Residual-Loss Clauses in Lender‑Placed Policies Create Borrower Third‑Party Beneficiary Rights Under Louisiana Law; Consideration Not Required Under Civil Code art. 1978

Introduction

In Williams v. Integon National Insurance Company, No. 24-30406 (5th Cir. Mar. 25, 2025), the Fifth Circuit confronted a recurring question in Louisiana hurricane litigation: when, if ever, may a homeowner whose property is insured under a lender‑placed (or forced‑placed) policy sue the insurer directly? Ellen Williams’s mortgagee, Flagstar Bank, purchased a lender‑placed hazard policy from Integon after Williams did not maintain her own insurance. Williams paid the premiums. Following Hurricane Ida, Integon did not fully fund her repair costs. The district court dismissed her contract and bad‑faith claims under Rule 12(b)(6), holding she lacked “standing” because she was not a named or additional insured and was not a third‑party beneficiary. It also denied leave to amend as futile.

The Fifth Circuit reversed. It held that (1) the loss‑payment clause here manifests a clear and non‑incidental benefit to the borrower and can support third‑party beneficiary status (a stipulation pour autrui) under Louisiana law, provided the borrower can plausibly allege that the loss exceeds the lender’s insurable interest; and (2) after the 1984 revision of Louisiana Civil Code article 1978, consideration is not part of the stipulation pour autrui analysis. The panel remanded with instructions to allow Williams to amend to plead facts showing the claimed loss exceeds Flagstar’s insurable interest.

Summary of the Opinion

• Governing law: Louisiana substantive law applies in this diversity case.
• Third‑party beneficiary test: The court applied the Louisiana Supreme Court’s three‑part test from Joseph v. Hospital Service Dist. No. 2, 939 So.2d 1206 (La. 2006): (1) manifestly clear stipulation for a third party; (2) certainty as to the benefit; and (3) benefit not merely incidental.
• Policy language: Integon’s loss‑payment clause stated that if the amount of loss exceeds Flagstar’s insurable interest, Integon “will pay Borrower any residual amount due for the LOSS,” up to the policy limit.
• Application of Joseph:
  • Manifestly clear: Satisfied. The clause expressly identifies the Borrower as a payee of residual amounts.
  • Certainty: Potentially satisfied if Williams plausibly alleges the loss exceeds Flagstar’s insurable interest. She represented as much in opposing dismissal; she must be permitted to amend to plead those facts.
  • Not incidental: Satisfied. This is not a diffuse, generalized benefit; it is an express entitlement triggered by a defined condition.
• Clarification of law: The court expressly held that, post‑1984, consideration is not an element of a stipulation pour autrui under article 1978, rejecting older dicta sometimes repeated in district court cases.
• Leave to amend: Denying leave as futile was an abuse of discretion because Williams might plead facts establishing the second Joseph prong (loss exceeding the lender’s interest).
• Disposition: Reversed and remanded with instructions to permit amendment.

Analysis

Precedents Cited and Their Role

Framework and standards

• First Colony Life Ins. Co. v. Sanford, 555 F.3d 177 (5th Cir. 2009): Confirms that Louisiana substantive law governs.
• Fernandez‑Montes v. Allied Pilots Ass’n, 987 F.2d 278 (5th Cir. 1993) and Collins v. Morgan Stanley Dean Witter, 224 F.3d 496 (5th Cir. 2000): Establish Rule 12(b)(6) and incorporation‑by‑reference standards; the policy could be considered because it was referenced and central.
• Jack v. Evonik Corp., 79 F.4th 547 (5th Cir. 2023) and Weyerhaeuser Co. v. Burlington Ins. Co., 74 F.4th 275 (5th Cir. 2023): Guide the abuse‑of‑discretion review of denial of leave to amend, underscoring Rule 15(a)(2)’s liberal policy and the need for a “substantial reason” to deny leave.

