Untangling Claims: The Art and Strategy of Interpleader Actions

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Resolving competing claims to insurance proceeds can become a complex and costly endeavor for an insurer without the proper strategies. Fortunately, the interpleader remedy offers a streamlined, efficient solution for stakeholders facing the potential for multiple liability. This post provides a practical guide to understanding interpleader actions, including their purpose, application, and strategic advantages.

What is Interpleader?

Interpleader is a legal procedure that allows a stakeholder faced with competing claims to property or funds to bring all potential claimants into a single lawsuit. Interpleader allows a court to determine the rightful recipient of the contested property, protecting the stakeholder from multiple lawsuits and inconsistent judgments. The process is designed to avoid contentious litigation for the stakeholder, offering a way to avoid the expense and risk of defending multiple actions.

Fortunately, courts have adopted a relatively low bar for stakeholders facing competing claims: most jurisdictions require only that a stakeholder have a good faith fear of multiple vexation to bring an interpleader action. See, e.g., Michelman v. Lincoln National Life Insurance Co., 685 F.3d 887, 894 (9th Cir. 2012) (“[T]o 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.”) (Internal citations omitted); Equitable Life Assurance Soc'y of the U.S. v. Porter-Englehart, 867 F.2d 79, 84 (1st Cir. 1989) (“[T]o support an interpleader action, the adverse claims need attain only ‘a minimal threshold level of substantiality.’”). Notably, even potential competing claims can satisfy the standard.  See Michelman, 685 F.3d at 895 (“The adverse claim—whether actual or potential—must be at least colorable.”). Many jurisdictions even allow the stakeholder to recover their attorney fees and costs through the interpleader process.

When is Interpleader Necessary?

In the life insurance context, there are several common scenarios that result in competing claims, necessitating an interpleader action. The nature of the dispute will often inform the litigation strategy.

1. Beneficiary designation errors in life insurance policy forms can lead to conflicting claims for benefits. Such errors include failing to name a beneficiary, improper completion of beneficiary forms, and unclear percentage allocations among beneficiaries. Timing issues with submitting beneficiary changes can also cause disputes if the paperwork is not submitted before the insured’s death.
2. Divorce frequently leads to complications regarding life insurance beneficiaries. It is common for an ex-spouse to remain designated as the beneficiary on a life insurance policy after a divorce, often resulting in contingent beneficiaries or others alleging the insured did not intend for the ex-spouse to remain beneficiary. To counter this, many states have enacted revocation-upon-divorce laws that operate to revoke an ex-spouse’s beneficiary designation. But there remains abundant litigation, even when a revocation-upon-divorce statute applies. Ambiguous language in marital settlement agreements also commonly result in competing claims.
3. Policyholders may fail to update beneficiary designations following significant life events such as marriage, divorce, or the birth of children, resulting in disputes over the intended distribution of the insurance proceeds among the designated beneficiaries.
4. Allegations of undue influence, duress, fraud, forgery, or the incapacity of the policyholder at the time of designating beneficiaries often result in competing claims necessitating interpleader actions concerning the authenticity of the designation and the rightful beneficiaries.  These conflicts frequently emerge when a policyholder makes alterations to her beneficiary designations shortly before passing away. Last-minute changes can prompt inquiries into the policyholder’s mental capacity when the change was made and whether the new beneficiary exerted any undue influence.

Types of Interpleaders

There are two types of interpleader actions available in federal court:

1. Rule Interpleader (Federal Rule of Civil Procedure 22): This type of interpleader requires the stakeholder to establish independent grounds for federal jurisdiction, such as diversity of citizenship or a federal question.
2. Statutory Interpleader (28 U.S.C. § 1335): Statutory interpleader has less stringent jurisdictional requirements, requiring only minimal diversity among the claimants and a stake valued at $500 or more. It also requires the stakeholder to deposit the funds or property with the court or post a bond.

There are two advantages to proceeding with a statutory interpleader where possible. First, under 28 U.S.C. § 2361, Congress granted the district courts authority to issue nationwide service of process in statutory interpleader actions, which establishes personal jurisdiction over the interpleader defendants.  Second, 28 U.S.C. § 2361 allows the district courts to issue a permanent injunction against all claimants to the funds, providing the insurer with an additional layer of protection.

Best Practices in Interpleader Actions

Navigating the interpleader process effectively requires careful planning and execution. Here are some best practices for stakeholders:

1. Take Action Early: Insurers should be proactive about competing claims as soon as they are received. In many instances, competing claims can be resolved without proceeding to litigation. It is advisable to notify the claimants of the details of the competing claims and allow a period in which the claimants may resolve their dispute. It can often be helpful to have outside counsel serve as an intermediary to answer questions about settlement and/or the interpleader process. However, as soon as it is clear that the claimants cannot resolve their dispute, the insurer should initiate an interpleader action.
2. Understand Jurisdictional Nuances: It is important to understand the legal dynamics at play, which often depend on the jurisdictions in which (a) the policy was issued, (b) the insured died, and (c) the claimants live. These factors inform issues like the timing requirements for filing an interpleader lawsuit. Texas, for instance, has enacted a prompt payment statute, which requires payment of the proceeds or the filing of an interpleader within 90 days of the receipt of competing claims.
3. Practice Empathy: Although interpleader is a legal process, it is driven by human dynamics. It is important to keep in mind that many claimants in interpleader actions are grieving the loss of a loved one as they navigate legal issues. Interpleaders frequently involve pro se parties, so maintaining empathy and patience, and taking the time to explain the interpleader process, often leads to smoother and more efficient outcomes.

By understanding the intricacies of interpleader actions and following these best practices, stakeholders can effectively resolve competing claims, minimize legal exposure, and conserve valuable time and resources.