Iowa Court Says Third-Party Beneficiary Bound by Policy Limitations

The Iowa Supreme Court recently held that a third-party beneficiary is granted no greater rights under an insurance policy and is bound by the same limitations as the policyholder. In Osmic v. Nationwide Agribusiness Ins. Co., No. 12-1295 (Iowa Jan. 10, 2014), the court found that while a passenger in a vehicle could claim underinsured motorist benefits under a driver’s insurance policy as a third-party beneficiary, the claim was subject to the policy’s time limitations and the insurer had no affirmative duty to notify the passenger of an impending deadline.

The case arose after an underinsured motorist struck another vehicle and injured that vehicle’s driver and passenger. The passenger recovered the maximum available benefits from the negligent motorist and then filed a claim for underinsured motorist benefits under the driver’s policy. The passenger, through his attorney, delayed in his dealings with the insurer and, though asking for the policy’s declarations page, never asked for the actual insurance policy with the pertinent terms including the two-year limitation for filing a lawsuit. While the passenger and the insurer exchanged communications in an effort to settle the claim, the time limit expired and the insurer dismissed the claim. The passenger sued the insurer, arguing that because he was not a party to the contract he should not be bound by the two-year limitation.

Contracts, including insurance policies, establish the rights and obligations of the parties to the contract but may also provide benefits to a person who is not a party to the contract. These third-party beneficiaries occupy a unique position in contract law and, as evidenced by this case, can engender questions as to the applicability of the contract.

Initially, the trial court and court of appeals found the limitation unenforceable as to the passenger. Both courts reasoned that as a non-party to the policy, the passenger had no knowledge of the contractual limitation and therefore could not fairly be held to it. The courts focused on the conduct of the insurer and concluded that it “hid the ball” where it should have notified the third party of the time limit.

The Iowa Supreme Court disagreed with the analysis of the lower courts and instead focused on the policy’s operation in relation to the third-party beneficiary. The court reasoned that a third-party beneficiary cannot enjoy the benefits of a policy without also abiding by its limitations. “When a right has been created by a contract, the third party claiming the benefit of the contract takes the right subject to all the terms and conditions of the contract creating the right.” The court further held that the insurer had no duty to alert the third-party beneficiary to the contractual deadline. The court reiterated the principle that “a third-party beneficiary’s rights under a contract do not exceed those of the primary party” and noted that the insurer had no duty to warn the insured of the limitation and similarly had no duty to warn any third party. Had the passenger requested the policy or inquired specifically about the deadline, the insurer would have had a duty to respond. The court placed significant emphasis on the fact that the passenger was represented by an attorney for over a year and, to no fault of the insurer, the attorney had failed to elicit details about any contractual limitation period. The policy terms controlled, and the third-party beneficiary gained no greater rights than the insured and the insurer assumed no greater obligations.

Where public policy and insurance law generally construe policies against insurers, and where the trial court and appellate court took issue with the insurer’s silence on the contractual limitation, the supreme court refused to impose a unique obligation on the insurer to alert the third-party beneficiary of the running time period and refused to grant the third party any additional leniency not supported by the contract.

The Iowa decision benefits insurers but contradicts rulings from other states. In Wilson v. Ohio Cas. Ins. Co., 923 N.E.2d 1187 (Ohio Ct. App. 2009), an Ohio court held that insurers have a general duty to notify insureds, including third-party beneficiaries, of limitation periods. The Iowa court rejected this case as unpersuasive in light of contradicting precedent within its own law which imposes no such duty. The court also rejected a decision from Indiana where a court held that when a third-party beneficiary asked an insurer if it needed additional information to process a claim and received no response until after the limitations period, the insurer breached its duty of good faith and fair dealing which “certainly must include an obligation to inform such a claimant of conditions precedent in the insurance contract.” Stewart v. Walker, 597 N.E.2d 368 (Ind. Ct. App. 1992). The Iowa court noted that Indiana has since clarified that the case did not establish a general rule, and distinguished the holding because the insurer “had attempted to rely upon a third-party insured’s failure to comply with a condition that the same insurance company had ‘refused’ to disclose” whereas the passenger in this case never asked about policy conditions or for the policy itself.

While state laws differ, the decision of the Iowa Supreme Court is an important statement of the rights of third-party beneficiaries under an insurance policy and is beneficial for insurers as it adds some consistency to their duties in the state. The Iowa court refused to expand the insurer’s obligations to third-party insureds, but insurers should be aware of how courts in their state treat third parties and whether any additional obligations may arise.