Court of Appeals of Texas, Houston (14th Dist.).
ALLIANCE SAVINGS AND LOAN ASSOCIATION, Appellant,
TRI-STATE INSURANCE COMPANY and Southwest International Underwriting Managers, Inc., Appellees.
June 13, 1991.
On Appeal from the 129th District Court Harris County, Texas Trial Court Cause No. 84-41527.
Before ROBERTSON, SEARS and DRAUGHN, JJ.
O P I N I O N
*1 Alliance Savings & Loan Association (”Alliance”) appeals from a judgment incorporating a jury verdict as to one cause of action and a partial instructed verdict as to Alliance’s other causes of action. Alliance raises seven points of error. We reverse and remand.
Alliance made a construction loan to Keppel Construction Builders and Developers, Inc. (”Keppel”) in the principal amount of $250,000.00. Keppel used the proceeds of this loan to build a single family residence. Keppel executed a note and deed of trust, conveying a security interest in the property to Alliance. The note was additionally secured by the personal guarantee of Israel Keppel, owner of Keppel. The deed of trust required Keppel to insure the premises for all hazards.
Keppel originally obtained a fire insurance policy from Aetna Insurance Company. Jay Gerstenhaber Insurance Agency was the local producing agent for this policy. In obtaining this policy, Keppel denied that any other entity had an interest in or encumbrance on the property. The policy included no mortgage loss payee clause in favor of any mortgage company. Keppel provided Alliance with a copy of this policy. This policy expired and Aetna refused to renew it.
Gerstenhaber then obtained a three month policy for $350,000.00 from appellee, Tri-State Insurance Company (”Tri- State”), through its Texas agent, appellee Southwest International Underwriting Managers, Inc. (”Southwest”). This policy also contained no loss payee mortgagee clause based on Gerstenhaber’s alleged representation that there was no mortgage. This policy was to expire on July 20, 1983 and Keppel’s construction loan was to become due on July 28, 1983. On June 8, 1983, a fire destroyed the dwelling. Arson investigators testified to finding evidence of arson. Furthermore, witnesses testified to seeing Mr. Keppel drive away from the dwelling at a high rate of speed just before the fire and that a loud explosion preceded the fire.
On July 28, 1983, Keppel filed an affidavit demanding the insurance proceeds and denying that any other entity had an interest in the property. After learning of the fire, Alliance notified appellees of its status as mortgagee and its claim for part of the proceeds. Appellees formally denied Alliance’s claim on March 29, 1984.
In June 1984, Alliance filed this lawsuit seeking an equitable lien and alleging breach of contract, breach of the duty of good faith and fair dealing, DTPA violations, and violation of the Texas Insurance Code. After Alliance presented its case in chief, the trial court granted appellees’ motion for instructed verdict as to all of Alliance’s claims except for the equitable claim. As to this equitable claim, the jury found that, under the terms of the policy, Keppel would not have recovered any insurance proceeds from appellee, Tri-State. Based on this finding, the trial court entered judgment incorporating the partial instructed verdict and ordering that Alliance take nothing on its claims.
*2 In point of error five, Alliance challenges the trial court’s submission of jury questions 1 and 2. In point of error seven, Alliance claims the trial court erred in entering final judgment on the jury verdict because it was contrary to the law applicable to the facts of this case. Appellees, on the other hand, claim that the trial court correctly submitted questions 1 and 2 and entered final judgment in appellees’ favor because an unnamed mortgagee is entitled to an equitable lien on insurance proceeds only if, under the terms of the policy, the proceeds are payable to the insured.
The court’s charge contained the following questions:
QUESTION NO. 1
Do you find from a preponderance of the evidence that under the terms of the policy in question, plaintiff’s Exhibit Number 1, Keppel construction Builders and Developers, Inc. would not have recovered any proceeds from Tri-State insurance [sic] Company?
Answer “Yes” or “No.”