Louisiana’s third‑party beneficiary doctrine

• Louisiana Civil Code art. 1978 and Andrepont v. Acadia Drilling Co., 231 So.2d 347 (La. 1969): Authorize stipulations pour autrui and note they are favored under Louisiana law.
• Joseph v. Hospital Service District No. 2, 939 So.2d 1206 (La. 2006): Provides the controlling three‑prong test (manifest intention; certainty of benefit; benefit not incidental). The Fifth Circuit methodically applied each prong.
• Dartez v. Dixon, 502 So.2d 1063 (La. 1987): Tracks the 1984 revision of article 1978; the Williams court relies on the revised text to conclude that consideration is not required.

Lender‑placed policy cases recognizing borrower benefits

• Lee v. Safeco Ins. Co. of America, 2008 WL 2622997 (E.D. La. 2008) and Martin v. Safeco Ins. Co., 2007 WL 2071662 (E.D. La. 2007): Both evaluated materially similar loss‑payment provisions providing residual payments to the borrower and concluded that they manifest a clear intention to benefit the borrower. Williams adopts this line.
• Haley v. American Security Ins. Co., 643 F. Supp. 3d 604 (E.D. La. 2022): Recognizes the Lee clause as an example of clear manifestation.
• Williams v. Certain Underwriters at Lloyd’s of London, 398 F. App’x 44 (5th Cir. 2010): Favorably references Lee by contrast; in that policy there was no similar borrower‑benefit clause.
• Brown v. American Modern Home Ins. Co., 2017 WL 2290268 (E.D. La. 2017); Tardo v. Integon Nat’l Ins. Co., 2023 WL 2757088 (E.D. La. 2023); Dehart v. Integon Nat’l Ins. Co., 2023 WL 4846839 (E.D. La. 2023): Each centers the “certainty” prong on whether the alleged loss exceeds the lender’s insurable interest (commonly approximated by the unpaid mortgage balance) and permits amendment to plead that fact. Williams embraces this approach at the pleading stage.

Cases deeming benefits incidental or denying borrower rights (distinguished)

• Riley v. Southwest Business Corp., 2008 WL 4286631 (E.D. La. 2008): Treated benefits under a forced‑placed policy as incidental. The Fifth Circuit distinguishes Riley because its policy language differed and did not expressly entitle the borrower to residual payments.
• Dail v. Integon Nat’l Ins. Co., 2024 WL 363322 (E.D. La. 2024); Bedi v. Integon Nat’l Ins. Co., 2023 WL 8622146 (E.D. La. 2023); Gisclair v. Great Am. Assurance Co., 2023 WL 1765922 (E.D. La. 2023); Harrison v. Safeco Ins. Co. of Am., 2007 WL 1244268 (E.D. La. 2007); and In re Katrina Canal Breaches Consol. Litig., 2010 WL 11541602 (E.D. La. 2010): Distinguished either because of materially different policy language, different arguments (e.g., subrogation instead of third‑party beneficiary), or unpersuasive reasoning.
• Allen & Currey Mfg. Co. v. Shreveport Waterworks Co., 37 So. 980 (La. 1905) and City of Shreveport v. Gulf Oil Corp., 431 F. Supp. 1 (W.D. La. 1975), aff’d, 551 F.2d 93 (5th Cir. 1977): Classic “incidental benefit” precedents where the public or a municipality indirectly benefited from a governmental contract; used to illustrate what “incidental” looks like. The Fifth Circuit explains the borrower’s expressly enumerated residual‑payment right is not analogous.
• Critical codal point: Some district courts, citing In re Katrina and City of Shreveport, had persisted in requiring that the third‑party benefit form part of the contract’s “consideration.” Williams corrects that misstep by directly tying the analysis to post‑1984 article 1978, which contains no consideration requirement.

The Court’s Legal Reasoning

1) Manifestly clear stipulation for a third party

The policy’s Loss Payment clause states:

“We will adjust each loss with [Flagstar] and will pay [Flagstar]. If the amount of loss exceeds [Flagstar’s] insurable interest, we will pay Borrower any residual amount due for the loss, not exceeding the Limit of Liability indicated on the Notice of Insurance.”

