HOUSTON 14TH COURT OF APPEALS HOLDS MORTGAGOR IS NOT A THIRD PARTY BENEFICIARY OR AN INTENDED BENEFICIARY OF FORCE-PLACED INSURANCE POLICY

May 21, 2012

On May 17th, Houston’s 14th Court of Appeals issued an important decision that may will likely impact future claims made under force-placed insurance policies by insured persons. Garcia v. Bank of America Corporation, et al., ---S.W.3d--- Nos. 14-10-00821-CV, 14-10-0856-CV, 14-10-011145-CV, (Tex.App.—Houston [14th Dist.] May 17, 2012).

The appellant, Milton Garcia, purchased a home pursuant to a mortgage agreement requiring Garcia to maintain insurance on the property sufficient to protect the mortgagee’s interest in the property.  The mortgage agreement authorized the mortgagee to purchase insurance to cover its own interest in the property (i.e. the amount owed on the loan) in the event Garcia did not provide the required insurance. After Garcia failed to maintain the required insurance coverage, the mortgagee purchased a “force- placed”  policy  (a.k.a.  “lender-placed”)  from  Newport  Insurance  Company  as  permitted  under  the mortgage agreement.  The policy only listed the mortgagee as an insured party.  Although the policy listed Garcia as the owner of the property, he was not listed as a primary or additional insured.

When Hurricane Ike struck Texas in 2008, Garcia’s home sustained some damage.  Garcia sued Newport Insurance, Bank of America (the mortgagee), and BAC Home Loan Servicing (the mortgage servicing company), alleging he was not adequately compensated under the force-placed insurance policy issued by Newport.   Garcia also alleged the defendants/appellees improperly switched the insurance to a lender- placed policy using escrow funds to pay premiums rather than obtaining insurance that would have protected his interests as well as the mortgagee’s interests.  The 11th  District Court of Harris County granted summary judgment in favor of all three defendants.

Garcia appealed alleging he was a third-party creditor beneficiary of the insurance policy.  The appellate court did not find Garcia’s arguments persuasive, however, and affirmed the district court’s summary judgment favoring Newport Insurance, Bank of America, and BAC Home Loan.   Turning to existing third-party beneficiary law, the Court noted that a third party may recover on a contract made between other parties only if the parties intended to secure some benefit to that party, and only if the contracting parties entered into the contract directly for the third party’s benefit.  Citing Stine v. Steward, 80 S.W.3d586, 589 (Tex. 2002).  In this case, the Court found the Newport policy language clearly did not reflect any intent by the parties to confer any benefits to Garcia.   The court further held that Garcia failed to point out any duties the defendants/appellees owed to him under the insurance policy; therefore, Garcia could not be a credit beneficiary and had no right to enforce the contract.

Other issues before the Court included the sufficiency of an affidavit presented on behalf of Bank of America and Garcia’s extensive claims against BAC Home Loan.  The Court determined that Garcia’s challenges to the affidavit were without merit and Garcia’s claims against BAC Home Loan were unsupported in law and/or by the evidence.  Thus, the Court held that the trial court did not err in granting summary judgment in favor of all defendants/appellees.

[Editor’s Note:  We wish to congratulate Newport, Bank of America, and BAC Home Loan Servicing on this big win both in the trial court and on appeal.  Our firm had the privilege of representing these parties in both the trial court and on appeal.  Chris Martin, Levon Hovnatanian  and Todd Lonergan served as counsel.]