COLORABLE ADVERSE CLAIMS REQUIRE INTERPLEADER
When two or more people make a colorable claim on insurance proceeds an insurer cannot safely pay one without facing litigation and the possibility of double payment to the others. The Ninth Circuit Court of Appeal, deciding a case out of Washington state, in Gail Michelman, An Individual v. Lincoln National Life Insurance Company, A Foreign Insurance Company, No. 11-35393 (9th Cir. 07/12/2012) was asked to decide whether an adverse claim to a stake may be so lacking in substance that a neutral stakeholder cannot interplead in good faith. Interpleader is proper when a stakeholder has at least a good faith belief that there are conflicting colorable claims.
Gail and Irwin Michelman submitted a life insurance application to Lincoln National Life Insurance Company in 1999 to obtain coverage for their minor daughter, Elizabeth. At the time, Gail and Irwin were married. The application listed Gail and Irwin as the primary beneficiaries and their other daughter, Jessica, as a contingent beneficiary. The application designated Gail as the policy owner, with policy ownership passing to Elizabeth upon her 21st birthday.
Whether Irwin also had an ownership interest in Elizabeth’s life insurance policy is less certain. The insurance contract unhelpfully defined the policy “Owner”-in the singular-as “the Owner identified in the application or a successor.” Although Irwin’s name was written on the line of the application designated for the “Contingent owner,” the Michelmans may have intended for Irwin to be a primary rather than a contingent owner. The application form did not provide a space for more than one primary owner. Nonetheless, in the space to be completed “[i]f two or more Primary owners are named,” the Michelmans checked the box indicating that they were to be joint owners with a right of survivorship between them.
The Michelmans themselves dispute what their intent was. Irwin testified at his deposition that he and Gail intended for both of them to be primary owners of the policy, but that his name was listed on the line for “Contingent owner” because there was no space on the form to insert the name of the second primary owner. At Gail’s deposition, she expressed her belief that Irwin was only a contingent owner. For its part, Lincoln was inconsistent on the ownership issue. Its records reflected that Gail was the policy’s primary owner and Irwin was the contingent owner, but its claims examiner stated in a declaration that the insurance application names Gail and Irwin as joint owners.
Gail and Irwin divorced in 2001. The divorce decree did not include Elizabeth’s life insurance policy among the assets that it catalogued. In 2002, when Elizabeth had not yet reached the age of 21, Gail submitted a change-of-beneficiary form to Lincoln purporting to remove Irwin as a beneficiary and leave herself as the sole primary beneficiary and Jessica as the contingent beneficiary. Lincoln acknowledged this change a few days later in a letter to Gail.
Elizabeth died on August 10, 2009 at the age of 22. Although the autopsy revealed no clear cause of death, the medical examiner found that Elizabeth’s multiple sclerosis and the high level of oxycodone in her blood were contributing factors. Elizabeth’s parents raised concerns about what they considered to be suspicious circumstances surrounding their daughter’s death, but the sheriff’s department found no evidence that another person was involved. Gail, who was out of state at the time of Elizabeth’s death, was never suspected of foul play.
On August 17, 2009, Irwin called Lincoln and stated that Lincoln should look for fraud in the beneficiary information for Elizabeth’s life insurance policy. Irwin told Lincoln that he and his wife were originally equal beneficiaries under the policy and that their divorce decree prohibited any changes.
Lincoln wrote to Gail and Irwin on October 12, 2009. Lincoln informed them that its records showed Gail to be the beneficiary but acknowledged that Irwin had made a conflicting claim. Admitting that the policy proceeds were due and payable, Lincoln explained that by paying one party it faced the risk of being sued by the other. The solution, Lincoln concluded, was to file an interpleader action unless Gail and Irwin could agree how to distribute the proceeds.
Before discovery had commenced, Lincoln moved for summary judgment on all of Gail’s claims. In its August 10, 2010 order, the district court granted Lincoln’s summary judgment motion in part. The court found that interpleader was appropriate and dismissed Gail’s claim for breach of contract but denied summary judgment as to Gail’s bad faith and CPA claims, finding that they were independent of Lincoln’s ultimate coverage decision.
DISCUSSION – Interpleader
Federal Rule of Civil Procedure 22 authorizes a stake-holder to join “[p]ersons with claims that may expose [the stakeholder] to double or multiple liability” and requires such persons to interplead. Here, the district court stated that “the bald assertion of a claim against the policy, without any colorable support, is probably not enough to warrant an interpleader action” but found that Lincoln had a good faith belief that it faced the potential of multiple liabilities.
