Javier Alvarado v. Lexington Insurance Company ( 2012 )

Opinion issued April 19, 2012.

In The

Court of Appeals

For The

First District of Texas

————————————

NO. 01-10-00740-CV

NO. 01-10-01150-CV

———————————

Javier Alvarado, Appellant

V.

Lexington Insurance Company, Appellee

On Appeal from the 11th District Court

Harris County, Texas

Trial Court Case No. 2009-36711A

DISSENTING OPINION

          A lender obtains a mortgage insurance policy to protect itself when its borrower fails to secure his own insurance coverage for mortgaged property, placing the lender’s collateral at risk.    The borrower in this case did not secure his own homeowner’s coverage.  The borrower now sues the lender’s insurance carrier directly for coverage for roof damage to his home.   With no indicia of third-party beneficiary status, however, the law presumes that an insurance contract governs only those who are parties to it.  The borrower is not.  Neither is he an intended third-party beneficiary of his lender’s force-placed policy, because the policy neither names the borrower as an additional insured, nor expressly declares that the policy covers the borrower’s interest in the insured property (as opposed to the lender’s), nor otherwise states that the borrower is a beneficiary of the lender’s coverage.   The borrower thus lacks standing to directly sue his lender’s insurance carrier.  On this basis, the trial court properly granted summary judgment.  We should affirm the trial court’s ruling; as we do not, I respectfully dissent.

Background

          The borrower, Javier Alvarado, paid his lender, Flagstar, an amount each month that included the principal and interest on his mortgage, as well as monies escrowed for taxes and premiums on a mortgage insurance policy.  In his first amended petition, he alleges that he made additional payments that Flagstar was obligated to remit to his homeowner’s insurer, National Lloyd’s, to secure Alvarado’s own coverage, but Flagstar “either refused to procure the coverage of [Alvarado] and/or required [Alvarado] to purchase insurance through another company.”  Alvarado’s property sustained damage as a result of Hurricane Ike.  Flagstar made a claim to Lexington Insurance Company on its forced-placed mortgage policy for losses to the Alvarado property.  Lexington paid Flagstar $4,410.49 on its claim.       

Alvarado also made a claim under the Lexington policy, which Lexington denied. Alvarado then sued Lexington.  Lexington moved for a traditional summary judgment.  The trial court granted summary judgment, ruling that Alvarado is not a direct third-party beneficiary of Flagstar’s insurance policy; thus Alvarado lacks standing to sue under it. 

The Contract Language

          The policy declares “Flagstar Bank, FSB” as the sole named insured.  The supplemental declaration states that Lexington will insure dwellings, structures, personal property, and losses of use, but only if “the Insured has a mortgage and/or owner interest,” and the loss is described in an agreed-upon “Reporting Mechanism.”   The policy “Conditions and Definitions” provide that the words “you” and “your” in the policy refer to the named insured, and that a reference to the named insured means the “Lending Institution” shown on the declaration page.  That section further provides:  “In consideration of the premium to be charged we will (as shown on the Declaration Page) insure. . . the Lending Institution (you, as shown on the Declaration Page) against direct physical loss resulting from destruction of or damage to your property. . . .”  The policy defines “Borrower” as an individual “obligated on a ‘loan’. . . and has . . . an interest in the property securing such ‘loan.’” The insurance policy neither names the borrower as an insured, nor states that the borrower’s interest in the property is insured.

          Endorsement #12 to the policy incorporates the coverage found in a broad form homeowner’s policy.  The endorsement also defines “you” and “your” to be the “named insured” recited in the declarations portion of the policy.   The “Loss Payable” clause provides that any “[l]oss will be adjusted with and made payable to you unless another payee is specifically named.”  This clause does not include the borrower, or recite that the borrower is entitled to proceeds in excess of Flagstar’s insurable interest in the property.   Nor does it authorize the borrower to participate in the adjustment process.  Finally, the endorsement contains a “mortgage clause” that states:  “loss, if any, under this policy will be payable to the mortgagee (or trustee) as its interests may appear under all present or future mortgages upon the Covered Property described on the reporting forms in which mortgagee may have an interest . . . .”  It does not state the reverse, or provide for a residual payment, to a borrower for losses in excess of a lender’s interest.

Third-Party Beneficiary Status

          A contract can benefit a third party only if the contracting parties intended to secure such a benefit and entered into the contract directly for the third party’s benefit.  MCI Telecomms. Corp. v. Tex. Utils. Elec. Co., 995 S.W.2d 647, 651 (Tex. 1999).  A third party claiming rights under an agreement thus must show that he is a beneficiary of the contract.  Id. 

