Insurance contracts are subject to the same rules of construction as ordinary contracts. ArchonInvs., Inc. v. Great Am. Lloyds Ins. Co., 174 S.W.3d 334, 338 (Tex. App.—Houston [1st Dist.] 2005, pet. denied) (citing Trinity Universal Ins. Co. v. Cowan, 945 S.W.2d 819, 823 (Tex. 1997)). When a policy permits only one reasonable interpretation, we construe it as a matter of law and enforce it as written. Id. (citing Upshaw v. Trinity Cos., 842 S.W.2d 631, 633 (Tex. 1992)). When construing an insurance policy, “[w]e must strive to effectuate the policy as the written expression of the parties’ intent.” Id. (citing State Farm Life Ins. Co. v. Beaston, 907 S.W.2d 430, 433 (Tex. 1995)). To discern the intent of the parties to a contract, the court examines and considers the entire writing to harmonize and give effect to all the provisions of the contract so that none will be rendered meaningless, no single provision taken alone will be given controlling effect, and all the provisions will be considered with reference to the whole instrument. In re Serv. Corp. Int’l, 355 S.W.3d 655, 661 (Tex. 2011).If the term to be construed is unambiguous and susceptible of only one construction, we “give the words in the policy their plain meaning.” Archon, 174 S.W.3d at 338 (citing Devoe v.Great Am. Ins., 50 S.W.3d 567, 571 (Tex. App.—Austin 2001, no pet.)).
In determining whether a third party can enforce a contract, we look only to the intention of the contracting parties. Basic Capital Mgmt., Inc. v. Dynex Commercial, Inc., 348 S.W.3d 894, 900 (Tex. 2011); MCI Telecomms.Corp. v. Tex. Utils.Elec. Co., 995 S.W.2d 647, 651 (Tex. 1999); Union Pac. R.R. Co. v. Novus Int’l, Inc., 113 S.W.3d 418, 421 (Tex. App.—Houston [1st Dist.] 2003, pet. denied). The fact that a person might receive an incidental benefit from a contract to which he is not a party does not give that person a right to enforce the contract. Basic Capital Mgmt., 348 S.W.3d at 899–900; MCI Telecomms., 995 S.W.2d at 651; Union Pac., 113 S.W.3d at 421. 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., 348 S.W.3d at 900; MCITelecomms., 995 S.W.2d at 651; Union Pac., 113 S.W.3d at 421. 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. MCITelecomms., 995 S.W.2d at 651; Union Pac., 113 S.W.3d at 421. A party is a donee beneficiary if the promised performance will, when rendered, come to him as pure donation. MCITelecomms., 995 S.W.2d at 651; Union Pac., 113 S.W.3d at 421. 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. MCITelecomms., 995 S.W.2d at 651; Union Pac., 113 S.W.3d at 421.
“We glean intent from what the parties said in their contract, not what they allegedly meant.” Union Pac., 113 S.W.3d at 421. We will not create a third-party beneficiary contract by implication. Basic Capital Mgmt., 348 S.W.2d at 900; MCITelecomms., 995 S.W.2d at 651; Union Pac., 113 S.W.3d at 422; see also Tawes v. Barnes, 340 S.W.3d 419, 425 (Tex. 2011) (“[I]n 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.”). As the Texas Supreme Court held in MCITelcommunications,
The intention to contract or confer a direct benefit to a third party must be clearly and fully spelled out or enforcement by the third party must be denied. Consequently, a presumption exists that parties contracted for themselves unless it “clearly appears” that they intended a third party to benefit from the contract.
995 S.W.2d at 651;see alsoBasic Capital Mgmt., 348 S.W.3d at 900 (quoting same).
Due to the presumption against finding third-party beneficiaries to contracts, 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., 113 S.W.3d at 422. We resolve all doubts against conferring third-party-beneficiary status. Tawes, 340 S.W.3d at 425; see also First Union Nat’l Bank v. Richmont Capital Partners I, L.P., 168 S.W.3d 917, 929 (Tex. App.—Dallas 2005, no pet.) (“If there is any reasonable doubt as to the intent of the contracting parties to confer a direct benefit on the third party, then the third-party beneficiary claim must fail.”).
