Life Insurance Beneficiary

Arlington life insurance attorneys need to have this 1967, Texas Supreme Court case, at hand in case the need for it arises. The style of the case is, McFarland v. Franklin Life Insurance Company. Here is the relevant information.
In 1950, Franklin Life issued a policy of insurance on the life of John V. McFarland, who was about nine years of age at the time. The policy was taken out by his parents, Bernard and Gwendolyn McFarland. Bernard was named in the policy as primary beneficiary, and Gwendolyn was designated as contingent beneficiary. John married in 1962 and died the following year. His father predeceased him; he was survived by his widow and Gwendolyn. McFarland brought this suit against Franklin Life to recover the amount due on the policy plus the statutory penalty and attorney’s fees. Franklin Life interpleaded Mrs. John V. McFarland, admitted liability for the proceeds of the policy, and paid the funds into court. The trial court, sitting without a jury, awarded McFarland the money so deposited but allowed no penalty or attorney’s fee, and the Court of Civil Appeals affirmed. The only question brought forward on appeal was whether McFarland is entitled to recover such penalty, attorney’s fee and court costs.
It is generally held that ‘where the insurer admits liability, but has reasonable grounds for anticipating rival claims, and in good faith declines to pay the named beneficiary, and deposits the money in court to be paid to the rightful person as determined by the court, it is not liable for more than the face amount of the policy.’
Franklin Life advances two basic propositions in support of the trial court’s judgment: (1) that, in view of a letter received from Mrs. John V. McFarland’s attorney and the possibility that she might be entitled to part of the policy proceeds under the community property laws of Texas, it had reasonable grounds for anticipating rival claims; and (2) that McFarland never made demand for payment. The following is a chronology of the relevant correspondence:
September 3, 1963: McFarland’s attorney notified respondent of John’s death.
September 6, 1963: Franklin Life sent McFarland’s attorney forms for filing the claim.
October 16, 1963: Franklin Life notified McFarland’s attorney that the completed claim forms had not been received.
October 29, 1963: Mrs. John V. McFarland’s attorney wrote Franklin Life advising that ‘we represent the wife of John Vernon McFarland, deceased, and would appreciate details concerning the amount and beneficiary, if any, of Policy No. 884834.’
October 31, 1963: Franklin Life wrote Mrs. John V. McFarland’s attorney that McFarland was the beneficiary of the policy and also furnished the name and address of McFarland’s attorney.
November 1, 1963: Franklin Life’s attorney sent McFarland the necessary proofs of death.
November 12, 1963: Franklin Life notified Mrs. John V. McFarland’s attorney that the proofs of death had been received and requested him to obtain and furnish a release from his client. A copy of this letter was sent to McFarland’s attorney.
January 7, 1964: McFarland’s attorney wrote Franklin Life as follows:
‘Regardless of ‘your practice’, the contract and the law in Texas require that the proceeds of this policy be paid to the beneficiary. Unless your check for the amount due under the policy is received forthwith or, in the alternative, we receive by return mail some valid reason (other than ‘your practice’) for withholding payment thereof, suit will be filed to recover on this policy, as well as attorneys’ fees which are authorized for this type of action.’
January 10, 1964: respondent replied as follows:
‘I am sorry for the delay that has occurred under this settlement, but we have been waiting for a reply from Mr. Billy G. Alexander of Odessa who represented the wife of the Deceased. In an effort to hurry along the disposal of the claim funds, I called Mr. Alexander and determined he no longer represents the widow as she recently called him that she had no need for legal counsel since there no longer was any family problems. Mr. Alexander stated it was his understanding the widow was living in your city and indicated we should have no problem in obtaining a Release from her.
‘The form is enclosed for her signature, and when received here with the policy, our check payable to Gwendolyn McFarland will be mailed promptly. The total proceeds amount to * * *.
‘If there is any objection to sending the Release and policy direct to us, they may be sent to the Illinois National Bank here in Springfield, and we will exchange the check for these items. Or, if you prefer that we have one of our agents call at your office and pick up the Release and policy in exchange for the check, we shall be glad to make that arrangement.
‘We agree that as beneficiary Mrs. Gwendolyn McFarland does have an interest in the policy proceeds, but the extent of her interest is certainly questionable under your Community Property Statutes when there is a surviving spouse. Claims of this kind are not infrequent in your state or in other states, where Community Property prevails, and it is seldom that we have a case where it is not determined that some part of the proceeds should go to the spouse. When the spouse is not brought into settlement, it is the opinion of our Legal Counsel that a Release of any interest she might have should be obtained for the Company’s protection against additional liability. We have followed this procedure for many years and without any difficulties; in fact, this procedure was discussed with your Texas State Insurance Department in 1959 without any suggestions for change in it.
‘We were at fault in not following this case more closely with Mr. Alexander, and when our check is issued to Mrs. Gwendolyn McFarland, we will include interest * * *.’
An insurance company which knows that rival claimants are actively asserting their rights is usually held to have reasonable grounds for withholding payment; it will not be subjected to the statutory penalties if the other conditions set out above are satisfied. That is not, however, the situation here. The October 29th letter from Mrs. John V. McFarland’s attorney gave no indication that she intended to claim all or any part of the policy proceeds. It was a mere inquiry–nothing more. Any misgivings about her attitude which the letter may have caused should have been dispelled when Franklin Life was advised that she had dismissed her attorney because there were no more family problems.
In the present case respondent had no information suggesting that the widow was asserting a right under the policy or that payment to the named beneficiary would subject it to a substantial risk of double liability. An investigation, which could have been made during the period of thirty days allowed by the Insurance Code, would have disclosed that the policy was taken out while the insured was unmarried and that all premiums were paid by McFarland and her husband. It thus appears that the widow did not have a valid claim, and there was nothing within respondent’s knowledge to warrant the belief that she did. Franklin Life was not justified, therefore, in requiring that McFarland obtain a release from the widow, and McFarland was under no duty to explain her failure to furnish the same. The mere possibility that facts giving rise to an adverse claim could exist does not constitute reasonable grounds for refusing to pay the designated beneficiary.
As previously indicated, Franklin Life also contended that McFarland failed to demand payment as required by the Insurance Code. The letter of January 7th makes it clear that McFarland was insisting upon payment and would file suit unless respondent had some valid reason for withholding the money other than its practice of requiring a release from the widow. This constitutes a sufficient demand under the statute.
McFarland prevailed in this case and was awarded the policy proceeds, plus interest pursuant to the Texas Prompt Payment of Claims Act, and court costs and attorney fees.