Third Party Beneficiary Bound by Conditions in Contract It Seeks to Enforce, Even if Conditions Stated as Promises

The automobile policy State Farm issued in State Farm Fire & Cas. Co. v. Nationwide Mut. Ins. Co., 2009 U.S. Dist. LEXIS 8263 (E.D. Va. Feb. 5, 2009) contained a commitment that the insured would maintain $250,000 in underlying coverage or be responsible for that sum before the State Farm policy attached. An additional insured argued that he was not a party to the contract and could not be bound by promises made by the named insured:

Although the general principle of contract law is that "a person is not bound by a contract to which he did not agree," Bishop v. Med. Facilities of Am. XLVII(47), Ltd. P'ship, 65 Va. Cir. 187, 192 (Va. Cir. Ct. 2004), there is an exception to this general rule where a third party seeks to enforce a contract assumed for his benefit. The Virginia Supreme Court has held that a third party beneficiary is "entitled to sue on the contract, bound by the terms of the contract, and subject to defenses arising out of the contract." Syndor & Hundley, Inc. v. Wilson Trucking Corp., 213 Va. 704, 707 (1973). Pursuant to Va. Code Ann. § 55-22, "the third-party beneficiary's rights under the instrument can rise no higher than the rights of the [promisee]." Ashmore v. Herbie Morewitz, Inc., 252 Va. 141, 149 (1996). ***According to Williston on Contracts, a third party beneficiary's rights are subject to "all express or implied conditions affecting the promise in which he is interested." 13 Richard A. Lord, Williston on Contracts § 37:24 (4th ed. 2008). This is true even if "the condition is an external event outside the control of the parties to the contract or the beneficiary," or if "it is something which can be brought about by the beneficiary." Id. "Third party beneficiaries must take their contracts as they find them -- the good with the bad." Id. § 37:23.

Because the third party beneficiary takes his rights under the contract subject to any conditions, the distinction between a promise and a condition is relevant in evaluating the enforceability of the terms of the contract against the third party. According to Williston on Contracts:

A promise is a manifestation of an intention to act or refrain from acting in a specified way, so made as to justify the promisee in understanding that a commitment has been made, while a condition is an event, not certain to occur, which must occur, unless its nonoccurrence is excused, before performance under a contract becomes due. If there is a condition precedent, the party in whose favor the condition exists is not liable to an action until the condition has been met. Breach of a promise, on the other hand, subjects the promisor to liability in damages, but does not necessarily excuse performance on the other side. Nonoccurence of a condition prevents the promisee from acquiring a right, or deprives him or her of one, but subjects him or her to no liability.

Id. § 38:5.

It appears that the provision of the State Farm umbrella policy at issue here is a condition precedent, not a promise. The subject provision states: "The limits listed in the Declarations are the minimum you must maintain. If the required underlying limits are not maintained, you will be responsible for the underlying limit amount of any loss." .... Under this provision, the insured's maintenance of underlying insurance in the amounts listed in the Declarations, including $ 250,000 for bodily injury, is a condition precedent to State Farm's full performance of providing payment up to the insured's underlying insurance. Although the provision requires that the insured maintain underlying insurance with the minimum limits specified, there is no penalty for failing to do so unless the insured seeks to enforce the policy. When the insured seeks payment under the umbrella policy, the minimum insurance provision operates as a condition on State Farm's full performance under the contract, and correspondingly, the insured's right to payment up to the amount of his underlying insurance. If the insured does not maintain the underlying minimum policy limits specified in the Declarations, State Farm will only pay the amount of loss in excess of that minimum limit. Thus, this provision is not a promise to act such that the insured would be liable in damages for a breach. Instead, this provision is a condition, the nonoccurrence of which "prevents the [insured] from acquiring a right . . . but subjects him or her to no liability." Williston on Contracts § 38:5. Under the majority view as expressed by Williston on Contracts, a third party's rights are subject to such a condition. Id. § 37:24.

Virginia cases interpreting insurance contracts are also persuasive in finding that third party additional insureds are bound by policy provisions that operate as conditions precedent to the insurance company's obligation to pay. *** [T]he Court has found no Virginia case in which an insured's duty under an insurance policy was held to be unenforceable against an additional insured. Accordingly, the rulings of the Virginia Supreme Court support the finding that the condition precedent in this case is enforceable against the third party additional insured.

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