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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.”

Topics Lawsuits Carriers Profit Loss Claims Louisiana Hurricane Homeowners

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Insurance clause defined.

Insurance clauses, also called general insurance clauses and insurance provisions, are the limitations of liability policy conditions and general liability risks an insurance provider takes. They’re also applied when more than one commercial property policy is in place by assigning financial liability in claims proportionately.

Here is another article that defines insurance clauses.

Insurance Clause Explained

Insurance clauses are used whenever parties are taking on insurable risks. They can prevent disastrous business consequences in the future.

Types of Insurance Clauses

There are four types of insurance clauses, including:

• Type 1: Indemnification agreements
• Type 2: Contract exclusions
• Type 3: Severability provisions
• Type 4: Limitations of liability

See this web article for more information about the different types of insurance clauses.

Purpose of an Insurance Clause

The purpose of an insurance clause is to assign risk associated with services rendered. If there are risk notes, both parties generally accept liability. However, the insurance clause shifts the risk away from clients.

Insurance Clause Examples

Examples of how you can use insurance clauses include:

• Example 1: Requiring tenants to hold renter’s insurance
• Example 2: Financial services firms assigning loss payable clauses
• Example 3: Insurance policies specifying covered losses
• Example 4: Business partners protecting their assets from legal mistakes
• Example 5: Construction companies providing for specific bodily injuries

Insurance Clause Samples

Sample 1 – Construction Contract:

34. Contractor’s Insurance Obligations . The Contractor shall purchase from and maintain insurance for protection from claims under workers’ compensation acts and other employee benefit acts which are applicable, claims for damages because of bodily injury, including death, and claims for damages, other than to the Work itself, to property which may arise out of or result from the Contractor’s operations under this Agreement, whether such operations be by the Contractor or a Subcontractor or anyone directly or indirectly employed by any of them. This insurance shall be written for not less than limits of liability specified in this Section 34 or required by law, whichever coverage is greater, and shall include contractual liability insurance applicable to the Contractor’s obligations under Sections 23 and 33. Certificates of such insurance shall be filed with the Owner prior to the commencement of the Work.

34.1 The insurance required by this Section 34 shall be provided by an insurance company or companies lawfully authorized to conduct business in the state where the Project is located which have a policy-holder’s rating of not less than “A” in the most recent edition of Best’s Rating Guide. Such insurance shall be written on an occurrence basis and shall be maintained without interruption from the date of commencement of the Work until at least one (1) year following the date of Final Payment and at all times thereafter when the Contractor may be correcting, removing or replacing defective or rejected Work, or longer if required below. The Contractor shall name the Owner and its agents and employees as additional insureds on all insurance policies, except the Workers’ Compensation policy. The Contractor shall obtain from the Owner the list of names to appear on the insurance policies. The Contractor shall pay all deductibles. The insurance shall be written for not less than the following limits, or greater if required by law, and otherwise shall comply with the following requirements:

34.1.1 Workers’ Compensation:

• State: Statutory.
• Employer’s Liability: $1,000,000.

34.1.2 Commercial General Liability, applicable to all premises and operations, including Bodily Injury, Property Damage, Independent Contractors, Blanket Contractual, Personal Injury, Products and Completed Operations, Broad Form Property Damage (including Completed Operations) and coverage for explosion, collapse, and underground hazards, with limits of liability of not less than the following:

• $1,000,000 combined single limit per occurrence.
• $2,000,000 aggregate applicable specifically to the Project.
• The Commercial General Liability insurance shall be primary and non-contributory with the Owner’s policies carried for their sole benefit and include umbrella liability coverage of not less than $10 million for per occurrence.

34.1.3 Comprehensive Automobile Liability, applicable to any automobile, including owned, non-owned, and hired automobiles, with limits of liability of not less than $1,000,000 combined single limit for Bodily Injury and Property Damage each accident.

34.1.4 Builders All-Risk insurance, with limits of liability as specified in Exhibit A (the “Builders All-Risk Insurance Limits of Liability”) naming Owner as the insured.

34.1.5 Each policy shall contain a provision that the policy will not be canceled or allowed to expire until at least thirty (30) days’ prior written notice to the Owner. Such notices and any endorsements subsequently issued amending coverage or limits shall be delivered to the Owner by certified mail. Upon receipt of any notice of cancellation, non-renewal or reduction in coverage, the Contractor shall within five (5) days procure other policies of insurance, similar in all respects to the policy or policies about to be canceled, non-renewed or reduced in coverage. If the Contractor fails to provide acceptable policies of insurance, the Owner may obtain such insurance at the cost and the expense of the Contractor.

34.1.6 The Contractor shall require each Subcontractor to purchase and maintain insurance of the types and for the durations stipulated hereinabove with policy limits as established by Contractors Master Subcontract Agreements. All general liability policies carried by Subcontractors shall be endorsed to include as additional insured parties the Owner and its agents and employees.

Reference :

Security Exchange Commission - Edgar Database, EX-10.7 11 dex107.htm CONSTRUCTION AGREEMENT , Viewed April 5, 2021, < https://www.sec.gov/Archives/edgar/data/1381697/000119312507121562/dex107.htm >.

