Friday, June 3, 2011

When Is Federal Common Law Appropriate to Determine Domestic Partner Status?

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    In Union Security Insurance Company v. Blakeley, 2011 FED App. 0052P (6th Cir. 2011), the Sixth Circuit addressed the proper role of federal common law in determining a beneficiary under a domestic partner clause.  The court decided that, in order to determine the proper beneficiary, the plan’s eligibility provisions for domestic partners for insurance coverage should be relied upon in determining the proper beneficiary. In so doing, it appears that the court rejected the argument that federal common law should determine whether a person was a domestic partner as set forth in a default beneficiary clause.

    In Blakeley, an employee covered by a life insurance plan died and was survived by three children and a partner. Because the employee had neglected to designate a beneficiary, the plan provided that benefits would be distributed first to the insured's spouse, then to his domestic partner, his children (or his domestic partner's children), his living parents, or his estate. The employee was not married, and the parties disagreed as to whether the partner qualified as a domestic partner.

    The insurance company filed an interpleader action to identify the correct beneficiary.

Finding no definition of “domestic partner” in the plan's “general definitions” section, the district court turned to federal common law. The court borrowed from an Ohio statute to determine domestic partner status, concluded that the partner met this status, and entered a judgment for the partner. The children appealed, and the Sixth Circuit reversed.

    The Sixth Circuit noted that, although courts do sometimes resort to federal common law to identify beneficiaries under ERISA plans, the text of the plan is the much preferred source. Although the court agreed that the term “domestic partner” was missing from the plan's general definitions section, it noted that the plan did list criteria to identify a domestic partner whose life was also insurable under the plan. Although these criteria only specifically related to insurability, the Sixth Circuit decided that they should be used. These criteria included standard domestic partner criteria that relate to age, length and exclusivity of relationship, and financial interdependence, criteria also used by the district court under the federal common law test.  

    Interestingly, the plan also required that an employee and a domestic partner each have power of attorney for the other. This requirement was the primary difference between the plan and the standard adopted by the district court. The Sixth Circuit noted that neither the district court nor the parties pointed to facts to indicate that the employee and the partner met this requirement and remanded the case for the purpose of determining whether the requisite powers of attorney existed.

    Although it may not be surprising that the Sixth Circuit in Blakeley preferred the text of the plan over federal common law, what does seem surprising is that a plan standard for determining insurability was used to determine beneficiary status, as a standard for insurability is normally more stringent than for a designation of a beneficiary (mainly for underwriting purposes). It seems that beneficiary status was determined under criteria that were designed to avoid adverse selection.

--Mark C. Wolf, Tax Law Editor (Compensation Planning)

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