Aetna Life Ins. Co. v. Wadsworth
| Decision Date | 04 October 1984 |
| Docket Number | No. 50317-6,50317-6 |
| Court | Washington Supreme Court |
| Parties | AETNA LIFE INSURANCE CO., Plaintiff, v. Sharon Ann WADSWORTH, Petitioner, and Joan Carol Wadsworth, Respondent. |
William J. Carlson, Bellevue, for petitioner.
Keller, Rohrback, Waldo, Butterworth & Fardal, Kurt Lichtenberg, Seattle, for respondent.
Harry M. Cross, Seattle, amicus curiae, for University of Washington Law School.
This interpleader action involves a dispute between decedent Lawrence Wadsworth's first wife and his wife at the time of his death over the proceeds of a group term life insurance policy. The dissolution decree between the decedent and his first wife purported to transfer all of her interests in all life insurance policies on the decedent's life to him. The first wife, however, remained the named beneficiary of the term insurance at the time of his death.
This action raises two issues. First, what is the proper characterization under our community property law of the group term life insurance policy? We hold that the character should be determined by the identity of funds used to pay for the most recent term.
Second, does a dissolution decree purporting to divest a spouse of her interests in all life insurance policies also divest her of all interest as a named beneficiary? We hold that it does not. We hold further that the former spouse named beneficiary in the policy is entitled to the proceeds unless (1) a dissolution decree specifically states that the former spouse is divested of his or her expectancy as named beneficiary and (2) the policy owner formally executes this previously stated intention to change the beneficiary within a reasonable time (but no longer than 1 year) after dissolution. After this reasonable time period, assuming no community property rights are invaded, the beneficiary named in the insurance policy is entitled to the proceeds despite a statement in the dissolution decree indicating a contrary intent.
Joan and Lawrence Wadsworth were married in 1949. In 1952, Lawrence commenced work for the Boeing Company. In 1963, Aetna Life Insurance Company issued a group term life insurance policy covering Boeing employees, including Lawrence. The policy has no cash surrender value and each premium is paid in full on a monthly basis as a benefit of employment by the Boeing Company. Lawrence designated Joan as beneficiary.
Joan and Lawrence were divorced on August 3, 1978. The dissolution decree incorporated a separation contract in which Joan conveyed to Lawrence "as his sole and separate property, free and clear of any right, title, or interest on her part ... [a]ll life insurance policies" insuring his life. Lawrence Wadsworth married Sharon Wadsworth on the same day. Lawrence never changed the designation of Joan as beneficiary of the group policy.
Lawrence Wadsworth died intestate on January 10, 1981. Sharon, as surviving spouse and administratrix of his estate, claimed the proceeds of the group policy. Pursuant to the terms of the policy, Aetna commenced an interpleader action to determine whether Sharon or Joan should receive the policy proceeds. Joan moved for partial summary judgment, arguing that she was entitled to one-half of the policy proceeds as named beneficiary. Sharon brought a cross motion, claiming all of the proceeds.
The trial court denied Joan's motion and granted Sharon's motion for summary judgment, and awarded her the policy proceeds.
Joan appealed. The Court of Appeals found that the dissolution decree divested Joan of any interest she had in the group policy, including her right to be named as beneficiary. It further held that the dissolution of Joan and Lawrence's marriage converted the group policy into Lawrence's separate property. Thereafter, ownership of the policy or its proceeds was both separate and community property in proportion to the percentage of the total premiums paid. Thus, the Court of Appeals held that Sharon obtained a community property interest in only that portion of the proceeds attributable to the premiums paid with community funds after her marriage to Lawrence. It reversed and remanded to the trial court for resolution of two factual issues: (1) did Lawrence intend Joan to be the beneficiary of the policy, and (2) if so, what portion of the policy proceeds are attributable to premiums paid by funds of the marital community of Lawrence and Sharon. Aetna Life Ins. Co. v. Wadsworth, 36 Wash.App. 365, 675 P.2d 604 (1984).
