When there are Multiple Possible People With a Right to Life Insurance Proceeds Interpleader is Required
When a life insurance company is faced with multiple claimants to the proceeds of a life insurance policy and is ready to pay but cannot decided to whom it should pay, the law allows an insurer to deposit the proceeds of the policy into court and sue the potential beneficiaries by an interpleader action. In 5 Star Life Insurance Company v. Monica Smith, et al., 2:19-cv-00095-ACA, United States District Court For The Northern District Of Alabama Southern Division (October 23, 2020) 5 Star Life Insurance Company’s (“5 Star”) moved the USDC to dismiss those defendants who did not respond to the suit and asked it to decide guardian ad litem Cindy Webb’s petition for attorney’s fees and 5 Star’s petition for attorney’s fees and costs.
The work of the court was simplified because in the interpleader action, only one party presented evidence in favor of their claim: the decedent’s minor children through their guardian ad litem.
5 Star issued a group life insurance policy covering Steven Small in the amount of $15,000. Mr. Small died without naming a beneficiary, and 5 Star filed this action in interpleader to determine who is entitled to Mr. Small’s insurance proceeds. In the absence of a named beneficiary, the policy provides that the proceeds may be paid to (1) the insured’s surviving spouse, (2) the insured’s children, (3) the insured’s parents, or (4) the insured’s brothers and sisters. 5 Star identified nine potential claimants to Mr. Small’s insurance proceeds: Monica Smith, Brittany Boyd, Crystal Boyd, Shennell Fisher, George Poole, Gloria Small, G.S., F.S., and S.S.
Monica Smith and Shennell Fisher both claim to be Mr. Small’s surviving spouse. Gloria Small claims to be Mr. Small’s beneficiary based upon a writing by Mr. Small prior to his death. Brittany Boyd and Crystal Boyd claim to be Mr. Small’s adult children. George Poole claims to be Mr. Small’s father. Finally, through their guardian ad litem, G.S., F.S., and S.S. claim to be Mr. Small’s minor children.
Brittany Boyd, Crystal Boyd, Ms. Smith, Ms. Small, and the minor children all filed timely answers to 5 Star’s complaint. Ms. Fisher and Mr. Poole, however, failed to file a responsive pleading. Therefore, the Clerk entered default against Ms. Fisher and Mr. Poole and 5 Star subsequently moved for default judgment.
Ms. Webb provided the court with a guardian ad litem report recommending that the minor children share the insurance proceeds in equal proportions. Ms. Webb also produced the minor children’s birth certificates to establish Mr. Small’s paternity. Other than the minor children, no party has presented evidence to the court supporting their claim to the insurance proceeds.
Both Mr. Poole and Ms. Fisher are named and properly served interpleader defendants who have failed to answer the interpleader complaint. Accordingly, the Clerk entered default against Mr. Poole and Ms. Fisher. Because of their failure to plead or otherwise defend this interpleader suit, Mr. Poole and Ms. Fisher have both forfeited any claim of entitlement that they may otherwise have had on the decedent’s life insurance proceeds. Thus, an entry of default judgment against them was proper.
5 Star filed this interpleader action so that the court could “determine which of the Defendants in the Interpleader are entitled to the proceeds.” 5 Star makes no claim to the insurance proceeds and is seeking to avoid multiple liability by asking the court to determine the asset’s rightful owner.
Under Alabama law, the birth certificates are evidence of Mr. Small’s paternity. No party to this action has disputed that Mr. Small is the minor children’s father. Because the insurance policy lists the insured’s children as a class of beneficiaries if there is no named beneficiary, and no other party has presented evidence in support of a claim, the court concluded that the minor children were entitled to the insurance proceeds.
In an interpleader action, attorney’s fees and costs are awarded at the discretion of the court. The court appointed Ms. Webb to represent the minor children in this case. Ms. Webb spent 7.1 hours reviewing the pleadings and law in this case, speaking with the mother of the minor children, obtaining the children’s birth certificates, and drafting her report. Accordingly, Ms. Webb is entitled to attorney’s fees in the amount of $2,100 to be paid out of the interpleaded funds.
In the interest of preserving the limited insurance proceeds for Mr. Small’s beneficiaries, and because this interpleader action arose out of the normal course of 5 Star’s business, the court denied 5 Star’s motion for attorney’s fees.
Although usually the insurer interpleading funds into court will have its fees paid from the interpleaded funds. However, since the proceeds of the policy was limited, and insurers are not a favored litigant, the guardian was paid and the insurer was not paid so the children could get more money. It is appropriate for a court, acting in equity, to do as did the USDC and the insurer was protected from the competing claims. Interpleader is an important tool to any insurer faced with multiple claims against the proceeds, whether life, property or casualty insurance.
© 2020 – Barry Zalma
Barry Zalma, Esq., CFE, now limits his practice to service as an insurance consultant specializing in insurance coverage, insurance claims handling, insurance bad faith and insurance fraud almost equally for insurers and policyholders. He also serves as an arbitrator or mediator for insurance related disputes. He practiced law in California for more than 44 years as an insurance coverage and claims handling lawyer and more than 52 years in the insurance business. He is available at http://www.zalma.com and email@example.com.
Mr. Zalma is the first recipient of the first annual Claims Magazine/ACE Legend Award.
Over the last 52 years Barry Zalma has dedicated his life to insurance, insurance claims and the need to defeat insurance fraud. He has created the following library of books and other materials to make it possible for insurers and their claims staff to become insurance claims professionals.
Read posts from Barry Zalma at https://parler.com/profile/Zalma/posts
https://visitor.r20.constantcontact.com/manage/optin?v=001Gb86hroKqEYVdo-PWnMUkV7pkuOtkiv6oakpgK33CNlNAYW-WBlLCOZFtgvpSdcL7R-tsWKfMVqG6fEuvmM7Hh7gUEJ7yKOdgHDbGl_cGAU%3De-mail Version of ZIFL, it’s Free! –