assignment of insurance contracts

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Can You Assign Your Insurance Benefits to Someone Else?

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Most business insurance policies contain a so-called anti-assignment clause. This clause prohibits policyholders from transferring any of their rights under the policy to someone else. This means that the insured business cannot cede its right to collect claim payments to another party. However, laws in most states permit policyholders to transfer their rights to another party under certain circumstances.

Anti-Assignment Clause

In the standard ISO policies , the anti-assignment clause is located in a separate form called the Common Policy Conditions. These conditions apply to all coverages that are included in the policy. For instance, if a policy includes business auto , general liability , and commercial property coverages, the anti-assignment clause applies to all three coverages.

The clause is entitled Transfer of Your Rights and Duties Under This Policy. It includes the following provision:

Your rights and duties under this policy may not be transferred without our written consent except in the case of death of an individual named insured.

The anti-assignment clause prohibits the  named insured from transferring any of its rights or obligations under the policy to someone else without the insurer's permission. The only exception is if the named insured is an individual (sole proprietor) and he or she dies. An assignment is permitted in this case because a sole proprietorship and the individual owner are one and the same. If the individual dies, the business cannot survive unless it is sold to someone else.

An anti-assignment clause is intended to prevent the insurer from unwittingly assuming risks it never intended to take on. Commercial insurers review business insurance applicants carefully. Before they issue policies, underwriters consider the knowledge and experience of a company's owners and managerial staff. If a business is sold to someone else, the new owners may not be as skilled or attentive as the previous ones. From the insurer's perspective, the new owners are an unknown risk.

Post-Loss Assignments Permitted

The anti-assignment clause doesn't distinguish between assignments made before a loss and those made afterward. Even so, courts in most states have allowed policyholders to assign their rights to another party after a loss has occurred. Pre-loss assignments are still prohibited. Here is an example of a post-loss assignment of insurance benefits.

Victor operates a restaurant called Vital Vittles out of a building he owns. Late one January night two water pipes in the building freeze. The pipes subsequently burst, causing considerable water damage to Victor's building. Victor is forced to close his restaurant until the repairs are completed.

Victor hires a water damage contractor called Rapid Restoration to repair the damage to his building. He tells the contractor that he needs the repairs done quickly as he is anxious to reopen his restaurant. The contractor says that the repairs can be expedited if Victor signs over his rights under the policy to Rapid Restoration. The contractor will then proceed with the repairs and negotiate a claim settlement with Vital Vittles' commercial property insurer. Victor agrees to the assignment and the contractor begins the repair work.

While Vital Vittles' commercial property policy contains an anti-assignment clause, Victor has assigned his rights to Rapid Restoration after a loss has occurred. Thus, in most states, Victor's insurer cannot reject the assignment (assuming post-loss assignments are permitted in Victor's state).

Problems With Assignments of Benefits

In recent years, assignment of benefits (AOB) agreements have been problematic in some states, particularly Florida. Unscrupulous contractors have preyed on unsuspecting homeowners and business owners who have suffered water damage . Some contractors work alone while others operate in cahoots with crooked lawyers. In either event, the contractor convinces the policyholder to assign his or her rights under the policy over to the contractor. The contractor then exaggerates the cost of the repairs and collects the inflated amount from the insurer. The policyholder is left with a large claim on his or her loss history. When the policy expires, the insurer may refuse to renew it.

In the previous example, Victor has assigned his rights under the policy to Rapid Restoration. Suppose that Rapid Restoration completes only half of the repair work on Victor's building. The actual cost is $15,000 but the contractor submits a bill to the insurer for $30,000. Alternatively, the contractor never submits a bill but sues the insurer for $30,000. In either case, the insurer may refuse to pay on the basis that the contractor has committed insurance fraud. Victor cannot intervene because he has signed his rights over to the contractor. If the contractor is unsuccessful in its lawsuit against the insurer, it may demand payment from Victor's company.

Avoiding Problems With AOBs

As a business owner, you can avoid problems associated with AOBs and unscrupulous contractors by taking the following steps:

• Report any loss or accident directly to your insurer (or your agent or broker ). Notify your insurer immediately. Don't allow a contractor to do the notification on your behalf.
• Take photos of the damage.
• Don't allow any contractor to begin work until an insurance adjuster has documented the damage
• Vet contractors thoroughly before hiring them. Make sure they are properly licensed. If your area has suffered a natural disaster, watch out for construction scams.
• Don't sign an AOB unless you have reviewed it carefully. If you don't understand it, ask your agent, insurer, or attorney for assistance.
• If your contractor won't do any work until you've signed an AOB, find another contractor.

AOBs in Health Insurance

Assignment of benefit agreements are common in health insurance. Patients are often asked to agree to such clauses before they receive treatment from a physician, hospital, or another healthcare provider. The assignment of benefits clause transfers a patient's right to collect benefits under his or her health policy to the provider. By signing the document, the patent agrees that payments will be made directly to the provider for the services rendered. The clause states that the patient is ultimately responsible for the charges if the insurer fails to pay.

Once the treatment has been performed, the provider submits the AOB along with a claim to the patient's health insurer. The insurer pays the provider for services rendered to the patient.

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• Insurance Reinsurance & Surety
• Litigation / Trial Practice
• 7th Circuit (incl. bankruptcy)

Insurance disputes sometimes arise out of transactions.  Those of you who are involved in transactions, including transactions arising out of insolvencies, might be interested in a cautionary tale from a recent Illinois appellate court case addressing the assignment of insurance policies as part of an asset purchase agreement.  This drafting lesson may help avoid future litigation.

In  The Premcor Refining Group Inc. v. ACE Insurance Company of Illinois , No. 5-18-0210, 2019 Ill. App. Unpub. LEXIS 1539 (Aug. 12, 2019), the purchaser of a refinery from a Chapter 11 debtor sought to obtain the benefits of all the insurance policies issued to the seller and its predecessors by various insurance companies to cover various environmental contamination lawsuits and proceedings.  The refinery was sold via an asset purchase agreement.  The question before the court was whether there was a valid assignment of all the insurance policies from seller to purchaser.

The court concluded that there was no valid assignment of all in the insurance policies in the asset purchase agreement, just the potential assignment of only those policies listed on a particular schedule.  The case was remanded to allow the purchaser to amend its complaint to address only those insurance policies scheduled.

The asset purchase agreement, in the section describing the assets purchased, provided that the purchaser would acquire, among other things, all right, title and interest of the seller in “all proceeds payable under any insurance policy covering the Purchased Assets by reason of any and all occurrences occurring prior to the Closings Date.”  In the section entitled Insurance, the agreement provided that any rights that the seller may have against their insurers with respect to the Purchased Assets shall at closing be assigned to the purchaser.

The court held that neither provision constituted a valid assignment of the rights of the seller under the relevant insurance policies.  The court pointed out that these sections of the asset purchase agreement did not mention liability insurance rights, but evidenced a promise to convey to the purchaser any proceeds from pending claims covering the purchased assets. The court opined that where a purported assignment does not specifically identify an insurance policy, and does not mention liability coverage at all, the subject of the assignment is not described with sufficient particularity to be a valid assignment of all the assignor’s rights under all of its past liability insurance policies.

The court referenced another case where an assignment was found valid by using language that clearly referenced the subject of the assigned liability policies.  In that case,  Illinois Tool Works, Inc. v. Commerce & Industry Insurance Co. , 2011 Ill. App. (1st) 093084 (Dec. 12, 2011), the purchase agreement sufficiently stated what was assigned:

“The benefits, including all rights to defense and indemnity coverage, under any and all policies of liability insurance issued to [Seller] prior to the closing Date . . . with respect to insurance coverage for accidents, occurrences, claims, suits, actions or proceedings arising from the operations, activities, or conduct of the [Seller’s] Business prior to the Closing Date; provided, however, that such benefits shall transfer to [Buyer] to the extent liabilities for such accidents, occurrences, claims, suits, actions, or proceedings are threatened against, transferred to, or otherwise imposed upon [Buyer].”

To avoid litigation over assignment of insurance policies in a corporate transaction requires that if the intent is to assign existing insurance coverage from seller to buyer, the assignment clauses in the purchase agreement must be crystal clear that the policies—not just the proceeds from the polices—are being assigned.  And to make it crystal clear specificity is necessary as to the policies (on a schedule) and what those policies are being assigned to cover should be made clear.

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Assignment of Benefits for Contractors: Pros & Cons of Accepting an AOB

22 articles

Insurance , Restoration , Slow Payment

When a property owner files an insurance claim to cover a restoration or roofing project, the owner typically deals directly with the insurance company. They may not have the funds available to pay the contractor out of pocket, so they’re counting on that insurance check to cover the construction costs.

But insurance companies often drag their feet, and payments can take even longer than normal. Contractors often wish they could simply deal with the insurance company directly through an assignment of benefits. In some circumstances, an AOB can be an effective tool that helps contractors collect payment faster — but is it worth it?

In this article, we’ll explain what an assignment of benefits is, and how the process works. More importantly, we’ll look at the pros and cons for restoration and roofing contractors to help you decide if an AOB is worth it . 

What is an assignment of benefits? 

An assignment of benefits , or AOB, is an agreement to transfer insurance claim rights to a third party. It gives the assignee authority to file and negotiate a claim directly with the insurance company, without involvement from the property owner. 

An AOB also allows the insurer to pay the contractor directly instead of funneling funds through the customer. AOBs take the homeowner out of the claims equation.

Here’s an example: A property owner’s roof is damaged in a hurricane. The owner contacts a restoration company to repair the damage, and signs an AOB to transfer their insurance rights to the contractor. The contractor, now the assignee, negotiates the claim directly with the insurance company. The insurer will pay the claim by issuing a check for the repairs directly to the restoration contractor. 

Setting up an AOB

A property owner and contractor can set up an assignment of benefits in two steps: 

• The owner and the contractor sign an AOB agreement
• The contractor sends the AOB to the insurance company

Keep in mind that many states have their own laws about what the agreement can or should include .

For example, Florida’s assignment of benefits law contains relatively strict requirements when it comes to an assignment of benefits: 

• The AOB agreements need to be in writing. The agreement must contain a bolded disclosure notifying the customer that they are relinquishing certain rights under the homeowners policy. You can’t charge administrative fees or penalties if a homeowner decides to cancel the AOB. 
• The AOB must include an itemized, per-unit breakdown of the work you plan to do. The services can only involve how you plan to make repairs or restore the home’s damage or protect the property from any further harm. A copy must be provided to the insurance company. 
• A homeowner can rescind an AOB agreement within 14 days of signing, or within 30 days if no work has begun and no start date was listed for the work. If a start date is listed, the 30-day rule still applies if substantial progress has not been made on the job. 

Before signing an AOB agreement, make sure you understand the property owner’s insurance policy, and whether the project is likely to be covered.

Learn more: Navigating an insurance claim on a restoration project

Pros & cons for contractors

It’s smart to do a cost-benefit analysis on the practice of accepting AOBs. Listing pros and cons can help you make a logical assessment before deciding either way. 

Pro: Hiring a public adjuster

An insurance carrier’s claims adjuster will inspect property damage and arrive at a dollar figure calculated to cover the cost of repairs. Often, you might feel this adjuster may have overlooked some details that should factor into the estimate. 

If you encounter pushback from the insurer under these circumstances, a licensed, public adjuster may be warranted. These appraisers work for the homeowner, whose best interests you now represent as a result of the AOB. A public adjuster could help win the battle to complete the repairs properly. 

Pro: More control over payment

You may sink a considerable amount of time into preparing an estimate for a customer. You may even get green-lighted to order materials and get started. Once the ball starts rolling, you wouldn’t want a customer to back out on the deal. 

Klark Brown , Co-founder of The Alliance of Independent Restorers, concedes this might be one of the very situations in which an AOB construction agreement might help a contractor. “An AOB helps make sure the homeowner doesn’t take the insurance money and run,” says Brown.  

Pro: Build a better relationship with the homeowner

A homeowner suffers a substantial loss and it’s easy to understand why push and pull with an insurance company might be the last thing they want to undertake. They may desire to have another party act on their behalf. 