Sample 2 – Lease Agreement:

INSURANCE; CASUALTY . Throughout the entire Term of this Lease, Tenant will obtain and maintain in good standing, at Tenant’s expense: (a) public liability insurance with respect to the Premises, and the business operated by Tenant, with such insurance companies and in such form as are acceptable to Landlord with minimum limits with respect to bodily injury of One Million Dollars ($1,000,000.00) per person, and One Million Dollars ($1,000,000.00) per accident or occurrence, and Five Hundred Thousand Dollars ($500,000.00) with respect to property damage; (b) all workmen’s compensation or employer’s liability insurance as may be required by law. Tenant will have all liability policies endorsed to show Landlord as an additional insured with respect to all occurrences and no insurance provided under this Lease will be subject to cancellation or reduction of limits unless at least ten (10) days written notice is given to Landlord. Certificates of all policies evidencing the insurance required must be delivered to Landlord within five (5) business days of Tenant’s execution of this Lease. Tenant will furnish Landlord with a copy of Tenant’s policy or policies of insurance or certificates thereof, within ten (10) days of Landlord’s request for same. If Tenant does not comply with the provision of this Section, Landlord may at its option, cause insurance as aforesaid to be issued, and in such event, Tenant agrees to pay the premium for the insurance within five (5) business days of Tenant’s receipt of Landlord’s demand along with a fee of three percent (3%) of the annual premium for any such policy in order to reimburse Landlord for the administrative cost of coordinating and ensuring Tenant’s compliance with this provision, which such cost would otherwise be extremely difficult and impractical to determine with certainty. In no event shall Landlord be liable for any loss occasioned by fire or other casualty to personal property or fixtures of Tenant, its agents, employees, assignees, sub lessees, bailers, licensees, invitees or of any other person, firm or corporation upon any part of the Premises. Tenant’s insurance will provide primary coverage to Landlord when any policy issued to Landlord provides duplicate or similar coverage; it being the intent of the foregoing that in such circumstance Landlord’s policy will provide excess coverage over Tenant’s policy. Tenant is advised that Tenant’s personal property and fixtures are not covered under any of Landlord’s property insurance policies.

Security Exchange Commission - Edgar Database, EX1A-6 MAT CTRCT.2 8 d33449dex1a6matctrct2.htm LEASE AGREEMENT , Viewed April 5, 2021, < https://www.sec.gov/Archives/edgar/data/1652238/000119312515311712/d33449dex1a6matctrct2.htm >.

Common Contracts with Insurance Clauses

Here are a few common contracts with insurance clauses:

Construction Contract

An insurance clause in construction contracts often deals with limitations around:

• Property damage
• Bodily harm
• Profit losses
• Third-party claims

The insurance policy often specifies covered events and waivers.

Lease Agreement

An insurance clause in lease agreements can require commercial tenants to hold renter’s insurance. These clauses protect the real estate property owner and tenant in case of fire, flood, or storm damage in lease agreements.

Learn more about an “other” insurance clause here .

Insurance Clause FAQs

Insurance clauses carry specific legal implications. Below, you can find important insurance clause FAQs:

Which elements are included in an insurance clause?

There are three elements included in an insurance clause:

• A party makes an offer
• Another party accepts it
• They both exchange consideration

What makes an insurance contract legally binding?

Insurance contracts are legally binding when they include the elements of an insurance clause with affixed party signatures. However, legal mistakes can render them unenforceable.

If you need legal advice, speak with insurance lawyers clauses in insurance policy today.

ContractsCounsel is not a law firm, and this post should not be considered and does not contain legal advice. To ensure the information and advice in this post are correct, sufficient, and appropriate for your situation, please consult a licensed attorney. Also, using or accessing ContractsCounsel's site does not create an attorney-client relationship between you and ContractsCounsel.

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• Practical Law

Assignment of insurance policies and claims

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Assignment of Claim after a Loss: What Homeowners Should Know

Let’s start with the basics. If you, as a homeowner, sustain property damage or losses because of a covered event (like a fire, for example), you will need your home repaired. You choose a contractor or restoration company to do the work – but the check from the insurance company has not come through yet, and you need them to start right away. So, what can you do?

You can sign an “assignment of claim,” which assigns your rights (as the policyholder) to benefits and proceeds from the loss, to the company or contractors. In the simplest of terms, the assignment of claim allows your contractor to get paid directly from the insurance company.

What is the anti-transfer clause in insurance?

However, many contractors and purchasers of the damaged property have found themselves in a tight spot over the years, because of something called the anti-transfer clause. As explained on the Tennessee Insurance Litigation Blog ,  the anti-transfer clause usually reads something like this: “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.” Sometimes, the insurance company requires written consent before an assignment of claim can be made.

This clause routinely allows insurers to deny payments to contractors – but it shouldn’t, when an assignment of claim is made post-loss.

What’s the difference between pre-loss vs. post-loss assignments?

The Courts of Tennessee have routinely ruled on behalf of contractors and purchasers who were assigned the claim after the loss occurred. That is because the original assignee – the homeowner – was approved by the insurance company in the first place, and because the damage occurred regardless. There was no additional risk for the insurance company. Therefore, even if the contractor has a long and storied history of rule-breaking (or even criminal activity), the homeowner can assign the claim however he or she chooses; after all, the loss already happened.