Texas’s third-party beneficiary policy was recently examined and explained by the Texas Supreme Court in Basic Capital Management.348 S.W.3d 894. In that case, Basic managed real estate investment trusts, including American Realty Trust, Inc. (“ART”) and Transcontinental Realty Investors, Inc. (“TCI”). Id. at 896. Basic and Dynex signed a Commitment, in which Dynex agreed to loan funds to “single-asset, bankruptcy-remote entities” (“SABREs”) owned by ART and TCI if Basic would “propose other acceptable SABREs to borrow $160 million over a two-year period.” Id. at 896–97. The issue on appeal was whether ART and TCI could recover damages from Dynex for its alleged breach of the Commitment as third-party beneficiaries to the Commitment. Id. at 898.
The supreme court reasoned that, because the intention to confer a direct benefit to a third party must be clearly and fully spelled out in the contract for that party to have standing as a third-party beneficiary, “a presumption exists that parties contracted for themselves unless it clearly appears that they intended a third party to benefit from the contract.” Id. at 900.Although only Dynex and Basic had signed the Commitment, “Dynex knew that the purpose of the Commitment was to secure future financing for ART and TCI, real estate investment trusts that Basic managed and in which it held an ownership interest.” Id. Not only was Basic not intended to be the borrower, but the Commitment expressly required that the borrowers be SABREs acceptable to Dynex, and Dynex knew that Basic would not own the SABREs. Id. The court concluded that this requirement was for Dynex’s benefit, since SABREs are designed to provide more certain recourse to collateral in the event of default. Id. The court pointed out that “SABRE-borrowers provided a mechanism for ART and TCI to hold investment property directly but in a way that would provide Dynex greater security.” Id. Thus, “if Dynex and Basic did not intend the Commitment to benefit ART and TCI directly, then the Commitment had no purpose whatsoever.” Id. Moreover, the Commitment “clearly and fully spelled out the benefit to ART and TCI because their role was basic to Dynex’s and Basic’s agreement.” Id. at 901. The court concluded, “The Commitment itself, and the undisputed evidence regarding its negotiation and purpose, establish that ART and TCI were third-party beneficiaries.” Id.
Although Texas state courts have addressed whether a party may be a third-party beneficiary in the general insurance policy context, they have not addressed the specific issue of whether a homeowner-borrower qualifies as a third-party beneficiary under a force-placed insurance policy entered into between the insurance company and the mortgage company. See, e.g., Paragon Sales Co. v. N.H. Ins. Co., 774 S.W.2d 659, 660–61 (Tex. 1989) (holding distributor presented some evidence that it was third-party beneficiary of indemnity contract between insurance company and public motor carrier). As a result of Hurricanes Dolly, Katrina, and Rita, however, some federal courts within the Fifth Circuit Court of Appeals’ jurisdiction, primarily in Louisiana, have addressed this issue and have reached differing conclusions as to the homeowner’s third-party-beneficiary status according to the specific terms of the policy and the facts of the case.
When deciding whether a homeowner-borrower is a third-party beneficiary under a force-placed insurance policy, the federal courts applying state law, like the Texas courts, have looked to the language of the policy to determine whether any of the provisions clearly confer a direct benefit upon the borrower. Thus, the Fifth Circuit has found third-party beneficiary status to exist (1) when the policy, although only listing the mortgage company as a named insured, contains a subrogation clause providing that the homeowner-borrower will not be liable to the insurance company for any loss paid to the insured and (2) when the policy contains a provision allowing for temporary housing expenses to be paid to the homeowner-borrower. See Palma v. Verex Assurance, Inc., 79 F.3d 1453, 1457–58 (5th Cir. 1996) (subrogation clause case decided under Texas law). In Palma, the Fifth Circuit held that the inclusion of the subrogation clause within the insurance policy demonstrated a clear intention on the part of the contracting parties to benefit the homeowner-borrower. Seeid.at 1458 (“[The subrogation clause] is written for the sole benefit of the borrower. . . . We also find that the insurance contract was actually made, in part, for the benefit of Palma [the borrower].”); see also Henderson v. Certain Underwriters at Lloyds, London, Civil Action No. 09-1320, 2009 WL 3190710, at *3 (E.D. La. Sept. 30, 2009) (slip op.) (noting that plaintiff’s standing was limited solely to seeking temporary housing expenses because this was only clause in policy providing direct benefit to borrower).