Application of community property principles to life insurance policies in Washington has its roots in Occidental Life Ins. Co. v. Powers, 192 Wash. 475, 74 P.2d 27, 114 A.L.R. 531 (1937). In Powers, the husband changed the beneficiary of a life insurance policy purchased with community funds from his wife to his mother and secretary. This change was made without the wife's knowledge or consent. After the husband's death, the wife and the named beneficiaries made conflicting claims to the proceeds. This court held that a nonconsenting spouse could void her husband's designation of a beneficiary of a policy purchased with community funds. The court reasoned:
In this state, insurance or the proceeds of insurance are not mere expectancies or choses in action, but are property; and if the premiums are paid by the assets of the community, they constitute community property.
Powers, at 484, 74 P.2d 27. Since substantial gifts of community property may not be made without the consent of both spouses, the change of beneficiaries was held void ab initio.
Powers has been consistently questioned over the years on several grounds. E.g., Cross, The Community Property Law in Washington, 49 Wash.L.Rev. 729, 790-93 (1974); Comment, Life Insurance Process as Community Property, 13 Wash.L.Rev. 321 (1939).
One criticism of Powers revolves around its characterization of the designation of a life insurance beneficiary as a present property interest rather than an expectancy. Where the policy owner has the right to change the beneficiary, the named beneficiary has no vested right in the nomination. Occidental Life Ins. Co. v. Gannon, 57 Wash.2d 868, 360 P.2d 350 (1961); Massachusetts Mut. Life Ins. Co. v. Bank of Cal., 187 Wash. 565, 60 P.2d 675 (1936). Even if the insured cannot change the beneficiary, the beneficiary's interest is not indefeasibly vested so long as there remain premiums to be paid. Francis v. Francis, 89 Wash.2d 511, 573 P.2d 369 (1978). Thus, the characterization of the right to proceeds as a present property interest rather than an expectancy is wrong.
The effect of Powers was somewhat diminished by In re Estate of Towey, 22 Wash.2d 212, 155 P.2d 273 (1945) which upheld an insured husband's change of beneficiary from his wife to his executor. Under Towey, the wife's half interest in the proceeds was preserved but the husband could dispose of his half of the policy proceeds by will.
Finally, in Francis v. Francis, supra, this court overruled Powers, at least insofar as the Francis court held that the insured spouse may designate a person other than his or her spouse as beneficiary of up to one-half of the proceeds of a community-owned policy. Francis recognized that designation of a beneficiary is quasi-testamentary rather than a means of making a gift of community property. Since the insured spouse has the right to dispose of one-half of the community property upon his or her death, designation of a beneficiary other than his or her spouse as to one-half of the proceeds is permissible.
Powers was also the progenitor of the apportionment rule under which ownership of an insurance policy or its proceeds is separate or community property in proportion to the premiums paid by separate or community property. See Wilson v. Wilson, 35 Wash.2d 364, 212 P.2d 1022 (1949); Small v. Bartyzel, 27 Wash.2d 176, 177 P.2d 391 (1947). Critics of this apportionment rule argue that it fails to take into account the nature of life insurance, especially term life insurance. 1
Although numerous variations of life insurance exist, life insurance policies generally may be divided into two broad classes: term insurance and cash value insurance. Premiums purchasing cash value insurance pay for both cash value and protection from risk of death. The cash value, somewhat akin to a savings account, is a permanent cumulative asset against which the owner may borrow, and which the owner may receive upon cancellation of the policy. On the other hand, term insurance has no cash surrender value; premiums purchase only protection from risk of death for a fixed period of time. At the end of that period, there is no asset remaining. The length of time the insured has had the policy and the number of premiums paid are irrelevant.
Based upon these differences in life insurance policies, critics of the apportionment theory argue for adoption of a risk payment theory. The risk payment theory is a functional approach which takes into account the manner in which values accrue under various types of policies. Under this theory, the proceeds of a life insurance policy are characterized by determining the source of funds which paid for the risk portion of the policy. In the case of term insurance, only the character of funds used to purchase the most recent premium is significant because term insurance premiums purchase solely protection from risk of death. Hence, the character of a term policy should depend upon whether payment for the most recent premium was made with community or separate funds.
Courts in several community property jurisdictions have adopted, at least implicitly, a risk payment approach to characterization of term life insurance policies. For example, in Lock v. Lock, 8 Ariz.App. 138, 145, 444 P.2d 163 (1968), the Arizona Court of Appeals stated:
[S]eparate funds paid for all of the coverage that resulted at the time of Mr. Lock's death....
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