Lunsford v. Western States Life Ins., 93SC764

• Citation: 908 P.2d 79
• Decision Date: 04 December 1995
• Docket Number: No. 93SC764,93SC764
• Parties: Tammi LUNSFORD, Lori Hustwaite, Kathy Webster, Perry Edson Nelson, III, a minor, and Brooke Erin Nelson, a minor, by and through their legal guardian ad litem, Ellen Trujillo, Petitioners, v. WESTERN STATES LIFE INSURANCE and North American Life & Casualty Company, Respondents.
• Court: Colorado Supreme Court

Page 79

908 P.2d 79

Tammi LUNSFORD, Lori Hustwaite, Kathy Webster, Perry Edson Nelson, III, a minor, and Brooke Erin Nelson, a minor, by and through their legal guardian ad litem, Ellen Trujillo, Petitioners, v. WESTERN STATES LIFE INSURANCE and North American Life &amp Casualty Company, Respondents.

No. 93SC764.

Supreme Court of Colorado En Banc.

Dec. 4, 1995.

Rehearing Denied Jan. 16, 1996.

Haddon, Morgan & Foreman, P.C., Harold A. Haddon, Rachel A. Bellis, Denver, Haines & Olsen, P.C., Susan Haines, Spencer J. Crona, Denver, for Petitioners.

Phelps, Singer & Dunn, Alan Gary Dunn, Joan M. Riordan, Denver, for Respondents.

Justice LOHR delivered the Opinion of the Court.

This case concerns the scope of protection provided by Colorado's "slayer statute" to insurance companies that paid life insurance policy proceeds to a primary beneficiary who was later determined to have murdered the insured, where the insurers did not receive written notice of competing claims from the contingent beneficiaries prior to disbursement. See § 15-11-803, 6B C.R.S. (1987) ("slayer statute"). The plaintiff contingent beneficiaries obtained a judgment for damages against the defendant insurers based on a jury determination that the insurers acted negligently in paying the policy proceeds to the primary beneficiary. The Colorado Court of Appeals reversed and held that where payment is made according to the terms of an insurance policy and in the absence of written notice of contingent beneficiaries' claims, section 15-11-803(6) protects an insurer from liability for disbursing policy proceeds to one who is later determined to be guilty of murdering the insured. Lundsford v. Western States Life Ins., 872 P.2d 1308, 1311 (Colo.App.1993). ¹ We granted certiorari to review the court of appeals' resolution of this issue and now reverse and remand to that court for further proceedings.

I.

During the first half of 1983, Perry Nelson and his wife, Sharon Nelson, purchased several policies that provided over $200,000 in life insurance coverage to Mr. Nelson. Two of the policies were issued by defendants Western States Life Insurance Company and North American Life and Casualty Company. ² Mr. Nelson designated Sharon Nelson as the primary beneficiary in the North American Life and Casualty Company policy, and the Nelson's minor children as the contingent beneficiaries. The primary beneficiary in the Western States Life Insurance Company policy was designated as the "Nelson Family Trust--A," of which Sharon Nelson was the trustee, and the contingent beneficiary was designated as Mr. Nelson's estate.

On July 22, 1983, Mr. Nelson, an optometrist from Trinidad, Colorado, traveled to Denver to update his optometry certificate. He disappeared, and the next day law enforcement officers discovered his partially stripped and empty vehicle in the waters of Clear Creek. When investigating officers recovered the vehicle, they did not find Mr. Nelson's body. Without a recovered body or other conclusive evidence of Mr. Nelson's death, but upon petition by Sharon Nelson, on February 18, 1984, the Las Animas County District Court issued an order declaring that Mr. Nelson had died on July 23, 1983.

Meanwhile, Mr. Nelson's life insurers retained Equifax Services, Inc. ("Equifax") to conduct an investigation into the circumstances surrounding Mr. Nelson's disappearance. On August 12, 1984, Mr. Nelson's body was found on a sandbar in Clear Creek. The sheriff's office closed the case after concluding in a final report that the available evidence indicated that Mr. Nelson died as the result of a traffic accident. In the course of an extensive investigation culminating in a 600-page report, the Equifax investigator developed concerns of foul play centering on Sharon Nelson but nonetheless determined that he did not have the "well-founded suspicion" necessary to warrant a delay in disbursing the insurance proceeds. As a result, the insurers paid the policy proceeds to Sharon Nelson. ³

Several years later, Sharon Nelson admitted her complicity in Mr. Nelson's murder during an unrelated investigation. On June 7, 1989, Sharon Nelson pled guilty to the murder of Mr. Nelson and received a sentence of life imprisonment. On July 19, 1989, Mr. Nelson's children filed a complaint against the insurers in Denver District Court, ⁴ claiming negligence and breach of contract. In their initial complaint, the children alleged that the insurers paid life insurance benefits contrary to section 15-11-803(3), which generally provides that a beneficiary who murders an insured is prohibited from receiving an insured's policy proceeds and is treated as predeceasing the insured. The insurers offered several affirmative defenses, including the contention that section 15-11-803(3) was inapplicable because of the plaintiffs' failure to give written notice of competing claims as required by section 15-11-803(6). The insurers moved for summary judgment, maintaining that section 15-11-803(6) barred the plaintiffs' claims.

