Alabama Federal District Court Holds Insurer Has No Bad Faith Liability to Third Party Beneficiary

Recently, the U.S. District Court for the Southern District of Alabama held, in a case of first impression in the state, that an insurer’s liability for bad faith did not extend to a third party beneficiary to an insurance contract.  In Jones v. General Ins. Co. of America, the plaintiff was a homeowner who had failed to obtain insurance coverage for her home, in violation of her mortgage agreement.  After giving notice, the lender purchased “force placed” coverage from General.

Th policy named the lender as the sole named insured, and the plaintiff was named as the “borrower.”  It further stated that any covered amounts in excess of the lender’s interest would be paid to the borrower.

Her Mobile, Alabama area home was damaged as a result of Hurricane Katrina.  General paid a portion the claim, but denied another portion, in which she asserted damage to its foundation.  Jones sued General, alleging bad faith, and General moved for summary judgment.

The Court specifically found that the plaintiff was a third party beneficiary of the contract, pursuant to the policy’s language. However, recognizing that “the Alabama Supreme Court has explained in no uncertain terms that ‘a party cannot bring an action against an insurance company for bad-faith failure to pay an insurance claim if the party does not have a direct contractual relationship with the insurance company,'” Williams v. State Farm, 886 So.2d 72 (Ala. 2003), the Court held that the policy’s clear language identified the “insured” as the lender, and not the plaintiff.  The Court further cited Peninsular Life Ins. Co. v. Blackmon, 476 So.2d 87 (Ala. 1985):

The tort of bad faith refusal to pay a claim has heretofore been applied only in those situations where a typical insurer/insured relationship existed; that is, where the insured or his employer entered into a written contract of insurance with an insurer and premiums were paid into a central fund out of which claims were to be paid.  We are very hesitant to expand the tort beyond these narrow circumstances.

Based upon the above precedent, the Court held that as a third party beneficiary, the plaintiff lacked standing to sue for bad faith, and granted summary judgment in favor of the insurer.