State Farm Life Ins. Co. v. Martinez

216 S.W.3d 799

STATE FARM LIFE INSURANCE COMPANY, Petitioner, v. Toni Wasson MARTINEZ, Respondent.

No. 05-0812.

Supreme Court of Texas.

Argued December 7, 2006.

Delivered February 9, 2007.

Rehearing Denied April 13, 2007.

J. Hampton Skelton, Eva C. Ramos, Stephanie Elizabeth Clark, Skelton & Woody, Austin, Allen A. King Jr., David Black & Associates, Houston, Raul A. Gonzalez, Law Offices of Raul A. Gonzalez, Austin, Chris J. Kling, Dallas, Stuart Smith, Greg White, Naman, Howell, Smith & Lee LLP, Waco, for Petitioner.

Bill M. Payne, Payne, Watson, Miller, Malechek & Scherr, P.C., Bryan, for Respondent.

Larry A. Catlin, Bryan, R. Hal Moorman, Moorman, Tate, Moorman, Urquhart & Haley, L.L.P., Brenham, for Other.

Douglas W. Alexander, Alexander Dubose Jones & Townsend LLP, Austin, for Amicus Curiae.

Justice BRISTER delivered the opinion of the Court.

It has long been the rule in Texas that if an insurer promptly interpleads policy proceeds, it cannot be subjected to statutory penalties for delayed payment even if it missed the statutory deadlines. The Legislature's 1991 changes to the Insurance Code suggest the courts should not continue imposing a different deadline. But nothing in those changes suggests that statutory penalties should apply after interpleader occurs. Thus, we hold the court of appeals here properly imposed statutory penalties for the delay before interpleader was filed, but improperly imposed them thereafter.

I. Background

After 13 years of marriage, Ed and Linda Martinez divorced in 1994. In their Agreement Incident to Divorce, Ed agreed to pay Linda contractual alimony of $5,000 per month for ten years ($600,000), with his estate to continue paying if he died earlier. Ed also agreed to name Linda as irrevocable beneficiary on three life insurance policies,¹ providing that he could drop those policies or change beneficiaries so long as the unpaid alimony amount was covered.²

The policy at issue here is a $500,000 policy issued by State Farm. Beginning in 1994, this policy listed as beneficiary "Linda Martinez, 41, ex-wife, in accordance with divorce decree dated 09-15-94." On August 1, 2002, shortly before he died, Ed signed a State Farm "Change of Beneficiary" form naming Toni, his current wife, as beneficiary. State Farm refused to process the request, returning it on August 16th with a request for proof that the change complied with the divorce agreement.³

Ed died on August 25th-24 days after signing his request, and before acting on State Farm's response. Within three weeks, State Farm received three conflicting claims to the policy proceeds: (1) from Ed's daughter (Lisa) on September 2nd; (2) from his ex-wife (Linda) on September 5th; and (3) from his surviving spouse (Toni) on September 10th. Toni sued State Farm on November 20th. Two days later State Farm filed this interpleader, depositing $506,061 (the policy proceeds plus interest and a partial premium refund) in the court's registry.

Lisa (Ed's daughter and successor beneficiary on the policy) and Toni filed cross-motions for summary judgment seeking the proceeds. During the summary judgment hearing in February 2003, after the trial judge indicated Toni could not get the policy proceeds without a constructive trust imposed to secure Linda's alimony, Linda and Toni agreed to precisely that. Thereafter, the trial court granted Toni's summary judgment and denied Lisa's; the final judgment ordered State Farm to pay all the policy proceeds to Toni with $70,000 to be held in trust and paid $5,000 per month to Toni if Ed's estate continued to pay the balance of Linda's alimony.

But the case was not over. Toni claimed State Farm violated the Texas prompt payment of claims statute by failing to pay her within 60 days,⁴ thus entitling her to penalty interest of 18 percent and attorney's fees:

In all cases where a claim is made pursuant to a policy of insurance and the insurer liable therefor is not in compliance with the requirements of this article, such insurer shall be liable to pay the holder of the policy, or the beneficiary making a claim under the policy, in addition to the amount of the claim, 18 percent per annum of the amount of such claim as damages, together with reasonable attorney fees. If suit is filed, such attorney fees shall be taxed as part of the costs in the case.⁵

State Farm received Toni's claim on September 11th, so the 60-day period elapsed on November 10th. State Farm interpleaded the funds 12 days later. After a bench trial, the trial court assessed against State Farm prejudgment interest at 6 percent ($25,506.73), penalty interest at 18 percent ($76,520.19), and attorney's fees for the trial court ($37,089.92), court of appeals ($10,000), and this Court ($10,000).

