The U.S. Court of Appeals for the Third Circuit recently held that an insurance carrier properly filed an interpleader complaint against policyholders to determine the distribution of $100,000 in life insurance proceeds. Prudential Ins. Co. of Am. v. Hovis, et al., -- F.3d --, (3d Cir. Jan. 27, 2009).

In February 2003, Robert Hovis (“Hovis”), an insurance company sales representative, sold a life insurance policy to Bonnie Shall (“Shall”). The policy designated her son as the primary beneficiary and her daughter as a contingent beneficiary. According to the complaint, Hovis and Shall subsequently became romantically involved and Shall was diagnosed with terminal cancer. Shall eventually submitted a request to change ownership of the policy from Shall to Hovis as well as the primary beneficiary from her son to Hovis. The insurer allegedly delayed its response to the request in order to conduct an internal investigation due to its policy prohibiting sales representatives from having an ownership or beneficiary interest in its client’s insurance policies. According to the complaint, at the latter part of the investigation, Shall’s son became aware of the policy changes and requested the resolution of the policy’s status, informing the insurer that he suspected Hovis of fraudulent activity in submitting the policy changes.

The insurer filed an interpleader action, naming Hovis and Shall’s son and daughter as defendants. In its interpleader complaint, the insurer sought to deposit the life insurance proceeds with the district court and withdraw from the proceeding. Hovis argued that the insurer had no “legally cognizable reason” to deny him the proceeds of the policy and brought counterclaims against the insurer for breach of contract, negligence, breach of fiduciary duty, bad faith and unfair trade practices resulting from the insurer’s failure to timely process the policy changes. Subsequently, Hovis and the other defendants reached a settlement with respect to the distribution of the policy proceeds but Hovis’ counterclaims remained.

In granting summary judgment to the insurer on Hovis’ counterclaims, the U.S. District Court for the Middle District of Pennsylvania had held that the interpleader action protected an insurer from any liability stemming from its failure to resolve policy disputes. The Court, however, dismissed the interpleader complaint as moot and directed the insurer to pay the policy proceeds.

The Third Circuit affirmed and held that the insurer was not to blame for the ownership and beneficiary interest dispute, thus it could seek the protection of an interpleader action. Additionally, the court rejected Hovis’ argument that his counterclaims are outside the scope of the interpleader action, stating, “none of the counterclaims is truly independent of who was entitled to the life insurance proceeds, which is the issue the interpleader action was brought to settle.”

For a copy of the decision, please click here.