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

In Emerald Coast Finest Produce Co. v. Sunrise Fresh Produce an attempt was made by a person claiming to be a third-party beneficiary to collect more than the existing policy limit because of its claimed negligence of the insurance agent.

This case arose from a warehouse fire. Plaintiff Emerald Coast owned the building and leased it to defendant Sunrise, headquartered in Mississippi. The lease agreement required Sunrise to “provide and keep in force fire and extended coverage property damage insurance on the Premises equal to 100 percent of the replacement value of the building.” The building burned down. Emerald Coast claimed that the cost to repair or replace it was just more than $15 million, but the policy insuring the building provided $5 million in coverage.

Emerald Coast asserted negligence claims against additional defendants BancorpSouth Insurance Services and Alterra American Insurance Co. Specifically, Emerald Coast contended that it was a third-party beneficiary of the insurance policy. It argued that the agent negligently failed to procure insurance coverage equal to the replacement cost of the subject warehouse. Likewise, Emerald Coast argues that Alterra is liable for its insurance agent's actions.

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

A court is not permitted to make credibility determinations or weigh the evidence. When deciding whether a genuine fact issue exists, the court must view the facts and the inference to be drawn from in the light most favorable to the nonmoving party. Emerald Coast contends that BancorpSouth and Alterra owed it a duty to:

Determine the replacement cost of the warehouse before placing coverage.
Properly inspect the premises to determine the replacement cost before placing coverage.
Take other precautions to determine the replacement cost before placing coverage.
Procure insurance coverage equal to the replacement cost of the warehouse. Each of these claims arises from the procurement of the policy, and Emerald Coast contends that the defendants negligently failed to procure enough insurance coverage on the warehouse.

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

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

Case analysis

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

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

Insurance agents do not have an affirmative duty to advise buyers regarding their coverage needs, but if they offer advice to insureds, they have a duty to exercise reasonable care in doing so. Likewise, if an insurance agent or broker with a view to being compensated agrees to procure insurance for another and through fault or neglect fails to do so, he will be liable for any damage that results.

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

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

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

An insurance agent or broker who merely fulfills the request of the insured owes nothing more to the insured or any third-party beneficiary making a claim under the policy. The contract of insurance clearly and unambiguously provided $5 million in coverage. The contract of insurance only made the owner an additional insured.

Barry Zalma, Esq., CFE, is a California attorney, insurance consultant and expert witness specializing in insurance coverage, claims handling, bad faith and fraud. Contact him at zalma@zalma.com.

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Mississippi case says rights to insurance must spring from contract

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