Insurers Not Liable To Third-Party Beneficiaries to a Homeowners’ Insurance Policy for Property Damage as a Result of Migration of Oil

The New Jersey Supreme Court considered whether the plaintiffs’ claims for private nuisance and trespass, in an action for damages resulting from the migration of heating oil from an underground storage tank on a neighboring property, were properly dismissed in Ross v. Lowitz, et al., No. A-101-13 (N.J. Aug. 6, 2015). In the same matter, however, the court also considered whether the plaintiffs could maintain claims as third-party beneficiaries against the insurers that provided homeowners’ coverage to the former and current owners of the neighboring property where the underground storage tank was located.

Briefly, the plaintiffs learned of contamination on their property as a result of a leak that previously existed in the underground storage tank located on a neighboring property after contracting to sell the house. The prospective purchaser cancelled the contract and the plaintiffs commenced suit against the current and former owners of the neighboring property and their respective insurance carriers. The insurers remediated the contamination and the plaintiffs’ lawsuit proceeded on the claims for damages against all defendants on the theories of negligence, strict liability, private nuisance and trespass as well as violations of the New Jersey Spill Compensation and Control Act.

The trial court dismissed the claims for breach of the covenant of good faith and fair dealing as well as the claims for nuisance and trespass against the former and current neighbors’ insurance carriers. The plaintiffs did not appeal with respect to the former neighbor’s insurance carrier but did appeal the trial court’s ruling with respect to the current neighbor’s insurance carriers, arguing they were third-party beneficiaries of these insurance contracts. The appellate court affirmed the trial court’s ruling.

Earlier this month, the New Jersey Supreme Court affirmed the trial court’s ruling, noting that when a court is to determine whether a party is a third-party beneficiary of contract rights, the inquiry must focus on whether the parties to the contract intended others to benefit from the contract, or whether the benefit derived arises as an unintended incident of the agreement. If there is no intent to recognize a right in a third party to obtain performance of the contract, the third party holds no rights or benefits under the contract. The migration of oil from one property to another does not confer third-party beneficiary status on the plaintiffs.

New Jersey does not construe an insurer’s duty of good faith and fair dealing to allow for a bad-faith claim by one who is not the insured or an assignee of the insured’s contract rights. The New Jersey Supreme Court in Ross makes it clear that an insurer’s duty of good faith and fair dealing only extends to the insured.

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