In Ross v. Lowitz, New Jersey’s Supreme Court reaffirmed the rule that an injured party has no direct rights against a tortfeasor’s insurer, absent an assignment or standing as an express third party beneficiary.
In that case, the plaintiffs suffered damages from their neighbor’s oil tank leak. They sought to bring claims directly against the neighbor’s insurer, in the absence of an assignment. The court observed that generally, “an individual or entity that is ‘a stranger to an insurance policy has no right to recover the policy proceeds.’” A non-insured may get around this limitation and bring a bad faith claim against a tortfeasor’s insurer by virtue of an assignment of rights. In this case, however, there was no such assignment. Rather, the injured parties took the position that they were third-party beneficiaries to the tortfeasor’s insurance contracts with here insurers, “and that the insurers breached that duty by delaying the remediation of [the injured plaintiffs’] residence.”
The court’s analysis made clear that there was no automatic third party beneficiary status under insurance policies to parties injured by the insured. In essence it rejected the idea of universal third party status to the public who might be injured by an insured, or retroactive findings that an injured third party must have been an intended beneficiary because all injured parties are intended to be party to the contract by virtue of being injured by the insured.
Instead, to determine third party beneficiary status, an inquiry must be made into whether the insured and insurer, as the contracting parties, “’intended others to benefit from the existence of the contract, or whether the benefit so derived arises merely as an unintended incident of the agreement.’” In this inquiry, the determining factor is the intention of the contracting parties.
“’Thus, the real test is whether the contracting parties intended that a third party should receive a benefit which might be enforced in the courts; and the fact that such a benefit exists, or that the third party is named, is merely evidence of this intention.’” In making this determination: “If there is no intent to recognize the third party’s right to contract performance, ‘then the third person is only an incidental beneficiary, having no contractual standing.’”
The court then observed the basic theory of bad faith loss, under the contractual duty of good faith and fair dealing when processing claims: “In the case of processing delay, bad faith is established by showing that no valid reasons existed to delay processing the claim and the insurance company knew or recklessly disregarded the fact that no valid reasons supported the delay. . . . [L]iability may be imposed for consequential economic losses that are fairly within the contemplation of the insurance company.”
It then observed that this claims processing duty to the insured had “never been applied in New Jersey to recognize a bad-faith claim by an individual or entity that is not the insured or an assignee of the insured’s contract rights.”
Citing the Appellate Division, “[t]he right of the assured to recover against the insurer for its failure to exercise good faith in settling a claim within the limits of a liability policy . . . is predicated upon the potential damage to the assured in being subjected to a judgment in excess of her policy limits and the consequent subjection of her assets to the satisfaction of such judgment. The damage is peculiarly to the assured by reason of a breach of an implied condition of the policy contract. The injured third party is a stranger in that sense. Moreover, public policy does not mandate that the injured party in the accident should be deemed the intended beneficiary of the company’s contractual duty to its policyholder to act in good faith regarding settlement.” (Emphasis in original)
The Supreme Court concurred in this reasoning, finding that it “is a fundamental premise of contract law that a third party is deemed to be a beneficiary of a contract only if the contracting parties so intended when they entered into their agreement.” (Emphasis added) In the case at hand, there was “no suggestion in the record that the parties to the insurance contracts at issue had any intention to make plaintiffs, then the neighbors of the insured, a third-party beneficiary of their agreements. Nor does the migration of oil from [the insured’s] property to plaintiffs’ residence retroactively confer third-party beneficiary status on plaintiffs. The insurers’ duty of good faith and fair dealing in this case extended to their insured, not to plaintiffs.”
Thus the insurers were granted summary judgment.
Date of Decision: August 6, 2015
Ross v. Lowitz, A-101 September Term 2013, 074200, 2015 N.J. LEXIS 819 (N.J. August 6, 2015)