As an AOB recipient, the claims ball is now in your court. By taking some of the weight off a customer’s shoulders during a difficult period, it could help build good faith and further the relationship you strive to build with that client. 

Learn more : 8 Ways for Contractors to Build Trust With a Homeowner

Con: It confuses payment responsibilities

Even if you accept an AOB, the property owner still generally bears responsibility for making payment. If the insurance company is dragging their feet, a restoration contractor can still likely file a mechanics lien on the property .

A homeowner may think that by signing away their right to an insurance claim, they are also signing away their responsibility to pay for the restoration work. This typically isn’t true, and this expectation could set you up for a more contentious dispute down the line if there is a problem with the insurance claim. 

Con: Tighter margins

Insurance companies will want repairs made at the lowest cost possible. Just like you, carriers run a business and need to cut costs while boosting revenue. 

While some restoration contractors work directly with insurers and could get a steady stream of work from them, Brown emphasizes that you may be sacrificing your own margins. “Expect to accept work for less money than you’d charge independently,” he adds. 

The takeaway here suggests that any contractor accepting an AOB could subject themselves to the same bare-boned profit margins. 

Con: More administrative work

Among others, creating additional administrative busywork is another reason Brown recommends that you steer clear of accepting AOBs. You’re committing additional resources while agreeing to work for less money. 

“Administrative costs are a burden,” Brown states. Insurers may reduce and/or delay payments to help their own bottom lines. “Insurers will play the float with reserves and claims funds,” he added. So, AOBs can be detrimental to your business if you’re spending more while chasing payments. 

Con: Increase in average collection period

Every contractor should use some financial metrics to help gauge the health of the business . The average collection period for receivables measures the average time it takes you to get paid on your open accounts. 

Insurance companies aren’t known for paying claims quickly. If you do restoration work without accepting an AOB, you can often take action with the homeowner to get paid faster. When you’re depending on an insurance company to make your payment, rather than the owner, collection times will likely increase.

The literal and figurative bottom line is: If accepting assignment of benefits agreements increases the time it takes to get paid and costs you more in operational expense, these are both situations you want to avoid. 

Learn more: How to calculate your collection effectiveness 

AOBs and mechanics liens

A mechanics lien is hands down a contractor’s most effective tool to ensure they get paid for their work. Many types of restoration services are protected under lien laws in most states. But what happens to lien rights when a contractor accepts an assignment of benefits? 

An AOB generally won’t affect a contractor’s ability to file a mechanics lien on the property if they don’t receive payment. The homeowner is typically still responsible to pay for the improvements. This is especially true if the contract involves work that wasn’t covered by the insurance policy. 

However, make sure you know the laws in the state where your project is located. For example, Florida’s assignment of benefits law, perhaps the most restrictive in the country, appears to prohibit an AOB assignee from filing a lien. 

Florida AOB agreements are required to include language that waives the contractor’s rights to collect payment from the owner. The required statement takes it even further, stating that neither the contractor or any of their subs can file a mechanics lien on the owner’s property. 

On his website , Florida’s CFO says: “The third-party assignee and its subcontractors may not collect, or attempt to collect money from you, maintain any action of law against you, file a lien against your property or report you to a credit reporting agency.”

That sounds like a contractor assignee can’t file a lien if they aren’t paid . But, according to construction lawyer Alex Benarroche , it’s not so cut-and-dry.

“Florida’s AOB law has yet to be tested in court, and it’s possible that the no-lien provision would be invalid,” says Benarroche. “This is because Florida also prohibits no-lien clauses in a contract. It is not legal for a contractor to waive their right to file a lien via an agreement prior to performance.” 

Learn more about no-lien clauses and their enforceability state-by-state

Remember that every state treats AOBs differently, and conflicting laws can create additional risk. It’s important to consult with a construction lawyer in the project’s state before accepting an assignment of benefits. 

Best practices for contractors 

At the end of the day, there are advantages and disadvantages to accepting an assignment of benefits. While it’s possible in some circumstances that an AOB could help a contractor get paid faster, there are lots of other payment tools that are more effective and require less administrative costs. An AOB should never be the first option on the table . 

If you do decide to become an assignee to the property owner’s claim benefits, make sure you do your homework beforehand and adopt some best practices to effectively manage the assignment of benefits process. You’ll need to keep on top of the administrative details involved in drafting AOBs and schedule work in a timely manner to stay in compliance with the conditions of the agreement. 

Make sure you understand all the nuances of how insurance works when there’s a claim . You need to understand the owner’s policy and what it covers. Home insurance policy forms are basically standardized for easy comparisons in each state, so what you see with one company is what you get with all carriers. 

Since you’re now the point of contact for the insurance company, expect more phone calls and emails from both clients and the insurer . You’ll need to have a strategy to efficiently handle ramped-up communications since the frequency will increase. Keep homeowners and claims reps in the loop so you can build customer relationships and hopefully get paid faster by the insurer for your work.

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Assignment of insurance policies and claims

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9.4: Distinguishing Characteristics of Insurance Contracts

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Learning Objectives

In this section we elaborate on the following:

• The concept and importance of utmost good faith in insurance contracts
• The feature of adhesion and why it plays a significant role in the event of contract disputes
• The importance of indemnity and how it is enforced
• The personal nature of insurance contracts

In addition to the elements just discussed, insurance contracts have several characteristics that differentiate them from most other contracts. Risk managers must be familiar with these characteristics in order to understand the creation, execution, and interpretation of insurance policies. Insurance contracts are the following:

• Based on utmost good faith
• Contracts of adhesion
• Contracts of indemnity

Based on Utmost Good Faith

When an insurer considers accepting a risk, it must have accurate and complete information to make a reasonable decision. Should the insurer assume the risk and, if so, under what terms and conditions? Because insurance involves a contract of uberrimae fidei , or utmost good faith, potential insureds are held to the highest standards of truthfulness and honesty in providing information for the underwriter. In the case of contracts other than for insurance, it is generally assumed that each party has equal knowledge and access to the facts, and thus each is subject to requirements of “good faith,” not “utmost good faith.” In contrast, eighteenth-century ocean marine insurance contracts were negotiated under circumstances that forced underwriters to rely on information provided by the insured because they could not get it firsthand. For example, a ship being insured might be unavailable for inspection because it was on the other side of the world. Was the ship seaworthy? The underwriter could not inspect it, so he (they were all men in those days) required the insured to warrant that it was. If the warranty was not strictly true, the contract was voidable. The penalty for departing from utmost good faith was having no coverage when a loss occurred. Today, the concept of utmost good faith is implemented by the doctrines of (1) representations and (2) concealment.Warranties are no longer as prevalent. However, they are stringent requirements that insureds must follow for coverage to exist. They were considered necessary in the early days of marine insurance because insurers were forced to rely on the truthfulness of policyholders in assessing risk (often, the vessel was already at sea when coverage was procured, and thus inspection was not possible). Under modern conditions, however, insurers generally do not find themselves at such a disadvantage. As a result, courts rarely enforce insurance warranties, treating them instead as representations. Our discussion here, therefore, will omit presentation of warranties. See Kenneth S. Abraham, Insurance Law and Regulation: Cases and Materials (Westbury, NY: Foundation Press, 1990) for a discussion.

Representations

When people are negotiating with insurers for coverage, they make statements concerning their exposures, and these statements are called representations . They are made for the purpose of inducing insurers to enter into contracts; that is, provide insurance. If people misrepresent material facts —information that influences a party’s decision to accept the contract—insurers can void their contracts and they will have no coverage, even though they do have insurance policies. In essence, the contracts never existed.

Note that “material” has been specified. If an insurer wants to void a contract it has issued to a person in reliance upon the information she provided, it must prove that what she misrepresented was material. That is, the insurer must prove that the information was so important that if the truth had been known, the underwriter would not have made the contract or would have done so only on different terms.

If, for example, you stated in an application for life insurance that you were born on March 2 when in fact you were born on March 12, such a misrepresentation would not be material. A correct statement would not alter the underwriter’s decision made on the incorrect information. The policy is not voidable under these circumstances. On the other hand, suppose you apply for life insurance and state that you are in good health, even though you’ve just been diagnosed with a severe heart ailment. This fact likely would cause the insurer to charge a higher premium or not to sell the coverage at all. The significance of this fact is that the insurer may contend that the policy never existed (it was void), so loss by any cause (whether related to the misrepresentation or not) is not covered. Several exceptions to this rule apply, as presented in chapters discussing specific policies. In the case of life insurance, the insurer can void the policy on grounds of material misrepresentation only for two years, as was discussed in "1: The Nature of Risk - Losses and Opportunities" .

It is not uncommon for students to misrepresent to their auto insurers where their cars are garaged, particularly if premium rates at home are lower than they are where students attend college. Because location is a factor in determining premium rates, where a car is garaged is a material fact. Students who misrepresent this or other material facts take the chance of having no coverage at the time of a loss. The insurer may elect to void the contract.

Concealment

Telling the truth in response to explicit application questions may seem to be enough, but it is not. One must also reveal those material facts about the exposure that only he or she knows and that he or she should realize are relevant. Suppose, for example, that you have no insurance on your home because you “don’t believe in insurance.” Upon your arrival home one afternoon, you discover that the neighbor’s house—only thirty feet from yours—is on fire. You promptly telephone the agency where you buy your auto insurance and apply for a homeowner’s policy, asking that it be put into effect immediately. You answer all the questions the agent asks but fail to mention the fire next door. You have intentionally concealed a material fact you obviously realize is relevant. You are guilty of concealment (intentionally withholding a material fact), and the insurer has the right to void the contract.

If the insurance company requires the completion of a long, detailed application, an insured who fails to provide information the insurer neglected to ask about cannot be proven guilty of concealment unless it is obvious that certain information should have been volunteered. Clearly, no insurance agent is going to ask you when you apply for insurance if the neighbor’s house is on fire. The fact that the agent does not ask does not relieve you of the responsibility.

In both life and health insurance, most state insurance laws limit the period (usually one or two years) during which the insurer may void coverage for a concealment or misrepresentation. Other types of insurance contracts do not involve such time limits.

Contracts of Adhesion

Insurance policies are contracts of adhesion , meaning insureds have no input in the design of a policy’s terms. Unlike contracts formulated by a process of bargaining, most insurance contracts are prepared by the insurer and then accepted or rejected by the buyer. The insured does not specify the terms of coverage but rather accepts the terms as stipulated. Thus, he or she adheres to the insurer’s contract. That is the case for personal lines. In most business lines, insurers use policies prepared by the Insurance Services Office (ISO), but in some cases contracts are negotiated. These contracts are written by risk managers or brokers who then seek underwriters to accept them, whereas most individuals go to an agent to request coverage as is.

The fact that buyers usually have no influence over the content or form of insurance policies has had a significant impact on the way courts interpret policies when there is a dispute.Some policies are designed through the mutual effort of insurer and insured. These “manuscript policies” might not place the same burden on the insurer regarding ambiguities. When the terms of a policy are ambiguous, the courts favor the insured because it is assumed that the insurer that writes the contract should know what it wants to say and how to state it clearly. Further, the policy language generally is interpreted according to the insured’s own level of expertise and situation, not that of an underwriter who is knowledgeable about insurance. When the terms are not ambiguous, however, the courts have been reluctant to change the contract in favor of the insured.

A violation of this general rule occurs, however, when the courts believe that reasonable insureds would expect coverage of a certain type. Under these conditions, regardless of the ambiguity of policy language (or lack thereof), the court may rule in favor of the insured. Courts are guided by the expectations principle (or reasonable expectations principle), which may be stated as follows:

The objectively reasonable expectations of applicants and intended beneficiaries regarding the terms of insurance contracts will be honored even though painstaking study of the policy provisions would have negated those expectations.See Robert E. Keeton, Basic Text on Insurance Law (St. Paul, MI: West Publishing Company, 1971), 351. While this reference is now almost forty years old, it remains perhaps the most popular insurance text available.

