HENSLEY v. STATE FARM FIRE AND CASUALTY CO., 2017 OK 57

Background

Bob Douglas purchased property from Kenneth Hensley by contract for deed (equitable title to purchaser; Hensley retained legal title). The contract required Douglas to keep the property insured and to pay the premiums via monthly payments to Hensley.
Hensley was the named insured on a State Farm homeowner policy; premiums continued to be paid and State Farm was aware of the contract-for-deed status for several years.
The property suffered covered damage (hail; later theft/vandalism). State Farm corresponded with both Hensley and Douglas, requested a proof of loss from Douglas, and paid sums to Hensley; some communications referred to Douglas as "Our Insured."
Douglas and Hensley sued State Farm for breach of contract and for breach of the implied-in-law duty of good faith and fair dealing; State Farm moved for summary judgment arguing Douglas was a stranger to the policy and lacked standing for a bad-faith claim.
The trial court granted summary judgment for State Farm; the Court of Civil Appeals affirmed. The Supreme Court of Oklahoma granted certiorari.
The Oklahoma Supreme Court held that equitable title from a contract for deed alone does not make Douglas an insured or create a policy-based good-faith duty; but disputed factual evidence supported Douglas’s claim that he was an intended third‑party beneficiary/insured, so summary judgment was improper and must be reversed.

Issues

Issue	Plaintiff's Argument	Defendant's Argument	Held
Whether Douglas (purchaser under contract for deed) was an insured or third‑party beneficiary under Hensley’s State Farm policy	Douglas: his equitable interest + conduct of State Farm (letters, requests, proof-of-loss) and premium payments created an expectation and intent that he was covered	State Farm: Douglas was not named in the policy; no endorsement or loss‑payee/lienholder designation; he is a stranger to the contract	Court: Equitable title alone is insufficient; but factual disputes about intent and insurer’s conduct could support third‑party beneficiary/insured status — remand for factfinder
Whether a loss‑payment clause in the policy created a contractual duty to Douglas (standing to sue for bad faith)	Douglas: the policy’s Loss Payment provision and practice created rights to payment and thus a basis for an implied good‑faith duty	State Farm: the clause pays the named insured or a named lienholder; it does not impose a duty to unnamed third parties	Court: Where the contract does not unambiguously create a right to payment for the third party, loss‑payment language alone does not automatically create an insured’s good‑faith duty; issue depends on whether parties intended to benefit Douglas
Whether parol/extrinsic evidence of insurer’s conduct can create latent ambiguity making Douglas an intended beneficiary	Douglas: extrinsic evidence (correspondence, treatment as insured, proof‑of‑loss requests) shows latent ambiguity and intent to cover his interest	State Farm: written policy controls; unilateral expectations and conduct cannot alter clear policy terms absent ambiguity	Court: Extrinsic evidence can show latent ambiguity and party intent; whether that evidence proves intended beneficiary status is a factual question for the jury
Whether summary judgment was appropriate	Douglas: disputed material facts exist about intent and insurer conduct that preclude summary judgment	State Farm: no genuine issue — policy terms are clear and Douglas lacks contractual status	Court: Summary judgment improper because disputed material facts exist; reverse and remand

Key Cases Cited

May v. Mid‑Century Ins. Co., 151 P.3d 132 (Okla. 2006) (loss‑payment clause that gives insurer option to pay named insured negates third‑party beneficiary status)
Trinity Baptist Church v. Brotherhood Mut. Ins. Servs., 341 P.3d 75 (Okla. 2014) (implied duty of good faith runs to insureds; strangers to the contract generally not owed the duty)
Badillo v. Mid Century Ins. Co., 121 P.3d 1080 (Okla. 2005) (standard for insurer culpability greater than negligence for bad‑faith liability)
Roach v. Atlas Life Ins. Co., 769 P.2d 158 (Okla. 1989) (third‑party beneficiary may enforce contract made expressly for his benefit)
Shebester v. Triple Crown Insurers, 826 P.2d 603 (Okla. 1992) (insurance‑based duties arise from express, implied‑in‑fact, or implied‑in‑law promises)
Connor v. Northwestern Nat. Cas. Co., 774 P.2d 1055 (Okla. 1989) (standard mortgage/union loss payable clause creates separate contractual rights for mortgagee)
Brown v. First Nat. Bank of Dewey, 617 F.2d 581 (10th Cir. 1980) (equitable lien on proceeds may arise when mortgagor promises to insure for mortgagee's benefit, but contract naming is critical)