Memorandum: Force-Placed Policies

Question Presented

When is a homeowner-borrower an intended third-party beneficiary under a lender-placed insurance policy?

Short Answer

A homeowner-borrower is an intended third-party beneficiary under a lender-placed policy when the policy confers rights and or duties directly to the borrower.

Discussion

Third-party Beneficiaries

The question of whether or not a homeowner is an intended third-party beneficiary under a lender-placed policy is a very fact-specific issue. It is beneficial to first understand third-party beneficiary status under contracts generally. A third party may recover on a contract made between other parties only if the contracting parties intended to secure a benefit to the third party and only if the contracting parties entered into the contract directly for the third party’s benefit. Basic Capital Mgmt. v. Dynex Commercial, Inc., 348 S.W.3d 894(Tex.2011). The third party must show that he is either a donee or a creditor beneficiary of the contract, and not one who is only incidentally benefitted by its performance. MCI Telecomms. Corp. v. Texas Utils. Elec. Co.,995 S.W.2d 647(Tex.1999). A party is a donee beneficiary if the promised performance will come to him as a pure donation when rendered. Id at 651. If that performance will come to him in satisfaction of a legal duty owed to him by the promisee, such as an “indebtedness, contractual obligation or other legally enforceable commitment,” he is a creditor beneficiary. Id. The contract must demonstrate more than a mere incidental benefit to the third party. “In the absence of a clear and unequivocal expression of the contracting parties’ intent to directly benefit a third party, courts will not confer third-party beneficiary status by implication.” Tawes v. Barnes, 340 S.W.3d 419, 425 (Tex. 2011). There is a presumption against finding third-party beneficiaries to contracts, and courts will generally deny third-party-beneficiary claims unless:

(1) the obligation of the bargain-giver is fully spelled out

(2) it is unmistakable that a benefit to the third party was within the contemplation of the contracting parties; and

(3) the contracting parties contemplated that the third party would be vested with the right to sue for enforcement of the contract.

Union Pac. R.R. Co. v. Novus Int’l, Inc.,113 S.W.3d 418(Tex. App. Houston 1st Dist.2003).While insurance policies are subject to the same rules as any other contract, it is helpful to examine how courts have treated third-party beneficiaries in the specific context of force-placed policies.

Homeowner-borrowers and Force-placed Policies

Third-party beneficiary status in force-placed policies, is a relatively novel concept to Texas state courts. To date, there have only been two state court opinions on the issue. In Alvarado v. Lexington, Alvarado was a homeowner-borrower who filed suit against Lexington Insurance Company for breach of contract, breach of duty of good faith, and DTPA violations. Alvarado v. Lexington Ins. Co.,371 S.W.3d 417(Tex. App. Houston 1st Dist.2012). The only named insured under the policy was Flagstar Bank. Lexington moved for summary judgment arguing that Alvarado could not recover since he was neither a named insured nor an additional insured under the policy. The trial court granted Lexington’s motion and Alvarado appealed. On appeal, Alvarado argued that he was a third-party beneficiary under the policy because of a particular endorsement in the policy. Since Texas State courts had not yet addressed the specific issue of third-party standing under force-placed policies, the Appellate court looked to Federal opinions for guidance. Federal courts have found that third-party standing exists when:

1. The policy contains a subrogation clause providing that the homeowner-borrower will not be liable to the insurance company for any loss paid to the insured; or
2. The policy contains a provision allowing for temporary housing expenses to be paid to the homeowner-borrower if the property is damaged.

Palma v. Verex Assurance, Inc., 79 F.3d 1453, 1457-58 (5th Cir. 1996); see also Henderson v. Certain Underwriters at Lloyds, 2009 U.S. Dist. LEXIS 90696.

Federal courts have looked for one of two particular clauses when determining whether or not the policy was intended to benefit the borrower.

1. An “excess loss” or “residual payment” clause which provides that the homeowner-borrower will be entitled to funds which exceed the mortgagee’s interest in the property; or
2. A clause providing that the insurer will adjust all personal property losses with, and pay all such proceeds to the borrower.

Alvarado 371 S.W.3d at 427.

The policy which covered Alvarado’s property contained an endorsement entitled “Special Broad Form Homeowner’s Coverage.” Id. at 433. Although Alvarado was not named on the policy, this endorsement contained a Mortgage Clause which provided “If a mortgagee is named in the policy, any loss payable will be paid to the mortgagee and you as interests appear.” Id. This endorsement covered the real and personal property, as well as additional living expenses for loss of use. Id. The court reasoned that the ‘insured’ under this endorsement could reasonably only be the homeowner. Though it did not specifically name Alvarado, the court determined that this provision was intended to benefit Alvarado as the homeowner. Id. The court of appeals reversed and remanded holding that Lexington failed to carry its burden of conclusively negating Alvarado’s status as a third-party beneficiary to the Policy. Id at 437.

Garcia v. Bank of America Corp. stands in stark contrast to Alvarado. Garcia was a homeowner-borrower who filed suit against National Lloyds Insurance. Garcia v. Bank of Am. Corp. 375 S.W.3d 322 (Tex. App. Houston 14th Dist.2012). Like Alvarado, Garcia was not named as an insured or as an additional insured. Id. at 324. Garcia argued that a specific endorsement in the policy made him a third-party beneficiary. The endorsement provided that if the amount of a covered loss exceeded the value of the mortgagee’s interest in the property, payment for the loss would be paid to the mortgagee and Garcia. Id. at 327. However, the very same endorsement contained language which stated that “Notwithstanding the foregoing, nothing contained in this endorsement shall make a Mortgagor in legal possession of the Insured Residential Property or Commercial Property an Insured or an additional insured under this Policy.” Id. The court reasoned that this language indicated that the contracting parties had no intent to provide a benefit to Garcia. Id. The court found that any benefit provided to Garcia was incidental and the parties to the contract did not intend to directly benefit Garcia as a third party. The Appellate court found that the trial court had properly granted summary judgment since the defendant established as a matter of law that Garcia was neither an insured, an additional insured, nor an intended third-party beneficiary under the policy. Id. at 328.

Garcia demonstrates the importance of the intent of the contracting parties. When comparing the decisions of Alvarado and Garcia, it seems as though each policy contained an excess-loss provision. However, the provision in Garcia specifically stated that it was not intended to make the mortgagor an insured or an additional insured under the policy. This shows that while an excess-loss provision can give a homeowner third-party standing, it can also be negated by specific policy language.