Banks and mortgage companies regularly buy what is known in the insurance world as “force-placed” insurance coverage. This type of coverage protects a mortgagee’s interest in the property should no other insurance coverage apply. In other words, force-placed insurance ensures that a property is covered, regardless of the circumstances. Most force-placed policies are made between the bank/mortgage company and the insurer. So what rights, if any, does a borrower have under such a policy?
The Texas Court of Appeals for the First District in Houston dealt with this very issue in Alvardo v. Lexington Insurance Company. In Alvarado, Mr. Alvarado refinanced his mortgage, but in order to refinance, he was required to drop his homeowners insurance policy with Columbia Lloyds, and was told by Flagstar Bank, his mortgagee, that it would acquire insurance coverage for the property. Flagstar obtained a force-placed insurance policy through Lexington Insurance Company, and a portion of Mr. Alvarado’s monthly mortgage payment went to pay for that insurance.
Mr. Alvarado’s property was damaged by Hurricane Ike in 2008 while the “forced-placed” policy was in effect. Lexington made an insurance payment for the damage to Flagstar, and Mr. Alvarado was never given any of those proceeds to repair the property. Mr. Alvarado then attempted to recover insurance proceeds to repair his home, but Lexington told him that because he was not listed as an insured under the forced-placed policy, he had no rights under the policy and they would not be issuing any payment to him. Mr. Alvardo then sued Lexington under a third-party beneficiary theory. The trial court granted summary judgment in favor of Lexington, and Mr. Alvarado appealed.
On April 19, 2012, the Texas Court of Appeals rendered its decision. The Court noted that,
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.
Because there was no guidance at the state court level, the Texas Court of Appeals turned to federal case law for guidance.
The federal courts applying state law, like Texas courts, have looked to the language of the policy to determine whether any of the provisions clearly confer a benefit upon the borrower.
The Court noted two examples where the Fifth Circuit found third-party beneficiary status: (1) when the policy, although only listing the mortgage company as a named-insured, contains 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.
Primarily, the federal district courts have focused on whether the policy contains one of two specific clauses that may benefit the borrower: 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.
The Court concluded that this question is very fact-specific. The Court of Appeals, by a split 2-1 decision, ruled that the specific set of facts in Alvarado did not merit summary judgment for Lexington, and reversed the lower court’s decision.