The Interpleader Process
When multiple people claim to be the rightful beneficiary of a life insurance policy, the life insurance company typically does not try to determine who has the rightful claim.
Paying the wrong person can expose the life insurance company to a lawsuit from a disgruntled claimant and even result in double liability. The insurance company will rarely intentionally ignore a contest letter from a lawyer. That is particularly true when the allegations include lack of mental capacity, undue influence or fraud. Even in facially incorrect challenges, such as community property claims regarding ERISA policies, insurance companies are reluctant to pay the proceeds and risk a court finding it paid the wrong claimant. Instead of taking chances, insurance companies can file a type of lawsuit known as an interpleader.
Texas and federal law protects an insurance company that files an interpleader in response to a beneficiary contest.
Texas common law provides that an insurer faced with rival claims to policy proceeds could interplead the funds, join the rivals who claimed them, and be discharged from further liability. A stakeholder may be entitled to recover its attorney's fees from the deposited funds unless there were no rival claimants or the interpleader was unreasonably delayed. State Farm Life Insurance Co. v. Martinez, 216 S.W.3d 799, 808 (Tex. 2007); Texas Rule of Civil Procedure 43; Federal Rule of Civil Procedure 22 and 28 U.S.C. § 1332.
How interpleader suits work
An interpleader lawsuit allows someone holding disputed funds (like an insurance company) to file a lawsuit and let a court decide the proper owner.
The interpleader prevents the life insurance company from being obliged to determine - at its peril - which person has the better claim.
As part of the process, the insurance company will name the competing claimants as defendants. After the competing parties appear in the interpleader case, the insurance company typically seeks an agreed order of dismissal. If the parties agree, the order typically provides an award of some attorney’s fees from the policy proceeds for the insurance company’s pursuit of the interpleader. If the parties do not agree, the court will consider the amount of reasonable and necessary fees for the insurance company. The awarded fees will generally be much lower if the competing parties agree to dismiss the insurance company as soon as possible after it files the interpleader. See Connecticut General Life Ins. v. Thomas, 910 F.Supp. 297, 305 (S.D.Tex.1995).
The pre-interpleader letter
Upon receiving notice of a contest, most insurance companies will send a pre-interpleader letter to the competing claimants. This letter will typically provide notice of competing claims to the policy proceeds and that the insurance company will allow 30 to 60 days for the parties to negotiate a compromise. That letter typically suggests the parties seriously consider a settlement to avoid the length and expense of litigation. Each company has its own procedures of course. Some will simply refer the matter to outside counsel to file the interpleader, without sending a pre-interpleader letter.
When to contact a lawyer
If the dispute cannot be resolved at this stage - during the pre-interpleader period - the claimants and their lawyers will appear in the interpleader lawsuit.
If you have not already hired a lawyer it is very important to do so after you receive a pre-interpleader letter from an insurance company - or if you have been told by an insurance representative that a contest has been asserted.
Consultations are free and confidential.