Disputed life insurance claims.
Disputed claims come in two varieties: those where the insurance company already paid the death benefits, but they were paid to the wrong person; and those where two or more people claim the same death benefits, but the insurance company hasn't paid the claim to anyone yet. The vast majority of disputed claims fall into the second category, though we sometimes see claims that were paid to the wrong person.
Instances where the insurance company already paid the death benefits, but they were paid to the wrong person, can occur because of an outright mistake by the insurance company, or in situations where the insurance company permitted changes without authority. For example, if policy changes cannot be made unless all co-owners sign a form, yet a change form signed by only one owner is approved by the company, the original beneficiary can sue for the death benefit, arguing that the new beneficiary was not properly designated, even after the money has already been paid out. In such a case, the insurance company could possibly be forced to pay twice.
The much more common scenario occurs when competing claims are submitted after a person's death, and both claimant's have a reasonable argument as to why they are the proper person to receive the proceeds. Usually, competing claims for death benefits are made by children and a step-parent or ex-spouse of the deceased. If both of the claimants can demonstrate even a possibility that they could be right, the insurance company will probably withhold payment until one of following three things happens:
Many times the insurance company will send letters to the competing claimaints giving them a short window of time (usually 30 days) to agree on a division of the death benefits. This sounds good in theory, but in practice very few people feel like splitting a pot of money with someone who they don't think is entitled to any of it.
Another possibility is that a claimant can ask an attorney to review the case and run through the laws of the state governing the insurance policy in question with the attorneys for the life insurance company. Sometimes, not always, the claimant's attorney can convince the life insurance company that the proceeds should legally be paid to one of the claimants and not the other. Remember, just because insurance companies sell policies all over the country, they rely on outside lawyers to guide them on the laws of the states.
The third option occurs when the insurance company files an interpleader lawsuit and asks a court to decide who should get the death benefits. When disputed claims can't be settled, this is usually what happens. The downside to interpleader litigation is that once it starts, it can take anywhere from 6 months to 2 years for the matter to be concluded, on average. All the while, the money is unavailable to the people who need it to pay life's expenses.
If you are in the middle of a showdown over the proceeds of a life insurance policy, we strongly recommend that you speak with a life insurance attorney. If your dispute can be resolved without heading to court, it can save you considerable time and money, as well. In almost all cases, the life insurance company gets to reimburse itself the money it spends on attorney's fees and court costs directly from the death benefits.