Generally, the language of an insurance policy governs the rights to any proceeds thereunder. However, many courts recognize a number of different theories that may allow third parties not specifically named as insureds in the policy to claim a right to the proceeds or even file suit for breach of contract. These theories include the equitable insured theory, the intended third-party beneficiary theory and the implied third-party beneficiary theory.
This article provides a general overview of these different avenues through which an unnamed third party may attempt to recover under an insurance policy.
Equitable Insured Theory
Under the equitable insured theory, a third party not named as an insured in an insurance contract may be considered an equitable insured if an underlying agreement exists between the insured and the third party that requires the insured to maintain insurance on identified collateral or real property. A number of jurisdictions have recognized the right of such unnamed third parties to bring a direct action in equity against an insurance company for proceeds due under a policy.
Either expressly or impliedly, these cases allow for the unnamed third party to bring such actions in equity rather than under a breach of contract theory. A clear distinction has been drawn between asserting an equitable right to proceeds under a policy and asserting a breach of contract claim. Webster Bank, NA v. Encompass, Ins. Co. of Am., No. CV 065000535S (Conn. Super. Ct. Feb 27, 2007). A claim in equity does not require privity between the third party and the insurer. Id.
In Cable Communications Network Inc. v. Aetna Casualty & Surety Co., the insurer commenced an interpleader action to resolve whether the named insured lessee or the lessor was entitled to the proceeds of a policy covering television and broadcasting equipment. 838 S.W.2d 947, 950 (Tex. App.—Houston [14th Dist.] 1992, no writ).
While adjusting and investigating the lessee’s claim, the insurer learned that, despite lease terms requiring the lessor to obtain insurance to cover the equipment, the lessor contended the lease had been orally modified to require the lessee to obtain insurance for the equipment on the lessor’s behalf. Id. at 948-49.
After the lessor formally notified the insurer of his claim to the policy proceeds, the insurer interpleaded the funds and asked the court to determine who should receive them. Id. at 949. The lessee argued that the insurer’s interpleader was not reasonable in light of existing insurance law and constituted a breach of contract and bad faith. Id. at 949-51.
The court rejected the lessee’s argument and stated that under Texas law, “if a lessee promised the lessor that the leased property would be insured for the lessor’s benefit and failed to do so, the benefits of the insurance policy taken out by the lessee on the leased property would be subject to the lien in favor of the lessor, and the lessor may then proceed directly against the insurance company to recover its share of any funds payable under the policy.” Id. at 950.
As Cable Communications Network illustrates, this equitable insured scenario arises most often in the context of a mortgage or lease requiring the named insured to maintain insurance on the subject property, giving rise to a claim in equity by the mortgagor or lessor who seeks protection against its loss or damage. In the absence of such a requirement, however, this doctrine does not apply.
Third-Party Beneficiary Theories
Depending on the jurisdiction, unnamed third parties may also be able to pursue an insurance claim under the theory of intended third-party beneficiary or implied third-party beneficiary. These theories are exceptions to the general rule that in order to bring a breach of contract action, one must be a party to the contract.
They also arguably undermine the general ideology that contracting parties should be able to know and control the scope of their contractual duties and obligations.
Intended Third-Party Beneficiary Theory
Under the intended third-party beneficiary theory, an unnamed third-party beneficiary may bring a breach of contract action directly against an insurer if the intent of the parties to the contract was that the promisor would assume a direct obligation to the third party. Reyes v. Nautilus Ins. Co. (Conn. Sup. Ct. Mar. 6, 2012).
The parties’ intent is determined by the terms of the contract read in light of the circumstances surrounding the acquisition of the policy. Id. There does not have to be contractual language expressly creating the direct obligation. Id.
In Reyes v. Nautilus Ins. Co, a homeowner filed suit against its insurer, claiming the insurer refused to pay covered damages caused by a fire (Conn. Sup. Ct. Mar. 6, 2012). The mortgagee intervened alleging, among other things, that it had standing to assert a breach of contract claim against the insurer because it was an intended third-party beneficiary of the insurance policy. Id. at *4-6.
Despite the fact that he was not named in the insurance policy, the mortgagee claimed the mortgage agreement required the homeowner to name the mortgagee on any insurance policy covering the property and the insurer “knew or should have known that he was a mortgagee for the insured property.” Id. at *5.
In rejecting the mortgagee’s argument, the court held that while the homeowner’s intent that the mortgagee be a third-party beneficiary under the insurance policy could be inferred, the “allegation that the [insurer] knew or should have known that the intervening plaintiff was a mortgagee” did not show the insurer’s intent. Id.
Although the Reyes court ultimately found that the pleadings did not support the position that the mortgagee was an intended third-party beneficiary, the court acknowledged acceptance of the intended third-party beneficiary theory. Id. at *4-6.
