How One Claim Can Freeze a Payment, and What Happens Next

Why a company stops paying

An insurer, retirement plan, bank, or other holder of money is a “stakeholder.” It usually does not care who gets the money; it cares about paying only once. If it pays the named beneficiary and a court later decides someone else was entitled, it may have to pay again.

The law protects a stakeholder that pays in good faith before it knows of a competing claim. Texas, for example, provides that a life insurer that pays the designated beneficiary “is discharged from all liability under the policy” unless, before the date of payment, it received notice of an adverse claim.¹ Statutes based on the Uniform Probate Code similarly protect a payor that pays before receiving written notice of a claimed forfeiture, but make it liable for payments made after notice.² Utah’s divorce statute likewise protects an insurer that pays the designated beneficiary before receiving written notice.

Once notice arrives, the protection is gone. Texas law says an insurer is not required to pay the designated beneficiary “if the company receives notice of an adverse claim to the proceeds from a person who has a bona fide legal claim to all or part of the proceeds.”¹ At that point the safest path for the company is to hold the money and let a court decide.

Common kinds of competing claims

A handful of situations account for most holds. Divorce-related claims, allegations that the insured lacked capacity or was unduly influenced, claims by the deceased person’s estate, and beneficiary changes made shortly before death come up most often, followed closely by disputes over change forms that were incomplete or never processed. Each has its own page:

• A divorce. A former spouse is still named, and a divorce decree or a state statute says otherwise. See divorce and beneficiary designations.
• A late or disputed change of beneficiary. The form was incomplete, never received, or signed when the insured was very ill. See change of beneficiary and substantial compliance.
• Undue influence or lack of capacity. Someone says the insured was pressured or did not understand what he or she signed. See undue influence and capacity.
• A suspicious death. A beneficiary is suspected of involvement. See the slayer rule.
• Order of death. The insured and the beneficiary died close together. See simultaneous death.
• Creditors, estates, and community property. An estate or creditor says the money should be part of the estate, or a spouse claims a share under state property law.
• Less common triggers. A minor beneficiary who cannot sign a release, a question whether the claimant was legally married to the insured, a change made by someone acting under a power of attorney, an assignment to a funeral home (see funeral homes and funeral-finance companies), an ambiguous designation, or no designation at all.

What a triggering statement often sounds like

A hold usually starts with a letter, email, or phone call to the company. The examples below are illustrative composites written for this guide, not quotations from any particular case. They show the kinds of statements a stakeholder commonly treats as notice of an adverse claim.

Statements like these can be enough to make a company stop and ask questions. They are not proof. Whether the claim succeeds depends on the documents, the law that governs the policy or plan, and evidence a court will accept, as the next sections explain.

How different holders respond

Life insurers. As described above, notice of a plausible competing claim generally leads to a hold. Many insurers then write to both sides, ask them to agree, and file an interpleader if they do not. That is what happened in Michelman, discussed below.

Employer plans governed by ERISA. A plan administrator must decide a claim under the plan’s procedures. A federal regulation requires notice of an adverse decision within a reasonable period, “not later than 90 days after receipt of the claim,” with one extension of up to 90 days if special circumstances require more time and the claimant is told before the first period ends.³ Where two people claim the same benefit, administrators often interplead rather than decide.

Banks. Banking statutes can set a higher bar. Florida’s statute provides that notice of an adverse claim to a deposit “does not obligate the institution to recognize the adverse claimant” unless the claimant obtains a restraining order or similar court process against the institution in a suit in which the account holder is a party, or gives the bank a bond indemnifying it against liability.⁴ Other states have their own versions; check the statute for the state involved. See also bank and payable-on-death accounts.

Low bar to stop payment, high bar to win

To interplead, a stakeholder does not have to decide who is right. The Ninth Circuit has held that “[i]nterpleader is proper when a stakeholder has at least a good faith belief that there are conflicting colorable claims,” and that good faith “requires a real and reasonable fear of exposure to double liability or the vexation of conflicting claims.”⁵

To win the money, a challenger has to prove the facts that defeat the designation. Courts generally start from the beneficiary designation on file. In Florida will contests, for example, once a will’s execution is shown, “the contestant shall have the burden of establishing the grounds on which the probate of the will is opposed or revocation is sought.”⁶ The cause pages linked above explain the standards for each type of claim. Some, such as Georgia’s slayer statute without a conviction, require “clear and convincing evidence.”⁷

The result is a gap: a claim strong enough to stop payment may be far too weak to win. That gap is the main reason named beneficiaries sometimes wait months for money they ultimately receive.

If you are the named beneficiary

These steps are lawful and commonly used. Whether any of them makes sense depends on your situation.

1. Ask for the basis of the hold. You can ask the company what competing claim it received and what it needs to resolve the matter. In Michelman, the named beneficiary asked the insurer what proof the other claimant had offered, and the insurer asked that claimant to provide proof.⁵
2. Ask the company to resolve it promptly. If the parties cannot agree, an interpleader puts the dispute before a judge rather than leaving it open-ended. See what an interpleader is.
3. Check whether interest is owed. Some states require interest on delayed death benefits. See discharge, fees, and interest.
4. Consider whether settlement makes sense. Litigation costs, including any fees the stakeholder is awarded from the fund, reduce what is left for everyone. Courts and parties often settle these disputes, but you are not required to.
5. Watch deadlines once a case is filed. See named in an interpleader and, if you are thinking about proceeding on your own, handling an interpleader without a lawyer.

How courts have ruled

For more examples, see the “How courts have ruled” sections on each beneficiary dispute page.

Footnotes

1. Tex. Ins. Code §§ 1103.102(b), 1103.103. Texas Constitution and Statutes. ↩ ↩²

2. E.g., Haw. Rev. Stat. § 560:2-803(h) (UPC § 2-803(h) as enacted). Hawaii State Legislature. ↩

3. 29 C.F.R. § 2560.503-1(f)(1). eCFR. ↩

4. Fla. Stat. § 655.83. Florida Legislature. ↩

5. Michelman v. Lincoln National Life Ins. Co., 685 F.3d 887, 891 (9th Cir. 2012). ↩ ↩²

6. Fla. Stat. § 733.107(1). Florida Senate. ↩

7. O.C.G.A. § 53-1-5(d). Justia (unofficial). ↩