The Merlin Law Group is often approached by individuals wishing to make insurance claims on policies where they are not the named insured. These are typically shareholders or members of a corporate insured seeking to make claims for bad faith or emotional damages due to an insurer’s denial of benefits. A recent unpublished case from the United States Court of Appeals for the Ninth Circuit shed light on which parties have the right to make a claim or sue on a commercial insurance policy.

In California, contract principles determine who has standing—the eligibility to make a claim or sue an insurer—to recover benefits due under the policy or for a “bad faith” withholding of policy benefits, as stated in Seretti v. Superior Nat’l Ins. Co. (1999) 71 Cal. App 4th 920, 929. Only parties in privity with an insurance company can make a claim, which typically includes the insured, coinsured, joint insured, additional insured, or a named third-party beneficiary. These parties are deemed to have an “insurable interest” in the subject of the insurance. With businesses frequently changing hands, the insurable interest often gets assigned to the new business owner or its assets as part of the sale, barring any anti-assignment provisions in the policy.

The recent case, MS & Sons Hospitality, LLC v. DB Insurance Co., Ltd., No. 22-55440, (9th Cir. 2023), presented an interesting scenario. The court upheld DB Insurance’s denial of policy benefits, asserting that the Plaintiffs lacked standing as they were not parties to the insurance agreement. The crucial question revolved around whether the Plaintiffs had validly acquired the rights under the contract through assignment when they purchased the business from the previous owner, Pinnacle. The trial court granted the carrier’s summary judgment motion on this issue, which the Plaintiffs then appealed.

The Plaintiffs made compelling arguments to substantiate their claim of standing. They contended that the insurer was estopped from arguing against their standing because it had recognized the Plaintiffs as insureds during the claim investigation and had required them to sit for an Examination Under Oath, a contractual provision. Moreover, they argued about the presence of genuine issues of material fact concerning the validity of their assignment from Pinnacle.

However, the appellate court concurred with the trial court that the Plaintiffs lacked standing. Regarding estoppel, the court ruled that judicial estoppel did not apply as the insurer’s actions took place outside the courtroom and did not involve persuading the court to accept its earlier position. Arguments under waiver and estoppel principles were also dismissed. Under California law, waiver demands an actual intention to relinquish an existing right, which the insureds could not establish. Similarly, for equitable estoppel, it is necessary to show reliance on the opposing party’s conduct to one’s detriment, a claim the insureds failed to prove.

When assessing the validity of the assignment from a former business owner, the court stated that California law required a clear intent from the owner of the right to transfer it to another person or entity. The insureds presented a letter from Mr. Chris Choi, the secretary of Pinnacle, but could not prove that Mr. Choi was the owner of the right or had the authority to assign the contractual rights.

This case underscores the significance of understanding contractual rights and standing when filing an insurance claim. Insured parties should always consult with an experienced insurance coverage attorney to ensure their rights are effectively protected when acquiring a new business or asset.