Before filing a lawsuit to litigate a life insurance dispute, it is a good idea to know whether you have standing to bring the action in the first place. This article examines the difference between intended beneficiaries and incidental beneficiaries. This is important because only an intended beneficiary may sue a life insurance company for failing to pay benefits under a policy.

Intended Beneficiary

An intended beneficiary is a person who the insured intended to receive benefits under a life insurance policy. For example, if Bob has a policy stating that his wife, Sally, will receive $1 million on Bob’s death, then Sally is an intended beneficiary.

This sounds simple. But, sometimes issues can arise when evidence suggests that a named beneficiary was not the intended beneficiary. This occurred in Parlette v. Parlette, 88 Md. App. 628 (1991). The father sold his son a life insurance policy. The father named himself as the beneficiary when he filled out the policy form for his son. However, there was evidence to suggest that the son actually told his father to name the mother as the beneficiary. As a result, there was a dispute as to who the son intended to receive the benefit payout.

In other words, the named beneficiary is not always the intended beneficiary. It all boils down to the insured’s intentions (hence the term “intended beneficiary”). So, if a family member sends you an email stating that they named you as the sole beneficiary under their life insurance policy, then you should save that email in case someone at the insurance company entered the wrong information on the policy form or someone fraudulently accessed the form and filled in their own name as the beneficiary.

Incidental Beneficiary

An incidental beneficiary is a person who stands to benefit from a contract even though the parties to the contract never referred to the person in any term or provision. They are, essentially, an unintended beneficiary.

In the context of life insurance, an example of an incidental beneficiary could be any dependent of the intended beneficiary. Let’s assume that Sally, from our earlier illustration of an intended beneficiary, has a minor child. The $1 million that Sally stands to gain from her deceased husband’s life insurance payout might allow her to enjoy a higher standard of living, which would elevate the child’s standard of living as well. In that sense, the child would benefit even though the funds would only be paid to Sally. The child in this scenario is an incidental beneficiary.

Standing

Unlike a normal contract, where a breach is typically litigated between the actual parties to the agreement, life insurance disputes usually arise where one of the parties to the contract – the insured – dies, and a third party then files a wrongful denial of benefits lawsuit. Of the two types of beneficiaries, only intended beneficiaries have standing to bring such a claim:

“In order for a person to recover as a third-party beneficiary, he or she must show that the parties to the contract clearly intended that the third party benefit from it.” [Parlette v. Parlette, 88 Md. App. 628, 637, 596 A.2d 665, 670 (1991)] (citing Shillman v. Hobstetter, 249 Md. 678, 687, 241 A.2d 570, 575 (1968)). Moreover, it “ ‘must clearly appear that the parties [to the contract] intend to recognize him as the primary party in interest and as privy to the promise.’ ” Shillman, 249 Md. at 688, 241 A.2d at 575 (quoting Marlboro Shirt Co. v. American District Telegraph Co., 196 Md. 565, 569, 77 A.2d 776, 777 (1951)) (emphasis added). “An incidental beneficiary,” in contrast, is “one who benefits from the contract although the benefit was not specifically intended or planned by the contracting parties.” Parlette, 88 Md. App. at 637, 596 A.2d at 670. An incidental beneficiary “has no rights against the promisee or promisor.” Id.

Higdon v. Lincoln Nat’l Ins. Co., No. ELH-13-2152, 2014 WL 6951290 *8 (D. Md. Dec. 8, 2014). In other words, a third party has standing to sue a life insurance company for breach of contract only if they are an intended beneficiary.

Summary

It is important to understand the difference between an intended beneficiary and an incidental beneficiary, because the former has standing to enforce a life insurance policy while the latter does not. Whether a person is an intended beneficiary depends on what the evidence suggests was the intent of the insured. In most cases, it is sufficient if the policy names the person as a beneficiary. However, disputes can arise if there is evidence that the person was named fraudulently or by mistake.

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