Non-Assignment Clauses Only Prevent Assignment of Policy Not a Perfected Loss and Claim
Every third party liability insurance policy contains an anti-assignment condition that prevents an insured from assigning the policy to a third party without the permission of the insurer. The clauses do not prohibit assignment of claims that resulted from a covered occurrence during the policy period of the insurer.
When a perfume maker was sued for environmental pollution its insurers refused to defend or indemnify because they were not named as insureds in the policy and that they did not approve an assignment of policies from various predecessors of the plaintiff, Fragrances.
Insurers, faced with an avalanche of case law across the country, allowing assignment of the claim – a chose in action – and refuse to apply the anti-assignment clause to claims, continue to try to convince courts to make the condition include rights not mentioned in the policy wording. They tried again in New Jersey this year in Givaudan Fragrances Corporation v. Aetna Casualty & Surety..., Supreme Court of New Jersey, — A.3d —-, 2017 WL 429476 (2/1/2017) when the Supreme Court of New Jersey was asked to settle whether New Jersey adheres to the rule that an anti-assignment clause in an insurance policy may not bar the assignment of a post-loss claim even though the claim has not been reduced to a money judgment.
Plaintiff Givaudan Fragrances Corporation (Fragrances) faces liability as a result of environmental contamination from a manufacturing site that a related corporate entity operated in a facility in Clifton, New Jersey, in relevant part, from the 1960s through 1990. The crux of this appeal involves Fragrances’s effort to obtain insurance coverage for environmental claims.
Defendants are insurance companies that wrote primary, excess, or umbrella policies of insurance for predecessors of Fragrances. Collectively, defendants refuse to honor Fragrances’s right to bring insurance contract claims against them.
Fragrances asserts that it has the right via an assignment of rights to claim coverage under the policies. That right, Fragrances asserts, may not be defeated by a clause, common to the policies at issue, that makes any assignment subject to the insurer’s consent (the “anti-assignment clause”). The language of that clause, as it appears in one representative policy, provides: “Assignment of interest under this policy shall not bind the Company until its consent is endorsed hereon…”
The dispute between Fragrances and defendants began in earnest when Fragrances was sued. Fragrances notified defendants of the environmental claims, but, generally stated, all defendants declined to provide coverage because Fragrances was not the named insured under the policies. Fragrances sued and while the declaratory judgment action was pending, Fragrances notified defendants that Flavors intended to assign its post-loss rights under the insurance policies to Fragrances. Defendants refused to consent to the assignment. Nevertheless, Flavors executed the assignment to Fragrances, which Fragrances maintains transferred its rights with respect to coverage for claims related to the fragrances operations that had been transferred pursuant to the 1998 restructuring.
After the assignment was executed, Fragrances filed a motion for summary judgment, asserting (1) that Fragrances has the rights of an insured under the policies because of the post-loss assignment of the claims.
Defendants countered that the 2010 assignment from Flavors to Fragrances was a policy assignment because it aimed to grant all rights under the policies to Fragrances. Defendants stated that insurance policies are personal contracts specific to the insured party that may not be assigned without the insurer’s consent.
The Appellate Division reversed and remanded. The panel explained that the policies were occurrence policies, where “the peril insured is the occurrence itself.” Although the anti-assignment clauses in the occurrence policies at issue would prevent an insured from transferring a policy without the consent of the insurer, once a loss occurs, an insured’s claim under a policy may be assigned without the insurer’s consent.
Defendants assert that Flavors’s assignment was invalid as it added a second insured to the policy, increasing their liability. More specifically, they contend that Flavors’s assignment was a proscribed policy assignment, not an allowable transfer of a claim under the policy. Fragrances argues that Flavors validly made a claim assignment—not a policy assignment—to Fragrances.
In Elat, Inc. v. Aetna Casualty & Surety Co., 280 N.J. Super. 62 (App. Div. 1995), the appellate court concluded that a post-loss insurance policy claim may be assigned. In Elat, the Appellate Division concluded that an anti-assignment condition in an insurance policy cannot restrict a policyholder’s ability to assign a post-loss claim.