By naming “Borrower” as the recipient of residual payments once the lender’s insurable interest is satisfied, the clause “manifestly” identifies the borrower as an intended beneficiary for a specific tranche of proceeds. The court aligns with Lee and Martin, where materially identical language satisfied this prong.

2) Certainty as to the benefit

The benefit is “residual loss” above the lender’s insurable interest, up to the policy limit. Certainty attaches when the borrower plausibly alleges facts showing the claimed loss exceeds the lender’s insurable interest (often approximated by the unpaid mortgage balance at the time of loss). The panel endorses district court practice permitting amendment to allege that differential, citing Brown, Tardo, and Dehart. Williams asserted in response to the motion to dismiss that her losses exceeded Flagstar’s insurable interest; she must be allowed to amend to plead those facts with specificity.

3) Benefit not merely incidental

Unlike governmental procurement or public‑service contracts where any benefit to residents or municipalities is diffuse and incidental, the borrower’s right here is neither attenuated nor generic. It is a discrete, bargained‑for entitlement expressly specified in the policy and triggered by an objective condition (loss exceeding the lender’s insurable interest). The court distinguishes cases that treat forced‑placed coverage solely as protecting the lender’s interest, emphasizing Louisiana’s instruction to evaluate “each contract on its own terms and conditions.” Where the policy text earmarks residual proceeds for the borrower, any resulting benefit is not incidental.

A clarifying holding on article 1978: no consideration element

Addressing a persistent misreading, the court explains that older authority (pre‑1984 article 1890) required that the third‑party benefit be part of the “consideration” of the contract. Article 1978, enacted in 1984, removed that requirement. Some district court decisions nevertheless continued to reference consideration, often via In re Katrina. Williams expressly rejects that approach: under modern article 1978, a stipulation pour autrui does not require proof that the third‑party benefit formed the consideration for the contract. This is a significant doctrinal clarification for Louisiana contract law.

Leave to amend and pleading standards

The district court denied leave to amend as “futile,” but the Fifth Circuit found abuse of discretion. Given Williams’s assertion that her losses exceed Flagstar’s insurable interest and the policy’s residual‑payment clause, she might plead a plausible claim satisfying Joseph’s certainty prong. Under Rule 15(a)(2)’s liberal policy—and absent undue delay, prejudice, or bad faith—she must be allowed to amend.

Impact and Practical Implications

Doctrinal impacts

• Third‑party beneficiary doctrine streamlined. The opinion brings welcome clarity to stipulation pour autrui under Louisiana law: consideration is not part of the analysis under article 1978; apply the three‑prong Joseph test to the specific contract language.
• Policy‑text centric approach. Courts must closely parse lender‑placed policy language. Where a loss‑payment clause expressly promises residual proceeds to the borrower, the borrower can be an intended beneficiary—not merely an incidental one.
• Pleading roadmap for borrowers. Borrowers may establish the “certainty” prong by alleging the loss exceeds the lender’s insurable interest and pointing to the residual‑payment clause. This will often defeat a 12(b)(6) “no‑right‑of‑action” challenge and at minimum secure leave to amend.

Litigation and drafting consequences

• Increased borrower access to courts in lender‑placed disputes. Insurers can still win on the merits, but early dismissals based solely on lack of insured status will be more difficult where residual‑payment clauses exist.
• Leave‑to‑amend practice. District courts in the Fifth Circuit should be reluctant to deny amendment as futile in this context if a plaintiff can plausibly allege the loss‑exceeds‑interest differential.
• Policy drafting. Insurers and lenders may revisit loss‑payment provisions. Drafters who wish to limit third‑party enforcement will need to consider:
  • Removing or narrowing residual‑payment promises to borrowers;
  • Express disclaimers of third‑party beneficiary rights (recognizing that explicit payment promises can override boilerplate disclaimers); and
  • Clear definitions of “insurable interest” and conditions precedent to any borrower payment.
• Proof and discovery. On the merits, disputes will likely focus on:
  • The lender’s insurable interest at time of loss (often the unpaid principal balance, plus potentially accrued interest and recoverable fees under the mortgage);
  • The quantum of covered loss; and
  • Any conditions precedent in the loss‑payment mechanism (for example, proof‑of‑loss submissions through the lender).
• Bad‑faith exposure questions remain. Williams did not resolve whether a borrower‑beneficiary may recover statutory bad‑faith penalties under La. R.S. 22:1892 or 22:1973. That issue will turn on statutory text and jurisprudence distinguishing an “insured” from other “claimants.” Expect motion practice on the scope of those statutes as applied to borrower‑beneficiaries.