Lisa and State Farm appealed. The court of appeals affirmed summary judgment against Lisa, finding Ed had changed the beneficiary to Toni.⁶ The court also affirmed the judgment against State Farm, but reduced the penalty interest calculation to $67,500.⁷ The court rejected State Farm's argument that penalty interest should apply only to the 12-day delay, holding it should continue until the final judgment "[t]o promote the purpose" of the statute.⁸

Lisa and State Farm filed petitions in this Court, but Lisa dismissed hers after reaching a settlement with Toni. We granted State Farm's petition to review the portion of the judgment assessing statutory penalties and attorney's fees against it.

II. Was Toni a Named Beneficiary under the Statute?

State Farm first argues that Toni is not covered by the prompt payment statute, and thus entitled to none of its penalties.

As set forth above, the statute makes insurers liable to either a "holder of the policy" or a "beneficiary making a claim under the policy." Toni was not a policyholder, so she may recover only if she was the latter. The statute defines a "claim" to further limit coverage to beneficiaries named in the policy:

"Claim" means a first party claim made by an insured or a policyholder under an insurance policy or contract or by a beneficiary named in the policy or contract that must be paid by the insurer directly to the insured or beneficiary.⁹

State Farm argues that Toni was not a named beneficiary at the time of Ed's death — due to its refusal to honor Ed's change-of-beneficiary request.

Generally, an insured's right to change beneficiaries is governed by the terms of the policy.¹⁰ The policy here provided that a change of beneficiary would take effect when Ed signed a written request.¹¹ The policy defined a "request" as one written "in a form acceptable to us."¹² As Ed signed and sent his request on State Farm's own printed form, it is hard to see how it could be deemed unacceptable. State Farm's valid concern that Ed's request might violate the divorce decree (a matter discussed below) did not make the request's "form" unacceptable.

But even if it did, and even if State Farm was right to check first, the policy still said that a change would take effect when a request was signed, not when it was accepted. Once Linda agreed to release her claims on the policy during the course of the litigation, Ed's designation of Toni became effective — retroactively — as of the day it was signed.

The Legislature has instructed us to construe the statute liberally to ensure prompt payment of insurance claims.¹³ Accordingly, we hold that Toni was a named beneficiary entitled to prompt payment under the statute.

III. Is Interpleader an Exception to the Statute?

State Farm also argues that the prompt payment statute does not apply when rival claims require an insurer to file an interpleader.

Since at least 1874, there have been Texas statutes punishing an insurer's failure to pay promptly.¹⁴ Until 1991, these statutes generally provided that if a life insurance claim was not paid within 30 days, the insurer had to pay penalty interest of 12 percent and attorney's fees to the policy beneficiary.¹⁵

Throughout this same period, Texas common law provided that an insurer faced with rival claims to policy proceeds could interplead the funds, join the rivals who claimed them, and be discharged from further liability.¹⁶ Under the common law, a stakeholder is entitled to recover its attorney's fees from the deposited funds unless there were no rival claimants or the interpleader was unreasonably delayed.¹⁷

Thus, Texas statutes have long punished insurers for delays beyond 30 days, while the common law punishes them only for unreasonable delays — an unspecified period that depends on the facts of each case. Generally, these two rules have operated in harmony: insurers interpleading within 30 days collected fees consistent with both rules, and those who unreasonably delayed interpleading paid penalties consistent with both.

But in some cases the different standards inevitably overlapped. Thus, for example, in Great American Reserve Insurance Co. v. Sanders, an insurer filed its interpleader 37 days after receiving a claim — more than 30 days, but less than an unreasonable delay.¹⁸ As both parties could not collect fees in such cases without partially frustrating both rules, one had to yield. For many years, Texas courts held that the statute must yield to the common law — that an interpleader filed within a reasonable time did not subject the insurer to the statutory penalties regardless of the statutory deadlines.¹⁹

But in 1991, the Legislature changed the prompt payment statute, raising the penalty interest to 18 percent and the deadline for payment (in most cases) to 60 days.²⁰ Neither the statute nor the legislative history mention interpleader, or the purpose for the amendments other than those obvious from the facial changes.

For several reasons, we hold that the interpleader exception to the prompt payment statute did not survive the 1991 changes. First and foremost, the statute itself makes no such exception. While we generally presume the Legislature accepts judicial ...