Generally, the law allows “choses in action” to be alienated (sold). This is a change that has been adopted over the course of the last 100 years or more. See W.W. Cook, The Alienability of Choses in Action, 29 Harv. L. Rev. 816 (1916). Because claims under insurance contracts properly viewed are choses in action, (Black’s Law Dictionary (5th ed. 1979) at 219), most courts have allowed insurance claims to be sold, too, even when the transaction takes the form of an “assignment.”
This is different from assigning the policy. Policies cannot be assigned, but what we mean by that is to change the named insured under the policy. Let me give an example: I have a car that I want to sell, which is worth $800. And let’s assume that I have an auto insurance policy with four months left in the policy term. What I cannot do is say, “buy my car for $1000 and I’ll throw in my insurance coverage” (as if you can be covered for the remaining policy term). This is changing the “named insured” going forward; the insurers haven’t checked out the buyer’s driving record, who might be a worse driver or a driver with a slew of speeding tickets.
But let’s change the scenario a little: let’s assume the day before I’m supposed to meet with you to sell my car I run into a bollard, which dents my fender and causes $200 of damage. Is there anything wrong with the idea that (assuming the $200 repair bill would be covered by my auto insurance) I can sell you my car for $700 plus the receivable from my insurance company for $200?
Most insurance policies state that “assignment of interest under this Policy shall not bind the [insurer] without its prior written consent.” Is selling the receivable – the chose in action – something that violates the policy terms? Is the chose an “interest under this Policy”? And if I breach this provision, is coverage vitiated (i.e., is this anti-assignment clause a condition precedent to coverage or a term whose breach is considered to be material to the contract as a whole)?
A more common real-life scenario is this: an insured-defendant settles with the tort plaintiff where one element of the consideration is the receivable owed from the insurance company (the insured’s claim for reimbursement of its defense costs and ultimately the value of its settlement with the plaintiff). See generally Enserch Corp. v. Shand, Morahan & Co., Inc., 952 F.2d 1485 (5th Cir. 1992) (Wisdom, J.) (approving of a “two tier” settlement whereby plaintiffs received certain monies up front and then additional monies on the back end depending on the recovery against the defendant-insured’s carriers). In these circumstances, the courts typically have held that the assignment of the chose in action to the insurers has not expanded the carrier’s risk, that choses are freely assignable, that the insurer is not at risk of double payment, and that the plaintiff may proceed against the insurer to assert on behalf of the insured its (pre-existing) contractual claims against the insurer. See generally International Rediscount Corp. v. Hartford Acc. & Indem. Co., 425 F. Supp. 488 (D.Del. 1977); Ardon Constr. Corp. v. Firemen’s Ins. Co., 185 N.Y.S.2d 723 (1959). Courts have held similarly regarding whether a fire insurance policy applies after property transfer. National Am. Ins. Co. v. Jamison Agency, Inc., 501 F.2d 1125 (8th Cir. 1974); Imperial Enter., Inc. v. Fireman’s Fund Ins. Co., 535 F.2d 287 (5th Cir. 1976); University of Judaism v. Transamerica Ins. Co., 61 Cal. App. 3d 93 (1976).
As with my selling my car and throwing the auto insurance in, there are countervailing concerns: in the auto example, the insurance company – at least insofar as liability insurance – elected to insure me and set a premium based in part on my driving record (although zip codes nowadays may be a stronger determinant of premium); if my insurance could be transferred to a riskier driver then the insurance company’s risk has changed – and the courts will invalidate that transfer on any number of grounds including “prejudice” or expansion of the risk to the carrier. See Muslin v. Frelinghuysen Livestock Managers Inc., 777 F.2d 1230, 1233 (7th Cir. 1985) (first-party mortality insurance on a racehorse not assignable).