Where insurance companies can (and do) have a leg up is for pre-loss assignments. The insurance company underwrote the risk on Bob and Jane Homeowner because it felt confident enough to do so. Bob and Jane cannot assign their policy to another person without the approval of the insurer, even when no loss has occurred.

Even if there is an anti-transfer clause in your policy, the chances are very good that a post-loss assignment cannot be legally denied by your insurer. If it is, seek out an experienced insurance dispute lawyer to help you argue the denial.

One last note for Tennessee policyholders

In some cases, the insurance company may decide that the amount of your loss is worth less than the cost of the renovations for which the contractor is charging. If this happens, you could be on the hook for the remainder of the costs, depending, of course, on the language of the deal with your contractor.

Because of this risk, it’s wise to contact an attorney before making any decisions. Get informed about your rights from the start, and let your lawyer address any potential hiccups along the way. If your insurer lowballs your claim, your attorney can  handle the dispute , to ensure that you are compensated fairly.

At McWherter Scott & Bobbitt, we have spent years fighting against unfair insurance claims policies in Tennessee and Mississippi. Let  Brandon McWherter ,  Jonathan Bobbitt  and  Clint Scott   put their knowledge and experience to work for you. Please call  731-664-1340 or fill out our  contact form . We maintain offices in Nashville, Chattanooga, Memphis, Jackson and Knoxville.

Brandon McWherter has dedicated his practice to assisting insurance policyholders with their claims against insurance companies, including claims for bad faith. He is licensed in Tennessee, Arkansas, and Mississippi. Learn More

How Does Your Insurance Policy’s “Assignment of Benefits” Clause Affect You?

When homeowners suffer a property loss, one of the first things they do – even before they know the amount of coverage they will receive from their insurer – is call a contractor. The contractor looks at the damage, and estimates the likely cost of repairing the property. Maybe that estimate is greater than the coverage amount the homeowner expects the insurance company to pay out.

In this instance, the contractor will sometimes suggest that the homeowner enter into an “assignment of benefits” (AOB) arrangement. Under this side contract, the contractor agrees to accept as payment whatever the insurance company pays for the insured’s property loss claim.

Such AOB deals can be a major problem.

For one thing, most contractors know very little about insurance coverages and the art of negotiating optimal coverage payouts. The insurance company may initially offer $60K, for example, in a situation where an experienced public adjuster could have secured almost twice that amount. The contractor might take the $60K, and then discover that amount isn’t enough to get the repair job done properly. The contractor then must skimp and cut corners, resulting in a shoddy repair job for the unsuspecting homeowner.

At common law, insureds were prohibited from assigning their insurance policy benefits and other underlying rights. State legislatures, however, have allowed AOB, and many state courts will permit the assignment of insurance policies.

The problems stemming from AOB have led to a mountain of litigation and debates about whether it should be allowed at all. Insurance carriers are happy to allow AOB, because contractors present an easy mark and often accept low-ball claim offers. The contractors, meanwhile, are serving two masters – handling the insured’s claim, as well as taking money to do repairs. That’s exactly why the National Association of Public Insurance Adjusters (NAPIA) doesn’t allow contractors to be PAs and do this type of work.

We recently spoke with Brian Goodman, General Counsel of NAPIA, who calls the practice of AOB “ripe with the possibility of harming consumers and making it so the insured never gets properly indemnified.”  We agree.

NAPIA is working with the National Association of Insurance Commissioners (NAIC) to eradicate the practice of AOB. There is some resistance because of an unwillingness to infringe on an individual’s right to contract with somebody. But, in our view, any use of AOB really harms consumers.

Diane Swerling

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Restricting Assignments of Claims Possible But Dangerous

Policy and Claim May Be Assigned After Loss If Contract Allows

Traditionally, an insurer that pays its insured’s claim is entitled to recover the payment from the third party who caused the insured’s covered loss. This concept is called subrogation, and can arise by contract, statute, or equitable principle. As early as 1888, the US Supreme Court found that equitable subrogation was a well-recognized doctrine. The Supreme Court stated the historical rule that:

The Equitable assignee of a chose in action has the right to go into a court of equity to have his interest therein established; and when so established he will have the right to complete relief in the same action by decree of specific performance of the contract. [ Aetna Life Insurance Company v. Middleport, SCT.40059; 124 U.S. 534, 31 L.Ed. 537, 8 S.Ct. 625 (1888).]

Attempting to fulfill an obligation under federal law to “prevent recipients from receiving any duplication of benefits,” the State required more than 150,000 Road Home grant recipients to execute a “Limited Subrogation/Assignment Agreement.” It stated, in pertinent part:

I/we hereby assign to the State of Louisiana … to the extent of the grant proceeds awarded or to be awarded to me under the [Road Home] Program, all of my/our claims and future rights to reimbursement and all payments hereafter received or to be received by me/us: (a) under any policy of casualty or property damage insurance or flood insurance on the residence, excluding contents (“Residence”) described in my/application for Homeowner’s Assistance under the Program (“Policies”): (b) from FEM A, Small Business Administration, and any other federal agency, arising out of physical damage to the Residence caused by Hurricane Katrina and/or Hurricane Rita.

