Intended / Third Party Beneficiaries

Insurance lawyers learn real fast to know who are the persons who can recover / benefit under an insurance policy.

Other persons who may sue for benefits under the insurance contract are “intended beneficiaries,” also known as “third party beneficiaries.”

A third person for whose benefit a contract is made may enforce the contract against the promissor.  The controlling factor in determining whether a third party may enforce a contract is the intention of the contracting parties.  This is illustrated in the 1985, 14th Court of Appeals opinion, Hermann Hospital v. Liberty Life Assurance Co.

A presumption exists that parties intended to contract only for themselves, so the contract will not be construed as having been made for the benefit of another, unless it clearly appears that this was the intention of the parties.  Any doubts are construed against such an intent.  This is set forth in the 1997, 5th Circuit opinion, Marine Indemnity Insurance Co. of America v. Lockwood Warehouse & Storage.

To qualify as a third party beneficiary, the plaintiff must prove:(1) that he was not privy to the written agreement; (2) that the contract was made at least in part for his benefit; and (3) that the contracting parties intended for him to benefit from their written agreement.  These elements are stated in the 1996, 5th Circuit opinion, Palma v. Verex Assurance, Inc.

The example of Palma is, the borrower was a third party beneficiary of private mortgage insurance, which protected the lender in case of default.  Palma was not a party to the contract, and the agreement was made in part for her benefit, because it protected her from a claim by the lender once the insurer paid.  The court also found the contracting parties intended for the borrower to benefit from their written agreement.  Also, in another 5th Circuit opinion from 1990, U.S. v. Allstate Insurance Co., the 5th Circuit found the government, which provided “free” health care, was third party beneficiary of insured service member’s auto policy personal injury protection benefits.

Caution is warranted in ERISA cases.  ERISA preempts state common law and statutory claims according to 29 U.S.C. Section 1144(a), when an insured or beneficiary receives the insurance in question under an employee benefit plan.