Note that the issue on which I am focused concerns the anti-assignment provision. Courts (and insurers) sometimes also focus on the “duty to cooperate” and the “no action” provision in disputes involving to some extent assignments of the chose in action under an insurance policy. Hamilton v. Maryland Casualty Co., 27 Cal. 4th 718 (2002); Miller v. Shugart, 316 N.W.2d 729 (Minn. 1982). Unique policy provisions or unique interests may affect whether a transfer of the right to collect from an insurance company is proper or whether pre-transfer insurance policies apply, but until the last few years the courts in virtually all states have allowed transfers of the insured’s chose in action, reasoning in part that an insurer has been paid to accept the transfer of risk, and if that risk has come to pass it matters not to whom the check is cut – the original insured or an assignee.
(In fact, it doesn’t matter who litigates against the insurer – an assignee or an assignor, so long as the absent party is bound to the result in the coverage case. See Greco v. Oregon Mut. Fire Ins. Co., 12 Cal. Rptr. 1802 (Cal. App. 1961); Clarkson Co. Ltd. v. Rockwell Int’l Corp., 441 F. Supp. 792 (N.D. Cal. 1977); Urrutia Aviation Enterprises, Inc. v. B.B. Burson & Assoc., Inc., 406 F.2d 769 (5th Cir. 1969); Icon Group, Inc. v. Mahogany Run. Dev. Corp., 829 F.2d 473, 478 (3d. Cir. 1987); Prosperity Realty, Inc. v. Haco-Canon, 724 Supp. 254, 258 (S.D.N.Y. 1989).)
And the reason for this consistent string of outcomes is that courts typically have found that there is no legitimate interest in allowing an insurance company to refuse to perform when its risk has not been (materially) altered and it has received payment for the transfer of that risk.
Nevertheless, there have been inconsistent results (spurring further litigation) regarding large-scale liability claims that came to rest on some corporate-successor-in-interest to the original tortfeasor-insured following a series of complex corporate transactions – which should cause serious concern for corporate-transactions lawyers who ignore the insurance consequences of the deals they put together. The Ohio Supreme Court just decided a case allowing insurers to get off the hook completely for mass lead-paint liability claims, not because the claims were not covered but rather because the insurance mysteriously evaporated along the way of a number of corporate transactions, leading to the tort liability flowing through to the successor but inadvertently stripped of the insurance protection that would have otherwise applied to the claims had the corporate transactions never occurred. See Glidden Cos. v. Lumberman’s Mut. Cas. Co. (Ohio Dec. 20, 2006).
Until the modern coverage wars broke out, however, the courts routinely allowed whoever ended up with the tort liability to tap the insurance coverage that would have applied before the later corporate transaction took place. See Ocean Acc. & Guar. Corp. v. Southern Bell Telephone Co., 100 F.2d 441 (8th Cir. 1939); Chatham Corp. v. Argonaut Ins. Co., 334 N.Y.S.2d 959 (N.Y. Supr. 1972); Aetna Life & Cas. v. United Pac. Reliance Ins. Cos., 580 P.2d 230 (Utah 1978); Paxton & Vierling Steel Co. v. Great American Ins. Co., 497 F. Supp. 673 (D. Neb. 1980); Brunswick Corp. v. St. Paul Fire and Marine Ins. Co., 509 F. Supp. 750 (E.D. Pa. 1981); Travelers Ins. Co. v. Western Fire Ins. Co., 709 P.2d 639 (Mont. 1985); Oklahoma Morris Plan Co. v. Security Mut. Cas. Co., 455 F.2d 1209 (8th Cir. 1972).
But the modern, large-dollar coverage cases often involve detours and frolics into corporate transactions, all ultimately concerned about whether the entity paying the liability of some historic predecessor somehow or another is naked as far as insurance coverage goes. Note that the issue does not involve any expansion of the insurers’ obligations beyond that which would exist had the original insured not been merged out of existence, sold its assets, or otherwise sliced, diced, chopped, and slawed. In each instance, the entity claiming the benefit of the coverage is paying for the historic insured’s liability, and the only question is whether the insurers somehow or another get off the hook – as in Glidden – because of the manner in which some legitimate post-injury corporate transaction took place. Indeed, in one of my coverage cases, the parties no doubt spent a million dollars exhuming various corporate transactions – all to the end that the court concluded that none of these really mattered so long as the insurers could be assured that nobody else would sue the insurance companies for the same obligations being claimed by the entity before the court.
