Who Is a Third-Party Beneficiary?

Often insurance contracts provide coverage for the property of those who are not parties to the actual contract. Third parties may be added as additional insureds to a policy. The Building and Personal Property Coverage Form (CP 00 10 06 07) also provides coverage for the personal property of others that is in the care, custody, or control of the insured and that is located in or on the building described in the declarations or in the open or in a vehicle within a hundred feet of the premises. In this case, “others” are not named in the policy, but they may still exercise some of the same rights as the named insured.

Those additional insureds, “others,” or “unnamed” insureds may be classified as third-party beneficiaries of the policy. Black's Law Dictionary defines a third-party beneficiary as a “person not a party to an insurance contract who has legally enforceable rights thereunder.” A third-party beneficiary may have the right to bring a direct cause of action against the insurer. And, while the commercial property conditions stipulate that legal action may only be brought against the insurer if there has been full compliance with the terms of the coverage part, courts have held that third-party beneficiaries may recover even when the insured has no right to recovery.

 Standing as a Third-Party Beneficiary

Generally, provisions in a contract can be enforced only by the parties that enter into the contract. [See, for example, East Meadows Co., LLC v. Greeley Irr. Co., 66 P.3d 214 (Colo. App. 2003); Carson v. Giant Food, Inc., 187 F. Supp.2d 462 (D.Md. 2002); Mahan v. Avera St. Luke's, 621 N.W.2d 150 (S.D. 2001).] However, an exception is made to this general rule if a contract is intended to benefit a third party. [See, for example, Village of Slinger v. City of Hartford, 650 N.W.2d 81 (Wis. App. 2002); Holmes Development, LLC v. Cook, 48 P.3d 895 (Utah 2002); Laurent v. Flood Data Serv., Inc, 766 N.E.2d 221 (Ohio App. 2001).]

In order for a third party to claim rights under an insurance policy, standing as a third-party beneficiary must be established.

One factor in determining standing as a third-party beneficiary is the intent of the parties to the contract. Lack of intent to insure a third party precludes standing, as illustrated in CSS Publishing Co., Inc. v. American Economy Ins. Co., 740 N.E.2d 341 (Ohio App. 2000).

CSS, a publisher of religious books and materials, owned a division called Fairway Press. Fairway required its authors to pay a fee to have their materials published. Once published, the authors received a portion of the books and a portion was stored at CSS's warehouse. CSS advertised the books and distributed royalties to the authors for any books it sold.

A fire in the warehouse damaged the buildings and property stored in them. CSS submitted a claim to its insurer, American Economy, which settled the claim except for the Fairway books stored in the warehouse. American classified the books as personal property of others, subject to a policy limit of $40,000. CSS countered that the books should not be classified as such but were business personal property, with a limit of over $2 million.

Not only did CSS bring action against the insurer, but CSS's officers and directors also filed suit for bad faith. American argued that only CSS was the named insured of the policy, and the officers and directors were not individually insured under the commercial property coverage provisions of the contract. CSS contended that the officers and directors were unnamed insureds and entitled to file suit.

The court, though, pointed to the words “you” and “your” in the policy, which referred only to CSS, the named insured shown in the declarations. The court also concluded that it was not the intent to include the officers and directors as named insureds. The court further declined to name the officers and directors third-party beneficiaries, stating, “The policy in question is an insurance policy on the business and personal property of CSS. The intent of the policy is not to benefit the employees of CSS.” Thus, the directors and officers had no standing to sue.

Third-party beneficiary standing may be granted by state law. California law, for instance, states, “A contract, made expressly for the benefit of a third person, may be enforced by him at any time before the parties thereto rescind it.” (Cal. Civil Code §1559.)

A California appeals court found a food manufacturer to be a third-party beneficiary within the meaning of California law in Shade Foods, Inc. v. Innovative Products Sales & Marketing, Inc., 78 Cal. App.4th 847 (2000).

Shade Foods manufactured nut clusters for General Mills and contracted an almond processor to provide almonds for the clusters. General Mills found wood splinters in the clusters, which halted production of the cereal containing the clusters and resulted in the destruction of the already-produced cereal. General Mills claimed over $1 million in losses due to the splinters in the clusters. Shade settled with the cereal company. It was determined that the wood was introduced into the clusters via the processor's almonds, so Shade sought coverage under the processor's policy, on which Shade was named an additional insured.