The reason for the distinction between a transfer of a contractual relationship and a transfer of a money claim is critical. The purpose behind a no-assignment clause in a casualty or liability policy which is to protect the insurer from insuring a different risk than intended. The assignment only changes the identity of the entity enforcing the insurer’s obligation to insure the same risk. Thus, the purpose behind the no-assignment clause is not inhibited by allowing claim, as opposed to policy, assignment.
The reasoning in Elat aligns with the overwhelming majority of jurisdictions that have, over the decades, spoken on the issue presented in the instant matter.
The majority rule in the United States is that a provision that prohibits the assignment of an insurance policy, or that requires the insurer’s consent to such an assignment, is void as applied to an assignment made after a loss covered by the policy has occurred. Once the loss has triggered the liability provisions of the insurance policy, an assignment is no longer regarded as a transfer of the actual policy. Instead, it is a transfer of a chose in action under the policy.
The majority rule is an exception to the general principle that parties to a contract may freely limit assignment of their contractual rights. The principle underlying the rule is a deeply rooted public policy against allowing restraints on alienation of choses in action. The rule also embodies a recognition that “once a loss occurs, an assignment of the policyholder’s rights regarding that loss in no way materially increases the risk to the insurer.” 17 Williston on Contracts § 49:126 (4th ed. 2016).
The key issue is whether claims based on injuries that occurred during the policy period, but that had not been reduced to money judgments, were assignable without the insurer’s consent.
With respect to the core argument about the enforceability of insurance policy anti-assignment provisions concerning post-loss claims, the Supreme Court found no reason to hesitate to adopt the position that an anti-assignment clause is not a barrier to the post-loss assignment of a claim. The better rule is the generally recognized majority rule on that issue.
Simply stated, that general rule recognizes that anti-assignment clauses in insurance contracts apply only to assignments before loss, and do not prevent an assignment after loss. Post-loss assignments do not further the purpose of the anti-assignment clause, which is to protect the insurer from increased liability, because, after the events giving rise to the insurer’s liability have occurred, the insurer’s risk cannot be increased by a change in the insured’s identity.
Having adopted the majority rule, the Supreme Court turned to its application to the case at hand. In doing so, it considered first whether Flavors’s assignment to Fragrances was a post-loss claim assignment, or, as the insurers argue, an attempt to assign the insurance policies themselves. The court concluded that it was a post-loss claim assignment and therefore that the rule adopted voiding application of anti-assignment clauses to such assignments applies.
Here, the right to insurance coverage for the “occurrence” of environmental contamination was assigned to Fragrances after the policies had expired. The loss event occurred during the policy periods. Nothing in the form of the assignment from Flavors to Fragrances alters the conclusion that only post-loss claims were assigned.
The Supreme Court concluded that the assignment does not increase the risk undertaken by the insurers for the policy periods for which they wrote coverage, in specified amounts, for occurrence-based claims pertaining to the Givaudan site in Clifton.
Where a valid post-loss claim assignment is made as to a given claim, an insurer has a duty to defend the assignee as the holder of that claim.
Environmental claims are expensive. Insurers would prefer not to pay them. However, the need to avoid payment, doesn’t work when insurers go against the majority rule on assignments and ask that the Supreme Court of New Jersey to rewrite the policy to provide language not there – something insurers argue against when clear language is modified or made ambiguous by courts – and were doomed to fail. They could have written the policy to avoid assignments of choses in action but did not. The insurers arguments against Fragrances raised a stink rather than the sweet smell of insurers providing defense and indemnity to their insured.
Barry Zalma, Esq., CFE, now limits his practice to service as an insurance consultant and expert witness specializing in insurance coverage, insurance claims handling, insurance bad faith and insurance fraud almost equally for insurers and policyholders. He also serves as an arbitrator or mediator for insurance related disputes. He practiced law in California for more than 44 years as an insurance coverage and claims handling lawyer and more than 49 years in the insurance business.
Mr. Zalma is the first recipient of the first annual Claims Magazine/ACE Legend Award.
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