In other words, the expectations principle holds that, in the event of a dispute, courts will read insurance policies as they would expect the insured to do. Thus, the current approach to the interpretation of contracts of adhesion is threefold: first, to favor the insured when terms of the contract drafted by the insurer are ambiguous; second, to read the contract as an insured would; third, to determine the coverage on the basis of the reasonable expectations of the insured.

Indemnity Concept

Many insurance contracts are contracts of indemnity. Indemnity means the insurer agrees to pay no more (and no less) than the actual loss suffered by the insured. For example, suppose your house is insured for $200,000 at the time it is totally destroyed by fire. If its value at that time is only $180,000, that is the amount the insurance company will pay. In some states, a valued policy law requires payment of the face amount of property insurance in the event of total loss, regardless of the value of the dwelling. Other policy provisions, such as deductibles and coinsurance, may also affect the insurer’s effort to indemnify you. You cannot collect $200,000 because to do so would exceed the actual loss suffered. You would be better off after the loss than you were before. The purpose of the insurance contract is—or should be—to restore the insured to the same economic position as before the loss.

The indemnity principle has practical significance both for the insurer and for society. If insureds could gain by having an insured loss, some would deliberately cause losses. This would result in a decrease of resources for society, an economic burden for the insurance industry, and (ultimately) higher insurance premiums for all insureds. Moreover, if losses were caused intentionally rather than as a result of chance occurrence, the insurer likely would be unable to predict costs satisfactorily. An insurance contract that makes it possible for the insured to profit by an event insured against violates the principle of indemnity and may prove poor business to the insurer.

The doctrine of indemnity is implemented and supported by several legal principles and policy provisions, including the following:

• Insurable interest
• Subrogation
• Actual cash value provision
• Other insurance provisions

Insurable Interest

If a fire or auto collision causes loss to a person or firm, that person or firm has an insurable interest. A person not subject to loss does not have an insurable interest. Stated another way, insurable interest is financial interest in life or property that is subject to loss. The law concerning insurable interest is important to the buyer of insurance because it determines whether the benefits from an insurance policy will be collectible. Thus, all insureds should be familiar with what constitutes an insurable interest, when it must exist, and the extent to which it may limit payment under an insurance policy.

Basis for Insurable Interest

Many situations constitute an insurable interest. The most common is ownership of property. An owner of a building will suffer financial loss if it is damaged or destroyed by fire or other peril. Thus, the owner has an insurable interest in the building.

A mortgage lender on a building has an insurable interest in the building. For the lender, loss to the security, such as the building being damaged or destroyed by fire, may reduce the value of the loan. On the other hand, an unsecured creditor generally does not have an insurable interest in the general assets of the debtor because loss to such assets does not directly affect the value of the creditor’s claim against the debtor.

If part or all of a building is leased to a tenant who makes improvements in the leased space, such improvements become the property of the building owner on termination of the lease. Nevertheless, the tenant has an insurable interest in the improvements because he or she will suffer a loss if they are damaged or destroyed during the term of the lease. This commonly occurs when building space is rented on a “bare walls” basis. To make such space usable, the tenant must make improvements.

If a tenant has a long-term lease with terms more favorable than would be available in the current market but that may be canceled in the event that the building is damaged, the tenant has an insurable interest in the lease. A bailee—someone who is responsible for the safekeeping of property belonging to others and who must return it in good condition or pay for it—has an insurable interest. When you take your clothes to the local dry-cleaning establishment, for example, it acts as a bailee, responsible for returning your clothes in good condition.

A person has an insurable interest in his or her own life and may have such an interest in the life of another.Although a person who dies suffers a loss, he or she cannot be indemnified. Because the purpose of the principle of insurable interest is to implement the doctrine of indemnity, it has no application in the case of a person insuring his or her own life. Such a contract cannot be one of indemnity. An insurable interest in the life of another person may be based on a close relationship by blood or marriage, such as a wife’s insurable interest in her husband. It may also be based on love and affection, such as that of a parent for a child, or on financial considerations. A creditor, for example, may have an insurable interest in the life of a debtor, and an employer may have an insurable interest in the life of a key employee.

When Insurable Interest Must Exist

The time at which insurable interest must exist depends on the type of insurance. In property insurance, the interest must exist at the time of the loss. As the owner of a house, one has an insurable interest in it. If the owner insures himself against loss to the house caused by fire or other peril, that person can collect on such insurance only if he still has an insurable interest in the house at the time the damage occurs. Thus, if one transfers unencumbered title to the house to another person before the house is damaged, he cannot collect from the insurer, even though the policy may still be in force. He no longer has an insurable interest. On the other hand, if the owner has a mortgage on the house that was sold, he will continue to have an insurable interest in the amount of the outstanding mortgage until the loan is paid.

As a result of the historical development of insurance practices, life insurance requires an insurable interest only at the inception of the contract. When the question of insurable interest in life insurance was being adjudicated in England, such policies provided no cash surrender values; the insurer made payment only if the person who was the subjectThe person whose death requires the insurer to pay the proceeds of a life insurance policy is usually listed in the policy as the insured. He or she is also known as the cestuique vie or the subject. The beneficiary is the person (or other entity) entitled to the proceeds of the policy upon the death of the subject. The owner of the policy is the person (or other entity) who has the authority to exercise all the prematurity rights of the policy, such as designating the beneficiary, taking a policy loan, and so on. Often, the insured is also the owner. of insurance died while the policy was in force. An insured who was also the policyowner and unable to continue making premium payments simply sacrificed all interest in the policy.

This led to the practice of some policyowners/insureds selling their policies to speculators who, as the new owners, named themselves the beneficiaries and continued premium payments until the death of the insured. This practice is not new but appears to have grown, as reported in the Wall Street Journal .Lynn Asinof, “Is Selling Your Life Insurance Good Policy in the Long-Term?” Wall Street Journal , May 15, 2002. Life - settlement companies emerged recently for seniors. Life-settlement companies buy life insurance policies from senior citizens for a percentage of the value of the death benefits. These companies pay the premiums and become the beneficiary when the insured passes away. This is similar to viatical-settlement companies , which buy life insurance policies from persons with short life expectancies, such as AIDS patients in the 1990s. An example of a life-settlement company is Stone Street Financial, Inc., in Bethesda, Maryland, which bought the value of $500,000 of life insurance for $75,775 from an older person. The person felt he was making money on the deal because the policy surrender value was only $5,000. Viatical settlement companies ran into trouble after new drug regimens extended the lives of AIDS patients, and investors found themselves waiting years or decades, instead of weeks or months, for a return on their investments. In contrast, life-settlement companies contend that, because there is no cure for old age, investors cannot lose in buying the policies from people over sixty-five years old with terminal illnesses such as cancer, amyotrophic lateral sclerosis (Lou Gehrig’s disease), and liver disease.Ron Panko, “Is There Still Room for Viaticals?” Best’s Review , April 2002. These companies don’t sell to individual investors, but rather package the policies they buy into portfolios for institutional investors. According to Scope Advisory GmbH (Berlin), which rates life-settlement companies, “Institutional investments helped increase the face value of life insurance policies traded through the life settlement market to about $10 billion in 2004, from $3 billion in 2003.”“Life Settlement Group Sets Premium Finance Guidelines,” National Underwriter Online News Service , April 5, 2005; “Firm to Offer Regular Life Settlement Rating Reports,” National Underwriter Online News Service , April 21, 2005; and Jim Connolly, “Institutions Reshape Life Settlement Market,” National Underwriter , Life/Health Edition, September 16, 2004. There is a regulatory maze regarding these arrangements.Allison Bell, “Life Settlement Firms Face Jumbled Regulatory Picture,” National Underwriter , Life/Health Edition, September 16, 2004.

Because the legal concept of requiring an insurable interest only at the inception of the life insurance contract has continued, it is possible to collect on a policy in which such interest has ceased. For example, if the life of a key person in a firm is insured, and the firm has an insurable interest in that key person’s life because his or her death would cause a loss to the firm, the policy may be continued in force by the firm even after the person leaves the firm. The proceeds may be collected when he or she dies. This point was brought to light with the publication of the Wall Street Journal story “Big Banks Quietly Pile Up ‘Janitors’ Insurance.”Theo Francis and Ellen E. Schultz, “Big Banks Quietly Pile Up ‘Janitors’ Insurance,’” Wall Street Journal , May 2, 2002. The article reports that banks and other large employers bought inexpensive life coverage—or janitor’s insurance —on the lives of their employees. This practice did not require informing the employees or their families. Coverage was continued even after the employees left the company. Upon the death of the employees, the employer collected the proceeds and padded their bottom-line profits with tax-free death benefits. Many newspapers reported the story as a breach of ethical behavior. The Charlotte Observer (North Carolina) reported that employers were not required to notify workers of corporate-owned life insurance (COLI) policies in which employers own life insurance policies on employees. However, the newspaper continued, “some of the Charlotte area’s biggest companies said they have notified all employees covered by the policies, but declined to say how they informed the workers. Use of COLI policies has raised outcries from human rights activists and prompted federal legislation calling for disclosure.”Sarah Lunday, “Business Giants Could Profit from Life Insurance on Workers,” The Charlotte (North Carolina) Observer , May 12, 2002: “Some of Charlotte’s biggest companies—Bank of America Corp., Wachovia Corp. and Duke Energy Corp. included—stand to reap profits from life insurance policies purchased on current and former workers. In some cases, the policies may have been purchased without the workers or their families ever knowing.” The National Association of Insurance Commissioners (NAIC) formed a special working group to study these issues. Dissatisfaction with the janitor insurance scandal led the state of Washington to instate a law requiring employers to obtain written permission from an employee before buying life insurance on the employee’s life. Key employees can still be exempt from the law. In 2005, members of the U.S. House of Representative also proposed legislation to limit such practices.Arthur D. Postal, “House Revives COLI Bill,” National Underwriter Online News Service , May 12, 2005.

Extent to which Insurable Interest Limits Payment

In the case of property insurance, not only must an insurable interest exist at the time of the loss, but the amount the insured is able to collect is limited by the extent of such interest. For example, if you have a one-half interest in a building that is worth $1,000,000 at the time it is destroyed by fire, you cannot collect more than $500,000 from the insurance company, no matter how much insurance you purchased. If you could collect more than the amount of your insurable interest, you would make a profit on the fire. This would violate the principle of indemnity. An exception exists in some states where valued policy laws are in effect. These laws require insurers to pay the full amount of insurance sold if property is totally destroyed. The intent of the law is to discourage insurers from selling too much coverage.

In contrast to property insurance, life insurance payments are usually not limited by insurable interest. Most life insurance contracts are considered to be valued policies ,Some property insurance policies are written on a valued basis, but precautions are taken to ensure that values agreed upon are realistic, thus adhering to the principle of indemnity. or contracts that agree to pay a stated sum upon the occurrence of the event insured against, rather than to indemnify for loss sustained. For example, a life insurance contract provides that the insurer will pay a specified sum to the beneficiary upon receipt of proof of death of the person whose life is the subject of the insurance. The beneficiary does not have to prove that any loss has been suffered because he or she is not required to have an insurable interest.

Some health insurance policies provide that the insurance company will pay a specified number of dollars per day while the insured is hospitalized. Such policies are not contracts of indemnity; they simply promise to make cash payments under specified circumstances. This makes such a contract “incomplete,” as discussed in the introduction to this chapter. This also leads to more litigation because there are no explicit payout amounts written into the contract while improvements in medical technology change the possible treatments daily.