If you have answered Question No. 1 “No”, and only in that event, then answer Question No. 2. Otherwise, do not answer Question No. 2.
QUESTION NO. 2
Under the term of the policy, Plaintiff’s Exhibit Number 1, what sums of money do you find from a preponderance of the evidence should have been paid to Keppel Construction Builders and Developers, Inc.?
Answer in dollars and cents.
Alliance objected to question 1 on several grounds. Alliance claimed that no evidence supported submission of this question and that question 1 was contrary to the law contained in TEX. INS. CODE ANN. art. 6.15. Furthermore, Alliance claimed that no pleadings supported submission of this question. As to question 2, Alliance claimed that it was irrelevant and not based on pleadings. Alliance also submitted nineteen requested questions and six requested instructions, all of which the trial court denied.
We agree with Alliance that the trial court erred in submitting questions 1 and 2 and in entering judgment for appellees based on the jury’s finding that Keppel could not have
recovered the insurance proceeds. Article 6.15 provides:
The interest of a mortgagee or trustee under any fire insurance contract hereafter issued covering any property situated in this State shall not be invalidated by any act or neglect of the mortgagor or owner of said described property or the happening of any condition beyond his control, and any stipulation in any contract in conflict herewith shall be null and void.
Golden, 91 S.W.2d at 696 (holding that conspiracy by mortgagor to destroy property by fire does not invalidate the insurance policy with respect to the mortgagee’s interest).
*3 Appellee contends that Alliance is not entitled to recover because Alliance was not listed as a loss payee in the policy. The Fidelity & Guar. Ins. Corp. v. Super-Cold Southwest Co., 225 S.W.2d 924, 925 (Tex. Civ. App. -- Amarillo 1949, writ ref’d n.r.e.), a mortgagor obtained a fire insurance policy as required by the chattel mortgage, but failed to name the mortgagee or its interest in the policy. In holding that the mortgagee had a right to institute suit and to recover on the insurance policy, the court stated:
It has been held many times by the courts of this state and practically every other state in this country that an agreement between a mortgagor and a mortgagee under which the mortgagor is charged with the duty of procuring insurance upon the mortgaged property for the benefit of the mortgagee, will encumber the proceeds of any insurance so procured by the mortgagor with a lien in favor of the mortgagee. In such cases it is the duty of the mortgagor to have a provision inserted in the policy that the proceeds shall be payable to the mortgagee as his interest might appear but, where he fails to do so, equity will treat the policy as having contained such a provision upon the principle that equity treats that as done which should have been done. Of course, if the insurer is not informed of such an agreement, it is not bound thereby, but after the information is given to it, the duty rests upon the insurer to treat the proceeds of the policy as though such a provision was written into the policy.
Id. at 927. Thus, if the mortgage requires the mortgagor to obtain insurance payable to the mortgagee, but the policy contains no provision for payment to the mortgagee, equity treats the policy as having contained a loss payable clause in favor of the mortgagee, entitling the mortgagee to recover under the policy. See Continental Ins. Co. v. Stewart & Stevenson Serv., Inc., 306 S.W.2d 415, 420 (Tex. Civ. App. -- Houston 1957, writ ref’d n.r.e.).
The deed of trust executed by Keppel required Keppel to maintain fire insurance on the property for the benefit of Alliance. Thus, equity treats the policy as having contained a loss payable clause in favor of Alliance and Alliance’s right to recover is unaffected by any wrongful acts committed by Keppel. The record reveals that Alliance notified Jay Gerstenhaber, the local agent, on the day of the fire of Alliance’s interest in the property as a mortgagee. Upon receipt of this information, appellees had the duty to treat the policy as if it contained a loss payable clause in Alliance’s favor. See art. 6.15 and the case law construing it, and as such, constituted reversible error. We sustain points five and seven.