Primarily, the federal district courts have focused on whether the policy contains one of two specific clauses that may benefit the borrower: (1) an “excess loss” or “residual payment” clause or (2) a clause providing that the insurer will adjust all personal property losses with, and pay any such proceeds to, the borrower. A common excess loss clause provides as follows:
We will adjust all losses with you [the mortgagee and named insured]. We will pay you but in no event more than the amount of your interest in the “insured location.” Amounts payable in excess of your interest will be paid to the “borrower” unless some other person is named by the “borrower” to receive payment . . . .
See, e.g., Turner v. Gen. Ins. Co. of Am., Civil Action No. 5:09cv00057-DCB-JMR, 2009 WL 3247302, at *3 (S.D. Miss. Oct. 7, 2009) (slip op.). If the policy provides coverage for personal property, the insurance policy may include a clause providing that the insurer will adjust all losses to personal property with the homeowner-borrower and will pay the borrower any proceeds for such loss, unless the borrower has named another person to receive payment. Id.
A number of courts in the cases in which there were force-placed policies with such clauses have found third-party-beneficiary status for homeowners under the terms of the particular policy. For example, in Lee v. Safeco Insurance Co. of America, the United States District Court for the Eastern District of Louisiana held that the excess loss clause, which “clearly stipulate[d] that the portion of any loss payment exceeding the value of [the mortgagee’s] interest in the property will be paid directly to [the homeowner-borrower],” manifested a “clear intent to benefit the borrower.” Civil Action No. 08-1100, 2008 WL 2622997, at *4 (E.D. La. July 2, 2008) (not designated for publication); see Turner, 2009 WL 3247302, at *4; Beck v. State Farm Fire &Cas. Co., No. 2:07 CV 1998, 2008 WL 4155301, at *2 (W.D. La. Sept. 5, 2008) (not designated for publication) (finding third-party-beneficiary status when policy contained excess loss clause and provision allowing for adjustment of personal property losses with and payment of such losses to borrower); Navarrete v. Gen. Ins. Co. of Am., Civil Action No. 07-4865, 2008 WL 659477, at *2 (E.D. La. Mar. 7, 2008) (not designated for publication) (same); Peters v. Safeco Gen. Ins. of Am., Civil Action No. 07-5612, 2008 WL 544226, at *1 (E.D. La. Feb. 25, 2008) (not designated for publication) (same); Martin v. Safeco Ins. Co., Civil Action No. 06-6889, 2007 WL 2071662, at *3 (E.D. La. July 13, 2007) (not designated for publication) (same); see also Hickman v. Safeco Ins. Co. of Am., 695 N.W.2d 365, 370–71 (Minn. 2005) (holding same when policy contained excess loss clause, coverage for personal property, provision that insurer would adjust personal property losses with borrower and would pay borrower, and provision allowing borrower to seek arbitration of appraisal of covered loss).
