Summary
recognizing exception to rule
Summary of this case from Broadway v. Allstate Prop. & Cas. Ins. Co.Opinion
C.A. No. 03C-11-016-RFS.
Submitted: June 3, 2004.
Decided: October 14, 2004.
James D. Nutter, Esquire, Delcollo Werb, P.A.
Randy J. Maniloff, Esquire, Christie, Pabarue, Mortenson Young.
John A. Sergovic, Esquire, Sergovic, Ellis Shirey, P.A.
Walter W. Speakman, Jr., Esquire, Brown, Shiels, Beauregard Chasanov.
Dear Counsel:
This is my decision regarding Defendant, United National Insurance Company's ("United National's") Motion to Dismiss Pursuant to Delaware Superior Court Civil Rule 12(b)(6). For the reasons set forth herein, United National's motion is granted.
STATEMENT OF THE CASE
In November 2001, Dolores Willis ("Willis"), and her now deceased husband, Cecil Willis, (collectively, "the Willises") who live in the City of Rehoboth ("the City"), applied for a building permit to make improvements to their property, a condominium unit which was classified under the Zoning Code as a garage apartment. The permit was approved and the Willises commenced construction on the improvements. In May of 2002, however, the City ordered the Willises to stop the construction, stating in a letter that the building permit was illegal. The City Zoning Code does not permit the expansion of garage apartments in their zone. The Willises application for a variance was subsequently denied, but they were able to acquire a special use exception allowing them to complete some of the improvements. While they were seeking relief from the stop work order, their apartment and some personal property was damaged by exposure to water. Plaintiff, Dolores Willis ("Willis"), for herself and as successor to her deceased husband, has brought an action for compensatory and punitive damages against the City of Rehoboth. She claims that Rehoboth is liable, under theories of negligence, intentional misrepresentation, breach of contract, consumer fraud and deceptive trade practices, for the misrepresentations of its building inspector who issued the permit. Willis has also brought suit for breach of contract against the City's public officials liability insurer, United National. She asserts that she and her husband are third-party beneficiaries to the policy. United National's policy covers the City for any damages it may be legally obliged to pay due to the wrongful acts of its public officials.
United National has filed a motion to dismiss pursuant to Superior Court Civil Rule 12(b)(6) for failure to state a claim upon which relief can be granted. At issue in the present action is whether the Willises can directly sue United National under the theory that they are third-party beneficiaries to the contract at the same time that they bring suit against the alleged tortfeasor, the City of Rehoboth.
DISCUSSION
When the Court considers a motion to dismiss for failure to state a claim, the Court accepts all well-pleaded allegations in the complaint as true. Spence v. Funk, 396 A.2d 967, 968 (Del. 1978). If the plaintiff can recover under any reasonably conceivable set of circumstances susceptible of proof under the complaint then it will not be dismissed. Id.
Generally, where the Defendant offers materials in addition to and outside of the pleadings, its motion must be treated as one for summary judgment. See Rule 12(b). Here, United National has attached a copy of its insurance policy. This motion will not be treated as one for summary judgment, however, because the policy is not a document "outside the pleadings." There is a well-recognized exception to the rule that a motion to dismiss must be converted to a summary judgment motion in cases where the submitted document is integral to plaintiff's claim and it is incorporated into the complaint. In re Santa Fe Pacific Corp Shareholder Litigation, 669 A.2d 59, 69 (Del. 1995); Great American Assurance Co. v. Fisher Controls Int'l, Inc., 2003 WL 21901094, at *2-3 (Del.Super.Ct.). Superior Court Civil Rule 10(c) provides that "[a] copy of any written instrument which is an exhibit to a pleading is a part thereof for all purposes." Although, the Plaintiff, in her complaint did not submit a copy of the insurance policy as an exhibit, the policy is central to her breach of contract claim against United National. "[W]hen plaintiff fails to introduce a pertinent document as part of his pleading, defendant may introduce the exhibit as part of his motion attacking the pleading. . . ." Lewis v. Straetz, 1986 WL 2252, at *3 (Del.Ch.) (referring to Del. Ch. R. 10(c)). See also Steinhardt Group Inc. v. Citicorp, 126 F.3d 144, 145 (3d Cir. 1997) ("a court may consider an undisputably authentic document that a defendant attaches as an exhibit to a motion to dismiss if the plaintiff's claims are based on the document." (Citation omitted)); Venture Assoc. Corp. v. Zenith Data Systems Corp., 987 F.2d 429, 431 (7th Cir. 1993) (noting that Fed.R.Civ.Pro. 10(c) is permissive in nature; "[a] plaintiff is under no obligation to attach to her complaint documents upon which her action is based, but a defendant may introduce certain pertinent documents if the plaintiff failed to do so."). Since the insurance policy was submitted as an exhibit to Defendant's Motion to Dismiss, the Court will review it in determining the motion, and it need not convert this motion to one for summary judgment. See Fayetteville Investors v. Commercial Builders, Inc., 936 F.2d 1462, 1465 (4th Cir. 1991) (concluding Court could consider provisions of contract in determining whether on face of complaint the claim was barred by limitation period).
