New Published Decision Reaffirms Protection for Insurers Bringing Good Faith Interpleader Actions in California

by Manatt, Phelps & Phillips, LLP

In Farmers New World Life Ins. Co. v. Rees,—Cal. Rptr. 3d—, 2013 WL 4654611 (August 30, 2013), the Second District of the California Court of Appeal vindicated the rights of an insurer that interpleaded funds in good faith, holding that the insurer had properly filed the interpleader action and was entitled to its attorneys’ fees and costs.

In Farmers, the insured (“Rosamaria”) was killed outside the home she shared with her husband (“Frank”), the sole primary beneficiary under her life insurance policy issued by Farmers. Rosamaria died intestate, had no children, and was survived by her mother. Farmers learned from the police that no one had been ruled out as a suspect in her death. Frank then submitted a claim for the policy benefits to Farmers. For the next several months, Farmers stayed in touch with the police, who repeatedly confirmed that Frank had not been ruled out as a suspect. Throughout this time, Farmers informed Frank that it would await the results of the police investigation before discharging its obligation under the policy.

In the meantime, Farmers filed a complaint in interpleader naming Frank as a defendant. Rosamaria’s mother, who would be entitled to the benefits under California’s slayer statute if Frank were found to have feloniously and intentionally killed Rosamaria, was eventually added as a defendant as well—but she did not appear and default was entered against her. Frank then filed a cross-complaint against Farmers asserting bad faith and breach of contract. The trial court eventually released the interpleaded funds to Frank, minus $7,997.49 in attorneys’ fees and costs requested by Farmers for bringing the interpleader action. Frank appealed the fee award. The Court of Appeal recently affirmed.

On appeal, Frank argued that the funds deposited with the court were not really “in dispute” as required by the interpleader statute because no one other than the named beneficiary actually claimed the funds. The Court rejected this argument, noting that a dispute existed because on one hand, Frank had filed a claim for benefits as the sole beneficiary, and on the other, until he was ruled out as a suspect, there was a possibility that he would be barred from receiving the benefits under California’s slayer statute. The Court also rejected Frank’s attempt to challenge the propriety of the interpleader action, finding that “the route taken by Farmers of filing an interpleader action to exhaust the possibility of double vexation furthers the statutory goals” of California’s interpleader and slayer statutes.

The Court also dispensed with Frank’s argument that Farmers ceased being a disinterested stakeholder by opposing his motion for release of the funds on the ground that the funds should not be distributed until he dismissed his claims for breach of contract and bad faith. The Court noted that, by the time it had opposed the motion, Farmers had already satisfied its obligations as the disinterested stakeholder. Farmers’ desire to have the breach of contract and bad faith claims dismissed did not suggest that Farmers had any interest in the interpleaded funds.

Finally, Frank argued that Farmers was not entitled to the fee award because filing an interpleader is the cost of doing business. The Court rejected this argument, confirming that the statutory scheme for interpleader contemplates an award of fees and costs at the trial court’s discretion.

This published opinion reaffirms that California’s interpleader statute is designed to protect insurers that interplead funds in good faith. It confirms that an insurer is entitled to bring an interpleader action based on the threat of multiple liability—regardless of whether the potential claimants actually make a claim for the funds. It also clarifies the definition of “disinterested stakeholder.” Finally, it confirms that the attorneys’ fees and costs incurred by the insurer are not merely the “cost of doing business” and may be awarded under the interpleader statute.

DISCLAIMER: Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

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