Can an Unfinished Life Insurance Beneficiary Change Still Count?

How the doctrine of substantial compliance can affect a life insurance beneficiary dispute.

What is “Substantial Compliance”?

The Quick Answer

Substantial Compliance in life insurance is a legal doctrine that courts and state laws sometimes recognize pertaining to the method in which an insured person can make a beneficiary change. More specifically, a beneficiary change attempt may still take effect in circumstances where an insured person has not fully complied with tthe insurance company’s required beneficiary change procedure, but: 

Substantial compliance in life insurance is a legal doctrine that may allow an attempted beneficiary change to take effect even when the insured did not complete every step required by the insurance company. Generally, the insured must have clearly expressed an intent to change the beneficiary, taken meaningful action toward making the change, and passed away before completing the required process.

•  expressed his or her intent to change the beneficiary designation on their life insurance policy; and
• made efforts to effect that change; and
• passed away before he or she could have fully complied with the required procedures.

The Issue

While life insurance policies are a helpful financial tool that hundreds of thousands of people across the country use, there are countless ways things can go awry. In this article, we are talking specifically about what happens when an insured person wants to change the beneficiary designation on their policy, but didn’t follow each and every step the insurance company required to effect that change prior to their passing. In these circumstances, the doctrine of “Substantial Compliance” often comes into play. 

Why it Happens

Watch the video below, then continue reading for a deeper explanation of substantial compliance, the evidence courts consider, and what may happen when multiple people claim the same life insurance benefits.

In a case I handled not too long ago, the wife of a deceased insured came to me for help claiming the life insurance benefits under her late husband’s life insurance policy. The problem was that the insurance company had told her that she was not the beneficiary of record. Instead, the named beneficiary was the deceased insured’s cousin whom he designated over two decades prior to his passing. 

The Attempted Beneficiary Change

In this case, the deceased insured had told his wife that he intended to make her the beneficiary of his policy, as he had done for all of his other assets. In order to make that change, he called his employer to find out how to make the change. The employer told him to call the insurance company, so he called the insurance company. The insurance company told him that he couldn’t make the change over the phone, so they emailed him the beneficiary change forms. The only problem was that he, much like the rest of us, couldn’t remember the password to his email account. 

The insured made numerous attempts to access the email account, but was unable to get the forms the insurance company required. As a result, he was never able to sign the paperwork the paperwork the insurance company required to change his beneficiary designation prior to his passing. Once the surviving spouse and the named beneficiary made competing claims to the death benefits, the insurance company filed an interpleader action in federal court thereby allowing a judge to determine who the rightful beneficiary to the policy. 

When Competing Claims Are Filed

In the case above, some might think that the surviving spouse was out of luck because the insured never submitted the beneficiary change to the insurance company. However, when an insurance company receives two competing claims to the same life insurance benefits, they often look to the courts to help them determine who the rightful beneficiary is. In those circumstances, a life insurance company files what is known as an “Interpleader Action”. Interpleader actions shield an insurance company from making the wrong decision on which claimant receives the benefits, and possibly having to pay twice. 

What the Law Says

When ERISA (a federal law that governs group employee benefits, including life insurance policies) governs an insurance policy and competing claimants seek the same life insurance benefits, federal common law applies. “Federal common law” is a set of legal rules that federal judges have created over time and that serve as precedent for future similar cases.

What Courts Look For

Under federal common law, substantial compliance applies to change of beneficiary disputes under ERISA-governed policies. What substantial compliance says, is that an insured person must: 

• Show an intent to change the beneficiary 
• Take positive action to make the change 

Although federal courts across the country unanimously accept the doctrine of substantial compliance in this context, they apply the substantial compliance standard with a large amount of variability in outcomes. For example, the following are outcomes of real substantial compliance cases in various federal courts:

Examples of Substantial Compliance Cases

• Where the Insured person died after completing and signing the beneficiary change for but failed to mail it, the court found substantial compliance. Rendleman v. Metropolitan Life Ins. Co., 937 F.2d at 1297 (7^th Cir. 1991)
• Where an insured person sent notice to the insurance company of his wishes to change the beneficiary designation on two separate occasions, the court found substantial compliance. Teachers Ins. And Annuity Ass’n of America v. Bernardo, 683 F.Supp.2d 344 (E.D. PA 2010). 
• Where the Insured person engaged in discussions about his intent to change his beneficiary, and filled out the requisite form but forgot to send it in, the court did not find substantial compliance. Aetna Life Ins. Co. v. Weatherford, No. 90-55 85, 1991 WL 11611, at *1, *6 (6^th Cir. Feb. 5, 1991). 
• Where the insured called an insurance company to notify them of his intent to change the beneficiary on his policy, but did not take any further steps, the court did not find substantial compliance. Prudential Ins. Co. of America v. Schmid, 337 F. Supp.2d 325, 327 (D.Mass.2004). 

Common Issues

After seeing plenty of interpleader actions play out in federal court, a few very clear patterns begin to arise depending on the underlying facts of the case. 

Claims of Undue Duress

First, it is very common that one or several of the competing claimants argue that someone placed the deceased insured under “undue duress” when the insured attempted to change the beneficiary. This argument essentially claims that one of the claimants forced the insured to change the beneficiary designation with threats of harm, physical force, or by taking advantage of the insured’s decreased mental capacity. 

Conflicting Evidence of Intent

Next, a competing claimant may allege that they are in possession of evidence to contradict the insured’s expressed intent. For example, the son of the deceased insured may claim that he has text messages from the insured person stating that he wants the son to be the beneficiary to his life insurance policy, while the daughter of the insured may be claiming that she has a beneficiary designation form that the insured completed two weeks before his death.

