Hickman v. SAFECO Insurance Company

Brief Fact Summary.

Plaintiff sued Defendants, disputing the amount of payment after Plaintiffs house was damaged in a storm. The trial court granted Defendants motion for summary judgment. The court of appeals affirmed. The Minnesota Supreme Court granted review on the question of whether Plaintiff was a third-party beneficiary of the insurance contract under the intent-to-benefit test.

Synopsis of Rule of Law.

A third party has rights under a contract if the promisee intended to give the third party the benefit of the promised performance.

Facts.

Hickman (Plaintiff) obtained a mortgage on his home. The mortgage was later assigned to Guaranty (Defendant). When Plaintiff failed to insure the home as required under the mortgage agreement, Guaranty obtained insurance from SAFECO Insurance Company (Defendant). The policy covered losses on the home, other structures, and the personal property of the “borrower” and the borrower’s family. Payments for losses on the home and other structures were to be paid to Guaranty up to the amount of its interest in the property, with the excess payable to the borrower. Payments for losses related to personal property were to be paid directly to the borrower. The policy also allowed the borrower to seek arbitration on any appraisal of loss determined by SAFECO. The insurance premiums were paid from an escrow account funded from Plaintiff’s monthly mortgage payments. Plaintiff’s home was damaged in a storm. SAFECO paid out a claim to Guaranty for more than the outstanding balance of the mortgage, and Guaranty paid the excess to Plaintiff. Plaintiff objected to the amount of the payment under the policy and sued Defendants. The district court granted SAFECO’s motion for summary judgment, and the court of appeals affirmed. The Minnesota Supreme Court granted review on the question of whether Plaintiff was a third-party beneficiary of the insurance contract under the intent-to-benefit test.

Issue.

Whether a third party has rights under a contract if the promisee intended to give the third party the benefit of the promised performance.

Held.

Yes. The court of appeals’ ruling is reversed and the case is remanded for further proceedings.A third party has rights under a contract if the promisee intended to give the third party the benefit of the promised performance.

Discussion.

Under § 302 of the Restatement (Second) of Contracts, a third party is an intended beneficiary, with rights under a contract, if recognition of third-party beneficiary rights is appropriate and either: (1) the performance of the promise will satisfy the promisee’s obligation to pay money to the third-party beneficiary (called the duty-owed test) or (2) the circumstances show that the promisee intends to give the third-party beneficiary the benefit of the promised performance (called the intent-to-benefit test). The circumstances in this case indicate that Guaranty intended to give Plaintiff the benefit of some of the promised insurance proceeds. Although Plaintiff is not specifically identified in the insurance policy, he is recognized as the borrower under the policy terms. Under the policy, amounts payable in excess of the outstanding amount of the mortgage were to be paid to the borrower. The policy also covered personal property, in which only Plaintiff would have an interest in the proceeds. The policy also required SAFECO to make any payments related to personal property directly to the borrower. The policy allowed the borrower to seek arbitration on any appraisal of loss determined by SAFECO. In addition, the insurance premiums were paid by Plaintiff. Finally, when SAFECO paid out the claim in this case, it paid Guaranty an amount in excess of Guaranty’s interest, and Guaranty paid that excess to Plaintiff. Plaintiff is therefore a third-party beneficiary of the insurance contract.