FALL 2018: It Takes Two: The Payee’s Duty to Secure and Actively Monitor the Payor’s Life Insurance Obligation

By Grace C. Roessler, Esq. of Mirick O’Connell DeMallie & Lougee, LLP

Life insurance obligations are common in separation agreements. They secure child support payments and college expenses through a child’s emancipation, alimony through the termination date, and in some instances, property division settlement payments over time. Whether securing child support, alimony, or property, the purpose is to ensure that the intended payee receives the benefits owed to him/her in the event of the payor’s untimely death, before the obligation has ended. The payor has an obligation to obtain the life insurance, and the payee or the payee for the benefit of the minor child(ren) is the intended recipient.

Though payees are the intended recipients, many payees neglect the life insurance provisions of their agreement until it is too late, only to discover that the now deceased ex-spouse (payor) named an alternate beneficiary for the policy or failed to carry the policy altogether. Surviving family members endure additional litigation and emotional hardship to recoup the amount owed. This article aims to encourage payees to be pro-active in securing the obligation meant for them, from drafting and actively utilizing favorable terms in separation agreements to filing litigation if necessary to enforce the provisions.

General Life Insurance Provisions and Oversight:

Life insurance provisions generally include the following terms: (1) payor maintains life insurance for a period of time with certain death benefit amount; (2) payor names the payee as beneficiary of the policy; (3) the payee may reasonably request proof of the policy at least once per year; (4) payee may pay the premium if the payor has not done so (to be reimbursed by the payor); and (5) payor has a claim against the estate of the payor in the event that he/she dies without the policy in place or insufficient death benefit.

Life insurance coverage generally exists in two forms: employment sponsored insurance or private insurance. In some instances, a party’s employer may provide a sufficient amount of life insurance to cover the amount required. If the party is self-employed or the employer-sponsored insurance is insufficient to cover the amount required to cover his/her obligation, the payor must obtain separate, private life insurance through a life insurance company.

Neither an employer or a life insurance company reviews the separation agreement terms for compliance. They do not inquire as to whether the payor has obtained the sufficient amount of death benefits. They do not ask why a payor changes the beneficiary listing. The employer and the insurance company have a fiduciary duty to the insured while he is living, and to the beneficiary after the insured’s death. Consequently, the only individual who has the ability to oversee the payor’s obligation is the payee. This can be accomplished by drafting favorable terms in the separation agreement that give the payee more oversight, frequent monitoring of the policy, and taking court action if necessary.

Draft Specific Terms That Provide Payee With Significant Information in Timely Manner

Aside from the general terms listed above, the following additional terms can provide payees more protection:

  1. If the payor secures his/her life insurance obligation through employment:
    • Require the payor to provide payee notice of change of employment within 10 days of said change;
    • Add an obligation for the payor to obtain employer-sponsored insurance at his/her new employment with copy of the new insurance plan documents to the payee.
    • If the payor is not employed within 30 days of leaving his/her old employment, payor must obtain a private insurance policy and provide all documentation to the payee;
  2. If the payor secures his/her life insurance obligation through a private insurance company:
    • Payor must inform the payee of the annual renewal date, and send proof of the annual renewal payment within 10 days of payment;
    • Payor may opt to have the payee make the payments on the plan (to ensure timely payment) with reimbursement by the payor;
  3. In either situation,
    • The payor should be obligated to send all life insurance documents to the payor twice per year.
    • The payor must respond to payee’s request for documentation within 10 days of request.
    • Detail the specific documents the payor is required to send, including but not limited to the beneficiary designation, the death benefit amount, and the proof of annual or monthly payment.

Monitor the Policy

Take advantage of the provisions of the agreement. Early detection of a non-existant policy, a lapse in coverage, lack of sufficient funds, or alternate beneficiary are key to correcting the violation before the payor’s death. Schedule the check-in bi-annually, perhaps at the beginning of the school year and in the new year. Mark it in the calendar. Email the payor and request all of the documents. Hold the payor to the schedule to respond.

Upon receipt, review all of the documents – not just the death benefit amount. Confirm the existence of the policy, the death benefit, and the beneficiary. Mark the renewal date in the calendar as well, and request the payor send proof of payment of the premium. Regular diligence on the payee’s part may deter the thought of straying from the Agreement on the part of the payor.

Take Court Action If Necessary

Violations Discovered While Payor is Alive

If a violation of the life insurance provisions exists while the payor (insured) is alive, it is appropriate to file a complaint for contempt to force the payor to correct the violation as soon as possible. Similarly, if a violation is suspected, the best way to ensure the payor is in compliance is to file a contempt and force the payor to produce evidence he/she is in compliance.

Filing a contempt may save payees significant time and money later on. For example, in one case, a mother asked a father for proof of his life insurance policy for the benefit of their four year-old daughter, and father failed to respond. The mother filed a contempt against a father for a lack of life insurance. At the contempt hearing, the Court discovered the father let his life insurance policy lapse. The Court found him in contempt, ordered him to obtain a new life insurance policy for several hundred thousand dollars, and scheduled a status conference on the contempt sixty days later to check in on whether the Father had obtained life insurance. The father obtained the insurance policy, and the parties settled the matter without having to appear in court again. Only a few months later, the young father was diagnosed with terminal cancer and passed away. Because the mother had filed the contempt immediately, and forced the father to obtain insurance while he was still healthy, she received all of the money for the benefit of their child, and did not have to pursue litigation against the insurance company or the Father’s estate. In this case, mother’s diligence proved essential to receipt of the funds for their daughter.

Violations Discovered After Payor’s Death

Violations may be discovered only after the payor (insured) has passed, in which case the payee must file an equity claim against the payor’s estate for the amount the payee should have received from the insurance.

Where the payor has insufficient funds or did not have the insurance policy in place, the payee should file an equity complaint against the estate to attempt to satisfy the requirement. Bank accounts, retirement accounts, and other non-liquid assets such as real property are all “fair game” to satisfy the amount due. The hardest circumstance occurs when the payee must litigate against the payor’s new spouse for the sought-after funds. In some circumstances, the payor may have started another family, in which case the parties to the litigation argue over a limited amount of money for the benefit of potentially two families, not just those of the first family.

Where the payor named a different beneficiary than the payee, the payee should file the equity claim against both the estate and the life insurance company to ensure the life insurance company does not release the funds to the named beneficiary. In most cases, the life insurance company will seek to be released from the case, so long as it abides by the ultimate court judgment in the action. Actions against the estate and insurance company should be filed as soon as the violation is revealed to the payee.

Conclusion

There is limited oversight over a payor’s compliance with the life insurance provisions of the parties’ agreements. It is in the best interest of the payee to draft favorable terms that provide payees with the ability to monitor the obligation and file court action as soon as a violation or suspected violation occurs. Payees should be pro-active in securing the very obligations meant to support them in the event of the payor’s untimely death. When the case ends, the payee’s night watch on these obligations should begin.