INSURANCE-RELATED COURT CASES
Digested from case reports published online
COURT DECISIONS
Lender-placed hazard policy benefit was expressly provided
Ellen Williams purchased a residential property in Houma, Louisiana, which was mortgaged by Flagstar Bank. Since Williams did not insure the home, Flagstar obtained a “lender-placed hazard insurance policy” from Integon National Insurance Company at Williams’s expense. The policy named Flagstar as the “Insured” and Williams as the “Borrower.” Williams paid all premiums on this policy and complied with all requirements in the policy at all relevant times.
The policy included the following salient provision: “13. Loss Payment. WE will adjust each LOSS with [Flagstar] and will pay [Flagstar]. If the amount of LOSS exceeds [Flagstar’s] insurable interest, WE will pay BORROWER any residual amount due for the LOSS, not exceeding the Limit of Liability indicated on the NOTICE OF INSURANCE. Payment for LOSS will be made within thirty (30) days after receipt of satisfactory proof of LOSS from [Flagstar].”
Importantly, Flagstar negotiated for a policy limit of $77,934, rather than opting to use its own insurable interest in the property to cap the liability risk.
In August 2021, Williams’s home sustained damage as a result of Hurri-cane Ida.
Although Integon cooperated with Williams by inspecting the property and exchanging loss and repair estimates with her, it ultimately refused to pay for her property repairs in full. Williams sued Integon in the 32nd Judicial District Court for the Parish of Terrebonne, asserting breach-of-contract and bad-faith claims under Louisiana law.
Integon removed the case to the United States District Court for the Eastern District of Louisiana on diversity grounds and filed a Rule 12(b)(6) motion to dismiss, arguing that Williams lacked standing to sue under the policy. Integon asserted that Williams lacked standing to sue under the policy because she was not a named insured, an additional insured, or a third-party beneficiary.
While Williams acknowledged that she was neither a named insured nor additional insured, she contended that she is a third-party beneficiary. She submitted that other courts “interpretating identical policy language at issue here” have held that a borrower who has a right to payments in excess of the lender’s insurable interest may pursue insurance claims as a third-party beneficiary.
The district court disagreed with Williams’s argument and granted Integon’s motion. It acknowledged that there is a line of cases that supports Williams’s position and another that supports Integon’s. However, it ultimately agreed with the latter, reasoning that any benefit that flows to a borrower-mortgagor in the forced-placed lender policy context are “merely incidental” to the policy and thus cannot confer third-party beneficiary status on the borrower.
In so concluding, the district court also denied Williams leave to amend her complaint, reasoning that any amendment would be futile because Williams could not plead any set of facts that would show such benefits were more than incidental.
Williams appealed.
The United States Court of Appeals for the Fifth Circuit reviewed the case. The court found that the loss payment provision of the Integon policy clearly manifested an intent to benefit Williams, namely to provide her with a certain benefit when the loss amount exceeded Flagstar’s insurable interest. It was the court’s opinion that this benefit is not merely incidental to the contract, but that it was expressly provided for in that enumerated circumstance.
In its opinion, the Fifth Circuit court wrote, “If Williams can show certainty as to the benefit owed to her under the policy—that is, if Williams can allege that the amount of loss exceeds Flagstar’s insurable interest—then she has standing to pursue her claims as a third-party beneficiary.”
Its finding was that the district court, by relying on inapposite case law, abused its discretion in denying Williams’s request to amend her complaint to plead such facts.
Consequently, the Fifth Circuit reversed the district court’s decision and remanded the case with instructions to allow Williams to amend her complaint.
Ellen Williams v. Integon National Insurance Company—United States Court of Appeals for the Fifth Circuit—No. 24-30406—March 25, 2025.