To remedy this situation, and pursuant to the assignment agreements, the State filed suit against more than two hundred insurance companies – allegedly all of the insurers who wrote property insurance in Louisiana at the time of the Hurricanes – in state court in Orleans Parish. The State sought to recover the funds expended and anticipated to be expended under the Road Home program and a declaration of the insurers’ duties under the “all risk” policies they had issued to Road Home applicants.

The Defendants successfully removed the case to federal district court under the Class Action Fairness Act. According to the Defendants, the insurance industry has paid more than forty billion dollars to homeowners as a result of losses from Hurricanes Katrina and Rita. The insurers argue that the State’s suit is an attempt to obtain yet more money from the insurers, even in situations where the homeowner was satisfied with the amount paid, had already filed a lawsuit against the insurer, or had reached a settlement agreement. Moreover, the insurers contend the State brought suit without investigating whether the Defendants had actually failed to make sufficient payment on individual homeowners’ claims.

The Fifth Circuit Court of Appeal presented a question to the Supreme Court of Louisiana to answer a question concerning state law in the case In Re: Katrina Canal Breaches Litigation , No. 2010-CQ-1823 (La. 05/10/2011). The United States Fifth Circuit Court of Appeals asked:

“ 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?”

The Supreme Court found that post-loss assignment of claims arising under the policy is not equivalent to the assignment of the policy itself, or an interest in the policy.  The Supreme Court also found that it is incumbent on insurers to include clear and unambiguous language in their policies if they wish to prevent such assignments. Since the case involved hundreds of different policies and since the Supreme Court concluded there is no public policy in Louisiana which precludes an anti-assignment clause from applying to post-loss assignments, the language of the anti-assignment clause must clearly and unambiguously express that it applies to post-loss assignments. It explained to the Fifth Circuit that it is necessary for the federal district court to evaluate the relevant anti-assignment clauses on a policy-by-policy basis to determine whether the language is sufficient to prohibit post-loss assignments.

Law and Analysis

The Louisiana Supreme Court has never addressed public policy considerations relative to post-loss assignments. The Supreme Court concluded that a distinction is to be made between the assignment of a policy before and after loss has accrued thereon. Noting that conditions in policies prohibiting assignment, except with the insurer’s consent, or upon giving some notice, on like conditions, have universally been held to apply only to assignments before loss, and, accordingly, non-compliance or non-conformity therewith does not prevent an assignment, after loss, of the claim or interest of the insured in the insurance money then due.

An assignment of the policy after loss is in effect no more than an assignment of a claim against the company, and is valid though the policy expressly provides against an assignment either before or after loss.

The Louisiana Civil Code does not place limits on parties’ contractual right to prohibit the assignment of insurance proceeds. Of course the parties to a contract may contract to limit assignability. The Supreme Court recognized that there exists a vast amount of national jurisprudence distinguishing between pre-loss and post-loss assignments and rejecting restrictions on post-loss assignments yet it found no public policy in Louisiana favoring free assignability of claims over freedom of contract.

Although the Supreme Court held that parties may contract to prohibit post-loss assignments, it also held the contract language must clearly and unambiguously express that the non-assignment clause applies to post-loss assignments.

An insurance policy is a nothing more than a contract between the parties and should be construed by using the general rules of interpretation of contracts in the Civil Code.

Since post-loss assignment of claims arising under the policy is not equivalent to the assignment of the policy itself, or an interest in the policy the Supreme Court found it incumbent on insurers to include clear and unambiguous language in their policies. Finding that the varying language in the insurance policies regarding assignment of rights, and that hundreds of relevant polices are included in the record it is not the job of the Supreme Court to review the language of each policy on a policy-by-policy basis, and instead leave that task to the federal district court to decide on the merits.

The Supreme Court concluded that there is no public policy in Louisiana which precludes an anti-assignment clause from applying to post-loss assignments. However, the language of the anti-assignment clause must clearly and unambiguously express that it applies to post-loss assignments. Thus, it is necessary for the federal district court to evaluate the relevant anti-assignment clauses on a policy-by-policy basis to determine whether the language is sufficient to prohibit post-loss assignments.

This case teaches that an insurer and insured can contract to prevent post-loss assignments of claims – choses in action – if they so desire. However, to do so, they must write the agreement in clear and unambiguous language. For example the New York Standard Fire Insurance policy adopted in most states provides: “Assignment of this policy shall not be valid except with the written consent of this company.” Almost identical language appears in the Insurance Services Office form of homeowners insurance, form HO 00 03 10 00. The assignment of a claim is not an assignment of a policy and, therefore, if this is the language of the policy that the District Court reviews then it must conclude that there was no prohibition on an assignment of a claim post loss.  If an insurer and insured agreed to a clause that prevented post-loss assignment of the claim it would need language like:

Assignment of this policy or assignment of the proceeds of any claim payable under this policy shall not be valid or enforceable except with the written consent of this company.

Barry Zalma, Esq., CFE, is a California attorney specializing in insurance coverage, insurance claims handling, insurance bad faith and insurance fraud. Mr. Zalma serves as a consultant and expert for insurers and policyholders. He founded Zalma Insurance Consultants in 2001 and serves as its senior consultant. He recently published the e-books, “Heads I Win, Tails You Lose — 2011,” “Zalma on Rescission in California,” “Zalma on Diminution in Value Damages,” “Arson for Profit” and “Zalma on California Claims Regulations,” and others that are available at  www.zalma.com/zalmabooks.htm. Contact the author or access his free insurance fraud letter at http://www.zalma.com or write to him at [email protected].