The Eastern District of Louisiana has also held, however, that a homeowner-borrower was not a third-party beneficiary to an insurance policy containing an excess loss clause when the claimed damages did not exceed the mortgagee’s interest in the property, as required by the terms of the policy for her to be considered an additional insured. Graphia v. Balboa Ins. Co., 517 F. Supp. 2d 854 (E.D. La. 2007). In Graphia, the policy provided that the borrower “shall be considered an additional insured with respect to any residual amounts of insurance over and above [the mortgagee’s] insurable interest.” Id. at 857. The borrower claimed damages of $56,542.91, and she presented evidence that the balance remaining on her loan was $110,000. Id. The court noted that there was “no amount ‘due for the loss’ that exceeds [the mortgagee’s] insurable interest.” Id. The court concluded, “The contract does manifest a clear intention to benefit Graphia, but only to the extent that she has an insurable interest in the property. The contract evidences no intent to give plaintiff personal rights in the insurance coverage for losses that do [not] exceed the mortgagee’s insurable interest.” Id. at 858. Because her losses did not exceed the mortgagee’s interest in the property, Graphia received only an incidental benefit from this policy and, therefore, could not enforce the contract. Id.; cf. Mingo v. Meritplan Ins. Co., No. 2:06 CV 1914, 2007 WL 4292026, at *3 (W.D. La. Dec. 4, 2007) (not designated for publication) (denying insurer’s motion to dismiss for lack of standing because parties disputed amount of loss and record did not reflect either amount of mortgage or mortgagee’s interest in property).
The federal courts have also found the force-placed homeowner not to be a third-party beneficiary when the homeowner did not receive a direct benefit from the policy under the policy’s own terms. Specifically, the federal courts have denied third-party beneficiary status when the insurance policy states (1) that it does not provide coverage for loss of use, personal liability, or personal property, (2) that the mortgagee is the sole insured, (3) that the policy is intended to protect the mortgagee’s interest only and not the borrower’s, or (4) that all losses will be adjusted with and made payable to the named insured, the mortgage company. See Williams v. Certain Underwriters at Lloyd’s of London, 398 Fed. App’x 44, 48–49 (5th Cir. 2010) (not designated for publication) (policy specified that mortgagee was sole insured and all benefits were payable directly to mortgagee); Lumpkins v. Balboa Ins. Co., 812 F. Supp. 2d 1280, 1283–84 (N.D. Okla. 2011) (policy provided no coverage for contents, personal effects, personal living expenses, fair rental value or liability and stated that contract was only with named insured and only intended to protect named insured’s interest); Barrios v. Great Am. Assurance Co., Civil Action No. H-10-3511, 2011 WL 3608510, at *4 (S.D. Tex. Aug. 16, 2011) (slip op.) (policy specified that, unless homeowners coverage was specifically added by endorsement, homeowner-mortgagor was not insured under policy); Williams v. Fid. Nat’l Ins. Co., Civil Action No. 07-4428, 2009 WL 2922310, at *3 (E.D. La. Sept. 8, 2009) (not designated for publication) (policy specified that, despite insurable interests of homeowner, only mortgagee was insured under policy); Simpson v. Balboa Ins. Co., Civil Action No. 2:08cv281KS-MTP, 2009 WL 1291275, at *3–4 (S.D. Miss. May 7, 2009) (policy provided no coverage for loss of use, personal liability, or personal property and no right of borrower to participate in claim adjustment); Jones v. Proctor Fin. Ins. Corp., Civil Action No. 06-9503, 2007 WL 4206863, at *3 (E.D. La. Nov. 21, 2007) (not designated for publication) (policy provided no coverage for personal property, and adjustment of and payment for loss would be made solely to mortgagee); Paulk v. Balboa Ins. Co., No. 1:04CV97, 2006 WL 1994864, at *3 (S.D. Miss. July 14, 2006) (not designated for publication) (same); see also Scheaffer v. Balboa Ins. Co., 1 So. 3d 756, 759 (La. Ct. App. 2008) (notice of premium informed borrower that he was not insured under policy, that he was not entitled to receive proceeds, and that policy protected only mortgagee’s interest). Mere payment of the force-placed-policy premiums by the homeowner-borrower, without more, does not necessarily confer third-party-beneficiary status on the borrower. See Scheaffer, 1 So. 3d at 760; Lee, 2008 WL 2622997, at *3 (“Mere payment or reimbursement of insurance premiums by a plaintiff to an insurance provider does not create a right to recovery under an insurance policy when the plaintiff is not the named insured and is nowhere named in the policy.”).
SOURCE: HOUSTON COURT OF APPEALS - NO. 01-10-00740-CV and NO. 01-10-01150-CV – 4/19/12