Although an insurable interest must exist at the inception of a life insurance contract to make it enforceable, the amount of payment is usually not limited by the extent of such insurable interest. The amount of life insurance collectible at the death of an insured is limited only by the amount insurers are willing to issue and by the insured’s premium-paying ability.Life and health insurance companies have learned, however, that overinsurance may lead to poor underwriting experience. Because the loss caused by death or illness cannot be measured precisely, defining overinsurance is difficult. It may be said to exist when the amount of insurance is clearly in excess of the economic loss that may be suffered. Extreme cases, such as the individual whose earned income is $300 per week but who may receive $500 per week in disability insurance benefits from an insurance company while he or she is ill, are easy to identify. Life and health insurers engage in financial underwriting to detect overinsurance. The requested amount of insurance is related to the proposed insured’s (beneficiary’s) financial need for insurance and premium-paying ability. The life insurance payout amount is expressed explicitly in the contract. Thus, in most cases, it is not subject to litigation and arguments over the coverage. The amount of the proceeds of a life insurance policy that may be collected by a creditor-beneficiary, however, is generally limited to the amount of the debt and the premiums paid by the creditor, plus interest.This is an area in which it is difficult to generalize; the statement made in the text is approximately correct. The point is that the creditor-debtor relationship is an exception to the statement that an insurable interest need not exist at the time of the death of the insured and that the amount of payment is not limited to the insurable interest that existed at the inception of the contract. For further discussion, see Kenneth Black, Jr., and Harold Skipper, Jr., Life Insurance , 12th ed. (Englewood Cliffs, NJ: Prentice-Hall, 1994), 187–88.

The principle of indemnity is also supported by the right of subrogation. Subrogation gives the insurer whatever claim against third parties the insured may have as a result of the loss for which the insurer paid. For example, if your house is damaged because a neighbor burned leaves and negligently permitted the fire to get out of control, you have a right to collect damages from the neighbor because a negligent wrongdoer is responsible to others for the damage or injury he or she causes. (Negligence liability will be discussed in later chapters.) If your house is insured against loss by fire, however, you cannot collect from both the insurance company and the negligent party who caused the damage. Your insurance company will pay for the damage and is then subrogated (that is, given) your right to collect damages. The insurer may then sue the negligent party and collect from him or her. This prevents you from making a profit by collecting twice for the same loss.

The right of subrogation is a common law right the insurer has without a contractual agreement. It is specifically stated in the policy, however, so that the insured will be aware of it and refrain from releasing the party responsible for the loss. The standard personal auto policy, for example, provides that

if we make a payment under this policy and the person to or for whom payment was made has a right to recover damages from another, that person shall subrogate that right to us. That person shall do whatever is necessary to enable us to exercise our rights and shall do nothing after loss to prejudice them.

If we make a payment under this policy and the person to or for whom payment is made recovers damages from another, that person shall hold in trust for us the proceeds of the recovery and shall reimburse us to the extent of our payment.

Actual Cash Value

This clause is included in many property insurance policies. An insured generally does not receive an amount greater than the actual loss suffered because the policy limits payment to actual cash value. A typical property insurance policy says, for example, that the company insures “to the extent of actual cash value…but not exceeding the amount which it would cost to repair or replace…and not in any event for more than the interest of the insured.”

Actual cash value is not defined in the policy, but a generally accepted notion of it is the replacement cost at the time of the loss, less physical depreciation, including obsolescence. For example, if the roof on your house has an expected life of twenty years, roughly half its value is gone at the end of ten years. If it is damaged by an insured peril at that time, the insurer will pay the cost of replacing the damaged portion, less depreciation. You must bear the burden of the balance. If the replacement cost of the damaged portion is $2,000 at the time of a loss, but the depreciation is $800, the insurer will pay $1,200 and you will bear an $800 expense.

Another definition of actual cash value is fair market value , which is the amount a willing buyer would pay a willing seller. For auto insurance, where thousands of units of nearly identical property exist, fair market value may be readily available. Retail value, as listed in the National Automobile Dealers Association (NADA) guide or the Kelley Blue Book, may be used. For other types of property, however, the definition may be deceptively simple. How do you determine what a willing buyer would be willing to pay a willing seller? The usual approach is to compare sales prices of similar property and adjust for differences. For example, if three houses similar to yours in your neighborhood have recently sold for $190,000, then that is probably the fair market value of your home. You may, of course, believe your house is worth far more because you think it has been better maintained than the other houses. Such a process for determining fair market value may be time-consuming and unsatisfactory, so it is seldom used for determining actual cash value. However, it may be used when obsolescence or neighborhood deterioration causes fair market value to be much less than replacement cost minus depreciation.

Property insurance is often written on a replacement cost basis, which means that there is no deduction for depreciation of the property. With such coverage, the insurer would pay $2,000 for the roof loss mentioned above and you would not pay anything. This coverage may or may not conflict with the principle of indemnity, depending on whether you are better off after payment than you were before the loss. If $2,000 provided your house with an entirely new roof, you have gained. You now have a roof that will last twenty years, rather than ten years. On the other hand, if the damaged portion that was repaired accounted for only 10 percent of the roof area, having it repaired would not increase the expected life of the entire roof. You are not really any better off after the loss and its repair than you were before the loss.

When an insured may gain, as in the case of having a loss paid for on a replacement cost basis, there is a potential moral hazard. The insured may be motivated to be either dishonest or careless. For example, if your kitchen has not been redecorated for a very long time and looks shabby, you may not worry about leaving a kettle of grease unattended on the stove. The resulting grease fire will require extensive redecoration as well as cleaning of furniture and, perhaps, replacement of some clothing (assuming that the fire is extinguished before it gets entirely out of control). Or you may simply let your old house burn down. Insurers try to cope with these problems by providing in the policy that, when the cost to repair or replace damage to a building is more than some specified amount, the insurer will pay not more than the actual cash value of the damage until actual repair or replacement is completed. In this way, the insurer discourages you from destroying the house in order to receive a monetary reward. Arson generally occurs with the intent of financial gain. Some insurers will insure personal property only on an actual cash value basis because the opportunity to replace old with new may be too tempting to some insureds. Fraudulent claims on loss to personal property are easier to make than are fraudulent claims on loss to buildings. Even so, insurers find most insureds to be honest, thus permitting the availability of replacement cost coverage on most forms of property.

Other Insurance Provisions

The purpose of other insurance provisions in insurance contracts is to prevent insureds from making a profit by collecting from more than one insurance policy for the same loss. For example, if you have more than one policy protecting you against a particular loss, there is a possibility that by collecting on all policies, you may profit from the loss. This would, of course, violate the principle of indemnity.

Most policies (other than life insurance) have some provision to prevent insureds from making a profit from a loss through ownership of more than one policy. The homeowner’s policy, for example, provides a clause about other insurance, or pro rata liability, that reads as follows:

If a loss covered by this policy is also covered by other insurance, we will pay only the proportion of the loss that the limit of liability that applies under this policy bears to the total amount of insurance covering the loss.

Suppose you have a $150,000 homeowners policy with Company A, with $75,000 personal property coverage on your home in Montana, and a $100,000 homeowners policy with Company B, with $50,000 personal property coverage on your home in Arizona. Both policies provide coverage of personal property anywhere in the world. If $5,000 worth of your personal property is stolen while you are traveling in Europe, because of the “other insurance” clause, you cannot collect $5,000 from each insurer. Instead, each company will pay its pro rata share of the loss. Company A will pay its portion of the obligation (\(frac{$75,000}{$125,000}= frac{3}{5}\)) and Company B will pay its portion (\(frac{$50,000}{$125,000}= frac{2}{5}\)). Company A will pay $3,000 and Company B will pay $2,000. You will not make a profit on this deal, but you will be indemnified for the loss you suffered. The proportions are determined as follows:

Insurance contracts are personal , meaning they insure against loss to a person, not to the person’s property. For example, you may say, “My car is insured.” Actually, you are insured against financial loss caused by something happening to your car. If you sell the car, insurance does not automatically pass to the new owner. It may be assigned,A complete assignment is the transfer of ownership or benefits of a policy. but only with the consent of the insurer. The personal auto policy, for example, provides that your rights and duties under this policy may not be assigned without our written consent.

As you saw in "7: Insurance Operations" , underwriters are as concerned about who it is they are insuring as they are about the nature of the property involved, if not more so. For example, if you have an excellent driving record and are a desirable insured, the underwriter is willing to accept your application for insurance. If you sell your car to an eighteen-year-old male who has already wrecked two cars this year, however, the probability of loss increases markedly. Clearly, the insurer does not want to assume that kind of risk without proper compensation, so it protects itself by requiring written consent for assignment.

Unlike property insurance, life insurance policies are freely assignable. This is a result of the way life insurance practice developed before policies accumulated cash values. Whether or not change of ownership affects the probability of the insured’s death is a matter for conjecture. In life insurance, the policyowner is not necessarily the recipient of the policy proceeds. As with an auto policy, the subject of the insurance (the life insured) is the same regardless of who owns the policy. Suppose you assign your life insurance policy (including the right to name a beneficiary) to your spouse while you are on good terms. Such an assignment may not affect the probability of your death. On the other hand, two years and two spouses later, the one to whom you assigned the policy may become impatient about the long prospective wait for death benefits. Changing life insurance policyowners may not change the risk as much as, say, changing auto owners, but it could (murder is quite different from stealing). Nevertheless, life insurance policies can be assigned without the insurer’s consent.

Suppose you assign the rights to your life insurance policy to another person and then surrender it for the cash value before the insurance company knows of the assignment. Will the person to whom you assigned the policy rights also be able to collect the cash value? To avoid litigation and to eliminate the possibility of having to make double payment, life insurance policies provide that the company is not bound by an assignment until it has received written notice. The answer to this question, therefore, generally is no. The notice requirements, however, may be rather low. A prudent insurer may hesitate to pay off life insurance proceeds when even a slight indication of an assignment (or change in beneficiary) exists.

Key Takeaways

In this section you studied the following:

• Insurance contracts are contracts of utmost good faith, so potential insureds are held to the highest standards of truthfulness and honesty in providing information (making representations) to the underwriter
• Insurance contracts are contracts of adhesion because the insured must accept the terms as stipulated; in disputes between insureds and insurers, this feature has led courts generally to side with insureds where policy ambiguity is concerned
• Actual cash value provisions
• Insurance contracts are personal, meaning that people are insured against losses rather than property; insurers often require written consent of assignment when insureds wish to assign coverage with the transfer of property

Discussion Questions

• Assume that you are a key employee and that your employer can buy an insurance policy on your life and collect the proceeds, even if you are no longer with the firm at the time of your death. Clearly, if you leave the firm, your employer no longer has an insurable interest in your life and would gain by your death. Would this situation make you uncomfortable? What if you learned that your former employer was in financial difficulty? Do you think the law should permit a situation of this kind? How is this potential problem typically solved? Relate your situation to the janitor’s insurance stories described in this chapter.
• Does the fact that an insurance policy is a contract of adhesion make it difficult for insurers to write it in simple, easy-to-understand terms? Explain.
• If your house is destroyed by fire because of your neighbor’s negligence, your insurer may recover from your neighbor what it previously paid you under its right of subrogation. This prevents you from collecting twice for the same loss. But the insurer collects premiums to pay losses and then recovers from negligent persons who cause them. Isn’t that double recovery? Explain.
• If you have a $100,000 insurance policy on your house but it is worth only $80,000 at the time it is destroyed by fire, your insurer will pay you only $80,000. You paid for $100,000 of insurance but you get only $80,000. Are you being cheated? Explain.
• Who makes the offer in insurance transactions? Why is the answer to this question important?

• assignments basic law

Assignments: The Basic Law

The assignment of a right or obligation is a common contractual event under the law and the right to assign (or prohibition against assignments) is found in the majority of agreements, leases and business structural documents created in the United States.

As with many terms commonly used, people are familiar with the term but often are not aware or fully aware of what the terms entail. The concept of assignment of rights and obligations is one of those simple concepts with wide ranging ramifications in the contractual and business context and the law imposes severe restrictions on the validity and effect of assignment in many instances. Clear contractual provisions concerning assignments and rights should be in every document and structure created and this article will outline why such drafting is essential for the creation of appropriate and effective contracts and structures.

The reader should first read the article on Limited Liability Entities in the United States and Contracts since the information in those articles will be assumed in this article.