Earlier this year, in rebuffing the effort of an insurer to deny coverage based on the assignment of the chose in action, the Pennsylvania Supreme Court likewise allowed the transfer of the right to collect. As that court explained:
The assignment changed only the identity of the party who was entitled to recover under the Gulf policy, in the event an excess verdict was obtained. [B]ecause [the insurer’s] risk was not increased following the assignment, [and] since the assignment was subject ‘to such claims, demands, or defenses as the insurer would have been entitled to make against the original insured,’ [citation omitted] the Superior Court correctly determined that the assignment was valid.
Egger v. Gulf Ins. Co. (Pa. Aug. 23, 2006). Indeed, several months ago, the California Supreme Court went so far as to hold that not only the insured’s coverage benefits but also first-party insurance bad-faith damages could be recovered by an assignee. Essex Ins. Co. v. Five Star Dye House Inc. (Cal. July 6, 2006).
In sharp contrast, the Oregon Supreme Court recently allowed an insurer off the hook because of an assignment of the chose in action. Holloway v. Republic Indem. Co. of Am. (Ore. Nov. 16, 2006) . As the Oregon court framed the question presented: “The central issue in this insurance contract case is whether an anti-assignment clause providing that ‘[y]our rights or duties under this policy may not be transferred without our written consent’ is ambiguous and thus should be construed against its drafter.” In Holloway, the court ruled that the policy’s anti-assignment provision was clear, thus eschewing any difference between pre-loss assignments (changing the named insured) with post-loss assignments (transferring the chose in action) and held that a post-loss assignment of the right to collect under the policy vitiated coverage.
Some courts, as in Holloway, look at the question in terms of whether the terms of the anti-assignment provision applies – but most courts as did the Pennsylvania Supreme Court in Egger find that the terms of that provision do not apply or are ambiguous in their application to the assignment of the right to collect and thus must be construed against the drafter. The court in Holloway put on blinders and failed to examine whether there was any real consequence to the insurer from changing who was asserting the insured’s rights (the original insured or someone else suing in the name of the insured or suing for the benefits owed the insured); instead, the Holloway court (like Glidden) viewed the anti-assignment clause as being applicable and absolute.
But even if one were to accept that analysis at face value, Holloway plainly goes wrong in not asking what is the consequence of the violation of the anti-assignment provision. In other words, it is never enough to say that the terms of a contract were violated – before the non-breaching party’s performance is excused, the breach must be one that is either material to the contract as a whole or whose satisfaction is a (valid) condition precedent to performance. Holloway simply stops after finding that the assignment at issue was subject to the policy provision – and the court does not address whether its violation constitutes a material breach of the contract as a whole.
This is another way of backing into the argument that assignments of the chose in action – as distinct from an assignment of the policy itself, i.e., changing the named insured – is not material in the ordinary case. The only real difference is to whom the insurance company is supposed to write its check. As in Egger, the insurance company is free to argue that the nature of the damages are uncovered or that the conduct leading to the claim is uncovered – but that is different from saying that because someone other than the original insured is knocking on the carrier’s door with the original-insured’s hat in hand the insurer somehow escapes paying.
Even though had the original insured pursued the identical claim for damages the insurance company would be required to pay, the courts in Holloway and Glidden allow insurers to distract them from the merits, expose managers to claims of waste from making good on the legal obligation of the tortfeasor-insured – sometimes decades later and many corporate-predecessors removed, permit insurers to keep the premiums for risks they were paid to assume and which came to pass, or allow tort victims who pursue collection against the tortfeasor’s insurer to go uncompensated, all because the court concludes the twain did not meet between the liability and the insurance. In contrast, the rule in Egger and cases like it ensures that the contracting parties achieve the benefits (or detriments) of the original bargain in the event the risk the insured sought to transfer– and for which the insurer collected premium — comes to fruition.