Implied Third-Party Beneficiary Theory
Under the implied third-party beneficiary theory, an unnamed third-party beneficiary may bring a breach of contract action directly against an insurer if it is within the class of beneficiaries intended by the parties and its addition as a beneficiary does not increase the risk undertaken by the promisor.
In Stewart-Smith Haidinger Inc. v. Avi-Truck Inc., Avi-Truck purchased an aircraft and leased it to another party. 682 P.2d 1108, 1110 (Alaska 1984). As required under the lease, the aircraft was insured by the lessee. Id. After the aircraft crashed on only its second flight, the bank that loaned Avi-Truck the purchase money brought suit against Avi-Truck to collect on the loan. Id. at 1111.
Avi-Truck filed a third-party complaint against the insurer, claiming entitlement to the policy proceeds. Id. The insurer challenged Avi-Truck’s standing to bring the suit because Avi-Truck was not a named insured on the insurance policy — the insurer had assumed the insured/lessee actually owned the plane. Id. at 1110-1111. The insurer argued that “a third-party beneficiary contract can exist only if both the parties intended to benefit a third party at the time the contract was negotiated.” Id. at 1112.
In rejecting the insurer’s argument, the court noted the difference between the intended and implied third-party beneficiary theories and held that Avi-Truck was an implied third-party beneficiary because Avi-Truck was “within the class of persons contemplated to be covered by insurance at the time the insurance contract was negotiated, i.e., within the class of owners and operators of the aircraft,” and “the risk to the carriers was not effected [sic] by ultimate ownership of the aircraft being placed in Avi-Truck.” Id. at 1111-1114.
The implied third-party beneficiary theory has not been widely addressed and is much less accepted. While the states of Alaska and Maine have adopted the implied third-party beneficiary theory (Stewart-Smith and Foley’s Ice Cream Co. v. American Health & Life Ins., 1989 Me. Super. (March 13, 1989)), the states of Washington and Connecticut have rejected it (Postlewait Constr. Inc. v. Great Am. Ins. Cos., 706 P.2d 636 (Wash. Ct. App. 1985), aff’d, 720 P.2d 805 (1986) and Reyes v. Nautilus Ins. Co., 2012 WL 1004302 (Conn. Sup. Ct. Mar. 6, 2012)).
Whether an unnamed third party has a valid insurance claim as an equitable insured or as an intended or implied beneficiary is determined by the applicable law. In responding to and handling claims submitted by third parties not specifically identified as insureds under the subject policies, insurers should have an understanding of the different avenues of legal recourse potentially available to a third party.
Even as strangers to the insurance policy, unnamed third parties may rely on these theories to assert a claim. Accordingly, mere confirmation that a claimant is not a named insured in the policy does not necessarily end the inquiry and further analysis may be required.
The opinions expressed are those of the author(s) and do not necessarily reflect the views of the firm, its clients, or Portfolio Media Inc., or any of its or their respective affiliates. This article is for general information purposes and is not intended to be and should not be taken as legal advice.
 See Cable Comms. Network Inc. v. Aetna Cas. & Sur. Co., 838 S.W.2d 947, 950 (Tex. App.—Houston [14th Dist.] 1992, no writ); Farmers Ins. Exch. v. Nelson, 479 S.W.2d 717, 721 (Tex. Civ. App.—Waco 1972, writ ref’d n.r.e.); Diaz v. Cherokee Ins. Co., 275 So.2d 922, 925 (La. Ct. App. 1973); Nor-Shire Assocs. Inc. v. Commercial Union Ins. Co., 270 N.Y.S.2d 38, 39-40 (N.Y. App. Div. 1996).
 See Nat’l Bedding & Furniture Indus. Inc. v. Clark, 481 S.W.2d 690, 691-693 (Ark. 1972); Atwell v. Western Fire Ins. Co., 163 So. 27, 30-31 (Fla. 1935); Marbach v. Gnadl, 219 N.E.2d 572 (Ill. App. Ct. 1966); Winneshiek Mut. Ins. Assn. v. Roach, 132 N.W.2d 436, 441-42 (Iowa 1965); Taylor v. Audubon Ins. Co., 357 So.2d 912, 914-15 cert. denied, 359 So.2d 1307 (La. Ct. App. 1978); McGory v. Allstate Ins. Co., 527 So.2d 632, 640 (Miss. 1988); Am. Equitable Assurance Co. v. Newman, 313 P.2d 1023, 1027 (Mont. 1957); Cromwell v. Brooklyn Fire Ins. Co., 44 N.Y. 42, 47 (1870); Wade v. Seeburg, 688 S.W.2d 638, 639 (Tex. App. 1985).
 Stewart-Smith Haidinger Inc. v. Avi-Truck, Inc., 682 P.2d 1108, 1111-14 (Alaska 1984); Postlewait Constr. Inc. v. Great Am. Ins. Cos., 720 P.2d 805, 807 (Wash. 1986).