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Ex-Spouse Remains Insurance Beneficiary Despite Law Change If Policy Issued Before Bill Took Effect

2005-2281. In re Estate of Holycross, 2007-Ohio-1.
Champaign App. No. 2005 CA 1, 2005-Ohio-5582. Judgment affirmed.
Moyer, C.J., Farmer, Lundberg Stratton, O'Donnell and Lanzinger, JJ., concur.
Pfeifer and O'Connor, JJ., concur in judgment only.
Sheila G. Farmer, J., of the Fifth Appellate District, was assigned to sit for Resnick, J., whose term ended on January 1, 2007.
Cupp, J., whose term began on January 2, 2007, did not participate in the consideration or decision of this case.
Opinion: http://www.supremecourt.ohio.gov/rod/newpdf/0/2007/2007-Ohio-1.pdf

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(Jan. 3, 2007) In a unanimous decision announced today, the Supreme Court of Ohio held that, regardless of the date on which a married couple was divorced, 1990 legislation that ‘automatically' terminates all life insurance beneficiary designations in favor of a former spouse at the time of a divorce does not apply to insurance contracts that were in effect prior to the effective date of that legislation.

Section 1339.63 of the Ohio Revised Code, which took effect on May 31, 1990, provides that upon the termination of a marriage by divorce, dissolution, or annulment, all life insurance beneficiary designations in favor of a former spouse are automatically terminated unless the divorce decree specifically provides otherwise. In today's decision, Justice Evelyn Lundberg Stratton affirmed lower court rulings that R.C. 1339.63 does not affect insurance contracts that were in effect prior to May 31, 1990, because retroactive application of the statute to pre-existing policies would violate the Contracts Clause of the Ohio Constitution.

The case involved Michael Holycross and Carol Zerkle, a married couple who were divorced in 1993. The couple agreed on a property settlement that specified the rights and responsibilities of both parties. That agreement did not address Zerkle's right to remain as the beneficiary of Holycross's life insurance policy following the divorce.

In 1997, Michael married Barbra Holycross and remained married to her until his death in 2003. Upon his death, Holycross' life insurance benefits, in the amount of $32,532.30, were paid to Zerkle, who had been designated as Michael's beneficiary in 1972 and had never been removed or replaced in the policy. Barbara Holycross filed an objection in Champaign County Probate Court, alleging that the proceeds of the insurance policy should have been included in the inventory of her husband's estate, and should not have been distributed to Zerkle because Zerkle's rights as his beneficiary were automatically extinguished by the 1993 divorce decree, which was entered after R.C. 1339.63 had taken effect.

The probate court considered Barbra Holycross's objection and complaint but ruled that Zerkle was entitled to the proceeds of the insurance policy under the Supreme Court of Ohio's 1993 ruling in Aetna v. Schilling. In Schilling, the Court held that the Ohio and U.S. constitutions prohibit the retroactive application of legislation in cases where doing so would deprive a person of property or rights arising from a contract that was in force before the new law was adopted. Applying that prohibition to R.C. 1339.63, the Schilling court held that a divorced spouse designated as the beneficiary in his or her ex-spouse's insurance policies prior to May 31, 1990 could not have that property right taken away retroactively by application of the new law.

Barbra Holycross appealed to the 2nd District Court of Appeals, which affirmed the judgment of the probate court. In today's decision, the Supreme Court agreed with the lower court rulings, holding that the legal rationale of the Schilling decision remains applicable to the current case despite the fact that the Holycross-Zerkle divorce occurred after R.C. 1339.63 was in effect.

In Schilling, Justice Stratton wrote, “we held that ‘the provisions of R.C. 1339.63, as applied to contracts entered into before the effective date of the statute, impair the obligation of contracts in violation of Section 28, Article II of the Ohio Constitution.' … The critical issue in Schilling was the date that the insurance contract was entered into, not the date of the divorce. The instant case is indistinguishable from Schilling.

In response to a supplemental argument advanced by Barbra Holycross that Schilling should be abandoned as having been wrongly decided, Justice Stratton observed: “We acknowledge that the policy behind the enactment of R.C. 1339.63 might have been to remedy the mistake of a spouse who inadvertently fails to remove the ex-spouse as a beneficiary to a life insurance policy. And we have sympathy for those who have encountered that situation. Ultimately, however, we are unpersuaded by this argument because adopting it would disrupt well-settled law.”

Justice Stratton noted that, since the Schilling decision 13 years ago, “at least four of Ohio's 12 appellate districts have applied Schilling to hold that R.C. 1339.63 does not apply to contracts entered into prior to May 31, 1990 … Schilling has clearly defined the rule that a person who owns an insurance policy in existence before May 31, 1990, and who wishes to remove his or her ex-spouse as beneficiary of that policy must undertake an affirmative act in order to remove his or her ex-spouse as beneficiary despite the language of R.C. 1339.63. The corollary to this rule is that by failing to act, the person owning the policy will be presumed to have made a conscious decision to retain the ex-spouse as beneficiary. … Consequently, spouses, and the attorneys who have advised them in a divorce or dissolution, have relied on Schilling as the governing law on the applicability of R.C. 1339.63. Reversing Schilling would create an undue hardship and could encourage litigation alleging wrongful distribution of insurance proceeds.”

Justice Stratton's opinion was joined by Chief Justice Thomas J. Moyer, Justices Terrence O'Donnell and Judith Ann Lanzinger, and Judge Sheila G. Farmer of the 5th District Court of Appeals, who sat in the case in place of Justice Alice Robie Resnick. Justices Paul E. Pfeifer and Maureen O'Connor concurred in judgment only.

Karl E. Paulig, 513.653.5257, for the Estate of Michael H. Holycross and Matthew S. Holycross, Executor.

William Clark, 614.766.8475, for Barbra Holycross.