While Shade's additional insured designation related only to the CGL coverage of the processor's package policy, the court found that Shade was a “beneficiary of the first party property insurance portion” of the policy. Thus, the court determined that, under California statute, Shade was allowed a direct action against the processor's insured.

Rights of Third Party-Beneficiaries

Once standing as a third-party beneficiary to an insurance contract has been established, the beneficiary may have certain rights under the contract. One of those rights is to bring direct action against the first party's insurer. For instance, in State Farm Fire and Casualty Co. v. Green, 624 So.2d 538 (Ala. 1993), the Supreme Court of Alabama ruled that, although one is not a party to an agreement and does not furnish consideration for it, he may maintain an action on contract if it was made for his benefit.

Thomas Green leased a commercial building and business-related personal property to James Barnes. Barnes bought coverage for Green's personal property from State Farm. The building and contents were damaged by fire, and Green sued Barnes for negligence and State Farm as a third-party beneficiary. He claimed that he was entitled to compensation under the State Farm policy. State Farm argued that Green could not maintain a direct action without first obtaining a judgment against Barnes.

The court said that “a third party can enforce a contract entered into between others for his direct benefit.” The court had previously held that “a third party can sue an insurer directly under a third-party beneficiary theory without first obtaining a judgment against the insured, provided that the insurer's liability is not predicated on the establishment of the liability of its insured.”

The policy indicated that State Farm was bound by the policy to pay for damage to Green's property, “irrespective of the legal liability of Barnes.” State Farm's agent, who sold the policy to Barnes, knew of the lease between Green and Barnes and that the policy was for Green's benefit. The policy even stated that State Farm had the right to adjust a claim directly with the property owner while under lease to its insured, thus showing the intent to benefit Green and establishing Green's determination as a third-party beneficiary with a right to sue State Farm directly.

Likewise, in Peters v. Employers Mut. Cas. Co., 853 S.W.2d 300 (Mo. 1993), the Supreme Court of Missouri ruled that a third-party beneficiary may sue to enforce a contract “if the contract terms 'clearly express' an intent to benefit either that party or an identifiable class of which the party is a member.”

A fire destroyed a theater at Tarkio College, also destroying personal property of faculty members. Tarkio insured the theater and its contents with Employers. The insurer argued that the faculty members lacked standing because they did not request the insurance and did not pay any premiums for it. They were not referred to by name in the policy, and Employers argued that it was not even the intent of Tarkio College to include coverage for them.

The court conceded that the policy did not name the faculty members and that Tarkio was the named insured on the policy. But, because the policy mentioned the personal property of others in the care, custody, or control of the named insured, it “clearly expresses an intent to benefit those whose property is in the care, custody or control of the insured college, and to pay the owner directly.” Thus, the faculty members could sue Employers directly for their losses.

Another right that may be imparted on third-party beneficiaries is the right to recover under the policy even when the insured has defeated his rights to recovery. Such was the case in Golden Door Jewelry Creations v. Lloyds Underwriters Non-Marine Association, 117 F.3d 1328 (11th Cir. 1998).

Sanford Credini and his wife owned 50 percent interest in two companies, Golden Door Jewelry Creations and Suisse Gold Assayer and Refinery. Credini was the president and principal operating officer for both companies. Golden Door used refined gold and precious metals in its business and Suisse Gold used scrap gold. Both purchased their gold from third parties. Suisse entered into a consignment agreement with Westway Metals to supply gold, and Golden Door entered into a similar agreement with Leach and Garner Co.

Credini stole $9 million in goods from Golden Door and Suisse, including the consigned gold. Credini submitted a claim to Lloyds under a jeweler's block policy. Lloyd's refused the claim under suspicion that Credini was involved in the loss. Credini eventually pleaded guilty to conspiracy.

Leach and Westway also sought recovery from the Lloyd's policy for their stolen gold. Lloyds claimed that Leach and Westway had no direct right of recovery under the policy and invoked policy defenses and coverage exclusions to bar coverage for Leach and Westway. Lloyd's also contended that, as third-party beneficiaries, Leach and Westway could not recover under the policy because a name insured had breached the policy.

Leach and Westway, however, argued that the policy language allows innocent insureds to recover “despite the misconduct of a co-assured.” They claimed that they had not been the ones to violate the policy.

The court agreed with Leach and Westway, determining that they did have a right to recover directly against Lloyds. The exclusions used to preclude coverage were severable, protecting other insureds from the violative acts of a coinsured. Leach and Westway were therefore entitled to recover their losses under the policy.