© 2011 Barry Zalma

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What Is an Anti-Assignment Clause?

Anti-Assignment Clauses Explained

• Definition and Example

How Anti-Assignment Clauses Work

• State Laws and Anti-Assignment Clauses

Extreme Media / Getty Images

An anti-assignment clause is a provision in an insurance policy that bars the policyholder from transferring their rights under the policy to another party. The clause prohibits the insured from authorizing someone else to file claims, make changes, or take other actions under the policy.

Many  small businesses  purchase insurance policies that contain an anti-assignment clause, which may affect their ability to conduct certain routine business transactions. For instance, if your property is damaged and you hire a contractor to make repairs, the clause may bar you from allowing the contractor to collect loss payments directly from your insurer. In addition, some restrictions found in anti-assignment clauses may be overridden by state laws. Below, we’ll explore further what an anti-assignment clause is and how it works.

Definition and Example of an Anti-Assignment Clause

An anti-assignment clause is language found in an insurance policy that forbids the policyholder from assigning their rights and interests under the policy to someone else without the insurer’s consent. The clause is usually found in the policy conditions section.

Alternate name : Assignment clause, Non-assignment clause

An example of an anti-assignment clause is wording contained in the standard Insurance Services Office (ISO) business owners policy (BOP) . You can find it in the Common Policy Conditions (Section III) under the heading “Transfer of Your Rights and Duties Under This Policy.” The clause states that your rights and duties under the policy may not be transferred without the insurer’s written consent. However, if you are an individual named on the policy and you die, your rights will be transferred to your legal representative.

An anti-assignment clause may not include the word “assignment” but instead refer to a transfer of rights under the policy.

Anti-assignment clauses prevent policyholders from transferring their rights under the policy to someone else without the insurer’s permission. The clauses are designed to protect insurers from unknown risks. Insurers evaluate insurance applicants carefully before they agree to provide coverage. They consider an applicant’s business experience, loss history, and other factors to gauge their susceptibility to claims. When an insurer issues a policy, the premium reflects the insurer’s assessment of the applicant’s risks. If the policyholder transfers their rights under the policy to another party, the insurer’s risk increases. This is because the insurer hasn’t had an opportunity to evaluate the new party’s risks.

The following example demonstrates how an anti-assignment clause in an insurance policy can affect a business.

Theresa is the owner of Tasty Tidbits, a pastry shop she operates out of a commercial building she owns. She has insured her business for liability and property under a business owners policy. Theresa decides to take a one-year sabbatical from her business and asks her friend Ted to manage Tasty Treats during her absence. Theresa signs a contract assigning her rights under Tasty Tidbits’ BOP to Ted.

If a loss occurs, Ted may have no right to file a claim or collect benefits under the policy on Tasty Treats’ behalf. The assignment is barred by the anti-assignment clause in the BOP.

Effect of State Laws on Anti-Assignment Clauses

Many states have enacted laws via a statute or court ruling that override anti-assignment clauses in insurance policies. These laws may invalidate all or a portion of a policy’s anti-assignment provision. While the laws vary, many bar pre-loss assignments but permit assignments made after a loss has occurred. Assignments made before any losses have occurred are prohibited because they increase the insurer’s risks. Post-loss assignments don’t increase the insurer’s risks, so they generally are permitted.

Some states prohibit any assignment of benefits made without the insurer’s consent, whether the assignment occurred before or after a loss.

Here's an example of how a state law can impact an anti-assignment clause in an insurance policy. Suppose that Theresa (in the previous scenario) has returned from her sabbatical and is again operating her business. Tasty Treats is located in a state that bars pre-loss assignments but allows assignments made after a loss has occurred.

Late one night, a fire breaks out in the pastry shop and a portion of the building is damaged. Theresa files a property damage claim under her BOP and hires Rapid Reconstruction, a construction company, to repair the building. At the contractor’s suggestion, Theresa assigns her rights to receive benefits for the claim under the BOP to Rapid Reconstruction. Because Theresa has assigned her rights after a loss has occurred, the assignment is permitted by law and should be accepted by Theresa’s insurer.

Key Takeaways

• Many policies purchased by small businesses contain an anti-assignment clause.
• An anti-assignment clause bars the policyholder from assigning their rights and interests under the policy to someone else without the insurer’s consent.
• Many states have a statute or court ruling that overrides anti-assignment clauses in insurance policies.
• State laws vary, but many prohibit pre-loss assignments yet permit assignments made after a loss has occurred.

Canopy Claims. " Business Owners Coverage Form ," Page 53.

Penn State Law Review. " If You Give a Shop a Claim: The Unsustainable Inequity of Pennsylvania’s Unbridled Post-Loss Assignments ."

Stahl, Davies, Sewell, Chavarria & Friend. " Buyers and Sellers Beware - Assignment of Hurricane Claims May Be Invalid in Texas ."