          In determining whether a third party can enforce a contract, we look only to the intention of the contracting parties.  Id.; Union Pac. R.R. v. Novus Int’l Inc., 113 S.W.3d 418, 421 (Tex. App.—Houston [1st Dist.] 2003, pet. denied).  We must not create a third-party beneficiary to a contract by implication.  MCI, 995 S.W.2d at 651; see also Tawes v. Barnes, 340 S.W.3d 419, 425 (Tex. 2011) (“[I]n the absence of a clear and unequivocal expression of the contracting parties’ intent to directly benefit a third party, courts will not confer third-party beneficiary status by implication.”).  As the Texas Supreme Court observed in MCI:

The intention to contract or confer a direct benefit to a third party must be clearly and fully spelled out or enforcement by the third party must be denied.  Consequently, a presumption exists that parties contracted for themselves unless it “clearly appears” that they intended a third party to benefit from the contract.

995 S.W.2d at 651. We resolve all doubts against conferring third-party beneficiary status.  Tawes, 340 S.W.3d at 425; First Union Nat’l Bank v. Richmont Capital Partners I, L.P., 168 S.W.3d 917, 929 (Tex. App.—Dallas 2005, no pet.) (“If there is any reasonable doubt as to the intent of the contracting parties to confer a direct benefit on the third party, then the third-party beneficiary claim must fail.”). 

          Alvarado contends that Endorsement #12 demonstrates that Lexington and Flagstar intended to benefit him, because the endorsement provides types of coverage that he, as a homeowner, could seek if he contracted directly with Lexington to procure homeowner’s insurance.  Chief among these:  coverage for personal property, loss of use, debris removal, reasonable repairs, credit card fraud, personal liability coverage, and for medical payments to others.  Endorsement #12 also refers to spouses and households, individuals who would never be connected with a lending institution.  Finally, the endorsement has a “mortgage clause,” which provides that a lender with a mortgage interest is a payee on the proceeds of a claim. Alvarado observes that all of these provisions are drafted with a homeowner in mind, not a lender.

None of these provisions answers the question:  Who is insured?  Although Endorsement #12 provides the type of coverage that an individual homeowner would generally seek from an insurance company,  the “definitions” section of that very endorsement states: “[i]n this policy, ‘you’ and ‘your’ refer to the ‘named insured’ shown in the Declarations . . . .”  The declarations page specifically names “Flagstar Bank, FSB” as the insured, not its borrower.  It does not name Alvarado, or “borrower,” or “homeowner,” or anyone other than subsidiaries or affiliates of Flagstar, as additional insureds.  Endorsement #12 defines the “insured” as “You and residents of your household . . . .”  This definition is partly circular because the definition of “You” in the same endorsement is defined to mean “the named insured” shown in the declarations, but it undisputedly does not include Alvarado—he is not the named insured.  Similarly, the section “duties in the event of loss or damage” requires the participation of the borrower “in the event of a dual interest.”  Because the borrower was not named as an additional insured, he has no “dual interest” in this policy. 

Endorsement 12 further provides that “[e]ven if more than one person has an insurable interest in the property covered, [Lexington] will not be liable in any one loss [t]o an ‘insured’ for more than the amount of such ‘insured’s’ interest at the time of loss.”  Thus, for all the types of coverages listed, liability under the policy is limited to those losses in which Flagstar has an interest.  The “Loss Payment” provision of this endorsement similarly reflects its limited nature:  “We will adjust all losses with you.  We will pay you unless some other person is named in the policy or is legally entitled to receive payment.”  Reading the endorsement together with the declarations it references, the policy provides that any losses under the endorsement will be paid to Flagstar to the extent of its insurable interest. 

The two other Texas courts that have addressed whether the homeowner‑borrower is a third-party beneficiary under a mortgage policy have reached this conclusion.  In Trevino v. Evanston Insurance Co., the borrower similarly argued that the endorsement provides coverage that is irrelevant to the lender and that “could only inure to the benefit of [the borrower].” No. M‑11‑18, 2011 WL 2709063, at *3 (S.D. Tex. July 12, 2011) (order granting motion to dismiss).   In rejecting that argument, the district court concluded that “the Policy language unambiguously manifests the intent to provide hazard coverage to [the lender] to the extent of its interest in the property, and any benefit conferred to [the borrower/homeowner] as a result is incidental.” The court observed that the borrower “has pointed to no provision that makes clearly apparent the contracting parties’ intent to confer a direct benefit [to him].”  Id.  The court ultimately held that the homeowner-borrower was not a third-party beneficiary under the insurance policy at issue.  Id.; accord Barrios v. Great Am. Assur. Co., No. H-10-3511, 2011 WL 3608510, at *3–4 (S.D. Tex. Aug. 16, 2011) (slip op.).

          Like the trial court here, and the district courts in Trevino and Barrios, this Court should hold that the provisions of Endorsement #12 are limited by that section’s definition of “you,” which is “the ‘named insured’ shown in the Declarations”—none other than Flagstar.  See AccuFleet, Inc. v. Hartford Fire Ins. Co., 322 S.W.3d 264, 271 & n.2 (Tex. App.—Houston [1st Dist.] 2009, no pet.) (“Continental does not qualify for liability coverage because it does not meet the definition of an ‘insured’ under the express terms of Section II of the policy. Continental . . . is not included in the definition of ‘You’ contained in the policy,” where policy defines “you” as “the Named Insured shown in the Declarations.”).  Reading Endorsement #12 and the policy as a whole, there is no benefit payable to Alvarado, the borrower.  

