If you designate a beneficiary on a life insurance policy, should you expect your intent to be honored upon your death? You may not be able to if you live in Minnesota or more than half of the nation’s other states. So said the Supreme Court today—despite the plain language of Constitution’s Contracts Clause, which categorically prohibits states from passing “any … Law impairing the Obligations of Contracts.” The case was Sveen v. Melin. The decision was 8-1, Justice Elena Kagan writing for the Court. The dissent by Justice Neil Gorsuch goes to the heart of the matter. (For an overview of the Contracts Clause, see chapter 3 in Bob Levy and Chip Mellor’s The Dirty Dozen.)
The decision’s syllabus nicely summaries the facts:
Mark Sveen and respondent Kaye Melin were married in 1997. The next year, Sveen purchased a life insurance policy, naming Melin as the primary beneficiary and designating his two children from a prior marriage, petitioners Ashley and Antone Sveen, as contingent beneficiaries. The Sveen-Melin marriage ended in 2007, but the divorce decree made no mention of the insurance policy and Sveen took no action to revise his beneficiary designations. After Sveen passed away in 2011, Melin and the Sveen children made competing claims to the insurance proceeds. The Sveens argued that under Minnesota’s revocation-on-divorce law, their father’s divorce canceled Melin’s beneficiary designation, leaving them as the rightful recipients. Melin claimed that because the law did not exist when the policy was purchased and she was named as the primary beneficiary, applying the later-enacted law to the policy violates the Constitution’s Contracts Clause. The District Court awarded the insurance money to the Sveens, but the Eighth Circuit reversed, holding that the retroactive application of Minnesota’s law violates the Contracts Clause.
So the question before the Court was the relatively simple one of whether the Minnesota legislature could, with its revocation-on-divorce law, retroactively change the terms of the contract.
In holding that the legislature could do so, the Court found, remarkably, that the law “does not substantially impair pre-existing contractual arrangements” and that it “is designed to reflect a policyholder’s intent—and so to support, rather than impair, the contractual scheme.” Speaking of presumptions, the Court added that “[l]egislative presumptions about divorce are now especially prevalent—probably because they accurately reflect the intent of most divorcing parties … [since] most divorcees do not aspire to enrich their former partners.”
Justice Gorsuch would have none of this. His dissent begins with the paradox at the heart of the Court’s reasoning:
The Court’s argument proceeds this way. Because people are inattentive to their life insurance beneficiary designations when they divorce, the legislature needs to change those designations retroactively to ensure they aren’t misdirected. But because those same people are simultaneously attentive to beneficiary designations (not to mention the legislature’s activity), they will surely undo the change if they don’t like it. And even if that weren’t true, it would hardly matter. People know existing divorce laws sometimes allow courts to reform insurance contracts. So people should know a legislature might enact new laws upending insurance contracts at divorce. For these reasons, a statute rewriting the most important term of a life insurance policy—who gets paid—somehow doesn’t “substantially impair” the contract. It just “makes a significant change.”
As Justice Gorsuch goes on to note, this case brings to the fore a fundamental problem with the Court’s deference to the legislature’s presumptions. For as Kay Melin testified, she and her former husband “agreed (repeatedly) to keep each other as the primary beneficiaries in the respective life insurance policies ... not only because they remained friends but because they paid the policy premiums from their joint checking account.”
Today’s decision is only one of far too many that illustrate how a court can play fast and loose with plain constitutional text to get a result that cannot be squared with that text. Read the opinion—it’s short, as opinions go—for the details. For 11 other examples of such legal legerdemain, read the Levy-Mellor book, available from Cato.