In Kaufmann v. McKeown, 193 A.2d 81 (Del. 1963), the Supreme Court stated that Delaware is not one of those states where direct action is permitted by an injured party against a tortfeasor's liability insurer. In Delmar News, Inc. v. Jacobs Oil Co., 584 A.2d 531, 533-34 (Del.Super.Ct. 1990), the Superior Court followed the authority of Kaufmann to conclude that an injured party may not bring a direct action against a liability insurer based upon the negligence of the insured. Accord Clark v. Simon, 1992 WL 354098, at *3 (Del.Super.Ct.); Starr v. Nationwide Mut. Ins. Co., 548 A.2d 22, 25 (Del.Ch. 1988). That Court also noted that there is an exception to the rule, that "it is well-settled law in Delaware that a third-party may recover on a contract made for his benefit." Delmar News, Inc., 584 A.2d at 534. See also Eric Mills Holmes, 22 Holmes' Appleman on Insurance 2d § 142.1 (2003). Thus, although, a party is not a named insured, she may still recover under the policy as a third-party beneficiary. O/E Systems, Inc. v. InaCom Corp., 179 F. Supp. 2d 363, 367 (D. Del. 2002). If, however, the injured party is neither a named insured nor a third-party beneficiary, she may not recover from the liability insurer unless there has been an assignment or there has been a judgment against the insured, such that the party has become a judgment creditor. Id.
Holmes notes that generally, an injured party may not bring a cause of action against the liability insurer of the tortfeasor.
The reason for the general rule is the perception that it would be prejudicial to the insured defendant and to the insurer if the jury that determines the liability of the insured were to learn that the defendant had insurance that covered all or part of the plaintiff's injuries. It is also founded in the contractual nature of the relationship between the insured and the insurer and the lack of privity between the insurer and the injured party.
But Holmes also points out that the states have devised ways of getting around the general rule. Injured parties may maintain an action against the tortfeasor's insurer when, inter alia, (1) the insured's liability has been determined and thus, the liability has been liquidated; (2) there has been an assignment of rights under the policy to the injured party; (3) the law of the state permits the action; (4) the language of the policy permits the injured party to sue the insurer directly; (5) the state has adopted a statute allowing the direct actions; or (6) the injured party is a third-party beneficiary of the policy.
Under general contract principles, in order for there to be a third-party beneficiary, the parties to the contract must have intended to confer a benefit. Delmar News, Inc., 584 A.2d at 534. "[W]here it is the intention of the promisee to secure performance of the promised act for the benefit of another, either as a gift or in satisfaction of an obligation to that person, and the promisee makes a valid contract to do so, then such third person has an enforceable right under that contract. . . ." Guardian Constr. Co. v. Tetra Tech Richardson, Inc., 583 A.2d 1378, 1387 (Del.Super.Ct. 1990).
The issue of whether an injured party is a third-party beneficiary to a liability insurance policy is essentially a question of interpretation. The court must look to the language of the policy to determine the parties' intent. "A third-party beneficiary cannot sue, unless the contracting parties confer upon him the right to sue." Wilmington Housing Authority v. Fidelity Deposit Co. of Maryland, 47 A.2d 524, 528 (Del. 1946). See Crow v. Erectors, Inc., 1988 WL 7617, at * 2 (Del.Super.Ct.) (concluding that the intent to benefit a third-party is dependent upon the language of the contract). This is not to say that the third-party beneficiary has to be specified in the contract. "It is not essential to the creation of a right in an intended beneficiary that he be identified when a contract containing the promise is made." Restatement (Second) of Contracts § 308 (1981). This is just one factor that may have a bearing on whether the parties intended to confer a right on the injured party. See id. cmt. a.
The Court's interpretation of an insurance policy is a matter of law. Nat'l Union Fire Ins. Co. v. Fisher, 692 A.2d 892 (Del. 1997); Universal Underwriters Ins. Co. v. The Travelers Ins. Co., 669 A.2d 45, 47 (Del. 1995).