*4 In point of error one, Alliance challenges the trial court’s grant of an instructed verdict as to Alliance’s claims of breach of contract, breach of the duty of good faith and fair dealing, DTPA violations, and violations of the Insurance Code. A trial court properly grants a motion for instructed verdict: (1) when the pleadings are defective and insufficient to support judgment, (2) when the evidence conclusively establishes a party’s right to judgment as a matter of law, or (3) when the evidence offered is insufficient to raise a fact issue as to a cause of action. See Collora v. Navarro, 574 S.W.2d 65, 68 (Tex. 1978). In making this determination, we review all the evidence in a light most favorable to the non-movant and disregard all contrary evidence and inferences. Id.
At the close of Alliance’s case in chief, appellees moved for instructed verdict as to the claims of breach of contract, breach of duty of good faith and fair dealing, and violations of DTPA and the Texas Insurance Code. As to the breach of contract claim, appellees argued that no contract existed between appellees and Alliance. Alliance countered that its interest as a loss payee mortgagee became part of the insurance contract as a matter of law under art. 6.15 prevents an insurer from asserting the mortgagor’s misconduct as a defense to a mortgagee’s claim.
Alliance’s right to sue the insurer to recover the insurance proceeds arises in equity. Because Keppel agreed to procure insurance for Alliance’s benefit, the proceeds of this insurance are encumbered with a lien in favor of Alliance. See Fidelity, 225 S.W.2d at 927. Even though Keppel failed to have a loss payable clause inserted in the policy that the proceeds shall be payable to Alliance, equity treats the policy as having contained such a clause on the principle that “equity treats that as done which should have been done.” Id. Treating the policy as containing a loss payable clause in favor of the mortgagee for the purpose of encumbering the proceeds with an equitable lien, however, does not make the unnamed mortgagee a party to the contract such that it may maintain a suit for breach of contract.
*5 Furthermore, we do not find that Alliance is a third party beneficiary of the contract. A third person who is not a party to the contract may assert a cause of action to enforce the contract if the contract was made for that person’s benefit. Republic Nat’l Bank v. National Bankers Life Ins. Co., 427 S.W.2d 76, 80 (Tex. Civ. App. -- Dallas 1968, writ ref’d n.r.e.)). Where a stranger to the contract contends that the parties intended the contract provisions to inure to his benefit, such intention must be clearly apparent. See Republic Nat’l Bank, 472 S.W.2d at 80. Any doubt should be resolved against finding this intent. See id.
The contract in this case references the insurers, Southwest and Tri-State, and the insured, Keppel. The policy covers a vacant dwelling located at 12074 South Circle Drive in the event of fire, vandalism, and malicious mischief with a liability limit of $350,000.00. Alliance points to the proof of loss section as indicative of intent to benefit Alliance. This section provides that a proof of loss shall be filed within ninety-one days after the loss revealing the interest of the insured “and all others in the property including any encumbrances thereon.” We do not find this to reflect a clear intent that the policy was to benefit Alliance. Thus, we hold that the trial court properly granted appellees’ instructed verdict as to the breach of contract claim.
Alliance also contends the trial court erred in granting an instructed verdict as to the claim of breach of the duty of good faith and fair dealing. A duty of good faith and fair dealing may arise as a result of the special relationship between the parties governed by a contract. Id. at 643-44.
*6 Alliance claims that its status as a mortgagee of the insured property was sufficient to create a duty of good faith and fair dealing on the part of appellees. In support of this proposition, Alliance cites 754 S.W.2d 129 (Tex. 1988). We find these cases distinguishable from this case.
Unlike the instant case, the party claiming breach of the duty of good faith and fair dealing in three of the four cited cases was the named insured. See Id. at 212-213. The instant case involves no statutory compensation scheme creating a special trust relationship. Finding no case law holding that an insurer owes a duty of good faith and fair dealing to a mortgagee who was not a party to the insurance contract, we decline to hold that an unnamed mortgagee previously unknown to the insurer has a cause of action against the insurer for breach of this duty.
