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What is a Third Party Beneficiary?

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  • Written By: Mary McMahon
  • Edited By: O. Wallace
  • Last Modified Date: 10 November 2016
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    Conjecture Corporation
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A third party beneficiary is someone who stands to benefit from a contract which he or she has not signed. The most classic example of a third party beneficiary appears in a life insurance policy. The insurance policy is between an individual and the insurance company, but a third party is the one who will receive the insurance payment in the event that loss of life occurs. Under contract law, third party beneficiaries have the right to sue one or both parties involved if a breach of contract occurs.

Contract law can get extremely complex. In the case of third party beneficiaries, a distinction is made between an incidental beneficiary and an intended beneficiary. Incidental beneficiaries are people who happen to benefit indirectly from a contract. The contract is not established for the purpose of conferring a benefit to the incidental beneficiary, but he or she stands to gain nonetheless. When a contract is specifically designed to confer a benefit to someone else, that person is the intended beneficiary.

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Third party beneficiaries are intended beneficiaries, which means that someone must be able to prove that he or she is an intended beneficiary when a lawsuit is brought to court. If, for example, Party X agrees with Party Y that an Apple computer will be purchased for Party Z, the Apple company is an unintended beneficiary with no rights to sue if the contract is breached. Party Z, however, could sue if Parties X and Y failed to fulfill the contract.

There is also a distinction between a creditor and a donee when discussing third party beneficiaries. If a third party beneficiary is a creditor, it means that the contract is entered into to discharge a debt of some form. Donees are people who are given a gift or award under the contract; in the case of life insurance, the beneficiary of the policy is a donee beneficiary.

The potential award for a third party beneficiary who opts to sue can vary, depending on the precise language of the contract and the situation. Most contracts which involve third party beneficiaries are very carefully constructed with the goal of protecting both parties. In some instances, it is routine for people to be forced to sue for benefits under such contracts. For example, a passenger in a car accident, considered a third party beneficiary of the car insurance policy, may not get compensation for pain and suffering from the insurance company unless he or she sues the company.

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dfoster85
Post 2

@rugbygirl - That's terrible! If anything like that happened to me, I would sign that check over to my sister-in-law before the ink was dry on it.

The child is the one who suffers. This will drive such a wedge between baby and his mom and the husband's family (unless the rest of the family steps in to make it up to the mom and apologize for the sister).

You're absolutely right. Your third-party beneficiary designations should *always* be up to date. I bet that husband would have thought that his sister would do the right thing (he must have loved her, since he had made her the original beneficiary) and would be surprised and disappointed.

rugbygirl
Post 1

I want to urge everyone with life insurance to update their third party beneficiary designations regularly! Sometimes, men in particular who work at a job for a long time fill out paperwork when they first get the job, and over time they may get married, divorced, etc.

This happened to a cousin of mine. She and her husband were married for just two years and she was pregnant with their first child when he died. Well, when he had first started his job, he named his sister as his life insurance beneficiary. And he had never changed the paperwork. So when he died, his sister got the entire payout, and my cousin got nothing. She had to sell their house and move in with her parents.

Of course, they were planning to make sure their life insurance, wills, etc. were in order--but they hadn't gotten around to it yet.

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