When an Insurer Must Interplead Funds

When an Insurer Must Interplead Funds

When an insurance company is faced with competing claims for the proceeds of a life insurance policy and cannot determine which claim is proper, it may deposit the benefits of the policy into court and ask that the competing interests litigate the right to the proceeds. Since it has no interest in the funds, once deposited, the insurer asks the court to release it from any obligation to the competing interests and is entitled to its fees and costs for bringing the action from the deposited funds.

In Farmers New World Life Insurance Co. v. Rees, B241099 (Cal.App. Dist.2 08/30/2013), the wife was found dead in the street outside the home she shared with her husband. Her death was investigated as a homicide. Husband, who was the sole beneficiary on the wife’s life insurance policy, was a suspect. The life insurance company filed an interpleader action and deposited the policy benefits plus interest with the trial court. The wife’s mother, who would be entitled to the policy benefits if husband were found to have feloniously and intentionally killed wife, defaults in the action. The court awards husband the interpleaded funds less attorney fees and costs requested by the life insurance company. Husband contended that the attorney fees and costs award was erroneous because his right to the policy benefits never was in dispute.

FACTUAL BACKGROUND

Frank and Rosamaria Rees married in 1997. In May 1998 they each obtained from Farmers New World Life Insurance Company (Farmers) a life insurance policy with benefits of $150,000. Rosamaria’s policy insured her life, and Frank’s policy insured his life. They named the other as the sole primary beneficiary and listed no contingent beneficiaries. According to the terms of Rosamaria’s policy, if Frank predeceased Rosamaria, the benefits were to be paid to Rosamaria or to her estate.

On September 18, 2009, Rosamaria, on her way to pick up Frank from a Gamblers Anonymous meeting, was shot and killed in the street outside the home she shared with Frank. She died intestate. Farmers’ insurance agent informed the company of Rosamaria’s death on September 23, 2009. A claims officer contacted Frank, who indicated that the Los Angeles Police Department (LAPD) was investigating Rosamaria’s death as a homicide. Farmers sent Frank a claim form for the policy benefits.

On October 1, 2009, a Special Investigation Unit Manager (manager) for Farmers spoke with an LAPD detective regarding Rosamaria’s death. According to the manager’s notes, the detective reported that “no one has been ruled out in this death. He said that [Frank] is a big gambler and has a couple million dollars in life insurance on his wife.” About two weeks later, on October 14, 2009, Frank submitted a claim to Farmers for the $150,000 in life insurance benefits.

For six months Farmers sent letters to Frank informing him that, according to the LAPD, the investigation of Rosamaria’s death still is ongoing and no one has been ruled out as a suspect in her homicide and that it would await the results of the investigation before discharging its obligation.

Frank retained counsel and asked for confirmation that Frank’s “claim was complete and that [it] [had] received all the supporting documents needed to process his claim….” Based on the receipt of this letter, and the fact that Frank was still considered a “prime suspect” in the murder of Rosamaria, the manager referred this matter to Farmers’ legal department and, subsequently, a decision was made to interplead the life insurance proceeds.

On August 3, 2010, Farmers filed a complaint in interpleader identifying Frank’s claim for the policy benefits and alleging that, based on LAPD’s investigation of Frank as a suspect in the homicide of Rosamaria, Farmers has been unable to determine the appropriate payee for the death benefit proceeds.

Frank answered the complaint and filed a first amended cross-complaint, asserting a cause of action for declaratory relief against Farmers and Rosamaria’s mother, as the person who would receive the policy benefits through Rosamaria’s estate if he were found to have feloniously and intentionally killed Rosamaria. Frank asked for a judicial determination that he was entitled to the $150,000 in benefits on Rosamaria’s policy. Frank also asserted causes of action against Farmers for breach of contract and bad faith based on its failure to pay him the policy benefits despite his filing a claim for them.

Frank, opposing the motion of Farmers to be discharged from the case, submitted the declaration of an insurance industry expert, who opined that Farmers did not act reasonably and within the standards of the insurance industry in the handling of Frank’s claim in its investigation and payment of benefits. Regardless, the trial court issued an order discharging Farmers from the interpleader action. The court awarded Farmers attorney fees of $7,506.30 plus $491.19 in costs and directed the clerk to pay Farmers that amount, which was the balance of the interpleaded funds.

DISCUSSION  In an interpleader action, the court initially determines the right of the plaintiff to interplead the funds; if that right is sustained, an interlocutory decree is entered which requires the defendants to interplead and litigate their claims to the funds. Interpleader proceeding is traditionally viewed as two lawsuits in one. The first dispute is between the stakeholder and the claimants to determine the right to interplead the funds. The second dispute to be resolved is who is to receive the interpleaded funds.

Frank contends that the attorney fees and costs award was improper because the funds Farmers deposited with the court were never “in dispute” as required by statute. The first amended complaint in interpleader defined the dispute over the policy benefits. On the one hand, Frank filed a claim to obtain the benefits as the sole beneficiary on the policy. On the other hand, Frank was a suspect, at one point “a ‘prime’ suspect in the death of his wife,” and LAPD had an ongoing investigation into Rosamaria’s death. If Frank were found to have feloniously and intentionally killed Rosamaria, he would not have been entitled to the policy benefits, and they would have been payable to Rosamaria’s mother through her estate.

A defendant in interpleader has the right to put in issue the question as to whether or not the facts were such as to entitle the plaintiff to compel the defendants to interplead. If the defendants in interpleader have fully litigated their claims without objection, they will be deemed to have consented to the remedy invoked and granted, and will not later be heard to object that the plaintiff’s complaint did not state a cause of action for interpleader.

Frank did not question Farmers’ use of the remedy of interpleader, but rather litigated the matter in the trial court. Frank did not contest Farmers’ decision to interplead the funds. Rather, he answered the original complaint, without asserting any affirmative defenses, and stipulated to the filing of the first amended complaint adding Rosamaria’s mother as a defendant.

The statutory scheme for interpleader contemplates an award of attorney fees in the trial court’s discretion. Nothing in that scheme suggests that life insurance companies should be exempt from such an award as a routine cost of doing business. Indeed, to read such an exception into the provision for attorney fees and costs would conflict with the statutory language.

ZALMA OPINION

Farmers was lucky that Frank agreed to and litigated the interpleader action. By so doing he allowed the court to determine the actions of Farmers was appropriate in refusing to pay Frank and to interplead the policy proceeds because he was a prime suspect in the death of his wife.

My concern is that the appellate decision does not reveal that Farmers did a thorough investigation of the claim presented by Frank but relied, apparently solely, on the representations of the LAPD officers investigating the death of the wife that Frank was a “prime suspect.” Farmers apparently did no investigation of its own.

Police officers have a different function than insurance investigators. They seek evidence of a crime that can be proved beyond a reasonable doubt. They have no interest in the rights and obligations of persons insured or their insurer. The insurer must make a decision based on its own investigation and does not have the five years police officers have to complete an investigation. If the insurer did a thorough investigation, determined that there was admissible evidence that indicated a probability that Frank killed his wife and that, therefore, the wife’s mother had a viable claim, interpleader was appropriate.

A police officer’s suspicions, like a fraud investigators suspicions, are just that – suspicions. They are not evidence. The lesson from this case is that interpleader should be filed if there is evidence to support it.