Alliance also asserts that it had a valid cause of action under the DTPA. Appellees contend that an unnamed mortgagee is not a “consumer” under the DTPA and this is the ground upon which the trial court granted the motion for instructed verdict. The DTPA contains the following definition of a “consumer:”
“Consumer” means an individual, partnership, corporation, this state or a subdivision or agency of this state who seeks or acquires by purchase or lease, any goods or services, except that the term does not include a business consumer that has assets of $25 million or more, or that is owned or controlled by a corporation or entity with assets of $25 million or more.
TEX. BUS. & COM. CODE ANN. Sec. 17.45(4) (Vernon 1987). In determining whether a party constitutes a “consumer” under the DTPA, we “must give the Act, under the rule of liberal construction, its most comprehensive application possible without doing any violence to its terms.” Cameron v. Terrell & Garrett, Inc., 618 S.W.2d 535, 541 (Tex. 1981).
*7 Alliance argues that it was a consumer because it sought to purchase insurance from appellees through Keppel. The deed of trust obligated Keppel to purchase the insurance policy for Alliance’s benefit. Furthermore, Alliance claims that it established it was a business consumer with assets less than $25 million. The record shows that Alliance was in receivership and had a negative net worth in July 1988. No evidence established Alliance’s net worth at the time the cause of action accrued or at the time suit was filed.
Privity of contract is of no consequence in determining a plaintiff’s status as a consumer under the DTPA. id. at 892.
In the instant case, Alliance acquired no benefits on the face of the policy. Rather, equity encumbers the proceeds with a lien in favor of Alliance because Keppel agreed to acquire the insurance for Alliance’s benefit. We find no case law extending consumer status to a party whose only relationship to the transaction is by virtue of an equitable lien. Thus, we decline to hold that Alliance is a consumer under the DTPA and we find no error in the trial court’s grant of instructed verdict on Alliance’s claim of violation of the DTPA.
Finally, Alliance claims the trial court erred in granting instructed verdict as to its claim of violations of the TEX. BUS. & COM. CODE ANN. Sec. 17.46 (the Texas DTPA). Because we have held that Alliance is not a “consumer” and thus not entitled to recover under the DTPA, we must determine whether Alliance can seek recovery for unfair or deceptive acts as defined in the rules or regulations promulgated by the State Insurance Board. Alliance specifically claimed that appellees violated “Insurance Board Order 18663 Section 4 (now 28 Tex. Admin. Code, Section 213 (Hart. 1986)).” This section provides:
(a) Misrepresentation of insurance policies, unfair competition, and unfair practices by insurers, agents, and other connected persons are prohibited by article 21.21 or by other provisions of the Insurance Code and by these sections of the State Board of Insurance. No person shall engage in this state in any trade practice that is a misrepresentation of an insurance policy, that is an unfair method of competition, or that is an unfair or deceptive act or practice as defined by the provisions of the Insurance Code or as defined by these sections and other rules and regulations of the State Board of Insurance authorized by the Code.
(b) Irrespective of the fact that the improper trade practice is not defined in any other section of these rules and regulations, no person shall engage in this state in any trade practice which is determined pursuant by law to be an unfair method of competition or an unfair or deceptive act or practice in the business of insurance.
*8 State Board of Insurance. See Vail, 754 S.W.2d at 134.
Alliance alleged that appellees failed to make a good faith settlement of Alliance’s claim, a practice defined in TEX. INS. CODE ANN. art. 21.21, Sec. 16 and we overrule point one as to Alliance’s other claims.
Having held that the trial court erred in granting an instructed verdict as to Alliance’s claim of violations of the Insurance Code, in submitting jury questions 1 and 2, and in entering final judgment on the verdict, we need not address Alliance’s other points of error.
*9 We reverse the judgment and remand the cause to the trial court.
Do not publish - TEX. R. APP. P. 90.