Basic Definitions and Concepts:

An assignment is the transfer of rights held by one party called the “assignor” to another party called the “assignee.” The legal nature of the assignment and the contractual terms of the agreement between the parties determines some additional rights and liabilities that accompany the assignment. The assignment of rights under a contract usually completely transfers the rights to the assignee to receive the benefits accruing under the contract. Ordinarily, the term assignment is limited to the transfer of rights that are intangible, like contractual rights and rights connected with property. Merchants Service Co. v. Small Claims Court , 35 Cal. 2d 109, 113-114 (Cal. 1950).

An assignment will generally be permitted under the law unless there is an express prohibition against assignment in the underlying contract or lease. Where assignments are permitted, the assignor need not consult the other party to the contract but may merely assign the rights at that time. However, an assignment cannot have any adverse effect on the duties of the other party to the contract, nor can it diminish the chance of the other party receiving complete performance. The assignor normally remains liable unless there is an agreement to the contrary by the other party to the contract.

The effect of a valid assignment is to remove privity between the assignor and the obligor and create privity between the obligor and the assignee. Privity is usually defined as a direct and immediate contractual relationship. See Merchants case above.

Further, for the assignment to be effective in most jurisdictions, it must occur in the present. One does not normally assign a future right; the assignment vests immediate rights and obligations.

No specific language is required to create an assignment so long as the assignor makes clear his/her intent to assign identified contractual rights to the assignee. Since expensive litigation can erupt from ambiguous or vague language, obtaining the correct verbiage is vital. An agreement must manifest the intent to transfer rights and can either be oral or in writing and the rights assigned must be certain.

Note that an assignment of an interest is the transfer of some identifiable property, claim, or right from the assignor to the assignee. The assignment operates to transfer to the assignee all of the rights, title, or interest of the assignor in the thing assigned. A transfer of all rights, title, and interests conveys everything that the assignor owned in the thing assigned and the assignee stands in the shoes of the assignor. Knott v. McDonald’s Corp ., 985 F. Supp. 1222 (N.D. Cal. 1997)

The parties must intend to effectuate an assignment at the time of the transfer, although no particular language or procedure is necessary. As long ago as the case of National Reserve Co. v. Metropolitan Trust Co ., 17 Cal. 2d 827 (Cal. 1941), the court held that in determining what rights or interests pass under an assignment, the intention of the parties as manifested in the instrument is controlling.

The intent of the parties to an assignment is a question of fact to be derived not only from the instrument executed by the parties but also from the surrounding circumstances. When there is no writing to evidence the intention to transfer some identifiable property, claim, or right, it is necessary to scrutinize the surrounding circumstances and parties’ acts to ascertain their intentions. Strosberg v. Brauvin Realty Servs., 295 Ill. App. 3d 17 (Ill. App. Ct. 1st Dist. 1998)

The general rule applicable to assignments of choses in action is that an assignment, unless there is a contract to the contrary, carries with it all securities held by the assignor as collateral to the claim and all rights incidental thereto and vests in the assignee the equitable title to such collateral securities and incidental rights. An unqualified assignment of a contract or chose in action, however, with no indication of the intent of the parties, vests in the assignee the assigned contract or chose and all rights and remedies incidental thereto.

More examples: In Strosberg v. Brauvin Realty Servs ., 295 Ill. App. 3d 17 (Ill. App. Ct. 1st Dist. 1998), the court held that the assignee of a party to a subordination agreement is entitled to the benefits and is subject to the burdens of the agreement. In Florida E. C. R. Co. v. Eno , 99 Fla. 887 (Fla. 1930), the court held that the mere assignment of all sums due in and of itself creates no different or other liability of the owner to the assignee than that which existed from the owner to the assignor.

And note that even though an assignment vests in the assignee all rights, remedies, and contingent benefits which are incidental to the thing assigned, those which are personal to the assignor and for his sole benefit are not assigned. Rasp v. Hidden Valley Lake, Inc ., 519 N.E.2d 153, 158 (Ind. Ct. App. 1988). Thus, if the underlying agreement provides that a service can only be provided to X, X cannot assign that right to Y.

Novation Compared to Assignment:

Although the difference between a novation and an assignment may appear narrow, it is an essential one. “Novation is a act whereby one party transfers all its obligations and benefits under a contract to a third party.” In a novation, a third party successfully substitutes the original party as a party to the contract. “When a contract is novated, the other contracting party must be left in the same position he was in prior to the novation being made.”

A sublease is the transfer when a tenant retains some right of reentry onto the leased premises. However, if the tenant transfers the entire leasehold estate, retaining no right of reentry or other reversionary interest, then the transfer is an assignment. The assignor is normally also removed from liability to the landlord only if the landlord consents or allowed that right in the lease. In a sublease, the original tenant is not released from the obligations of the original lease.

Equitable Assignments:

An equitable assignment is one in which one has a future interest and is not valid at law but valid in a court of equity. In National Bank of Republic v. United Sec. Life Ins. & Trust Co. , 17 App. D.C. 112 (D.C. Cir. 1900), the court held that to constitute an equitable assignment of a chose in action, the following has to occur generally: anything said written or done, in pursuance of an agreement and for valuable consideration, or in consideration of an antecedent debt, to place a chose in action or fund out of the control of the owner, and appropriate it to or in favor of another person, amounts to an equitable assignment. Thus, an agreement, between a debtor and a creditor, that the debt shall be paid out of a specific fund going to the debtor may operate as an equitable assignment.

In Egyptian Navigation Co. v. Baker Invs. Corp. , 2008 U.S. Dist. LEXIS 30804 (S.D.N.Y. Apr. 14, 2008), the court stated that an equitable assignment occurs under English law when an assignor, with an intent to transfer his/her right to a chose in action, informs the assignee about the right so transferred.

An executory agreement or a declaration of trust are also equitable assignments if unenforceable as assignments by a court of law but enforceable by a court of equity exercising sound discretion according to the circumstances of the case. Since California combines courts of equity and courts of law, the same court would hear arguments as to whether an equitable assignment had occurred. Quite often, such relief is granted to avoid fraud or unjust enrichment.

Note that obtaining an assignment through fraudulent means invalidates the assignment. Fraud destroys the validity of everything into which it enters. It vitiates the most solemn contracts, documents, and even judgments. Walker v. Rich , 79 Cal. App. 139 (Cal. App. 1926). If an assignment is made with the fraudulent intent to delay, hinder, and defraud creditors, then it is void as fraudulent in fact. See our article on Transfers to Defraud Creditors .

But note that the motives that prompted an assignor to make the transfer will be considered as immaterial and will constitute no defense to an action by the assignee, if an assignment is considered as valid in all other respects.

Enforceability of Assignments:

Whether a right under a contract is capable of being transferred is determined by the law of the place where the contract was entered into. The validity and effect of an assignment is determined by the law of the place of assignment. The validity of an assignment of a contractual right is governed by the law of the state with the most significant relationship to the assignment and the parties.

In some jurisdictions, the traditional conflict of laws rules governing assignments has been rejected and the law of the place having the most significant contacts with the assignment applies. In Downs v. American Mut. Liability Ins. Co ., 14 N.Y.2d 266 (N.Y. 1964), a wife and her husband separated and the wife obtained a judgment of separation from the husband in New York. The judgment required the husband to pay a certain yearly sum to the wife. The husband assigned 50 percent of his future salary, wages, and earnings to the wife. The agreement authorized the employer to make such payments to the wife.

After the husband moved from New York, the wife learned that he was employed by an employer in Massachusetts. She sent the proper notice and demanded payment under the agreement. The employer refused and the wife brought an action for enforcement. The court observed that Massachusetts did not prohibit assignment of the husband’s wages. Moreover, Massachusetts law was not controlling because New York had the most significant relationship with the assignment. Therefore, the court ruled in favor of the wife.

Therefore, the validity of an assignment is determined by looking to the law of the forum with the most significant relationship to the assignment itself. To determine the applicable law of assignments, the court must look to the law of the state which is most significantly related to the principal issue before it.

Assignment of Contractual Rights:

Generally, the law allows the assignment of a contractual right unless the substitution of rights would materially change the duty of the obligor, materially increase the burden or risk imposed on the obligor by the contract, materially impair the chance of obtaining return performance, or materially reduce the value of the performance to the obligor. Restat 2d of Contracts, § 317(2)(a). This presumes that the underlying agreement is silent on the right to assign.

If the contract specifically precludes assignment, the contractual right is not assignable. Whether a contract is assignable is a matter of contractual intent and one must look to the language used by the parties to discern that intent.

In the absence of an express provision to the contrary, the rights and duties under a bilateral executory contract that does not involve personal skill, trust, or confidence may be assigned without the consent of the other party. But note that an assignment is invalid if it would materially alter the other party’s duties and responsibilities. Once an assignment is effective, the assignee stands in the shoes of the assignor and assumes all of assignor’s rights. Hence, after a valid assignment, the assignor’s right to performance is extinguished, transferred to assignee, and the assignee possesses the same rights, benefits, and remedies assignor once possessed. Robert Lamb Hart Planners & Architects v. Evergreen, Ltd. , 787 F. Supp. 753 (S.D. Ohio 1992).

On the other hand, an assignee’s right against the obligor is subject to “all of the limitations of the assignor’s right, all defenses thereto, and all set-offs and counterclaims which would have been available against the assignor had there been no assignment, provided that these defenses and set-offs are based on facts existing at the time of the assignment.” See Robert Lamb , case, above.

The power of the contract to restrict assignment is broad. Usually, contractual provisions that restrict assignment of the contract without the consent of the obligor are valid and enforceable, even when there is statutory authorization for the assignment. The restriction of the power to assign is often ineffective unless the restriction is expressly and precisely stated. Anti-assignment clauses are effective only if they contain clear, unambiguous language of prohibition. Anti-assignment clauses protect only the obligor and do not affect the transaction between the assignee and assignor.

Usually, a prohibition against the assignment of a contract does not prevent an assignment of the right to receive payments due, unless circumstances indicate the contrary. Moreover, the contracting parties cannot, by a mere non-assignment provision, prevent the effectual alienation of the right to money which becomes due under the contract.

A contract provision prohibiting or restricting an assignment may be waived, or a party may so act as to be estopped from objecting to the assignment, such as by effectively ratifying the assignment. The power to void an assignment made in violation of an anti-assignment clause may be waived either before or after the assignment. See our article on Contracts.

Noncompete Clauses and Assignments:

Of critical import to most buyers of businesses is the ability to ensure that key employees of the business being purchased cannot start a competing company. Some states strictly limit such clauses, some do allow them. California does restrict noncompete clauses, only allowing them under certain circumstances. A common question in those states that do allow them is whether such rights can be assigned to a new party, such as the buyer of the buyer.

A covenant not to compete, also called a non-competitive clause, is a formal agreement prohibiting one party from performing similar work or business within a designated area for a specified amount of time. This type of clause is generally included in contracts between employer and employee and contracts between buyer and seller of a business.

Many workers sign a covenant not to compete as part of the paperwork required for employment. It may be a separate document similar to a non-disclosure agreement, or buried within a number of other clauses in a contract. A covenant not to compete is generally legal and enforceable, although there are some exceptions and restrictions.

Whenever a company recruits skilled employees, it invests a significant amount of time and training. For example, it often takes years before a research chemist or a design engineer develops a workable knowledge of a company’s product line, including trade secrets and highly sensitive information. Once an employee gains this knowledge and experience, however, all sorts of things can happen. The employee could work for the company until retirement, accept a better offer from a competing company or start up his or her own business.

A covenant not to compete may cover a number of potential issues between employers and former employees. Many companies spend years developing a local base of customers or clients. It is important that this customer base not fall into the hands of local competitors. When an employee signs a covenant not to compete, he or she usually agrees not to use insider knowledge of the company’s customer base to disadvantage the company. The covenant not to compete often defines a broad geographical area considered off-limits to former employees, possibly tens or hundreds of miles.

Another area of concern covered by a covenant not to compete is a potential ‘brain drain’. Some high-level former employees may seek to recruit others from the same company to create new competition. Retention of employees, especially those with unique skills or proprietary knowledge, is vital for most companies, so a covenant not to compete may spell out definite restrictions on the hiring or recruiting of employees.