The Ninth Circuit concluded that “in order to avail itself of the interpleader remedy, a stakeholder must have a good faith belief that there are or may be colorable competing claims to the stake.” This is not an onerous requirement.
The possibility of double liability is only one such problem; another is the cost of litigation, which does not depend on the merits of adverse claims. Although an interpleading stakeholder need not sort out the merits of conflicting claims as a prerequisite to interpleader, good faith requires a real and reasonable fear of exposure to double liability or the vexation of conflicting claims. A “real and reasonable fear” does not mean that the interpleading party must show that the purported adverse claimant might eventually prevail. Of course, the claims of some interpleaded parties will ultimately be determined to be without merit. That, however, is the very purpose of the proceeding and it would make little sense in terms either of protecting the stakeholder or of doing justice expeditiously to dismiss one possible claimant because another possible claimant asserts the claim of the first is without merit.
A stakeholder must interplead in good faith. The threshold showing is not exacting. Interpleader is appropriate where the stakeholder reasonably fears that there may be multiple parties with colorable adverse claims to the stake.
The ambiguity as to primary ownership of the policy appeared on the face of the insurance application, which Lincoln already had in its possession. Given the uncertainty about Irwin’s ownership of the policy, Lincoln had a reasonable fear that Gail and Irwin would make overlapping claims to the proceeds. The Ninth Circuit rejected the contention that Lincoln should have investigated further before interpleading. Interpleader proceedings are pragmatic in nature and should be resolved expeditiously. Because Irwin had a colorable claim to the insurance proceeds, Lincoln need not have expended additional time or resources trying to assess the merits of his claim.
The availability of interpleader need not produce a harsh result for a legitimate claimant who is forced into interpleader due to a rival claimant’s non-meritorious assertions. Lincoln interpleaded in good faith. It knew from Irwin’s phone call that Irwin had a potential claim arising from his asserted co-ownership of the policy and Gail’s unilateral change to the beneficiary designation. The ambiguity of the insurance application showed that Irwin’s assertion was not frivolous. While this alone sufficed to justify interpleader, Irwin took additional steps that further indicated his intent to litigate. He had his attorney send Lincoln a letter requesting that it refrain from paying Gail the policy proceeds. He filed a claim form demanding the policy proceeds. Lincoln thus had a real and reasonable fear of colorable conflicting claims. Consequently, the district court’s judgment in interpleader was proper.
DISCUSSION – Bad Faith
Lincoln did not refuse to pay a claim. It fully acknowledged that it owed Elizabeth’s insurance proceeds to somebody. Lincoln merely refused to pay any particular claimant until a court determined who was legally entitled to the proceeds. This was fully consistent with state law. We agree with the district court that, to the extent Lincoln’s claims investigation policy was unreasonable, any shortcomings in the policy were harmless. Lincoln’s decision to interplead was sound and it had no duty to investigate thereafter.
When an insurer is faced with competing claims against policy proceeds it is between the classic rock and a hard place. If it pays one it will be sued by the other. If it pays the other it will be sued by the one. Both will sue for the tort of bad faith. Lincoln was faced with this dilemma and took the only option available to it — it interpleaded the funds into court and asked that the competing parties prove to the court which was entitled to the funds.
Of course, when the ex-wife lost she sued and took up on appeal her loss. The Ninth Circuit, in a Solomon-like decision, found that both the ex-wife and ex-husband had colorable claims upon the life insurance proceeds and that, therefore, the insurer properly interpleaded the funds establishing that interpleader was the only safe response to competing claims of different people to the same funds.
© 2012 – Barry Zalma
Barry Zalma, Esq., CFE, has practiced law in California for more than 40 years as an insurance coverage and claims handling lawyer. He also serves as an insurance consultant and expert witness specializing in insurance coverage, insurance claims handling, insurance bad faith and insurance fraud. Mr. Zalma serves as a consultant and expert, almost equally, for insurers and policyholders.
He founded Zalma Insurance Consultants in 2001 and serves as its senior consultant.
Mr. Zalma recently published the e-books, “Zalma on Insurance Fraud – 2012″; “Zalma on Diminution in Value Damages – 2012,”“Zalma on Insurance,” “Heads I Win, Tails You Lose — 2011,” “Zalma on Rescission in California,” “Arson for Profit” and others that are available at www.zalma.com/zalmabooks.htm.