The district court denied summary judgment, holding that section 15-11-803(6) does not protect an insurer that negligently disburses policy proceeds to a primary beneficiary in the face of suspicious circumstances surrounding the death of an insured. In denying the insurers' summary judgment motion, the court ruled that the notice provision of section 15-11-803(6) was not an "absolute defense," that the "bottom line" was whether the insurers "acted in a reasonably prudent manner," and that the negligence issue required determination of factual questions. After denying the motion for summary judgment, the trial court granted the plaintiffs leave to amend their complaint. The amended complaint added claims of bad faith breach of insurance contract and punitive damages.

The insurers responded by filing a motion to dismiss the negligence, bad faith breach of insurance contract, and punitive damages claims. A different judge now presided, and that judge granted the motion to dismiss only as to the bad faith breach claim. ⁵ The judge declined to revisit the earlier ruling regarding the scope of section 15-11-803(6) both in resolving the motion to dismiss the negligence claim and in settling jury instructions. Instead, that judge also concluded that the notice requirements of section 15-11-803(6) "are not absolute" and that the insurers' actions should be judged on a reasonableness standard. ⁶ The jury found that the insurers acted negligently in disbursing the proceeds and awarded the plaintiffs $200,000 plus interest. ⁷

The Colorado Court of Appeals reversed, with one member of the three-judge panel dissenting. The court held that the notice provision of section 15-11-803(6) precluded insurer liability in this case. Western States Life, 872 P.2d at 1311. We granted certiorari to review that holding, ⁸ and now reverse based on our determinations that the statute is inapplicable and that the common law supports the judgment of the district court.

II.

The General Assembly has enacted legislation embodying the principle that killers should not reap profits from the perpetration of homicides. Section 15-11-803 prevents such a result in several specific contexts. See § 15-11-803, 6B C.R.S. (1987). Subsection (3) of that statute relates to the payment of life insurance policy proceeds and is relevant to the present case:

A named beneficiary of a bond, life insurance policy, or other contractual arrangement who kills the principal obligee or the person upon whose life the policy is issued and, as a result thereof, is convicted of, pleads guilty to, or enters a plea of nolo contendere to the crime of murder in the first or second degree or manslaughter, as said crimes are defined in sections 18-3-102 to 18-3-104, C.R.S., is not entitled to any benefit under the bond, policy, or other contractual arrangement, and it becomes payable as though the killer had predeceased the decedent.

§ 15-11-803(3), 6B C.R.S. (1987).

On its face, section 15-11-803(3) prevents an individual from receiving a victim's life insurance proceeds if that individual is convicted of, pleads guilty to, or enters a plea of nolo contendere to one of the specified homicide offenses. ⁹ In such circumstances, guilt is established by trial or by judgment entered on the individual's own plea, providing reliable evidence of criminal culpability. The statute is silent regarding a beneficiary's entitlement to insurance proceeds in other situations.

Section 15-11-803(6) offers protection to insurers that pay beneficiaries in accordance with the terms of their policies and without notice from contingent beneficiaries who may have become entitled to the insurance proceeds by reason of other subsections of section 15-11-803. Section 15-11-803(6) provides in pertinent part:

Any insurance company, bank, or other obligor making payment according to the terms of its policy or obligation is not liable by reason of this section unless prior to payment it has received at its home office or principal address written notice of a claim under this section.

§ 15-11-803(6), 6B C.R.S. (1987) (emphasis added). The protection offered by subsection (6) is limited to situations where the insurance company would be obligated under section 15-11-803(3) to make payment "as though the killer had predeceased the decedent." Id. Those situations, in turn, are restricted to ones in which the killer has been convicted of, or has pled guilty or nolo contendere to, murder or manslaughter of the insured. ¹⁰ Although there is no helpful legislative history, one can infer that the legislature deemed that a reliably established homicide would come to the attention of any contingent beneficiaries, who should then bear the burden of giving written notice of claim to the insurers.

In the absence of a notice of claim under subsection (6), insurers are protected in disbursing payments according to policy terms even though the paid beneficiaries...