E-Alert Case Updates

Supreme Court Finds Federal Law Preempts State’s Insurance Beneficiary Statute Scheme for FEGLIA Policies

Hillman v. Maretta
No. 11-1221 (Supreme Court of the United States, June 3, 2013)
by Anna C. Horevay, Summer Associate
Semmes, Bowen & Semmes (www.semmes.com)

In Hillman v. Maretta, the Supreme Court of the United States (“U.S. Supreme Court”) considered whether a state statute that allowed a current spouse to sue a designated beneficiary for life insurance proceeds preempted the Federal Employees’ Group Life Insurance Act of 1954 (“FEGLIA”), which gives highest priority to the insured’s designated beneficiary. Justice Sotomayor delivered the opinion of the Court, and affirmed the decision of the Virginia Supreme Court that FEGLIA preempts the Virginia state statutory scheme of beneficiary designation.

Congress enacted FEGLIA in 1954, which established a group life insurance program for federal employees. Under FEGLIA, upon an employee’s death, life insurance benefits will be paid according to a specified “order of precedence.” According to the order of precedence, benefits will first accrue to the beneficiary “designated by the employee.” In the event that there is no designated beneficiary, benefits are first paid to the “widow . . . of the employee.”

Warren Hillman married Judy Maretta, and subsequently named Ms. Maretta as the beneficiary of his FEGLIA policy. Mr. Hillman and Ms. Maretta later divorced, and four (4) years later, Mr. Hillman married Jacqueline Hillman. Despite the divorce and remarriage, Mr. Hillman never changed the named beneficiary on his FEGLIA policy, and Ms. Maretta continued as the beneficiary at the time of Mr. Hillman’s death. After Mr. Hillman’s death, Ms. Hillman filed a claim for the proceeds of Mr. Hillman’s FEGLIA policy. Because Ms. Maretta was the named beneficiary, Ms. Hillman was unable to collect the proceeds. Ms. Maretta later filed a claim for the benefits and collected the FEGLIA proceeds.

As a result, Ms. Hillman initially filed a lawsuit under Section 20-111.1(D) (“Section D”) before the Virginia state court claiming that Ms. Maretta was liable to her for the proceeds of Mr. Hillman’s FEGLIA policy. Section 20-111.1(A) (“Section A”) of the Virginia code provides that a divorce revokes a beneficiary designation on a then existing life insurance contract. In the event that Section A is preempted by federal law, Section 20-111.1(D) provides that “a former spouse who . . . receives the payment of any death benefit that the former spouse is not entitled to under 20-111.1 is personally liable for the amount of the payment to the person who would have been entitled to it were 20.111.1 not preempted.” In basic terms, if Section A is preempted, Section D applies and creates a cause of action whereby a former spouse is liable for the amount of insurance proceeds to the person who would have received them had Section A continued in effect.

In the Virginia state court, both parties agreed that Section A was preempted, but they did not agree on how Section D applied in this instance. Ms. Maretta claimed that Section D is preempted by FEGLIA’s order of precedence, and she was entitled to the insurance policy, as she was the named beneficiary. Ms. Hillman argued that the Congressional purpose in enacting FEGLIA was to advance administrative convenience, not to ensure that the named beneficiary received the insurance proceeds. On summary judgment, the Virginia state court agreed with Ms. Hillman and found that Mr. Maretta was liable to Ms. Hillman under Sec here tion D for the proceeds of Mr. Hillman’s policy.

Ms. Maretta appealed the decision of the Virginia state court to the Virginia Supreme Court. The Virginia Supreme Court subsequently reversed the lower court and found that Section D is preempted by FEGLIA and that FEGLIA instructed that the proceeds should be paid to the named beneficiary, not the former spouse. Following the ruling of the Virginia Supreme Court, Ms. Hillman petitioned the U.S. Supreme Court for a writ of certiorari, which the U.S. Supreme Court granted.

In its opinion, the U.S. Supreme Court stated that when state law conflicts with a federal statute, it is preempted under conflict preemption. Conflicts occur when the state law “stands as an obstacle to the accomplishment and execution of the full purposes and objectives of Congress.” Relying on Wissner v. Wissner and Ridgway v. Ridgway, the U.S. Supreme Court found that FEGLIA created a scheme that gave highest priority to the insured’s designated beneficiary. The order of precedence directed that the proceeds belong to the named beneficiary. The U.S. Supreme Court further found that Section D frustrated Congress’ scheme because it directed that the proceeds of the policy belong to someone other than the designated beneficiary by creating a cause of action for recovery by a third party. In other words, the state law displaced the selected beneficiary and placed someone else in his place. The U.S. Supreme Court found that when there is a named beneficiary, the insurance proceeds owed to her cannot be reallocated to another person by state law. As Section D did that, federal law preempted Section D.

In a concurring opinion, Justice Thomas rejected the “purposes and objectives” framework of the majority. In his opinion, because the ordinary meanings of FEGLIA and Section D directly conflict, the Court should have avoided inquiry into whether state law undermines the federal purposes and objectives of FEGLIA.

In a separate concurring opinion, Justice Alito opined that Section D conflicts with the purpose of FEGLIA to prioritize an insured’s articulated wishes above all considerations. Like Justice Thomas, Justice Alito found that the majority went too deep in attempting to find a basis for its holding in turning to the purposes and objectives of FEGLIA. In his opinion, the inquiry was not necessary to resolve the case.