ultimately is not able to obtain the portion of the proceeds she was promised in the divorce decree, she will end up with less than she bargained for in the divorce. Indeed, she may have given up other assets to the decedent in order to have him promise to name her as beneficiary.
- Even in the absence of a current family law situation, it’s always good to review your beneficiary designation for all benefits plans periodically.
If you have questions about an employee benefits or family law matter, please feel free to visit our website at www.yourncattorney.com, or give us a call at 704.937.2726.
Our blog posts are intended as general information on legal topics for our clients and friends. They are not legal advice nor may they be construed as such. If you have specific questions regarding a legal matter, we recommend that you consult an attorney.