A fundamental benefit a contract is supposed to confer is certainty – if you sign a divorce agreement, its terms will be honored, and if you buy life insurance, you’ll receive the promised death benefits.
But what happens if the provisions of two seemingly clear contracts may be in conflict? The likely result is a trip to court, as happened in a recent dispute that was addressed by the California Court of Appeal (Randle v Farmers New World Life Insurance Co.)
In 1992, Judy Randle and her then-husband, Alan McConnell, took out a $250,000 life insurance policy on McConnell with Randle as the sole beneficiary.
The couple divorced in 2004. The divorce agreement gave Randle a 25% “beneficial interest” in the policy. The agreement required McConnell to maintain the policy for at least her 25% interest but he was free to name any other beneficiaries for the remaining 75%.
Randle and McConnell were responsible for paying the premiums for their respective interests in the policy. If either decided to discontinue paying their share of the premium, he or she would forfeit their interest in the policy.
Specifically, if McConnell chose to discontinue paying premiums, forfeiting his 75% share, he had to notify Randle who could either let the policy lapse or pay the entire premium. If Randle was responsible for the entire premium, she would have the right to name any beneficiaries she chose for the full $250,000.
In 2006, McConnell submitted a form to the insurer, Farmers, designating the couple’s three sons as equal beneficiaries of his 75% interest in the policy. Accompanying the form were a few pages of the divorce decree.
Farmers’ internal procedures required changes in an insurance policy related to a divorce agreement to be processed with a certified copy of the entire divorce decree. Randle was also entitled to notice of any change McConnell made to designation of the beneficiaries.
McConnell, however, never sent the entire decree to Farmers and Randle was not notified of the beneficiary change by McConnell, Famers, or the insurance agent, Hebson Insurance.
McConnell soon stopped paying premiums on the policy. For a period of time the premiums were covered by the cash accumulated in the policy. Then, in 2008, Hebson informed Randle that the cash accumulation had been used up, putting her 25% interest at risk.
Randle told Hebson she would make the premium payments if she was beneficiary of 100% of the policy. Hebson said she could remain the beneficiary even if she was not the owner of the policy. It told her she did not need to become the listed owner to ensure that she continued to be the sole beneficiary, because Farmers would notify Hebson if the beneficiary were changed.
McConnell died on April 11, 2014. A few days later Randle informed Farmers of his death, and “was told again that she was the only beneficiary” under the policy. On April 16, 2014, she submitted a claim for 100% of the benefits.
Two days later, Farmers informed her for the first time that the claim that she was the sole beneficiary of the policy was in dispute.
Farmers told her that McConnell changed the policy in 2006 to designate the couple’s three sons as the beneficiaries. McConnell’s request, however, was apparently never confirmed because he failed to send Farmers a certified copy of the divorce decree as required by the policy terms.
Because of the dispute over the policy, Farmers asked the court to decide how to distribute the proceeds between Randle and her sons.
In April of 2015, Randle sued Farmers and the Hebson agency in Los Angeles Superior Court for breach of contract, among other claims. She told the court that the divorce decree “clearly confirmed that [she] was the rightful owner of the Policy after she began paying 100% of the Policy [premiums] in September 2008.”
She said Farmers confirmed that she was the sole beneficiary on numerous occasions. It was only after McConnell’s death that she was told she was not the sole beneficiary, thus preventing her from filing the change in beneficiary form to confirm her status.
Farmers asked the court to issue a summary judgment which would adjudicate the case without the need for a full trial. In its summary judgment motion, Farmers argued that since Randle was never the owner of the policy, there was no contract between Farmers and Randle that could sustain a breach of contract claim.
The trial court agreed and issued a summary judgment in favor of Famers. Randle subsequently appealed.
The appellate court reversed the lower court’s ruling finding that Farmers knew Randle was paying the premiums and was aware of the terms of the divorce agreement despite not having received a certified copy of the entire document. Also, Farmers agent, Hebson, “repeatedly assured Randle that she was the sole beneficiary of the policy, up to and even after Mr. McConnell’s death.”
The court found that the foregoing facts were sufficient to allow this matter to be decided at a trial rather than resolved by a summary judgment. The justices reversed the judgment of the lower court, clearing the way for Randle to argue her case in a full trial. Randle was awarded her costs on appeal.