Third-party beneficiaries to an insurance contract, as a matterof course, do not have contact with the insurer or the insuranceagent obtaining the insurance for the named insured.

In Emerald Coast Finest Produce Co. v. SunriseFresh Produce an attempt was made by a person claiming tobe a third-party beneficiary to collect more than the existingpolicy limit because of its claimed negligence of the insuranceagent.

This case arose from a warehouse fire. PlaintiffEmerald Coast owned the building and leased it to defendantSunrise, headquartered in Mississippi. The lease agreement requiredSunrise to “provide and keep in force fire and extended coverageproperty damage insurance on the Premises equal to 100 percent ofthe replacement value of the building.” The building burned down.Emerald Coast claimed that the cost to repair or replace it wasjust more than $15 million, but the policy insuring the buildingprovided $5 million in coverage.

Emerald Coast asserted negligence claims against additionaldefendants BancorpSouth Insurance Services and Alterra AmericanInsurance Co. Specifically, Emerald Coast contended that it was athird-party beneficiary of the insurance policy. It argued that theagent negligently failed to procure insurance coverage equal to thereplacement cost of the subject warehouse. Likewise,Emerald Coast argues that Alterra is liable for its insuranceagent's actions.

BancorpSouth and Alterra filed motions for summary judgment.Each argues that it owed no duty to Emerald Coast, and that itprocured a policy as specifically instructed by Sunrise.

A court is not permitted to make credibility determinations orweigh the evidence. When deciding whether a genuine fact issueexists, the court must view the facts and the inference to be drawnfrom in the light most favorable to the nonmoving party. EmeraldCoast contends that BancorpSouth and Alterra owed it a duty to:

1. Determine the replacement cost of the warehouse before placingcoverage.
2. Properly inspect the premises to determine the replacement costbefore placing coverage.
3. Take other precautions to determine the replacement cost beforeplacing coverage.
4. Procure insurance coverage equal to the replacement cost of thewarehouse. Each of these claims arises from the procurement of thepolicy, and Emerald Coast contends that the defendants negligentlyfailed to procure enough insurance coverage on the warehouse.

Among other issues, the defendants' motions for summary judgmentpresent a discrete question of law: May a third-party beneficiaryof an insurance policy assert a negligence claim against theinsurer and/or its agent arising from the policy's procurement,rather than its fulfillment?

Related: Arizona appeals court weighs in on renovationpolicy exclusion

An insurance agent or broker who fills the request of theinsured owes nothing more to the insured or third-partybeneficiary. (Photo: Shutterstock)

Case analysis

Applying the principles of agency, an insurer is bound by theacts of agents, and knowledge gained by an insurance agent withinthe scope of its agency is imputed to the insurer.

An insurance agent must use the same degree of diligence andcare that a reasonably prudent person would exercise in thetransaction of his own business.

Insurance agents do not have an affirmative duty to advisebuyers regarding their coverage needs, but if they offer advice toinsureds, they have a duty to exercise reasonable care in doing so.Likewise, if an insurance agent or broker with a view to beingcompensated agrees to procure insurance for another and throughfault or neglect fails to do so, he will be liable for any damagethat results.

Under Mississippi law, a third party may maintain an action as athird-party beneficiary to enforce a promise made for its benefit.However, this right must spring from the terms of the contract. Athird-party beneficiary may sue for a contract breach only when thealleged broken condition was placed in the contract for thebeneficiary's direct benefit. In order for the thirdperson beneficiary to have a cause of action, the contracts betweenthe original parties must have been entered into for his benefit,or at least such benefit must be the direct result of theperformance within the contemplation of the parties as shown by itsterms.

Assuming that Emerald Coast is a third-party beneficiary of theinsurance policy, its negligence claims against BancorpSouth andAlterra are untenable because an insurer's duties to a third-partybeneficiary must spring from the terms of the contract itself, anda third-party beneficiary may sue for a contract breach only whenthe alleged broken condition was placed in the contract for thebeneficiary's direct benefit. Emerald Coast argued thatBancorpSouth and Alterra owed it the duty of procuring coverage ina certain amount, and that this duty arose under the insurancepolicy acquired by Sunrise for its benefit.

Emerald Coast cited no Mississippi case in which a third-partybeneficiary of an insurance policy was permitted to assert anegligence claim arising from an insurance agent's failure toprocure adequate coverage. Indeed, the court's own research hasrevealed no such cases. Instead, Mississippi courts haveconsistently held that duties owed to the third-party beneficiaryof a contract must “spring from the terms of the contract itself”to be enforceable. A duty to procure certain coverage cannot springfrom the terms of the contract itself.

An insurance agent or broker who merely fulfills the request ofthe insured owes nothing more to the insured or any third-partybeneficiary making a claim under the policy. The contract ofinsurance clearly and unambiguously provided $5 million incoverage. The contract of insurance only made the owner anadditional insured.

Barry Zalma, Esq., CFE, is a California attorney, insuranceconsultant and expert witness specializing in insurance coverage,claims handling, bad faith and fraud. Contact him at [email protected].

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