Assignment under Insurance Policies

By J Mandakini, NUALS

Editor’s Note: This paper attempts to explore the concept of assignment under Indian law especially Contract Act, Insurance Act and Transfer of Property Act. It seeks to appreciate why the assignment is made use of for securities of a facility sanctioned by ICICI Bank. Also, it explains how ICICI Bank faces certain problems in executing the same. 

INTRODUCTION

For any facility sanctioned by a lender, collateral is always deposited to secure the same. Such mere deposition will not suffice, the borrower has to explicitly permit the lender to recover from the borrower, such securities in case of his default.

This is done by the concept of assignment, dealt with adequately in Indian law. Assignment of obligations is always a tricky matter and needs to be dealt with carefully. The Bank should not fall short of any legally permitted lengths to ensure the same. This is why ambiguity in its security documents have to be rectified. 

This paper attempts to explore the concept of assignment in contract law. It seeks to appreciate why the assignment is made use of for securities of a facility sanctioned by ICICI Bank. The next section will deal with how ICICI Bank faces certain problems in executing the same. The following sections will talk about possible risks involved, as well as defenses and solutions to the same.

WHAT IS ASSIGNMENT?

Assignment refers to the transfer of certain or all (depending on the agreement) rights to another party. The party which transfers its rights is called an assignor, and the party to whom such rights are transferred is called an assignee. Assignment only takes place after the original contract has been made. As a general rule, assignment of rights and benefits under a contract may be done freely, but the assignment of liabilities and obligations may not be done without the consent of the original contracting party.

The liability on a contract cannot be transferred so as to discharge the person or estate of the original contractor unless the creditor agrees to accept the liability of another person instead of the first. [i]

Illustration

P agrees to sell his car to Q for Rs. 100. P assigns the right to receive the Rs. 100 to S. This may be done without the consent of Q. This is because Q is receiving his car, and it does not particularly matter to him, to whom the Rs. 100 is being handed as long as he is being absolved of his liability under the contract. However, notice may still be required to be given. Without such notice, Q would pay P, in spite of the fact that such right has been assigned to S. S would be a sufferer in such case.

In this case, that condition is being fulfilled since P has assigned his right to S. However, P may not assign S to be the seller. P cannot just transfer his duties under the contract to another. This is because Q has no guarantee as to the condition of S’s car. P entered into the contract with Q on the basis of the merits of P’s car, or any other personal qualifications of P. Such assignment may be done with the consent of all three parties – P, Q, S, and by doing this, P is absolved of his liabilities under the contract.

 1.1. Effect of Assignment

Immediately on the execution of an assignment of an insurance policy, the assignor forgoes all his rights, title and interest in the policy to the assignee. The premium or loan interest notices etc. in such cases will be sent to the assignee. [ii] However, the existence of obligations must not be assumed, when it comes to the assignment. It must be accompanied by evidence of the same. The party asserting such a personal obligation must prove the existence of an express assumption by clear and unequivocal proof. [iii]

 Assignment of a contract to a third party destroys the privity of contract between the initial contracting parties. New privity is created between the assignee and the original contracting party. In the illustration mentioned above, the original contracting parties were P and Q. After the assignment, the new contracting parties are Q and S.

 1.2. Revocation of Assignment

Assignment, once validly executed, can neither be revoked nor canceled at the option of the assignor. To do so, the insurance policy will have to be reassigned to the original assignor (the insured).

 1.3. Exceptions to Assignment

There are some instances where the contract cannot be assigned to another.

• Express provisions in the contract as to its non-assignability – Some contracts may include a specific clause prohibiting assignment. If that is so, then such a contract cannot be assigned. Assignability is the rule and the contrary is an exception. [iv]

Pensions, PFs, military benefits etc. Illustration

 1.4. enforcing a contract of assignment.

From the day on which notice is given to the insurer, the assignee becomes the beneficiary of the policy even though the assignment is not registered immediately. It does not wait until the giving of notice of the transfer to the insurer. [vi] However, no claims may lie against the insurer until and unless notice of such assignment is delivered to the insurer.

If notice of assignment is not provided to the obligor, he is discharged if he pays to the assignor. Assignee would have to recover from the assignor. However, if the obligor pays the assignor in spite of the notice provided to him, he would still be liable to the assignee.

The following two illustrations make the point amply clear:

Illustrations

1. Seller A assigns its right to payment from buyer X to bank B. Neither A nor B gives notice to X. When payment is due, X pays A. This payment is fully valid and X is discharged. It will be up to B to recover it from A

2. Seller A assigns to bank B its right to payment from buyer X. B immediately gives notice of the assignment to X. When payment is due, X still pays A. X is not discharged and B is entitled to oblige X to pay a second time.

An assignee doesn’t stand in better shoes than those of his assignor. Thus, if there is any breach of contract by the obligor to the assignee, the latter can recover from the former only the same amount as restricted by counter claims, set offs or liens of the assignor to the obligor.

The acknowledgment of notice of assignment is conclusive proof of, and evidence enough to entertain a suit against an assignor and the insurer respectively who haven’t honoured the contract of assignment.

