Beneficiary Under A Fire Policy

Weatherford attorneys may run across a situation in a recent Waco Court of Appeals opinion. Here is what it tells us.
The dispute in this case centers on who is entitled to insurance proceeds associated with a house that burned down. Taylor claims that she is entitled to the proceeds because, she and Lough lived together in a house from 2005 to 2007. Apparently, Taylor continued living in the house after the couple broke up and Lough moved out in mid-2007.
In any event, on March 1, 2007, Lough, an “unmarried person,” executed a homestead lien contract and deed of trust with the Bank for a loan secured by the property at issue in this case–the proceeds of which, according to Taylor, were used to buy land to move Lough’s feed store. The contract and deed of trust specifically stated that Lough granted the Bank a lien . . . “in and to the following described real property, together with all improvements, all proceeds (including without limitation premium refunds) of each policy of insurance relating to any of the improvements, or the Real Property . . . .”
As of March 1, 2007, the Johnson County property records indicated that title to the property was vested in Lough. The terms of the contract and deed of trust required Lough to purchase and maintain “policies of fire insurance with standard extended coverage endorsements” for the property, including “an endorsement providing that coverage in favor of Lender will not be impaired in any way by any act, omission or default of Owner or any other person.” The contract and deed of trust also stated that: “Whether or not Lender’s security is impaired, Lender may, at Lender’s election, receive and retain proceeds of any insurance and apply the proceeds to the reduction of the indebtedness, payment of any lien affecting the Property, or the restoration and repair of the Property.”
Thereafter, Lough purchased a fire insurance policy from Foremost Lloyd’s of Texas (“Foremost”). On the declarations page of the insurance policy, Lough was listed as the insured and the Bank was identified as the mortgagee. The “Mortgage Clause” of the insurance policy provided the following:
b. We will pay for any covered loss of or damage to buildings or structures to the mortgagee shown on the declarations page as interests appear.
c. The mortgagee has the right to receive loss payment even if the mortgagee has started foreclosure or similar action on the building or structure.
… .
e. If we pay the mortgagee for any loss or damage and deny payment to you [Lough] because of your acts or because you fail to comply with the terms of this policy:
… .
(2) the mortgagee’s right to recover the full amount of the mortgagee’s claim will not be impaired.
Nowhere in the insurance policy is Taylor listed as an insured. In her lawsuit Taylor alleged that Lough executed a quitclaim deed to the property in favor of her on January 29, 2007. However, Taylor did not record this deed until September 17, 2007. Furthermore, the Bank contends that Lough and Taylor executed reciprocal quitclaim deeds to the property on or about January 29, 2007; thus, Taylor did not have a clear ownership interest in the property.
In July 2007, the relationship between Lough and Taylor soured, and a dispute arose over ownership of the property. After Taylor recorded her deed, Lough filed suit, seeking a declaration that he is the owner of the property and that Taylor’s deed is void. The trial court signed a final judgment in favor of Taylor on May 26, 2009. Specifically, the final judgment stated that Taylor owned the property in question pursuant to the quitclaim deed.
On May 30, 2009, the property was damaged by fire. Thereafter, Taylor sued Lough and Foremost to recover the proceeds from the insurance covering the property. The Bank intervened, seeking a declaration that it was entitled to the insurance proceeds pursuant to the terms of the insurance policy. Foremost deposited the insurance proceeds into the registry of the court and was subsequently non-suited.
Later, the Bank filed for summary judgment, arguing that it was entitled to the insurance proceeds because: (1) the Bank is a third-party creditor beneficiary under the insurance policy with standing to enforce its rights to the proceeds; (2) Taylor lacks standing to challenge the enforceability of the insurance policy because she is a stranger to the contract; and (3) even if Taylor has standing, her challenges to the enforceability of the insurance policy fail as a matter of law.
The trial court granted the Bank’s summary-judgment motion. As a result of the trial court’s judgment, the Bank was awarded the insurance proceeds deposited in the court’s registry, and Taylor took nothing.
This appeal followed.
The Bank further argues that it is a third-party creditor beneficiary pursuant to the insurance policy, and as such, it is entitled to the insurance proceeds as a matter of law.
Insurance policies are contracts, so the rights and duties they create and the rules governing their interpretation are those generally pertaining to contracts. Under the general law of contracts, a party must show either privity or third-party-beneficiary status in order to have standing to sue.
To qualify as a third-party beneficiary, a third party must show that it is either a donee or creditor beneficiary of the contract, and not one who is benefited only incidentally by its performance. The intention of the contracting parties is controlling. The intention to contract or confer a direct benefit to a third party must be clearly and fully spelled out or enforcement by a third party must be denied. We glean the parties’ intention from the words of their contract, and not from what they allegedly meant. Texas courts have occasionally recognized third-party beneficiaries in the insurance context when the policy language so requires.
Here, the evidence indicates that Lough and Foremost entered into the insurance contract to directly benefit the Bank. In fact, as a condition of the loan, Lough was required to secure the fire-insurance policy specifically for the Bank’s benefit. Furthermore, the insurance policy at issue identifies the Bank as the mortgagee and states that, in the event of damage or loss to the property, the Bank, as mortgagee, is entitled to the insurance proceeds. Thus, it is clear from the document itself that the parties intended for the Bank to be a third-party creditor beneficiary to the insurance policy so long as the Bank’s mortgage encumbered the property. It is also clear from the insurance policy that Lough was the only named insured. Further, the contract and deed of trust between Lough and the Bank identifies Lough as the sole owner of the property at the time both documents were executed.
Despite this, Taylor asserts that she was the true owner of the property when the deed of trust and insurance policy were executed, and thus, the insurance policy and deed of trust are invalid and the Bank is not entitled to the insurance proceeds. However, in asserting these arguments, Taylor did not proffer probative evidence indicating that she has standing to challenge the insurance policy. She does, however, rely on the quitclaim deed, which was signed on January 29, 2007, prior to the execution of the insurance policy.
In this case, Taylor did not produce any evidence showing that she was a named insured or a party to the insurance policy. Furthermore, the insurance policy does not indicate that Taylor is a third-party beneficiary of the policy. As such, the court agreed with the Bank that Taylor is a “stranger” to the insurance policy and therefore lacks standing to challenge its enforceability.
In any event, we also note that Taylor’s reliance on the quitclaim deed does not create a material fact issue about who is entitled to the insurance proceeds. The record demonstrates that Taylor did not record her deed until September 17, 2007, which was after (1) Lough and the Bank entered into the insurance contract and deed of trust; and (2) the Bank recorded its deed of trust in Johnson County.
Based on the foregoing Taylor lost.