A covenant not to compete may also define a specific amount of time before a former employee can seek employment in a similar field. Many companies offer a substantial severance package to make sure former employees are financially solvent until the terms of the covenant not to compete have been met.

Because the use of a covenant not to compete can be controversial, a handful of states, including California, have largely banned this type of contractual language. The legal enforcement of these agreements falls on individual states, and many have sided with the employee during arbitration or litigation. A covenant not to compete must be reasonable and specific, with defined time periods and coverage areas. If the agreement gives the company too much power over former employees or is ambiguous, state courts may declare it to be overbroad and therefore unenforceable. In such case, the employee would be free to pursue any employment opportunity, including working for a direct competitor or starting up a new company of his or her own.

It has been held that an employee’s covenant not to compete is assignable where one business is transferred to another, that a merger does not constitute an assignment of a covenant not to compete, and that a covenant not to compete is enforceable by a successor to the employer where the assignment does not create an added burden of employment or other disadvantage to the employee. However, in some states such as Hawaii, it has also been held that a covenant not to compete is not assignable and under various statutes for various reasons that such covenants are not enforceable against an employee by a successor to the employer. Hawaii v. Gannett Pac. Corp. , 99 F. Supp. 2d 1241 (D. Haw. 1999)

It is vital to obtain the relevant law of the applicable state before drafting or attempting to enforce assignment rights in this particular area.

Conclusion:

In the current business world of fast changing structures, agreements, employees and projects, the ability to assign rights and obligations is essential to allow flexibility and adjustment to new situations. Conversely, the ability to hold a contracting party into the deal may be essential for the future of a party. Thus, the law of assignments and the restriction on same is a critical aspect of every agreement and every structure. This basic provision is often glanced at by the contracting parties, or scribbled into the deal at the last minute but can easily become the most vital part of the transaction.

As an example, one client of ours came into the office outraged that his co venturer on a sizable exporting agreement, who had excellent connections in Brazil, had elected to pursue another venture instead and assigned the agreement to a party unknown to our client and without the business contacts our client considered vital. When we examined the handwritten agreement our client had drafted in a restaurant in Sao Paolo, we discovered there was no restriction on assignment whatsoever…our client had not even considered that right when drafting the agreement after a full day of work.

One choses who one does business with carefully…to ensure that one’s choice remains the party on the other side of the contract, one must master the ability to negotiate proper assignment provisions.

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Post-Loss Assignments of Claims Under Insurance Policies

In the settlement of lawsuits involving insured claims, it is not uncommon that one condition of the settlement is that the defendant assign his or her claims under all applicable insurance policies to the party that filed suit.

Indeed, it is frequently the case that the defendant, particularly when the defendant is an individual, has a limited ability to pay a judgment and insurance coverage offers the best opportunity for a recovery by the suing party. Usually, such settlements are made without any serious thought being given to whether the defendant’s claim against its insurer is assignable; the assumption being that it is assignable.

However, insurance policies generally have anti-assignment clauses which prohibit the assignment of the policy, or an interest in the policy, without the insurer’s consent. These clauses come into play in determining the validity or enforceability of the assignment of a claim under an insurance policy and should be considered when such an assignment is part of a settlement.

When considering the enforceability of anti-assignment clauses in insurance policies, the courts generally draw a distinction between an assignment made prior to the occurrence of a covered loss (a “pre-loss” assignment) and an assignment made after the occurrence of a covered loss (a “post-loss” assignment).

In analyzing pre-loss assignments, the courts recognize that requiring an insurer to provide coverage to an assignee of its policy prior to the occurrence of a covered loss would place the insurer in the position of covering a party with whom it had not contracted nor been allowed to properly underwrite to assess the risks posed by that potential insured, and, accordingly, determine the appropriate premium to charge for the risks being undertaken or choose to decline coverage.

Post-loss assignments, on the other hand, take place after the insurer’s obligations under its policy have become fixed by the occurrence of a covered loss, thus the risk factors applicable to the assignee are irrelevant with regard to the covered loss in question. For these reasons, the majority of the courts enforce anti-assignment clauses to prohibit or restrict pre-loss assignments, but refuse to enforce anti-assignment clauses to prohibit or restrict post-loss assignments.

Katrina Cases

The Louisiana Supreme Court, which had not previously addressed the enforceability of anti-assignment clauses for post-loss assignments, was recently confronted with this issue in the In re: Katrina Canal Breaches Litigation, litigation involving consolidated cases arising out of Hurricane Katrina. The issue arose as a result of a lawsuit brought by the State of Louisiana as the assignee of claims under numerous insurance policies as part of the “Road Home” Program. The Road Home Program was set up following Hurricanes Katrina and Rita to distribute federal funds to homeowners suffering damage from the hurricanes. In return for receiving a grant of up to $150,000, homeowners were required to execute a Limited Subrogation/Assignment agreement, which provided in pertinent part:

Pursuant to these Limited Subrogation/Assignments, the State of Louisiana brought suit against more than 200 insurance companies to recover funds dispensed under the Road Home Program. The suit was removed to Federal Court under the Class Action Fairness Act and the insurers filed motions to dismiss, arguing that the assignments to the State of Louisiana were invalid under the anti-assignment clauses in the homeowner policies at issue.

On appeal, the United States Fifth Circuit Court of Appeals certified the following question to the Louisiana Supreme Court: “Does an anti-assignment clause in a homeowner’s insurance policy, which by its plain terms purports to bar any assignment of the policy or an interest therein without the insurer’s consent, bar an insured’s post-loss assignment of the insured’s claims under the policy when such an assignment transfers contractual obligations, not just the right to money due?”

In answering this question, the Louisiana Supreme Court began by noting that, as a general matter, contractual rights are assignable unless the law, the contract terms or the nature of the contract preclude assignment. Specific to the certified question, Louisiana Civil Code article 2653 provides that a right “cannot be assigned when the contract from which it arises prohibits the assignment of that right.” The Louisiana Supreme Court observed that the language of article 2653 is broad and, on its face, applies to all assignments, including post-loss assignments of insurance claims. The Court, therefore, construed the issue confronting it as whether Louisiana public policy would enforce an anti-assignment clause to preclude post-loss assignments of claims under insurance policies.

In addressing the public policy question, the Louisiana Supreme Court recognized the distinction between pre-loss assignments and post-loss assignments discussed by courts from other states and noted that the prevailing view was that anti-assignment clauses were invalid and/or unenforceable when applied to post-loss assignments. Notwithstanding this weight of authority, the Louisiana Supreme Court stated:

“[W]hile the Louisiana legislature has clearly indicated an intent to allow parties freedom to assign contractual rights, by enacting La. C.C. art. 2653, it has also clearly indicated an intent to allow parties freedom to contractually prohibit assignment of rights. We recognize the vast amount of national jurisprudence distinguishing between pre-loss and post-loss assignments and rejecting restrictions on post-loss assignments, however we find no public policy in Louisiana favoring assignability of claims over freedom of contract.”

Thus, Court refused to invalidate the enforceability of the anti-assignment clauses to the post-loss assignments before it based on public policy, adding that public policy determinations are better suited to the legislature.

Nonetheless, after having recognized the general enforceability of anti-assignment clauses to post-loss assignments, the Court immediately placed limits on when those clauses would be applicable, stating that to be applicable, they “must clearly and unambiguously express that the non-assignment clause applies to post-loss assignments.” The Court refused “to formulate a test consisting of specific terms or words,” which would satisfy this condition and remanded the case to the federal courts to determine whether the individual anti-assignment clauses in the various policies were sufficiently clear and explicit to be enforced with respect to post-loss assignments at issue.

A Broad Application

It should be noted that the Court’s opinion appears to apply broadly to all post-loss assignments irrespective of what specific rights are being assigned, despite the fact that the certified question was narrower and asked only about the applicability of a post-loss assignment where the assignment “transfers contractual obligations, not just the right to money due.”

In a footnote at the beginning of its opinion, the Louisiana Supreme Court observed that in certifying the question to it, the Fifth Circuit “disclaimed any intent” that the Court “confine its reply to the precise form or scope of the legal questions certified.” The footnote indicates that the Court’s opinion was not intended to be limited to only those post-loss assignments involving the assignment of contractual obligations.

Louisiana has departed from the majority view in holding that as a matter of general law, anti-assignment clauses are not inherently void with regard to post-loss assignments. However, it may be that in practical application, the results of individual cases may well be consistent with the majority rule of not enforcing anti-assignment clauses with regard to post-loss assignments because Louisiana courts may be reluctant to find that the anti-assignment clauses are sufficiently “clear and explicit” unless they specifically state that they apply to post-loss assignments, notwithstanding the Louisiana Supreme Court’s unwillingness to “formulate a test consisting of specific terms or words.”

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Assignment of Benefits: What It Is, and How It Can Affect your Property Insurance Claim

Table of Contents

What is an Assignment of Benefits?

In the context of insured property claims, an assignment of benefits (AOB) is an agreement between you and a contractor in which you give the contractor your right to insurance payments for a specific scope of work .  In exchange, the contractor agrees that it will not seek payment from you for that scope of work, except for the amount of any applicable deductible.  In other words, you give part of your insurance claim to your contractor, and your contractor agrees not to collect from you for part of its work.

The most important thing to know about an assignment of benefits is that it puts your contractor in control your claim , at least for their scope of work.  Losing that control can significantly affect the direction and outcome of your claim, so you should fully understand the implications of an AOB (sometimes called an assignment of claims or AOC) before signing one.

How Does an Assignment of Benefits Work in Practice? 

Let’s say you’re an insured homeowner, and Hurricane Ian significantly damaged your roof.  Let’s also assume your homeowner’s policy covers that damage.  A roofer, after inspecting your roof and reviewing your insurance policy, might conclude that your insurer is probably going to pay for a roof replacement under your insurance policy.  The only problem is that it’s early in the recovery process, and your insurer hasn’t yet stated whether it will pay for the roof replacement proposed by your contractor. So if you want your roof replaced now, you would ordinarily agree to pay your roofer for the replacement, and wait in hopes that your insurer reimburses you for the work.  This means that if your insurance company refuses to pay or drags out payment, you’re on the hook to your roofer for the cost of the replacement.

As an alternative to agreeing to pay your roofer for the full cost of the work, you could sign an assignment of benefits for the roof replacement.  In this scenario, your roofer owns the part of your insurance claim that pertains to the roof replacement.  You might have to pay your roofer for the amount of your deductible, but you probably don’t have to pay them for the rest of the cost of the work.  And if your insurance company refuses to pay or drags out payment for the roof replacement, it’s your roofer, and not you, who would be on the hook for that shortfall.

So should you sign an AOB?  Not necessarily.  Read below to understand the pros and cons of an assignment of benefits.

Are There any Downsides to Signing an Assignment of Benefits?

Yes.  

You lose control of your claim . This is the most important factor to understand when considering whether to sign an AOB.  An AOB is a formal assignment of your legal rights to payment under your insurance contract.  Unless you’re able to cancel the AOB, your contractor will have full control over your claim as it relates to their work. 

To explain why that control could matter, let’s go back to the roof replacement example.  When you signed the AOB, the scope of work you agreed on was to replace the roof.  But you’re not a roofing expert, so you don’t know whether the costs charged or the materials used by the roofer in its statement of work are industry appropriate or not.  In most cases, they probably are appropriate, and there’s no problem.  But if they’re not – if, for instance, the roofer’s prices are unreasonably high – then the insurer may not approve coverage for the replacement.  At that point, the roofer could lower its prices so the insurer approves the work, but it doesn’t have to, because it controls the claim .  Instead it could hold up work and threaten to sue your insurer unless it approves the work at the originally proposed price.  Now the entire project is insnared in litigation, leaving you in a tough spot with your insurer for your other claims and, most importantly, with an old leaky roof.