1.5. Assignment under various laws in India

There is no separate law in India which deals with the concept of assignment. Instead, several laws have codified it under different laws. Some of them have been discussed as follows:

1.5.1. Under the Indian Contract Act

There is no express provision for the assignment of contracts under the Indian Contract Act. Section 37 of the Act provides for the duty of parties of a contract to honour such contract (unless the need for the same has been done away with). This is how the Act attempts to introduce the concept of assignment into Indian commercial law. It lays down a general responsibility on the “representatives” of any parties to a contract that may have expired before the completion of the contract. (Illustrations to Section 37 in the Act).

An exception to this may be found from the contract, e.g. contracts of a personal nature. Representatives of a deceased party to a contract cannot claim privity to that contract while refusing to honour such contract. Under this Section, “representatives” would also include within its ambit, transferees and assignees. [vii]

Section 41 of the Indian Contract Act applies to cases where a contract is performed by a third party and not the original parties to the contract. It applies to cases of assignment. [viii] A promisee accepting performance of the promise from a third person cannot afterwards enforce it against the promisor. [ix] He cannot attain double satisfaction of its claim, i.e., from the promisor as well as the third party which performed the contract. An essential condition for the invocation of this Section is that there must be actual performance of the contract and not of a substituted promise.

  1.5.2. Under the Insurance Act

The creation of assignment of life insurance policies is provided for, under Section 38 of the Insurance Act, 1938.

• When the insurer receives the endorsement or notice, the fact of assignment shall be recorded with all details (date of receipt of notice – also used to prioritise simultaneous claims, the name of assignee etc). Upon request, and for a fee of an amount not exceeding Re. 1, the insurer shall grant a written acknowledgment of the receipt of such assignment, thereby conclusively proving the fact of his receipt of the notice or endorsement. Now, the insurer shall recognize only the assignee as the legally valid party entitled to the insurance policy.

 1.5.3. Under the Transfer of Property Act

Indian law as to assignment of life policies before the Insurance Act, 1938 was governed by Sections 130, 131, 132 and 135 of the Transfer of Property Act 1882 under Chapter VIII of the Act – Of Transfers of Actionable Claims. Section 130 of the Transfer of Property Act states that nothing contained in that Section is to affect Section 38 of the Insurance Act.

 I) Section 130 of the Transfer of Property Act

An actionable claim may be transferred only by fulfilling the following steps:

• Signed by a transferor (or his authorized agent)

The transfer will be complete and effectual as soon as such an instrument is executed. No particular form or language has been prescribed for the transfer. It does not depend on giving notice to the debtor.

The proviso in the section protects a debtor (or other person), who, without knowledge of the transfer pays his creditor instead of the assignee. As long as such payment was without knowledge of the transfer, such payment will be a valid discharge against the transferee. When the transfer of any actionable claim is validly complete, all rights and remedies of transferor would vest now in the transferee. Existence of an instrument in writing is a sine qua non of a valid transfer of an actionable claim. [x]

 II) Section 131 of the Transfer Of Property Act

This Section requires the notice of transfer of actionable claim, as sent to the debtor, to be signed by the transferor (or by his authorized agent), and if he refuses to sign it, a signature by the transferee (or by his authorized agent). Such notice must state both the name and address of the transferee. This Section is intended to protect the transferee, to receive from the debtor. The transfer does not bind a debtor unless the transferor (or transferee, if transferor refuses) sends him an express notice, in accordance with the provisions of this Section.

III) Section 132 of the Transfer Of Property Act

This Section addresses the issue as to who should undertake the obligations under the transfer, i.e., who will discharge the liabilities of the transferor when the transfer has been made complete – would it be the transferor himself or the transferee, to whom the rest of the surviving contract, so to speak, has been transferred.

This Section stipulates, that the transferee himself would fulfill such obligations. However, where an actionable claim is transferred with the stipulation in the contract that transferor himself should discharge the liability, then such a provision in the contract will supersede Ss 130 and 132 of this Act. Where the insured hypothecates his life insurance policies and stipulates that he himself would pay the premiums, the transferee is not bound to pay the premiums. [xi]

FACILITIES SECURED BY INSURANCE POLICIES – HOW ASSIGNMENT COMES INTO THE PICTURE

Many banks require the borrower to take out or deposit an insurance policy as security when they request a personal loan or a business loan from that institution. The policy is used as a way of securing the loan, ensuring that the bank will have the facility repaid in the event of either the borrower’s death or his deviations from the terms of the facility agreement.

Along with the deposit of the insurance policy, the policyholder will also have to assign the benefits of the policy to the financial institution from which he proposes to avail a facility. The mere deposit, without writing, or passing of any document of title to such a claim, does not create any equitable charge. [xii]

ETHICS OF ASSIGNING LIFE INSURANCE POLICY TO LENDERS

The purpose of taking out a life insurance policy on oneself, is that in the event of an untimely death, near and dear ones of the deceased are not left high and dry, and that they would have something to fall back on during such traumatic times. Depositing and assigning the rights under such policy document to another, would mean that there is a high chance that benefits of life insurance would vest in such other, in the event of unfortunate death and the family members are prioritized only second. These are not desirable circumstances where the family would be forced to cope with the death of their loved one coupled with the financial crisis.

 Thus, there is a need to examine the ethics of:

• The bank accepting such assignment

The customer should be cautious before assigning his rights under life insurance policies. By “cautious”, it is only meant that he and his dependents and/or legal heirs should be aware of the repercussions of the act of assigning his life insurance policy. It is conceded that no law prohibits the assignment of life insurance policies.

