Lender-Placed Policies

On occasion someone in Grand Prairie, Arlington, Fort Worth, Dallas, Mansfield, De Soto, Duncanville, Cedar Hill, Irving, or some where else in North Texas will find themselves in a situation where they have lender-placed insurance on their property. This is also sometimes called forced-placed insurance.
These types of insurance usually are the result of a borrower, who has a contractual obligation to keep certain property insured, fails to do so. When this happens the lender purchases insurance and applies the cost of the insurance to the loan. The big problem for these types of insurance is that the insurance is for the benefit of the lender, not the borrower.
The United States District Court, Southern District of Texas, Houston Division issued an opinion on August 16, 2011, in a case dealing with lender-placed insurance. The Judge was Judge Kenneth M. Hoyt. The style of the case is, Horacio Barrios, et al. v. Great American Assurance Company, et al.
Great American and the other defendants filed motions for summary judgment which the court granted.
The case concerned a dispute over who is insured by a lender-placed insurance policy covering a commercial property damaged during Hurricane Ike. While Barrios and the other plaintiffs claimed co-ownership of the property, Barrios was listed as the mortgagor under a mortgage loan with Bayview, a loan servicing company. Bayview, in turn, required the plaintiffs to maintain an insurance policy covering potential wind, hail and hurricane damage. When the plaintiffs filed to do so, Bayview arranged for Great American to issue it a lender-placed insurance policy, which covered the property during all relevant times to protect Bayview’s mortgagee interest in the property. Bayview required the plaintiffs to make the monthly payments on this policy. The notice of insurance reflects Batres and Barrios as the mortgagors and Bayview as the insured mortgagee.
In September 2008, Hurricane Ike damaged the property. In March 2009, an insurance adjuster inspected the property, and Great American ultimately paid $40,999.63 towards repairing the property. Plaintiffs then sued for breach of contract and violations of the Texas Insurance Code contending the monies paid were not sufficient to cover all the damages incurred.
The plaintiffs contended that the amount of money that Great American paid towards repairing the property was insufficient to complete the repairs. They argued that Bayview failed to compel Great American to expend enough money to complete the repairs. They maintained that, although they were not in privity with and lacked standing against General American, equitable concerns should allow them to force Great American to perform the duties that it allegedly owes the plaintiffs under the policy.
Great American’s position was that the plaintiffs did lack standing to assert any claims and that the causes of action are barred because the plaintiffs are not named insureds, additional insureds or third-party beneficiaries under the policy.
In discussing this case, the court said, “Regarding Great American, its contractual obligations are limited to its named insured: Bayview. The plaintiffs are not listed as insureds or additional insureds in the policy between Great American and Bayview. Without a valid contract between Great American and the plaintiffs, the plaintiffs’ cannot establish any element of this claim against it. Regarding Bayview, the only known contract between it and the plaintiffs is the underlying promissory note secured by a deed of trust on the property.”
The plaintiffs were not third-party beneficiaries of the policy. To qualify as a third-party beneficiary of an insurance contract, a plaintiff must prove that: (1) it was privy to the contract; (2) the contract was made at least in part for its benefit; and (3) the contracting parties intended to benefit the plaintiff by their contract. Furthermore, Texas law has a presumption against third-party beneficiaries.
The court pointed out that the plaintiffs cannot establish themselves as third-party beneficiaries because they cannot show that either defendant intended to secure a benefit for the plaintiffs and that the defendants contracted directly for that benefit. To the contrary, the policy expressly states that the plaintiffs are not intended third-party beneficiaries because it specifies that “unless specifically added by endorsement, the mortgagor is not an Insured under the policy.”
As for the Texas Insurance Code, the plaintiffs could not establish either element of a bad faith claim against either defendant. The plaintiffs are not parties to the policy and are thus legally incapable of proving that either defendant had a clear liability regarding nonexistent duties owed to the plaintiffs.
It is rare that someone who has a lender-placed or force-placed policy on their property is going to directly benefit from that policy. The policy is for the protection of the lender, not the borrower. For a borrower to have one of these polices and rely on the policy helping them, is a case of misplaced reliance.