Misunderstanding the Scope of Work.   Another issue that can arise is that you don’t understand the scope of the assignment of benefits.  Contractor estimates and scopes of work are often highly technical documents that can be long on detail but short on clarity.  Contractors are experts at reading and writing them.  You are not.  That difference matters because the extent of your assignment of benefits is based on that technical, difficult-to-understand scope of work.  This can lead to situations where your understanding of what you’re authorizing the contractor to do is very different from what you’ve actually authorized in the AOB agreement.

In many cases, it’s not necessary .   Many contractors will work with you and your insurer to provide a detailed estimate of their work, and will not begin that work until your insurer has approved coverage for it.  This arrangement significantly reduces the risk of you being on the hook for uninsured repairs, without creating any of the potential problems that can occur when you give away your rights to your claim.

Do I have to sign an Assignment of Benefits?

No.  You are absolutely not required to sign an AOB if you do not want to. 

Are There any Benefits to Signing an Assignment of Benefits?

Potentially, but only if you’ve fully vetted your contractor and your claim involves complicated and technical construction issues that you don’t want to deal with. 

First, you must do your homework to fully vet your contractor!  Do not just take their word for it or be duped by slick ads.  Read reviews, understand their certificate of insurance, know where they’re located, and, if possible, ask for and talk to references.  If you’ve determined that the contractor is highly competent at the work they do, is fully insured, and has a good reputation with customers, then that reduces the risk that they’ll abuse their rights to your claim.

Second, if your claim involves complicated reconstruction issues, a reputable contractor may be well equipped to handle the claim and move it forward.  If you don’t want to deal with the hassle of handling a complicated claim like this, and you know you have a good contractor, one way to get rid of that hassle is an AOB.

Another way to get rid of the hassle is to try Claimly, the all-in-one claims handling tool that get you results but keeps you in control of your claim.  

Can my insurance policy restrict the use of AOBs?

Yes, it’s possible that your Florida insurance policy restricts the use of AOBs, but only if all of the following criteria are met:

• When you selected your coverage, your insurer offered you a different policy with the same coverage, only it did not restrict the right to sign an AOB.
• Your insurer made the restricted policy available at a lower cost than the unrestricted policy.
• If the policy completely prohibits AOBs, then it was made available at a lower cost than any policy partially prohibiting AOBs.
• The policy includes on its face the following notice in 18-point uppercase and boldfaced type:

THIS POLICY DOES NOT ALLOW THE UNRESTRICTED ASSIGNMENT OF POST-LOSS INSURANCE BENEFITS. BY SELECTING THIS POLICY, YOU WAIVE YOUR RIGHT TO FREELY ASSIGN OR TRANSFER THE POST-LOSS PROPERTY INSURANCE BENEFITS AVAILABLE UNDER THIS POLICY TO A THIRD PARTY OR TO OTHERWISE FREELY ENTER INTO AN ASSIGNMENT AGREEMENT AS THE TERM IS DEFINED IN SECTION 627.7153 OF THE FLORIDA STATUTES.

627.7153. 

Pro Tip : If you have an electronic copy of your complete insurance policy (not just the declaration page), then search for “policy does not allow the unrestricted assignment” or another phrase from the required language above to see if your policy restricts an AOB.  If your policy doesn’t contain this required language, it probably doesn’t restrict AOBs.

Do I have any rights or protections concerning Assignments of Benefits?

Yes, you do.  Florida recently enacted laws that protect consumers when dealing with an AOB.

Protections in the AOB Contract

To be enforceable, a Assignments of Benefits must meet all of the following requirements:

• Be in writing and executed by and between you and the contractor.
• Contain a provision that allows you to cancel the assignment agreement without a penalty or fee by submitting a written notice of cancellation signed by the you to the assignee:
• at least 30 days after the date work on the property is scheduled to commence if the assignee has not substantially performed, or
• at least 30 days after the execution of the agreement if the agreement does not contain a commencement date and the assignee has not begun substantial work on the property.
• Contain a provision requiring the assignee to provide a copy of the executed assignment agreement to the insurer within 3 business days after the date on which the assignment agreement is executed or the date on which work begins, whichever is earlier.
• Contain a written, itemized, per-unit cost estimate of the services to be performed by the assignee .
• Relate only to work to be performed by the assignee for services to protect, repair, restore, or replace a dwelling or structure or to mitigate against further damage to such property.
• Contain the following notice in 18-point uppercase and boldfaced type:

YOU ARE AGREEING TO GIVE UP CERTAIN RIGHTS YOU HAVE UNDER YOUR INSURANCE POLICY TO A THIRD PARTY, WHICH MAY RESULT IN LITIGATION AGAINST YOUR INSURER. PLEASE READ AND UNDERSTAND THIS DOCUMENT BEFORE SIGNING IT. YOU HAVE THE RIGHT TO CANCEL THIS AGREEMENT WITHOUT PENALTY WITHIN 14 DAYS AFTER THE DATE THIS AGREEMENT IS EXECUTED, AT LEAST 30 DAYS AFTER THE DATE WORK ON THE PROPERTY IS SCHEDULED TO COMMENCE IF THE ASSIGNEE HAS NOT SUBSTANTIALLY PERFORMED, OR AT LEAST 30 DAYS AFTER THE EXECUTION OF THE AGREEMENT IF THE AGREEMENT DOES NOT CONTAIN A COMMENCEMENT DATE AND THE ASSIGNEE HAS NOT BEGUN SUBSTANTIAL WORK ON THE PROPERTY. HOWEVER, YOU ARE OBLIGATED FOR PAYMENT OF ANY CONTRACTED WORK PERFORMED BEFORE THE AGREEMENT IS RESCINDED. THIS AGREEMENT DOES NOT CHANGE YOUR OBLIGATION TO PERFORM THE DUTIES REQUIRED UNDER YOUR PROPERTY INSURANCE POLICY.

• Contain a provision requiring the assignee to indemnify and hold harmless the assignor from all liabilities, damages, losses, and costs, including, but not limited to, attorney fees.

Contractor Duties

Under Florida law, a contractor (or anyone else) receiving rights to a claim under an AOB:

• Must provide you with accurate and up-to-date revised estimates of the scope of work to be performed as supplemental or additional repairs are required.
• Must perform the work in accordance with accepted industry standards.
• May not seek payment from you exceeding the applicable deductible under the policy unless asked the contractor to perform additional work at the your own expense.
• Must, as a condition precedent to filing suit under the policy, and, if required by the insurer, submit to examinations under oath and recorded statements conducted by the insurer or the insurer’s representative that are reasonably necessary, based on the scope of the work and the complexity of the claim, which examinations and recorded statements must be limited to matters related to the services provided, the cost of the services, and the assignment agreement.
• Must, as a condition precedent to filing suit under the policy, and, if required by the insurer, participate in appraisal or other alternative dispute resolution methods in accordance with the terms of the policy.
• If the contractor is making emergency repairs, the assignment of benefits cannot exceed the greater of $3,000 or 1% of your Coverage A limit.

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Nomination and Assignment under Insurance Contracts

Published by siri k reddy on 30/01/2021 30/01/2021, introduction:.

The term assignment itself means you assign something to someone else. In term life insurance, the assignment of the policy describes the action of assigning legal rights as well as policy ownership to someone else. The person who assigns the policy is known as an Assignor and the person who has been assigned the policy is known as an Assignee.

Nomination under the insurance contract refers to nominate someone on your behalf in order to collect the benefit in your absence. A person who is trustworthy can be nominated upon the death of a person. The trustworthy person could be from the dead person’s family or close friends. Then that person is the nominee of the policy.

However in most of the cases, people choose their family member as the nominee of the policy but as per the insurance act of 1938, under section 39, the nomination of a particular person is not restricted to a family only. Any person who is considered as trustworthy and any person who will not misuse the policy are considered to be an ideal nominee of that particular policy.

Types of Assignment

There are two types of assignment of policies:

• Absolute assignment: under this particular type of assignment, the assignor is bound to transfer the ownership, title, legal interests and all the rights of the policy to the assignee. This type of transfer of the policy does not include the terms and conditions on the part of the assignee. The exact purpose of the absolute assignment is to repay the debts or to show affection to loved ones.
• Collateral assignment: collateral assignment refers to that particular assignment in which the policyholder assigns the policy on terms and conditions, and the assignee is restricted to avail the benefits of all the terms and conditions. The main purpose of the collateral assignment is to repay loans and liabilities.

Types of Nomination

There are three types of nominations, such as:

• Beneficiary nominee: in this particular nomination a particular person can be made beneficiary to the immediate family members like parents, children, and spouse. The beneficiary will be entitled to receive all the benefits of the policy legally only in case of unfavourable conditions.
• Minor nominee: since it is considered that a minor cannot deal with financial conditions, the guardian of that particular minor has to give the details of their selves only when the policyholder chooses his/her child as the nominee.
• Non-family nominee: a non-family member is that person who does not have blood relation with the policyholder such as close friends, a distant relative, a neighbour, etc. under section 39 of the insurance act of 1938; any trustworthy person can be a policy nominee.

Nomination and Assignment in Life Insurance Plans

As it is already known that insurance is a legal contract between the insurance company who is also called the insurer and the policyholder. An assignee is a person to whom the rights have been transverse to. An example of an absolute assignment is as follows: Mr Bharath owns a life insurance policy of 1 crore and he wants to gift this particular policy to his wife as ‘absolute assignment’ to her name. Once this absolute assignment is made to his wife’s name, she will be the owner of the policy. She also has the right to transfer this policy to someone else.

An example of a conditional assignment is as follows: Ms Supriya owns a term insurance policy of 900,000. She wants a home loan of the same amount. Hence her banker asked her to assign the term policy in their name in order to get the loan.  If Supriya meets an untimely death the banker is entitled to enjoy their money. An assignment deed or deed of assignment [DOA] is that deed through which rights can be transferred from one person to another.

Sections and Policies

SECTION 38- ASSIGNMENT AND TRANSFER OF INSURANCE POLICIES

The provisions under section 38 of the Insurance Law Act, 2015. The provisions of this particular section are as follows:

• This policy allows itself to be transferred with or without consideration.
• An assignment has a high chance of being affected by an endorsement upon the policy or by a separate instrument to the insurer.
• The instruments should reflect the assignment and the reasons for the transfer.
• An authorized agent or the transferor should sign the assignment.
• The transferor of the assignment should not be operative against an insurer until prior notice is issued
• The authority has the right to specify the fees that is paid for the transfer
• The insurer is also expected to give a written acknowledgement of receipt of the notice. Such notice acts as evidence for the future.
•  The notices shall be delivered only at one place where the policy is being served in order to avoid confusions. This arrangement is made as the insurer is involved in managing more than one business place.
• The insurer has the right to accept or deny acting upon any transfer or endorsement only if it is not bonafide or not in the public interest.
• Before denying the endorsement, the insurer should make a note of the reasons for the same.

SECTION 39- NOMINATION BY POLICYHOLDER

The provisions of this particular section are as follows:

• The policyholder can nominate a person to whom money secured by the policy shall be paid during the death.
• When in case of a minor, the policyholder can appoint any person to receive the money in the event of policyholder’s death during the minority of the nominee.
• Nomination can be made at any time before the maturity of the policy.
• The nomination can be incorporated or endorsed to the insurer.
• The provisions of section 39 are not applicable to any life insurance policy to which section 6 of the Married Women’s Property Act, 1874 applies.
• If the nominee dies before the policyholder, the money is payable to the legal representatives or the holder of succession certificate.

SECTION 45- Policy shall not be called in question on the ground of misstatement after three years

Provisions of this section are as follow:

• Any policy of life insurance shall not be called in question after the expiry of three years from the date of issuance of the policy, the date of commencement of risk, the date of revival, the date rider coming to the policy.
• Silence is not considered to be fraud unless it depends on the circumstances of the case.
• The insurer can call for age proof at any time only if he is entitled.
• No insurer can reject a life insurance policy on the grounds of fraud if the beneficiary can prove that the fraud was true to the best of his knowledge.

Difference between Nomination and Assignment

Assignment of policies- impact on existing nomination.