Practical pleading guidance

• For borrowers:
  • Attach or quote the policy, especially the loss‑payment clause naming the borrower for residuals.
  • Plead the unpaid mortgage balance (or other measure of the lender’s insurable interest) as of the date of loss.
  • Plead estimated covered loss and facts supporting that the loss exceeds the lender’s insurable interest.
  • Allege compliance with relevant policy conditions (e.g., cooperation, inspections) and any proof‑of‑loss steps taken.
  • Allege premium payments if applicable; while not dispositive, this fact may reinforce the equitable posture.
• For insurers/lenders:
  • Evaluate whether the policy’s residual‑payment language is materially indistinguishable from Lee/Williams or more limited (e.g., like Dail).
  • Be prepared to quantify the lender’s insurable interest at time of loss and document how claim payments were allocated.
  • Consider early settlement post‑pleading if the “excess‑over‑interest” delta is clear and documented, as the borrower’s right to residuals may be straightforward.

Complex Concepts Simplified

• Stipulation pour autrui (third‑party beneficiary): A contract can expressly give rights to someone who is not a party. In Louisiana, to enforce that right, the third party must show: a clear intent to benefit them, a definite benefit, and that the benefit is not just an incidental side effect of the contract.
• Lender‑placed (forced‑placed) insurance: If a borrower fails to keep homeowner’s insurance, the mortgage lender buys a policy to protect its collateral interest and often charges the premium to the borrower. These policies frequently prioritize protecting the lender’s interest, but some contain clauses that also provide limited payments to the borrower.
• Insurable interest (for a lender): Typically the amount the lender stands to lose if the property is damaged—often approximated by the unpaid mortgage balance (sometimes including accrued interest and certain recoverable costs under the loan documents).
• Residual loss payments: Under some policies, if the insurer calculates a covered loss that is larger than the lender’s insurable interest, the excess (up to the policy limit) is payable to the borrower.
• “Standing” here vs. Article III standing: The opinion uses “standing” in the sense of a right to sue/enforce the contract (a “right of action” under state law). It is distinct from federal constitutional standing, which concerns a concrete injury, causation, and redressability.
• Rule 12(b)(6) and leave to amend: A case can be dismissed at the pleading stage if the complaint fails to state a plausible claim. But courts should freely allow plaintiffs to amend unless there is a substantial reason (like undue delay, bad faith, prejudice, or clear futility).

Conclusion

Williams v. Integon supplies two important clarifications in Louisiana insurance and contract law. First, it affirms that a lender‑placed policy’s residual‑payment clause can create an enforceable third‑party beneficiary right in the borrower when the loss exceeds the lender’s insurable interest. That benefit is express, definite, and not incidental under the Joseph test. Second, it corrects a lingering doctrinal drift by holding that, after the 1984 revision of Civil Code article 1978, consideration is not an element of a stipulation pour autrui.

On the procedural front, the decision reinforces Rule 15’s liberal amendment policy: where a borrower plausibly can allege the “excess‑over‑interest” differential, denying leave to amend is improper. Looking ahead, the case will recalibrate early motion practice in lender‑placed disputes, focus attention on the precise policy text and the lender’s insurable interest at the time of loss, and may influence policy drafting. While questions remain about the scope of statutory bad‑faith remedies for borrower‑beneficiaries, Williams ensures that, in Louisiana, policy language expressly promising residual payments to borrowers carries real legal weight.