Homeowner not a Beneficiary of a Forced Placed Policy

A homeowner sued the bank that held her mortgage and the bank’s insurance company. The bank had force-placed insurance on her property because she let her prior insurance lapse. She claimed the insurance company refused to pay for damage after a storm. In Nina Breland v. Trustmark Corporation D/B/A Appelleestrustmark National Bank, Proctorfinancial Inc. A/K/A Proctor Financialinsurance Company, And Certainunderwriters At Lloyd’s Of London, Including Ironshore Europe Limited, No. 2020-CA-00970-COA, Court of Appeals of Mississippi (January 4, 2022) resolved the dispute after the trial court granted summary judgment, finding the bank and insurance company were not liable because Ms Breland did not have a contractual relationship with the insurer

FACTS

In 2004, Trustmark National Bank loaned Nina Breland $78,500 to allow her to buy a house in Gulfport. The house was financed by a Fannie Mae mortgage through Trustmark. As a result, Trustmark used a series of guidelines propagated by Fannie Mae.

The Deed of Trust on the home required Ms. Breland to insure it. She initially obtained a homeowner’s hazard insurance policy and wind policy for the home. Ms. Breland maintained this private insurance from March 2004 to March 2015.

In 2015, Ms. Breland’s insurance carrier notified her that it was discontinuing her insurance coverage for wind damage. Ms. Breland failed to obtain a new wind policy. Trustmark sent letters to Ms. Breland on several occasions informing her that the hazard and windstorm coverage had lapsed. By these notices, the bank informed her that under the Deed of Trust it intended to force-place insurance if she did not secure her own private insurance.

After Ms. Breland failed to obtain adequate insurance coverage, Trustmark secured force-placed insurance coverage on her house through a third-party insurance servicing company known as Proctor Financial Inc. According to the Deed of Trust, Ms. Breland was obligated to pay the policy premiums despite her interests being unprotected by the insurance. Notably, Trustmark-not Ms. Breland-was the named insured under the policy. Ms. Breland was not a party to the policy and was not an additional insured on the policy.

The policy issued windstorm coverage which ran from 2015 through 2016. The policy charged a higher premium than Ms. Breland had paid for her private insurance. The policy also had a $5,000 deductible, which Ms. Breland’s private insurance did not have. Ms. Breland never obtained windstorm coverage during the 2015 through 2016 period.

As a result, the force-placed windstorm coverage was reinstated from 2016 to 2017 in the amount of $100,000.

In March 2016, Ms. Breland’s home was damaged in a windstorm. She initially claimed a loss of $2,244. She filed a windstorm claim with Ironshore. The insurer denied the claim on the basis that its investigation revealed that the cost to repair the home did not exceed the $5,000 deductible. In August 2017, Ms. Breland commissioned a second inspection of her home. This second inspection quoted Ms. Breland an estimate of $14,550 to replace her roof and decking as well as correct termite damage. Ms. Breland later obtained private insurance coverage, and Trustmark subsequently canceled the force-placed coverage.

In granting summary judgment, the trial court found that Ms. Breland was not a third-party beneficiary to the force-placed insurance contract, Trustmark did not breach its contract with Ms. Breland, and she had no private right of action to enforce federal Fannie Mae regulations that governed her mortgage. The trial court further held that Trustmark and the insurance companies did not act wrongfully and dismissed Ms. Breland’s claims of civil conspiracy and punitive damages.

Ms. Breland appealed.

DISCUSSION

A party must show, to establish it is a third-party beneficiary, the contracts between the original parties must have been entered for his benefit, or at least such benefit must be the direct result of the performance within the contemplation of the parties as shown by its terms.

When the contract of insurance was between the bank and the insurance providers, with the property owner as an additional insured, the property owner’s claims necessarily fail as a matter of law.

The Mississippi Supreme Court has held that to receive third-party-beneficiary status, the contract “must have been entered for his benefit. Here, the contract for insurance between Trustmark and Ironshore was not for the benefit of Ms. Breland, but rather for the benefit of the bank. Additionally, it is clear under the Deed of Trust and on the plain face of the insurance contract that Ironshore’s insurance was intended to protect the interests of Trustmark. The whole purpose of the Deed of Trust’s clause securing force-placed insurance was to safeguard the interests of the mortgage holder. Here, the mortgage holder is Trustmark.

Additionally, the Deed of Trust makes clear that “such coverage shall cover Lender, but might or might not protect Borrower . . . .” (Emphasis added). In other words, the force-placed insurance was not for her benefit. In addition, the letters sent to her indicated that insurance was being force-placed to protect the bank’s interests, and these notices were sent to her on more than one occasion.

Here, Ms. Breland contends that the contracts at issue are the Deed of Trust between herself and Trustmark and the force-placed insurance policies covering her home. However, it is axiomatic that the duty of good faith arises only when there is a contractual relationship between parties. Neither Ironshore nor Proctor were parties to any contract with Ms. Breland. Therefore, her claim against the bank and insurance companies fails as a matter of law.

Mississippi law requires that the right of a third party to maintain an action as a third-party beneficiary must spring from the contract terms and Ms. Breland could not offer competent summary judgment evidence to support the conclusion that she was an intended third-party beneficiary of Fannie Mae’s servicing guidelines.”

Under Mississippi law, punitive damages may be considered if, but only if, an award of compensatory damages has been made against a party.[Miss. Code Ann. § 11-1-65(c) (Rev. 2019).] As all the defendants correctly point out, Ms. Breland’s claim for punitive damages fails at the outset because there was no award for compensatory damages.

ZALMA OPINION

Ms. Breland was lucky that the uninsured loss was small. She tried, however, to make a profit from her error, from her failure to fulfill the obligation under the deed of trust to maintain insurance protecting her and the lender from the risks of loss by windstorm and other perils. She did not fulfill her obligation under the deed of trust. The bank protected itself with a forced placed insurance and did not insure the risks faced by Ms. Breland. Her suit was unenforceable and an attempt to make her error into a profit by seeking bad faith and punitive damages from insurers who did not insure her directly or as a third party beneficiary.

© 2022 – Barry Zalma

Barry Zalma, Esq., CFE, now limits his practice to service as an insurance consultant specializing in insurance coverage, insurance claims handling, insurance bad faith and insurance fraud almost equally for insurers and policyholders.

He also serves as an arbitrator or mediator for insurance related disputes. He practiced law in California for more than 44 years as an insurance coverage and claims handling lawyer and more than 54 years in the insurance business.

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