• According to section 39(4) of the insurance act, 938, the assignment of an insurance policy automatically cancels the nomination.
• Here are the few circumstances under which the assignment does not automatically cancel nomination :

When the policy loan is taken from the life insurer who issues the policy, the policy has to be assigned in favour of the life insurer. Under such circumstances, assignments in favour of the life insurer do not automatically cancel the nomination.

On the other hand, where the policy is assigned by a debtor to creditor acts as collateral security for the loan taken by the policyholder from the assignee.

The nomination and assignments have their own uses and benefits as a separate topic under the insurance contracts. I have gained in-depth knowledge of what exactly is nomination and assignment along with minute differences between them. The differences between them have helped me gain much more understanding of the topic. Nomination protects the interests of the insured and the insurer. Whereas the assignment strives to protect the interests of the assignee in availing all the benefits.

References:

• INSURANCE LAWS IN INDIA- VARDHAMAN MAHAVEER, pg. 32. 54.
• RAJIV JAIN: INSURANCE LAW AND PRACTICE, pg. 44
• https://m.economictimes.com/nomination-and-assignment/articleshow/3320189.cms
• https://accountlearning.com/difference-nomination-assignment/
• https://accountlearning.com/assignment-in-insurance-policy-meaning-explanation-types/
• https://life.futuregenerali.in/life-insurance-made-simple/life-insurance/change-nominee-in-term-insurance

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Insurance Policy Consent to Assignment Clauses

Many policyholders forget that their insurance policy is a contract and is subject, with exceptions, to the usual laws of contract. An issue that frequently arises is whether the named insured is able to assign insurance proceeds under the policy to another. The answer to that question is dependent on the type of coverage sought.

Most insurance policies have a “consent to assignment clause” that typically provides: “Assignment of interest under this policy shall not bind the Company until its consent is endorsed hereon.” 1 This clause is designed to protect the insurer from having to extend coverage to an entity it never agreed to cover. In California, the enforceability of the clause depends on both the timing of the assignment and whether the claim is a first party loss – where the insured is seeking benefits for a sunk ship or a burned building, or a third party claim, which protects insured in certain instances when the insured might be liable to another.

With respect to first party claims, insurers have a vested interest in their personal relationships with the named insureds, and before a loss , a legally recognized need to prevent non-consensual assignments to less responsible insureds. 2 After a first party loss , however, the insurer’s need to consent dissipates, because any assignment is only of money already due under the contract and any right of the insured as a result of the loss may be assigned with or without the consent of the insurer; thus the consent to assignment clause is deemed unenforceable. 3 With respect to third party claims, the California Supreme Court held in Henkel that the consent to assignment clause is enforceable and, as a result, a company that acquired a policyholder’s assets and liabilities could not receive the benefits of the policyholder’s liability coverage in the absence of an insurer-approved assignment regardless of when the assignment took place. 4

The enforceability of “consent-to-assignment” clauses is dependent on the law of each particular state. Always check with an attorney before making an assignment of policy benefits to another, regardless of the situation.

1    Henkel Corp. v. Hartford Accident & Indemnity Co. (2003) 29 Cal.4th 934 , 943. 2 Bergson v. Builders Ins. Co. (1869) 38 Cal. 541, 545. 3 Vierneisel v. Rhode Island Ins. Co. (1946) 77 Cal.App.2d 229 , 232 [house destroyed by fire before close of escrow; affirming assignment by sellers to buyers of right to recover proceeds under fire insurance policy]. 4 Henkel , supra , 29 Cal.4th at p. 944.

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Assignment of Insurance Benefits Contracts: Resolving AOB Claims and Defending AOB Lawsuits

Aob's scope, invoking the appraisal remedy, enforcing conditions to payment, handling multiple assignments.

Recording of a 90-minute CLE video webinar with Q&A

Conducted on Thursday, January 21, 2021

Recorded event now available

This CLE course will guide insurance practitioners to an enhanced understanding of the use and abuse of assignment of benefits (AOB) whereby a third party, such as a contractor or physician, steps into the insured's shoes to negotiate claims with, and to receive payments and benefits directly from, the insurer. The panel will discuss the importance of any contractual limitations on AOBs, how AOBs affect the adjustment and settlement of losses, whether the assignee might be an unlicensed public adjuster, conflicts and competing interests AOBs can create, how AOBs can create "Catch-22" scenarios for insurers, and best practices for investigating and countering suspicious claims.

Description

AOB is standard practice in insurance: an agreement that transfers the insurance claims rights or benefits of the policy to a third party. An AOB gives the third party authority to file a claim, make repair decisions , and collect insurance payments without the policyholder's involvement.

AOBs have been used with life and health insurance policies for many years. Now, AOBs are commonly used in homeowners' insurance claims by restoration companies and contractors. AOBs can help navigate the claims process but can lead to unintended consequences for insurers and policyholders .

Savvy counsel must understand the nuances of AOBs and their impact on claims , along with the evolving approaches of public adjusters, contractors, and lawyers in the first-party property insurance context.

Listen as our authoritative panel of insurance practitioners discusses the current state of the law, including state-specific reform efforts and trends, how AOB affects the adjustment of a loss, and strategies for negotiating the loss settlement. The panel will also address the importance of understanding the competing interests in the policy proceeds, best practices for investigating and countering contractor misrepresentations, and related appraisal and litigation issues.

• Assignment of benefits overview
• The current state of the law
• State reform efforts and trends
• Policyholder perspectives
• Insurer perspectives
• Best practices and case studies

The panel will review these and other key issues:

• What are the essential elements of an AOB contract, and who benefits from it?
• What is the impact of a "non-assignability" clause in the insurance contract?
• What are "red flags" for potential fraud involved with the assignment of claim presentations?
• What are the best strategies to help navigate a policyholder's claim through an AOB situation?
• What is the current state of the law and state-specific reform efforts?
• What are the critical AOB-related appraisal and litigation issues?

Mr. Friedman provides corporate insurance counseling to companies in Florida, the Caribbean, New York, and other U.S. and foreign jurisdictions. He also advised the State of Florida on insurance policy issues. He writes extensively about insurance coverage for many publications, including National Underwriter, Business Insurance, Risk & Insurance, South Florida Business Journal, and Harvard Law Record.

Mr. Rybny represents insurers in all phases of first and third party insurance disputes, including pre-litigation activities, special investigations, declaratory relief actions, and lawsuits alleging bad faith. His experience encompasses CGL, farm, condominium, fiduciary liability, property, business interruption, commercial crimes and credit risk insurance. Over the years, Mr. Rybny has been asked to speak on a variety of emerging insurance issues. Scott has presented at PAMIC, IASIU, PACIA, NBI, PDI and PLRB.

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Tred Eyerly Director Damon Key Leong Kupchak Hastert

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Assignment in Insurance Policy | Meaning | Explanation | Types

Table of Contents

• 1 What is Assignment in an Insurance Policy?
• 2 Who can make an assignment?
• 3 What happens to the ownership of the policy upon Assignment?
• 4 Can assignment be changed or cancelled?
• 5 What happens if the assignment dies?
• 6 What is the procedure to make an assignment?
• 7 Is it necessary to Inform the insurer about assignment?
• 8 Can a policy be assigned to a minor person?
• 9 Who pays premium when a policy is assigned?
• 10.1 1. Conditional Assignment
• 10.2 2. Absolute Assignment

What is Assignment in an Insurance Policy?

Assignment means a complete transfer of the ownership of the policy to some other person. Usually assignment is done for the purpose of raising a loan from a bank or a financial institution .

Assignment is governed by Section 38 of the Insurance Act 1938 in India. Assignment can also be done in favour of a close relative when the policyholder wishes to give a gift to that relative. Such an assignment is done for “natural love and affection”. An example, a policyholder may assign his policy to his sister who is handicapped.

Who can make an assignment?

A policyholder who has policy on his own life can assign the policy to another person. However, a person to whom a policy has been assigned can reassign the policy to the policyholder or assign it to any other person. A nominee cannot make an assignment of the policy. Similarly, an assignee cannot make a nomination on the policy which is assigned to him.

What happens to the ownership of the policy upon Assignment?

When a policyholder assign a policy, he loses all control on the policy. It is no longer his property. It is now the assignee’s property whether the policyholder is alive or dead, the assignee alone will get the policy money from the insurance company.

If the assignee dies, then his (assignee’s) legal heirs will be entitled to the policy money.

Can assignment be changed or cancelled?

An assignment cannot be changed or cancelled. The assignee can of course, reassign the policy to the policyholder who assigned it to him. He can also assign the policy to any other person because it is now his property. We can think of a bank reassigning the policy to the policyholder when their loan is repaid.

What happens if the assignment dies?

If the assignee dies, the assignment does not get cancelled. The legal heirs of the assignee become entitled to the policy money. Assignment is a legal transfer of all the interests the policyholder has in the policy to the assignee.

What is the procedure to make an assignment?

Assignment can be made only after issue of the policy bond. The policyholder can either write out the wording on the policy bond (endorsement) or write it on a separate paper and get it stamped. (Stamp value is the same, as the stamp required for the policy — Twenty paise per one thousand sum assured). When assignment is made by an endorsement on the policy bond, there is no need for stamp because the policy is already stamped.

Is it necessary to Inform the insurer about assignment?

Yes, it is necessary to give information about assignment to the insurance company. The insurer will register the assignment in its records and from then on recognize the assignee as the owner of the policy. If someone has made more than one assignment, then the date of the notice will decide which assignment has priority. In the case of reassignment also, notice is necessary.

Can a policy be assigned to a minor person?

Assignment can be made in favour of a minor person. But it would be advisable to appoint a guardian to receive the policy money if it becomes due during the minority of the assignee.

Who pays premium when a policy is assigned?

When a policy is assigned normally, the assignee should pay the premium, because the policy is now his property. In practice, however, premium is paid by the assignor (policyholder) himself. When a bank gives a loan and takes the assignment of a policy a security, it will ask the assignor himself to pay the premium and keep it in force. In the case of an assignment as a gift, the assignor would like to pay the premium because he has gifted the policy.

Types of assignment

Assignment may take two forms:

• Conditional Assignment.
• Absolute Assignment.

1. Conditional Assignment

It would be useful where the policyholder desires the benefit of the policy to go to a near relative in the event of his earlier death. It is usually effected for consideration of natural love and affection. It generally provides for the right to revert the policyholder in the event of the assignee predeceasing the policyholder or the policyholder surviving to the date of maturity.

2. Absolute Assignment

This assignment is generally made for valuable consideration. It has the effect of passing the title in the policy absolutely to the assignee and the policyholder in no way retains any interest in the policy. The absolute assignee can deal with the policy in any manner he likes and may assign or transfer his interest to another person.

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635th Anti-Aircraft Missile Regiment

635-й зенитно-ракетный полк

Military Unit: 86646

Activated 1953 in Stepanshchino, Moscow Oblast - initially as the 1945th Anti-Aircraft Artillery Regiment for Special Use and from 1955 as the 635th Anti-Aircraft Missile Regiment for Special Use.

1953 to 1984 equipped with 60 S-25 (SA-1) launchers:

• Launch area: 55 15 43N, 38 32 13E (US designation: Moscow SAM site E14-1)
• Support area: 55 16 50N, 38 32 28E
• Guidance area: 55 16 31N, 38 30 38E

1984 converted to the S-300PT (SA-10) with three independent battalions:

• 1st independent Anti-Aircraft Missile Battalion (Bessonovo, Moscow Oblast) - 55 09 34N, 38 22 26E
• 2nd independent Anti-Aircraft Missile Battalion and HQ (Stepanshchino, Moscow Oblast) - 55 15 31N, 38 32 23E
• 3rd independent Anti-Aircraft Missile Battalion (Shcherbovo, Moscow Oblast) - 55 22 32N, 38 43 33E

Disbanded 1.5.98.

Subordination:

• 1st Special Air Defence Corps , 1953 - 1.6.88
• 86th Air Defence Division , 1.6.88 - 1.10.94
• 86th Air Defence Brigade , 1.10.94 - 1.10.95
• 86th Air Defence Division , 1.10.95 - 1.5.98