On May 15, 2018, the United States Court of Appeals for the Fifth Circuit affirmed the dismissal of a suit by an equipment lessor seeking coverage under a property policy issued to its lessee. See Case No. 17-10076, Sierra Equipment, Inc. v. Lexington Ins. Co. (5th Cir. 2018). The equipment lease required LWL Management to procure insurance and deliver a copy to Sierra Equipment, Inc. The lease did not require that Sierra be named as an additional insured or loss payee, which proved fatal to Sierra’s subsequent claims for coverage under the policy.
The Fifth Circuit surveyed a line of Texas cases extending standing, on equitable grounds, to a specific class of parties, namely mortgagees or lessors. While the general rule is that a non-party to the contract may not maintain a suit on it, the “equitable lien doctrine” extends standing where an insured mortgagor or lessee has a duty to procure a policy with loss payable to its mortgagee/lessor. In Sierra’s case, however, the equipment lease did not require that it be named as a loss payee nor did the policy contain such language. Despite Sierra’s argument that the insurance was for its benefit, the Court held that Texas courts would not apply the equitable line doctrine absent such an agreement. The Court also noted that its holding was in contrast with the opinion of “at least one district court in this circuit,” citing Sentry Select Ins. Co. v. R&R Marine, Inc. (E.D. Tex. Jan. 26, 2012).
The takeaway: Lessors must not merely require that lessees obtain insurance on leased property but must include a contractual term that requires them to be named as insureds or loss payees to enforce coverage under the lessee’s policy. See opinion here.
