When a Life Insurance Policy Falls Outside ERISA: Texas District Court Applies the Sole-Owner Exception and Resolves Beneficiary Dispute Under State Law

In Principal Life Insurance Co. v. Jones, No. 3:25-cv-00221, 2026 WL 1480286 (S.D. Tex. May 27, 2026), Magistrate Judge Andrew M. Edison recommended that summary judgment be granted to the administrator of the decedent’s estate in an interpleader action involving the proceeds of a $2,000,000 flexible premium variable universal life insurance policy. The decision turns on two issues of interest to ERISA practitioners: whether the policy qualified as an ERISA-governed employee welfare benefit plan, and, after concluding that it did not, how Texas state law resolves a beneficiary dispute where the decedent signed a binding informal settlement agreement in pending divorce proceedings but died before the divorce decree was entered.

Why Was the Life Insurance Policy Not Governed by ERISA?

Plaintiff, the surviving spouse and named policy beneficiary, argued that distribution of the proceeds fell within the scope of ERISA and that the company was required to pay her as the named beneficiary regardless of any state-law waiver. The court rejected this argument and concluded that the policy was not an ERISA-governed plan. ERISA preempts state laws insofar as they relate to any employee benefit plan, and an employee welfare benefit plan is defined under 29 U.S.C. § 1002(1) as a plan established or maintained by an employer to provide benefits, including death benefits, to its participants or their beneficiaries. While the policy resembled such a plan in that it provided benefits upon the decedent’s death, the court explained that determining whether a plan falls within ERISA’s scope requires a more probing inquiry into the plan’s structure and participants, citing Meredith v. Time Ins. Co., 980 F.2d 352, 355 (5th Cir. 1993).

Applying Department of Labor regulations at 29 C.F.R. § 2510.3-3(b) and (c)(1), the court noted that an employee benefit plan does not include any plan under which no employees are participants, and that an individual is not deemed an employee with respect to a trade or business wholly owned by that individual. The court relied on Raymond B. Yates, M.D., P.C. Profit Sharing Plan v. Hendon, 541 U.S. 1, 21 (2004), for the proposition that plans covering only sole owners fall outside ERISA’s domain. The decedent was the sole owner of the policy, no other employees were covered, and even assuming the decedent’s professional corporation was his employer, the policy still failed to qualify because no other employee-participant existed. With ERISA out of the picture, the court turned to Texas state law.

Did the Texas Insurance Code Require the Insurer to Pay the Named Beneficiary?

Plaintiff argued that Texas Insurance Code § 1103.102(a) mandated payment to her as the designated beneficiary. The court acknowledged that this would be the default rule but pointed to subsection (b), which provides that the insurer is not required to pay the proceeds to a designated beneficiary if it receives notice of an adverse claim from a person with a bona fide legal claim to the proceeds. The administrator of the decedent’s estate had notified Principal Life of the parties’ settlement agreement and divorce decree, and Plaintiff did not dispute that the estate’s claim was made in good faith. Because Principal Life received notice of a bona fide adverse claim, the statute did not compel payment to Plaintiff.

Was the Binding Informal Settlement Agreement Enforceable Despite Plaintiff’s Attempted Revocation?

The parties entered into a Binding Informal Settlement Agreement under § 6.604 of the Texas Family Code on May 14, 2025, awarding each party all life insurance policies insuring his or her own life, releasing all claims against the other, and stating it was irrevocable and effective immediately. Both parties signed an Agreed Final Divorce Decree incorporating those terms. The decedent died on May 27, 2025, before the judge signed the decree. The day after the decedent’s death, Plaintiff filed a Revocation of Agreement in the state court divorce proceedings.

The court held the agreement enforceable. It met the requirements of § 6.604(b): it contained a prominently displayed statement in bold capital letters that the agreement was not subject to revocation, both parties signed it, and the decedent’s attorney signed it (Plaintiff was not represented). Following Spiegel v. KLRU Endowment Fund, 228 S.W.3d 237, 242 (Tex. App.—Austin 2007, pet. denied), and In re M.A.H., 365 S.W.3d 814, 820 (Tex. App.—Dallas 2012, no pet.), the court concluded that an informal settlement agreement complying with § 6.604(b) is irrevocable and must be enforced even where one party dies before entry of the divorce decree. Plaintiff’s attempted revocation the day after signing was therefore ineffective. The court further held the agreement enforceable as a standalone contract under Texas Rule of Civil Procedure 11, observing that a Rule 11 agreement becomes a contract when executed and not when a court later attempts to enforce it.

Did the Decedent’s Death Render the Estate’s Performance Impossible?

Plaintiff argued that the agreement was unenforceable because the decedent could not perform, particularly his obligation to pay $30,000 to Plaintiff on or before the date of divorce. The court rejected this argument on three grounds. First, the agreement’s enforceability was not conditioned on entry of a divorce decree or any future court action; it provided that it shall be effective immediately. Second, under Texas contract law, a cause of action founded on a contract survives the death of either party, and contractual obligations bind the decedent’s estate if the contract is capable of being performed by the estate representative. The estate administrator could pay the $30,000. Third, performance was not yet due because the divorce decree had not been entered, and Texas law presumes performance within a reasonable time where time is not expressly made of the essence. The court ordered the estate to tender the $30,000 within seven days of adoption of the recommendation.

Did the Settlement Agreement and Decree Divest Plaintiff of Her Status as Named Beneficiary?

Plaintiff argued that because the decedent never submitted written notice to Principal Life changing the beneficiary designation, she remained entitled to the proceeds. The court held that the agreement and decree divested her beneficiary interest notwithstanding the unchanged designation. Citing Beckham v. Beckham, 672 S.W.2d 41, 42 (Tex. App.—Houston [14th Dist.] 1984, no writ), the court explained that the decedent’s intent controls over the policy’s terms, and the presumption arising from his failure to change the designation can be rebutted.

Three factors compelled the conclusion that the presumption was rebutted and conclusively overridden. First, the decree expressly divested Plaintiff of all right, title, interest, and claim in any life insurance policy insuring the decedent’s life, and awarded all such policies, including cash values, to the decedent as his sole and separate property. Texas courts have treated materially identical language as sufficient to divest a beneficiary’s interest in both ownership and proceeds, citing Hennig v. Didyk, 438 S.W.3d 177, 188 (Tex. App.—Dallas 2014, pet. denied), and Novotny v. Wittner, 731 S.W.2d 103, 105 (Tex. App.—Houston [14th Dist.] 1987, writ ref’d n.r.e.). Second, the agreement contained a broad mutual release of all claims, demands, and causes of action each party had against the other, and Spiegel held that such a broad release supports revocation of a beneficiary designation. Interpreting the agreement to preserve Plaintiff’s beneficiary status would impermissibly render the release provision meaningless. Third, the decedent died just thirteen days after signing the agreement, depriving him of a meaningful opportunity to change the beneficiary designation, a circumstance Texas courts have repeatedly recognized as supporting divestment.

The court concluded that the parties intended to sever their financial relationship, that the agreement and decree operated to divest Plaintiff as the beneficiary, and that under the policy’s terms the proceeds were therefore payable to the decedent’s estate. The court recommended that the estate’s motion for summary judgment be granted, Plaintiff’s motion be denied, and the estate be ordered to tender a lump-sum $30,000 payment to Plaintiff within seven days after adoption of the recommendation.