An interpleader is the proper method to resolve an ERISA beneficiary dispute

An ERISA plan administrator, usually an insurance company, may face competing claims to group life insurance benefits.  The insurance company may investigate the dispute and make payment to whom it determines to be the proper beneficiary. 

However, that exposes the administrator to a lawsuit from the disgruntled claimant.  A court might well agree with the administrator's decision, particularly given the wide discretion typically allowed ERISA fiduciaries.  However, that exposes the insurance company to significant risk, including legal expenses in defending the claim.  Worse, a court could determine that the insurance company made the wrong decision. The insurance company would be forced to pay the benefits twice and the employee(s) who made the decision to pay would likely be fired.

Courts recognize this dilemma and allow ERISA administrators the to file what is known as an interpleader lawsuit. As the 9th Circuit Court of Appeals in California has stated:

interpleader provides a process by which a party may “join all other claimants as adverse parties when their claims are such that the stakeholder may be exposed to multiple liability. . . Interpleader's primary purpose is not to compensate, but rather to protect stakeholders from multiple liability as well as from the expense of multiple litigation.  

Aetna Life Insurance Co. v. Bayona, 223 F.3d 1030, 1033 (9th Cir.2000).

Designated beneficiaries are often frustrated by what they consider a "frivolous" contest and want to sue the insurance company for filing the interpleader, instead of just paying them the policy benefit.  However, ERISA preempts state law remedies and federal judges will typically give the insurance company the benefit of doubt regarding the bona fides of a contest.  After all, the aim of the interpleader process is to have the court, not the insurance company, determine if a dispute is bona fide.

Federal law allows the insurance company to deduct its attorney's fees from the interplead funds upon court approval. This is yet another reason why it makes sense for the insurance company/administrator to resolve a dispute via interpleader. I've found that most insurance companies are reasonable in limiting the fees they seek to deduct from the policy, particularly if the contestants agree early in the suit to release the insurance company.