Plaintiff turns to the case, Wilmington Housing Authority v. Fidelity Deposit Co. of Maryland, 47 A.2d 524 (Del. 1946), to support the proposition that a stranger to a contract may enforce a promise if the contract has been made for his benefit. Wilmington Housing involved a surety bond executed by the Defendant with a contractor as principal, and on behalf of the Wilmington Housing Authority in connection with the construction of a housing project . The bond provided that if all parties furnishing materials and performing labor as part of the contract or an extension of the contract had been paid, the obligation of the surety would be void. Id. at 524. At the time, the Delaware Code mandated that any public improvement exceeding $500 in cost required a surety bond ensuring that the contractor shall pay to all persons furnishing material or providing labor "every sum due for such labor and materials for which the contractor is liable." Id. at 524-23. The statute also authorized "every such person" to maintain an action on the bond for the sums due. Id. The contractor in Wilmington Housing sublet some of the work to a subcontractor, who in turn employed Joseph R. Simeone ("Simeone") to furnish and haul dirt and to move equipment. Simeone was never paid and suit was brought to recover the amount owed to him. The Court determined Simeone was a third-party beneficiary to the surety bond.
Wilmington Housing is distinguishable from the present case because "[a] third-party beneficiary cannot sue, unless the contracting parties confer upon him the right to sue." Id. The language of the policy in this case does not permit such a right. In addition, obligation under the bond to laborers and suppliers in the construction project arose once payment by the contractor became due. Here, no obligation for payment for damages arises on behalf of the insured until liability has been determined and the liability can be said to be liquidated. Moreover, persons providing labor and materials were specifically authorized by statute to bring suit for payments owed them. No such authorization exists in this case.
In this regard, if a liability insurance policy explicitly states that injured parties could bring direct suit against the insurer before judgment had been obtained against the tortfeasor, such an action would be permitted. On the other hand, if a policy prohibited a direct action to be brought against the liability insurer by injured parties, the intent would be clear on the face of the policy. In that case a direct action would not be allowed. See, e.g., O/E Systems, Inc., 179 F. Supp. 2d at 367 (finding Plaintiff could not make a direct claim against the insurer because the policy prohibited any third-party benefit).
United National's insurance policy provides: "We will pay on behalf of the insured those sums that the insured becomes legally obligated to pay as damages resulting from claims . . . against the insured by reason of public officials wrongful acts. . . ." The policy expressly limits the rights of persons who want to bring suit against United National, stating:
SECTION IV — PUBLIC OFFICIALS LIABILITY CONDITIONS
3. Legal Action Against Us
No person or organization has a right under this policy:
a. To join us as a party or otherwise bring us into a suit asking for damages from an insured; or
b. To sue us under this policy unless all of its terms have been fully complied with.
A person or organization may sue us to recover on an agreed settlement or on a final judgment against an insured obtained after an actual trial; but we will not be liable for damages that are not payable under the terms of this policy or that are in excess of the applicable Limit of Insurance. . . .
It is clear to the Court from this language, that the policy does not permit injured parties to sue as third-party beneficiaries until there has been a final judgment or an agreed settlement. This is an indemnification policy, which does not contemplate any obligation for payment by the insurer until the insured becomes legally obligated to pay damages.
The Plaintiff argues that the "or" connecting subparts (a) and (b) indicates that subpart (b) is a distinct condition which permits direct actions against the insurer. Although subpart (b) is an alternative to subpart (a), it still works to prohibit Plaintiff from bringing a direct action against United National until there has been a judgment. Subparts (a) and (b) work together to say that no person has a right under the policy if either of the criteria are not met. All of the terms of the policy must be complied with before any person has a right under the policy. Thus, for example, if the policy requires that the insurer be timely notified of any claims, any person, third-party or insured, would not have any rights under the policy if they had failed to notify the insurer within a reasonable time of the claim. The purpose of subpart (b) is to inform third-parties wishing to exercise rights under the policy, whether pursuant to assignment or judgment or other legitimate means, that they too must comply with the terms of the policy. Subpart (b) would also apply to an insured seeking judgment against their insurer.
In Lewis v. Home Ins. Co., 314 A.2d 924, 926 (Del.Super.Ct. 1973), the Court interpreted a similar provision in an insurance policy in exactly this manner. The first provision, subpart (a), however, is a distinct requirement and applies specifically to third-parties, and not the insured. No person may join the insurer to a suit asking for damages from the insured. But subpart (a) is also modified by the paragraph following subpart (b). A person may sue the insurer directly once a final judgment has been obtained. In conclusion, the Court finds, that pursuant to the plain language of the United National policy, there must be legally determined liability before there can be an obligation to pay.
Even if the Court were to find the policy's language to be ambiguous, the most it could find is that the contract is empty of intent. In such a case, Delaware courts have followed the majority of courts from other jurisdictions in concluding that, absent language in the policy stating otherwise, a third-party beneficiary has no right to sue the insurer directly until there has been a judgment awarding damages. See Delmar News, Inc., 584 A.2d at 534-35; Hulliger v. Thompson, 1992 WL 9307 (Del.Super.Ct.).
