APPEAL FROM THE UNITED STATES DISTRICT COURT FOR THE EASTERN DISTRICT OF PENNSYLVANIA (D.C. Civil No. 84-3514).
Before: WEIS and SLOVITER, Circuit Judges, and ZIEGLER,*fn* District Judge
In this diversity case, the question is whether a life insurance company is required to pay interest on policy proceeds for the interim between receipt of proof of death and payment into court as part of an interpleader action. We conclude that under Pennsylvania law interest is payable as a matter of right for loss of use of the principal. Institution of an interpleader in response to competing claims will not defeat the claimant's entitlement to interest. Accordingly, we will reverse the ruling of the district court and will direct entry of a judgment for interest at the legal rate.
After it had entered summary judgment for the insurance company denying the plaintiff's demand for prejudgment interest, the district court ruled in favor of her claim for the proceeds. She then appealed the adverse decision on interest.
When he died on May 15, 1984, Melvin Atlin, a resident of Pennsylvania, was covered by a life insurance policy issued by Security-Connecticut Life Insurance Company. Plaintiff Lillian Atlin is the widow of Mr. Atlin and the primary beneficiary of the policy. Under its terms, she forwarded proof of death which was received by the company on June 7, 1984.
On July 11, 1984, National Paragon Company wrote Security, asserting a claim against the policy. The insurance company sent a copy of the letter to Mrs. Atlin, who responded by filing this diversity suit against Security on July 20, 1984. The company joined National Paragon as a third-party defendant and filed an interpleader counterclaim. On September 11, 1984, Security paid into the court registry the face amount of the policy, together with interest at 3 1/2 percent from the date it had received the proof of loss. Although not required by the terms of the policy, Security's interest payment was standard company practice.
In a summary judgment motion, plaintiff demanded interest at the rate of thirteen percent for the period before deposit into the registry. The district court accepted Security's premise that, absent an unreasonable delay, an insurance company that interpleads the funds in dispute is not liable for interest. Finding that Security had acted with due diligence and had not delayed unreasonably, the court denied the plaintiff's motion.
Plaintiff then sought discovery related to Security's retention of the money for three months. The company objected, and the record does not clearly indicate whether plaintiff sought enforcement of her request. The docket entries do show that the court denied a motion by plaintiff to compel discovery; however, that same order also required a response to the plaintiff's outstanding request for documents.
The court granted summary judgment for Security and dismissed it from the suit. After a non-jury trial on the competent claims to the proceeds, the district court entered judgment for plaintiff, and this appeal followed. Although other issues were initially included, only the plaintiff's cross-appeal of the district court's rulings on interest and discovery remains.
After the district court had issued the order challenged here, we decided Benefit Trust Life Ins. Co. v. Union Nat'l. Bank of Pittsburgh, 776 F.2d 1174 (3d Cir. 1985). In that case, a life insurance company had delayed payment until a murder prosecution established that the contingent beneficiaries, rather than the primary one, were entitled to the policy proceeds. We held that the company had no affirmative duty to interplead and pay the sum into court, but that prejudgment interest at the legal rate was payable. However, the district court had fixed the date on which interest began to run, and because the parties did not dispute the beginning point, we had no occasion to address that issue.
Benefit Trust reviewed state law decisions and concluded that in Pennsylvania once the amount becomes payable under a contract, prejudgment interest is available as of right, not as a matter of discretion. This result follows from the theory that interest represents compensation for the loss of use of the money, and is not punitive in nature. Although state precedents on life insurance disputes were not definitive, we determined that the contract rule should apply after examining cases involving other types of insurance where the Pennsylvania courts had invoked that principle.
The stakeholder in Benefit Trust had not paid the proceeds into court, and Security would have us apply a different rationale here because it took that step. The company contends that in an interpleader action equitable considerations should govern the court's decision on prejudgment interest. In these circumstances, Security urges, only unreasonable delay in instituting an interpleader will justify an award of interest from the date of the insured's death until payment into court. Some jurisdictions apply such a rule. See, e.g., Powers v. Metropolitan Life Ins. Co., 142 U.S. App. D.C. 95, 439 F.2d 605 (D.C. Cir. 1971); 15 G. Couch, Couch on Insurance 2d § 52:16 at 17.
The company also relies on two Pennsylvania cases that it contends contradict Benefit Trust's reading of Pennsylvania law as requiring prejudgment interest in contract cases. Security points to language in Cianfrani v. Commonwealth State Employees' Retirement Bd., 505 Pa. 294, 479 A.2d 468 (1984), as establishing a prerequisite of a "wrongful" or "unjust" withholding. Those ...