October 31, 2017 Practice Points

Frightening Consequences of Handling Life Insurance Claim by Spouse Indicted for Policyholder’s Murder

The Bailey case demonstrates the need for careful compliance with the legal mandate to withhold funds to a policy beneficiary who allegedly kills the insured, while simultaneously engaging in careful and effective claims handling

by Stephen J. Rapp

Georgia follows the unsurprising rule that the beneficiary of a life insurance policy who murders the insured cannot thereafter claim the proceeds of the policy. O.C.G.A. § 33-25-13. The practical perils confronting a life insurer among allegations of murder were recently revealed in The Prudential Ins. Co. of America v. Bailey, Case No. 6:16-cv-00060-JRH-GRS (S.D. Ga. Sept. 29, 2017). There, Sherry Bailey sought $332,000 in term life and $332,000 in accidental death benefits under a policy issued by Prudential to her husband Russell. Prudential accepted the claim and subsequently created an interest bearing account in Sherry Bailey’s name to which it credited the term life benefits. Prudential notified Sherry Bailey of the account, and provided instructions for making a total withdrawal or partial withdrawals of the funds by way of written drafts.

Sherry Bailey thereafter wrote three checks from the account totaling just under $84,000, and these amounts were paid by Prudential. In this same time period, however, a grand jury indicted Sherry Bailey for Russell Bailey’s murder, and after the roughly $84,000 in withdrawals, Prudential froze the remaining funds. Prudential then filed an interpleader complaint in Georgia federal court to deposit what the court understood was the total death benefit into the court registry, to interplead all potential beneficiaries, and to enjoin future claims against it. Prudential’s complaint did not mention the prior distributions of the term life benefits from the account, and the court entered an order for the payment of the proceeds into the court registry.

Sherry Bailey filed a counterclaim in the interpleader action contending that Prudential stole funds without notice from an account belonging to her, and that Prudential failed to disclose its prior payment of amounts from the account in obtaining an order allowing payment of the funds into the court registry. Sherry Bailey asserted claims for conversion, fraud, and breach of contract against Prudential, and Prudential moved to dismiss the claims.

As a threshold matter, the court vacated its prior order allowing the disputed funds to be paid into the court registry based upon a lack of notice by Prudential to the beneficiaries. The court granted Prudential’s motion for interpleader of the other beneficiaries, but only as to the undistributed $332,000 in accidental death coverage. The court denied the request on the remains of the previously distributed term life benefits since it was unresolved whether Prudential was rightfully in possession of the funds (because it froze the previously established account and withdrew the funds for deposit with the court).

More importantly, the court denied Prudential’s motion for judgment on the pleadings. On the conversion claim, the court rejected Prudential’s claims that 1) it did not convert the funds for its own use and 2) did not possess the allegedly converted funds (since they were in the court registry). In the court’s view, Prudential’s claw-back of the proceeds was for its own benefit – protection of its interest in preventing double liability based upon possible claims of negligent distribution by other beneficiaries. As to Prudential’s claim that the funds were in the possession of the court and not Prudential, the court considered this to be the result of a less than full disclosure and a lack of transparency by Prudential about the manner in which it obtained the funds when it sought and obtain approval to make the deposit with the court. Since the court vacated the order allowing the deposit, Prudential was in possession, and therefore had potential liability for conversion.

The court also found that Sherry Bailey sufficiently established and adequately pled the elements of the alleged fraud, denying Prudential’s motion for judgment on the pleadings. The court similarly denied Prudential’s motion on Sherry Bailey’s claim for punitive damages, finding that there was an allegation Prudential willfully removed money from Sherry Bailey’s account in violation of state law. The court also noted an alternative claim that Prudential committed fraud from the removal of funds based upon representations to Sherry Bailey when the account was created that “her money” and “her funds” would be “secure”. Finally, the court rejected Prudential’s contention that it was insulated from liability pursuant to O.C.G.A. §33-24-41 because it acted in good faith to prevent Sherry Bailey’s access to policy proceeds after her indictment for murder. The court noted Sherry Bailey’s contention that Prudential paid the policy proceeds to her in full when it opened the Prudential account for her benefit, refuting Prudential’s contrary contention that it did not pay the proceeds in full and merely made “partial” payment of the proceeds when it honored the checks drawn on the Prudential account. The court nonetheless found the statute inapplicable since Prudential could invoke it only if it paid a claim to a rightful beneficiary and subsequently received notice of another beneficiary. Since Sherry Bailey’s claims were for conversion, fraud, and breach of contract--with no contention that Prudential distributed payments to another beneficiary after Sherry Bailey’s notice as a claimant--the statute did not apply.

The Bailey case demonstrates the need for careful compliance with the legal mandate to withhold funds to a policy beneficiary who allegedly kills the insured, while simultaneously engaging in careful and effective claims handling.

Stephen J. Rapp is a partner with Weinberg, Wheeler, Hudgins, Gunn & Dial, LLC, Atlanta.

Copyright © 2017, American Bar Association. All rights reserved. This information or any portion thereof may not be copied or disseminated in any form or by any means or downloaded or stored in an electronic database or retrieval system without the express written consent of the American Bar Association. The views expressed in this article are those of the author(s) and do not necessarily reflect the positions or policies of the American Bar Association, the Section of Litigation, this committee, or the employer(s) of the author(s).