What Is an Interpleader Action?
An interpleader action is a legal procedure that allows an insurance company to deposit life insurance proceeds with a court when multiple parties claim the right to the same money. Instead of deciding who should receive the funds, the insurer asks the court to make that determination.
In an interpleader, the insurance company effectively says: "I acknowledge I owe this money, but multiple people claim they're entitled to it. I don't want to pay the wrong person and get sued by the right one. Please take this money and decide who should get it."
Why Insurers File Interpleaders
Insurance companies file interpleaders for several reasons:
- Competing claims: Multiple people have made formal claims to the same death benefit
- Disputed beneficiary designation: The validity of a beneficiary change is questioned
- Unclear policy language: The beneficiary designation is ambiguous
- Potential for double liability: The insurer fears being sued by whoever doesn't get paid
- Estate disputes: The estate and named beneficiaries disagree on entitlement
While being sued by an insurance company sounds alarming, an interpleader action actually confirms that the insurer will pay - the only question is to whom. This is often better than an outright denial where the insurer keeps the money entirely.
Common Situations Leading to Interpleader
Divorce and Beneficiary Changes
After a divorce, the insured may have changed their beneficiary from their ex-spouse to someone else, but the ex-spouse disputes whether the change was valid. The new beneficiary and ex-spouse both claim the proceeds.
Conflicting Beneficiary Designations
Multiple beneficiary designation forms exist, and it's unclear which is the most recent or valid. For example, the insured may have completed a change form that the insurer never properly processed.
Claims of Undue Influence or Fraud
Family members allege that the named beneficiary manipulated the insured into changing the beneficiary designation through fraud, coercion, or undue influence while the insured was mentally incapacitated.
Slayer Rule Disputes
A beneficiary is accused of causing the insured's death. Under the "slayer rule," someone who kills the insured cannot benefit from their death, but this must be determined by a court.
Estate vs. Named Beneficiary Disputes
The estate argues that the named beneficiary should not receive the proceeds (often citing a will, divorce decree, or court order), while the named beneficiary insists the policy designation controls.
Under California Probate Code Section 5600, a beneficiary designation on a life insurance policy is generally controlling, even if it conflicts with the decedent's will. However, California Family Code Section 2040 allows courts to assign rights to life insurance in divorce proceedings, which can create conflicts with the policy's named beneficiary.
California courts will also consider whether a beneficiary change was made while the insured lacked mental capacity or was subject to undue influence.
The Interpleader Process
1 Insurer Files Complaint
The insurance company files an interpleader complaint in court, naming all potential claimants as defendants. The complaint explains the competing claims and states that the insurer does not know who is entitled to the funds.
2 Funds Deposited With Court
The insurer deposits the policy proceeds with the court. In some cases, the insurer may also request to be dismissed from the case at this point, since they have paid the money and no longer have a stake in the outcome.
3 Claimants Served
All claimants receive formal notice of the lawsuit and must respond. Failing to respond can result in losing your claim to the proceeds by default.
4 Claimants Assert Their Positions
Each claimant files an answer explaining why they are entitled to the funds. This typically includes evidence supporting their claim (beneficiary forms, court orders, etc.) and legal arguments.
5 Discovery and Motions
Claimants may conduct discovery (depositions, document requests) and file motions. Many interpleader cases are resolved on summary judgment without a full trial.
6 Trial or Settlement
If the case isn't resolved through motions, it proceeds to trial. Many interpleader cases settle before trial, with claimants agreeing to split the proceeds.
7 Court Awards Funds
The court determines who is entitled to the proceeds and orders the funds distributed. The prevailing party receives the deposited amount, potentially minus court costs and the insurer's attorney fees (if allowed).
If you receive notice that you've been named in an interpleader action, you must respond within the deadline (typically 20-30 days). Ignoring it can result in a default judgment against you - meaning you lose your claim entirely.
What Beneficiaries Should Do
If You're the Named Beneficiary
Being the named beneficiary on the policy is your strongest argument. Your strategy should:
- Obtain certified copies of the beneficiary designation form(s)
- Document that the designation was properly executed
- Show there was no subsequent valid change
- Argue that policy designations take precedence over wills or other documents
- Respond promptly to all court filings and deadlines
If You're Challenging the Named Beneficiary
If you believe you should receive the proceeds instead of the named beneficiary, you'll need to prove:
- A more recent beneficiary change was made (and you're on it)
- The beneficiary designation was procured through fraud or undue influence
- The insured lacked mental capacity when designating the beneficiary
- A divorce decree or court order supersedes the policy designation
- The named beneficiary is disqualified (e.g., under the slayer rule)
Interpleader cases often turn on documentary evidence: beneficiary forms, medical records (if capacity is at issue), divorce decrees, emails or letters showing intent, and witness testimony. Gather this evidence as soon as possible.
Consider Settlement
Interpleader litigation is expensive and uncertain. If there's any legitimate basis for the other party's claim, consider whether a negotiated settlement might be preferable to continued litigation. A 70% settlement now may be worth more than a 60% chance of winning 100% after years of legal fees.
Attorney Fees in Interpleader Cases
One frustrating aspect of interpleader cases is that the insurance company often deducts its attorney fees from the deposited funds before anyone receives payment. Courts frequently allow this, reasoning that the insurer was forced into litigation through no fault of its own.
However, this is not automatic. You may be able to argue that:
- The insurer's claimed fees are excessive
- The insurer could have resolved the dispute without filing suit
- The insurer acted in bad faith by filing an interpleader when there was no genuine dispute
- State law limits or prohibits fee deductions
California courts have discretion in awarding attorney fees to interpleading insurance companies. In City of Morgan Hill v. Brown, the California Supreme Court held that fee awards are not automatic and should be based on equitable considerations, including the conduct of the parties.
When Interpleader Is Improper
Sometimes insurance companies file interpleaders when they shouldn't. This can be a delay tactic or an attempt to avoid paying anyone at all. An interpleader may be improper if:
- There is no genuine dispute - only one person has actually claimed the funds
- The insurer is simply trying to deny the claim on other grounds
- The dispute is manufactured or exaggerated by the insurer
- The policy language clearly identifies a single beneficiary
If you believe an interpleader was filed in bad faith, you may be able to seek sanctions or have the case dismissed with an order that the insurer pay you directly.
Related Guides
Named in an Interpleader Action?
If you've received notice that an insurance company has filed an interpleader involving life insurance proceeds you believe you're entitled to, I can help you navigate the process and protect your claim. Time is critical - response deadlines are strict.