Lawrence Moon | Property Insurance Coverage Law Blog | September 2, 2017
It is widely accepted that insurance policies are generally not assignable by the policyholder unless the insurance company consents to the assignment. In most states, it is also well-established that after a covered loss has occurred, the policyholder ordinarily may assign the claim to another person or entity, even if the policy contains a clause that prohibits assignments. But what does that mean, exactly? Specifically, what rights and benefits can a policyholder assign to a third party after a covered loss has occurred?
Typically, when “post-loss assignments” are discussed, the conversation pertains to the assignment of a payment that has been reduced to a specific amount owed by the insurance company and regarding which there is nothing more that the policyholder must do to be entitled to receive the payment. For example, after a covered loss has occurred and the policyholder has notified the insurer of the loss, other than cooperating with the insurer’s evaluation of the loss and responding to any reasonable requests the insurer may have, ordinarily there is nothing more that the policyholder must do to be entitled to receive payment of the actual cash value (ACV) of the claim. In other words, the insurer’s obligation to pay the ACV of the claim to the policyholder is not contingent on any other specific conditions of the policy being satisfied or excused. In this blog, I will refer to such rights and benefits as “Noncontingent Benefits.”
As a number of my colleagues have written about in other blogs, it is well-established in most states that a policyholder may freely assign Noncontingent Benefits to a third party and the insurer must honor such assignments. For instance, if a policyholder assigns her rights to the ACV payment of her claim and the policyholder has cooperated with the carrier’s evaluation of the claim, the carrier ordinarily must pay the ACV amount of the claim to the assignee and the assignee may enforce the assignment against the carrier. But what about rights and benefits that the policyholder is not yet entitled to either because certain specific conditions of the policy have not yet been satisfied or the claim has not yet been reduced to a fixed amount or judgment? For instance, under a replacement cost property insurance policy, can a policyholder assign the replacement cost value (RCV) benefits, such as the right to receive the “depreciation holdback” payment, before the approved repairs have been completed? In other words, can a policyholder assign a benefit or right that is still subject to the satisfaction or fulfillment of one or more specific conditions of the policy, such as completion of the approved repairs under a replacement cost policy? In this blog, I will refer to such rights and benefits as “Contingent Benefits.”
While the validity of assignments of Noncontingent Benefits has been addressed fairly extensively by the courts in most states, the validity of assignments of Contingent Benefits has not. We are handling separate lawsuits in Arizona in which a national property insurance company has refused to honor assignments of Contingent Benefits—specifically, pre-repair assignments of the depreciation holdback associated with RCV benefits under a replacement cost policy. The carrier has asserted that only the policyholder may complete the approved repairs for it to have an obligation to pay the depreciation holdback. In addition, according to the carrier, if the policyholder assigns her rights to the RCV benefits before the approved repairs are completed and someone other than the policyholder completes the repairs (such as the assignee), the carrier has no obligation to pay the depreciation holdback to the assignee or anyone else.
All of the reported court decisions I have found that address the validity of assignments of Contingent Benefits—and there are only a few courts that have addressed that specific issue—have ruled that Contingent Benefits are as freely assignable as Noncontingent Benefits. For instance, courts in California, Iowa, Tennessee, Florida, Wisconsin (applying Mississippi law), and the District of Columbia have held that post-loss assignments of Contingent Benefits are valid and enforceable by the assignee. The primary distinction between Contingent Benefits and Noncontingent Benefits noted by the courts is that the assignee’s entitlement to the Contingent Benefits only arises when and if all conditions applicable to the Contingent Benefits are fulfilled or excused. If the conditions are not fulfilled or excused, the carrier may raise the unfulfilled conditions as a defense to enforcement of the assignment.
The carrier in our Arizona cases, however, noted that in an unreported decision, a federal district court in Washington held just the opposite, that an assignment of Contingent Benefits was not valid.1 In that decision, the district court held that the policyholders’ assignment of their claim for the replacement cost holdback was not valid or enforceable against their insurance company. Despite acknowledging that Washington follows the general rule that post-loss assignments of policy benefits are valid, the district court in Sherard held that the assignment of a claim for the replacement cost holdback is not valid if the claim is assigned before the approved repairs are completed. The court reasoned that only “accrued” claims could be assigned and a claim for the replacement cost holdback does not “accrue” until the approved repairs are completed. Ultimately, the district court in Sherard ruled that the policyholders could not assign their claim for the replacement cost holdback unless the underlying repairs had been completed.
The holding in Sherard contradicts the holdings and reasoning of the reported court decisions I found that specifically address the validity of assignments of Contingent Benefits. It also contradicts a substantial body of law regarding assignments of contract rights, generally. Perhaps coincidentally, the same year the district court in Sherard held that assignments of Contingent Benefits are not valid in Washington (i.e., 2015), the Supreme Court of California noted that the assignment of Contingent Benefits was an area that insurers had only recently begun to challenge.
In upcoming blogs, I will discuss how the Supreme Court of California has handled the assignment of Contingent Benefits in California, how we addressed the issue in our Arizona cases, and how the courts in Arizona have ruled on the issue.
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1 Sherard v. Safeco Ins. Co. of Amer., 2015 WL 5918397 (W.D. Wash.).