What Evidence Matters

Depending on the basis for the competing claims, the types of evidence that may be helpful can vary. However, typically it is helpful to collect as much information and as many records as possible. It’s better to be over-inclusive than under. Some examples of helpful records are:

• Medical records
• Phone records
• Text message threads
• Email exchanges
• Last Will and Testament
• Written notes
• Communications from the insurance company
• Communications from the employer (when applicable)
• Death certificate 
• Photos/Videos 

A substantial compliance argument relies heavily on circumstantial evidence. While no single set of records generally makes a case of substantial compliance fool proof, having a vast amount documentation supporting the claim increases the likelihood of success significantly. 

Practical Steps to Take

Gather and Organize Your Evidence

At the outset of any legal battle, the very first thing any potential client should do is collect as much relevant information as possible. Organize it into chronological order if possible, and make copies. Having more than one copy of the relevant documents will tend to make things easier when or if you hire an attorney to represent you. Generally, you do not want to provide original copies of important documents to an attorney’s office unless the attorney specifically requests them.

Deciding Whether to Hire an Attorney

Next, it is important to consider whether you may need an attorney to assist you. In beneficiary dispute cases an insurance company has filed an interpleader action, an attorney is almost always necessary. Because an interpleader action is a lawsuit, it requires knowledge of the rules of evidence and civil procedure, the ability to conduct legal research, a solid understanding of negotiation strategy, and the ability to draft very detailed and comprehensive motions. While you always have the choice not to retain an attorney, I’d like to provide a word of caution: Once the Interpleader action is underway, you may then find it very difficult to get an attorney down the road if you decide you need one. The reason for this is that attorneys very thoroughly vet each case that comes across their desk to determine the likelihood of success and the viability of the case. Asking an attorney to jump in mid-lawsuit is asking them to essentially bypass that vetting procedure and take a very big gamble that the case will provide a return on investment. 

Why Life Insurance Experience Matters

I’ve noticed more recently in my daily practice that trust and estates attorneys and personal injury attorneys will take on an occasional life insurance case as a means of making quick money. Unfortunately for the attorney and for the client, life insurance cases are almost never as simple as they seem. They require a solid foundation of knowledge about the life insurance industry, the specific procedures of an interpleader action, and the common strategies attorneys use in these types of cases. I don’t know about you, but I wouldn’t prefer a foot doctor to operate on my brain, just like I wouldn’t prefer an attorney who specializes in personal injury to handle my life insurance case. 

Be Honest About the Bad Facts

When and if you decide to hire an attorney for a beneficiary dispute case, it’s important at the outset to provide as much detailed information as possible, in an organized and clear manner. Written timelines, and narratives are extremely helpful at the beginning stages of a case. However, nothing helps an attorney represent you to the best of their ability as much as honesty. Providing all of the facts (not just the ones favorable to your case) gives your attorney the ability to strategize on how to deal with those bad facts, rather than allowing those facts to blindside the attorney later.

Frequently Asked Questions: 

What is substantial compliance in a life insurance case?

When two or more people are claiming entitlement to the same life insurance benefits because there is doubt about the validity of the beneficiary designation on file, one claimant may argue that the insured had an intent to name them as the beneficiary of the policy, took steps to effectuate that change, but never fully complied with the procedure the policy outlined.

That claimant would be saying that the insured “substantially complied” with the beneficiary change procedure, and as a result, the court should give effect to the insured person’s intent. 

What does substantial compliance mean?

Substantial compliance is generally a two part test: first, the insured person must indicate an intent to make a beneficiary change; then, the insured person must take actual steps toward completing that change. Usually something less than submitting a fully signed and dated form to the insurance company, but more than making a comment in passing to a friend. 

Can a court ignore the beneficiary listed on the policy?

Technically, yes. Because of the doctrine of substantial compliance, if the court finds sufficient evidence that the insured person intended to name someone other than the listed beneficiary, and made definitive steps toward accomplishing that goal, the court can choose to give effect to the insured person’s intent rather than the listed beneficiary on file. 

What evidence can prove someone intended to change their beneficiary?

The most common evidence claimants use to support the insured’s intent includes:
-Signed forms that were not submitted
-Emails
-Text messages
-Employer records
-HR communications
-Insurance agent notes and communications
-Witness testimony
-Electronic submissions
-Telephone recordings

What if the insurance company lost the beneficiary change form?

Insurance companies are large, complex organizations with numerous different departments. It’s certainly not unheard of for an insurance company to lose or misplace paperwork on an occasional basis. If the insurance company lost a completed beneficiary change form and never recorded it in its system, the new designation will not be on record.

If the insured person passes away before the insurance company resolves the issue, it will undoubtedly form the basis of a beneficiary dispute and likely an interpleader action.

What if my employer never submitted the beneficiary change?

Just like an insurance company, employers tend to have several different departments handling a wide variety of different tasks. As a result, there is a substantial likelihood that mistakes will happen. If an employer receives the completed beneficiary designation and fails to either submit it into the system or send it to the insurance company, the system will not reflect that designation.

If the employer does not correct the error before the insured person passes away, it will likely prompt claims from both the listed beneficiary and the new beneficiary. Generally, once two claimants have made claims to the same life insurance benefits, insurance companies will initiate an interpleader action in court.

Does substantial compliance apply to employer-provided life insurance?

Yes. A federal statute known as ERISA governs employer-provided life insurance policies. While ERISA itself does not speak to beneficiary disputes, over time, federal courts have agreed on the proper procedure for handling these types of cases. Substantial compliance is one of the widely accepted federal common law doctrines.