This case more closely resembles MCI Telecommunications Corp. v. Texas Utilities than it does Basic Capital Management. v. Dynex.  Compare MCI, 995 S.W.2d 647, 651 (Tex. 1999) with Basic Capital Mgmt., Inc. v. Dynex Commercial, Inc., 348 S.W.3d 894, 899–900 (Tex. 2011).  In Basic Capital, the agreement was to benefit the third parties directly, who sought financing for entities that would be created only if the financing was secured.   348 S.W.3d at 900.  The Texas Supreme Court held that the agreement demonstrated an intent to benefit the third parties directly, because if it did not, “then the [agreement] had no purpose whatever.” Id.

In contrast, MCI involved a utility company that sued a telephone company for damage to the utility’s telephone poles. 995 S.W.2d at 649.  The damage occurred when the telephone company laid its fiber optic cable in a railroad right‑of-way.  Id.  Both the telephone company and the utility company had agreements with the railroad to use the right of way, but had no agreement with each other.  Id.  The utility received incidental benefits from the telephone contract, because the telephone contract required the permission of third parties, like the utility company, to lay the cable.  Id.  The Texas Supreme Court nonetheless rejected the utility’s argument that it was a third-party beneficiary: the utility was not a named as a beneficiary, and nothing in the contract demonstrated that the parties intended that the utility could sue to enforce the agreement.  Id. at 651–52.  Like the utility in MCI, the borrower here is an incidental beneficiary to the policy, in that the coverage afforded the lender compensates for losses to property in which it shares a joint interest with the borrower.  But the contract does not grant the borrower the right to sue to enforce it.  Incidental benefits do not infuse a third party with contract enforcement rights.  See id. (rejecting contention that incidental benefits granted to non-signatories vest them with enforceable contract rights).

Lexington’s policy is inartful in including potential coverages that are unlikely to be applicable to a lender.  The borrower nonetheless is not a third-party beneficiary to it:  he is neither named as an additional insured nor expressly contemplated to be a beneficiary under it, as defined by its terms—most particularly, its liability limits. To rely on provisions that provide homeowner‑types of coverage to conclude that the borrower is insured for these homeowner risks would provide more insurance coverage to the borrower than it does to the named-insured lender, whose coverage is limited to losses in which the lender has “a mortgage or ownership interest.”  But it is axiomatic that a third‑party beneficiary cannot claim more rights under the contract than that of the first-party rights it relies on for enforcement.  Waggoner v. Herring-Showers Lumber Co., 40 S.W.2d 1, 4 (Tex. 1931) (“The beneficiaries for whose advantage the contract was made could not acquire a better standing to enforce such contract than that occupied by the contracting parties themselves.”); see also Sw. Health Plan, Inc. v. Sparkman, 921 S.W.2d 355, 358 (Tex. App.—Fort Worth 1996, no writ) (when insurance contract contained arbitration provision, third-party beneficiary to contract was compelled to arbitrate though beneficiary never signed contract); Nationwide of Bryan, Inc. v. Dyer, 969 S.W.2d 518, 520 (Tex. App.—Austin 1998, no pet.) (holding that third-party beneficiary is bound by terms of contract); Stonewall Ins. Co. v. Modern Exploration Inc., 757 S.W.2d 432, 434–35 (Tex. App.—Dallas 1988, no writ) (third-party beneficiary “steps into shoes” of contracting party and is subject to all provisions of contract).   

This is not to say that Alvarado is without any possible right to policy proceeds: one that derives from Flagstar’s contractual obligations to him, or as a judgment creditor or assignee of the proceeds from Flagstar’s claim, should it be determined that Flagstar was legally obligated to pay its insurance recovery to him.  Lexington will pay Alvarado, if, in the words of the policy, he is “legally entitled to receive payment.”  But Texas has disfavored direct actions against insurance carriers by potential claimants to insurance proceeds, unless and until the third party’s contractual or judgment interest is known and ripe for assignment.  See Allstate Ins. Co. v. Watson, 876 S.W.2d 145, 147 (Tex. 1994) (holding that third parties who assert claims based on liability of insured, but are not named as additional insured, do not have direct cause of action against insurers).

Conclusion

          For these reasons, this Court should hold that Alvarado is not a third-party beneficiary to Lexington’s mortgage insurance policy.  The trial court therefore correctly rendered summary judgment in favor of Lexington.  Because our Court reverses the case to allow the borrower to directly sue on the lender’s policy when that policy does not provide for it, I respectfully dissent.

                                                                    Jane Bland

                                                                   Justice

Panel consists of Justices Keyes, Bland, and Sharp.

Bland, J., dissenting.