In the underlying controversy, the plaintiff, a homeowner, neglected to acquire homeowners’ insurance in spite of a requirement in her mortgage agreement that she do so. As a consequence, her mortgage lender procured the insurance itself and required the homeowner to pay the premiums, a process called “force place insurance.” The mortgage lender was the named insured on the insurance policy. The policy provided that in the event of a covered loss, the insurer would pay the mortgage lender up to the amount of its financial interest in the property, and that any covered amounts in excess of that would be paid to the homeowner.
Following damage to the home resulting from Hurricane Katrina, the homeowner and insurer engaged in a dispute concerning whether damage to the home was caused by wind, a covered cause of loss. The dispute led to litigation, including bad faith claims brought by the homeowner. The insurer moved for summary judgment on the basis that the homeowner lacked standing to sue under the contract, because she was neither a party to the contract nor a third-party beneficiary. The district court disagreed with the insurer, ruling that the homeowner was a third-party beneficiary of the policy because she stood to receive any claim payment in excess of the mortgage lender’s financial interest, and that she therefore had standing to sue.
However, the court granted summary judgment to the insurer on the plaintiff’s bad faith claims. The court first discussed Alabama decisions requiring a direct contractual relationship between a plaintiff and the insurance company it is seeking to sue for bad faith. Finding no Alabama decisions directly addressing the issue of a third-party beneficiary pursuing a bad faith claim, the court noted that Alabama’s highest court has showed a hesitance to expand the tort of bad faith. Therefore, the court held that a third-party beneficiary to an insurance policy may not bring a bad faith claim against the insurer.