"There is a difference of opinion as to whether an injured party is a third-party beneficiary." Lee R. Russ Thomas F. Segalla, Couch on Insurance 3d § 242:24 (2000). But, in the vast majority of jurisdictions (of those that do not have a direct action statute) an injured party is not permitted to sue a tortfeasor's liability insurer directly until judgment has been obtained by the injured party against the insured. See Allan D. Windt, 2 Insurance Claims and Disputes, § 9:11 (4th ed. 2001) (noting that of those states that do not have a direct action statute, only Florida courts hold that an injured party becomes a third-party beneficiary of the policy upon having been injured by the insured).
Russ and Segalla, in Couch, supra, cite cases from California and Hawaii to support the proposition that some jurisdictions provide that an injured party is a third-party beneficiary. Even those Courts they mention do not go so far, however, as to allow direct actions where the provisions of the policy are dependent upon the liability of the insured. For example, Harper v. Wausau Ins. Co., 66 Cal. Rptr. 2d 64 (Cal.Ct.App. 1997), dealt with a direct action against a liability insurer for medical payments. The Court concluded that medical payment provisions provide an exception to the general rule because they provide direct obligations on the part of the insurer to intended beneficiaries. It noted that the medical payment provision is divisible from the rest of the policy, including the general liability provision. The Court stated: "[T]he medical payment language at issue here is not a liability provision but a direct and separate obligation in the policy to pay the medical expenses of persons injured on its insured's property. The provision specifically states the defendant will pay `without regard to fault.'" Id. at 71. See also Hunt v. First Ins. Co. of Hawaii, 922 P.2d 976, 982-83 (Haw.Ct.App. 1996) (finding that despite the fact that the insurance policy clearly restricted liability actions directly, the restriction was inapplicable where the Plaintiff was suing under the medical payments provision; those claims were based on the contract, not on liability).
The Delmar News Court dealt with this third-party beneficiary problem by distinguishing between third-parties who are intended to benefit from the contract and third-parties who benefit either indirectly or coincidentally. It noted that "[i]f . . . the parties to the contract did not intend to benefit the third-party but the third-party happens to benefit from the performance of the contract either indirectly or coincidentally, such third person has no rights under the contract." 584 A.2d at 534, citing, Insituform of North America v. Chandler, 534 A.2d 257 (Del.Ch. 1987). There, the Court found that at best, Delmar (the injured party) was an indirect beneficiary of the insurance contract in the event that if the alleged tortfeasor, Jacobs, was eventually found negligent, it may have a right to receive payment for its losses from Jacobs' insurer. Delmar News, Inc., 584 A.2d at 534 (emphasis added).
According to the Restatement (Second) of Contracts § 302 (1981) an intended beneficiary is either, what is often referred to as a "creditor beneficiary," or it is a person, to whom the circumstances indicate the promisee intends to give the benefit of the promised performance. In "creditor beneficiary" cases, the promisee is surety for the promisor. "The term `creditor beneficiary' has also sometimes been used with reference to promises to satisfy a supposed or asserted duty of the promisee, but there is no suretyship if the promisee has never been under any duty to the beneficiary." Id. "A promise in a contract creates a duty in the promisor to any intended beneficiary to perform the promise, and the intended beneficiary may enforce the duty." Restatement (Second) of Contracts § 304 (1981).
Here, the language of the policy clearly delineates when third-parties rights arise under the contract. If this were not the case, however, this Court would uphold the reasoning in Delmar News. Without language to the contrary in the policy, injured parties are merely incidental beneficiaries and have no right under the policy to sue the liability insurer until a judgment has been obtained against the insured.
Bringing suit directly against an insurance company also raises evidentiary issues. See, e.g., Clark v. Simon, 1992 WL 354098, at * 3 (Del.Super.Ct.) ("Preliminarily, I note that if the trial in this matter was to be by jury, then the claim against Aetna would have to be separated, by way of severance or bifurcation, since the issue of insurance is not a proper one for a jury, and the fact that a defendant is insured cannot be mentioned before a jury."); Hunt v. First Ins. Co. of Hawaii, 922 P.2d 976, (Haw.Ct.App. 1996) ("The reasons ascribed for the rule are varied although a deep-seated reason is simply that courts feel that it would not be sound public policy to permit the insurer to be joined as a defendant, in deference to what is believed to be a jury's tendency to find negligence or to augment damages, if it thinks that an affluent institution such as an insurance company will bear the loss.")
CONCLUSION
Considering the foregoing, the decision of the Board is affirmed.IT IS SO ORDERED.