Tort Victim Not a Beneficiary of a Mortgage Requiring Borrower to Buy Insurance

Mortgage Insurance Requirements Are Solely for the Benefit of the Lender

Mar 09, 2022

FACTS

Brooks owned and operated Chicks in Coffeyville, Kansas. CSB loaned Brooks $45,000 which he secured with a mortgage on Chicks filed on August 29, 2017. On January 16, 2019, Bookter patronized Chicks and got into a fight with Knisley, the bartender. Bookter suffered a concussion, multiple contusions and lacerations, a closed fracture of the maxillary sinus, and a fractured orbital floor of the left eye. Bookter’s injuries required hospitalization and reconstructive surgery.

Bookter sued Knisley for assault and battery and the bar owner, Brooks, under the theory of respondeat superior. Bookter filed a motion for summary judgment and the district court granted summary judgment to Bookter and awarded him more than $380,000 in economic and noneconomic damages.

After the judgment the district court ordered the Sheriff to seize and sell the pool hall to satisfy the judgment. CSB, as priority lienholder, moved to intervene. Bookter filed a cross-claim against CSB alleging negligence for not mandating that Brooks renew or secure liability insurance as required by the mortgage. Bookter asserted that he was entitled to recovery as a “third party creditor beneficiary” of the mortgage contract.

The district court granted CSB’s motion for summary judgment.

THE MORTGAGE

The mortgage contains the following language: ‘PROPERTY DAMAGE INSURANCE. … [Brooks] shall also procure and maintain comprehensive general liability insurance in such coverage amounts as [CSB] may request with [CSB] being named as additional insureds in such liability insurance policies…. Each insurance policy also shall include an endorsement providing that coverage in favor of [CSB] will not be impaired in any way by any act, omission or default of [Brooks] or any other person. . . .

In granting summary judgment for CSB, the district court found that Bookter was not an expressly intended third-party beneficiary to the mortgage agreement. The district court found that Bookter may have been an incidental beneficiary of any agreement to maintain insurance, but as an incidental beneficiary Bookter had no right to recovery under Kansas law.

The mortgage required the borrower to procure and maintain comprehensive general liability insurance in such coverage amounts as the lender “may request.” In another agreement signed by Brooks, the “Agreement to Provide Insurance,” it stated that Brooks would acquire minimum insurance coverage for the loan collateral including all inventory, equipment, and fixtures. The agreement provided that if Brooks failed to maintain adequate insurance coverage, then CSB could purchase coverage up to the balance of the loan.

Brooks, complying with the contracts, secured insurance coverage with United Specialty Insurance Company and provided CSB with a copy of the policy. The policy contained an exclusion for assault and battery and lapsed after a year.

While it is standard practice for lenders to require borrowers to maintain insurance, there is no law requiring it. The requirement is solely contractual and up to CSB to enforce.

CSB did not exercise its right under the agreement to purchase insurance on Brooks’ behalf when the policy lapsed. As a result, there was no liability policy in effect when Bookter sustained his injuries at Chicks. Even if a policy had been in effect, the coverage limit would have been $45,000, and it is questionable whether the policy would have provided coverage for the assault and battery Bookter alleged Knisley committed.

ANALYSIS

The district court granted summary judgment to CSB, finding Bookter was not a third-party beneficiary to the contract and thus lacked standing. Standing is a jurisdictional question which determines whether a litigant has a right to have a court determine the merits of the issues presented.

A party not privy to a contract has standing to sue as a third-party beneficiary if he or she establishes that the contract was made for his or her benefit, though not necessarily exclusively, and the parties intended that he or she benefit as a third-party beneficiary. Only an intended beneficiary has standing to sue for damages resulting from a breach of the contract. An intended beneficiary is one that the contracting parties intended the contract to benefit.

Mere knowledge by the contracting parties that a third party could benefit from the contract does not imply the contracting parties’ intent to benefit the third party.

Bookter tries to argue that the general liability insurance was meant to cover assault and battery, which he claims is the “primary liability risk associated with the business activity of the pool hall.” Bookter says that the risk of personal injury by assault and battery was known or should have been known by the loan officers and that is why the bank required the liability coverage. Although the pool hall had a CGL policy, that expired before the incident, it excluded assault and battery.

Standing

To have standing as a third-party beneficiary, Bookter must show that the mortgage contract was expressly intended to benefit him, or others in the same class as him.

The undisputed evidence before the district court showed that the intent of the insurance provision in the mortgage contract was solely for the benefit of CSB. Thus, the district court did not err in granting summary judgment to CSB.

ZALMA OPINION

Bookter, injured and with a $380,000 judgment that he could not collect – even if the property of the pool hall was sold – without first paying the judgment tried to create a right against the bank that held the mortgage on the property of the pool hall did not compel the pool hall to buy CGL insurance that covered assault and battery. Unfortunately for Bookter he had no standing and his creative efforts to find a way to collect his judgment failed.

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 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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