In fact, Section 38 of the Insurance Act, 1938 , provides for such assignments. Judicial cases have held life insurance policies as property more than a social welfare measure. [xiii] Further, the bank has no personal relationship with any customer and thus has no moral obligation to not accept such assignments of life insurance.

However, the writer is of the opinion that, in dealing with the assignment of life insurance policies, utmost care and caution must be taken by the insured when assigning his life insurance policy to anyone else.

CURRENT STAND OF ICICI REGARDING FACILITIES SECURED BY INSURANCE POLICY, WITH SPECIFIC REFERENCE TO ASSIGNMENT OF OBLIGATIONS

This Section seeks to address and highlight the manner in which ICICI Bank drafts its security documents with regard to the assignment of obligations. The texts placed in quotes in the subsequent paragraphs are verbatim extracts from the security document as mentioned.

Composite Document for Corporate and Realty Funding

 “ 8 .   CHARGING CLAUSE

  The Mortgagor doth hereby:

iii) Assign and transfer unto the Mortgagee all the Bank Accounts and all rights, title, interest, benefits, claims and demands whatsoever of the Mortgagor in, to, under and in respect of the Bank Accounts and all monies including all cash flows and receivables and all proceeds arising from Projects and Other Projects_______________, insurance proceeds, which have been deposited / credited / lying in the Bank Accounts, all records, investments, assets, instruments and securities which represent all amounts in the Bank Accounts, both present and future (the “Account Assets”, which expression shall, as the context may permit or require, mean any or each of such Account Assets) to have and hold the same unto and to the use of the Mortgagee absolutely and subject to the powers and provisions herein contained and subject also to the proviso for redemption hereinafter mentioned;

(v) Assign and transfer unto the Mortgagee all right, title, interest, benefit, claims and demands whatsoever of the Mortgagors, in, to, under and/or in respect of the Project Documents (including insurance policies) including, without limitation, the right to compel performance thereunder, and to substitute, or to be substituted for, the Mortgagor thereunder, and to commence and conduct either in the name of the Mortgagor or in their own names or otherwise any proceedings against any persons in respect of any breach of, the Project Documents and, including without limitation, rights and benefits to all amounts owing to, or received by, the Mortgagor and all claims thereunder and all other claims of the Mortgagor under or in any proceedings against all or any such persons and together with the right to further assign any of the Project Documents, both present and future, to have and to hold all and singular the aforesaid assets, rights, properties, etc. unto and to the use of the Mortgagee absolutely and subject to the powers and provisions contained herein and subject also to the proviso for redemption hereinafter mentioned.”

 ICICI Bank’s Standard Terms and Conditions Governing Consumer Durable Loans

  “ insurance.

The Borrower further agrees that upon any monies becoming due under the policy, the same shall be paid by the Insurance Company to ICICI Bank without any reference / notice to the Borrower, but not exceeding the principal amount outstanding under the Insurance Policy. The Borrower specifically acknowledges that in all cases of claim, the Insurance Company will be solely liable for settlement of the claim, and he/she will not hold ICICI Bank responsible in any manner whether for compensation, recovery of compensation, processing of claims or for any reason whatsoever.

Reference has been made only to assignment of assets, rights, benefits, interests, properties etc. No specific reference has been made to the assignment of obligations of the assignor under such insurance contract.

THE ISSUE FACED BY ICICI BANK

Where ICICI Bank accepts insurance policy documents of customers as security for a loan, in the light of the fact that the documents are silent about the question of assignment of obligations, are they assigned to ICICI Bank? Where there is hypothecation of a life insurance policy, with a stipulation that the mortgagor (assignor) should pay the premiums, and that the mortgagee (assignee) is not bound to pay the same, Sections 130 and 132 do not apply to such cases. [xiv] With rectification of this issue, ICICI Bank can concretize its hold over the securities with no reservations about its legality.

RISKS INVOLVED

This section of the paper attempts to explore the many risks that ICICI Bank is exposed to, or other factors which worsen the situation, due to the omission of a clause detailing the assignment of obligations by ICICI Bank.

Practices of Other Companies

The practices of other companies could be a risk factor for ICICI Bank in the light of the fact that some of them expressly exclude assignment of obligations in their security documents.

There are some companies whose notice of assignment forms contain an exclusive clause dealing with the assignment of obligations. It states that while rights and benefits accruing out of the insurance policy are to be assigned to the bank, obligations which arise out of such policy documents will not be liable to be performed by the bank. Thus, they explicitly provide for the only assignment of rights and benefits and never the assignment of obligations.

Possible Obligation to Insurance Companies

By not clearing up this issue, ICICI Bank could be held to be obligated to the insurance company from whom the assignor took the policy, for example, with respect to insurance premiums which were required to be paid by the assignor. This is not a desirable scenario for ICICI Bank. In case of default by the assignor in the terms of the contract, the right of ICICI Bank over the security deposited (insurance policy in question) could be fraught in the legal dispute.

Possible litigation

Numerous suits may be instituted against ICICI Bank alleging a violation of the Indian Contract Act. Some examples include allegations of concealment of fact, fraud etc. These could be enough to render the existing contract of assignment voidable or even void.

Contra Proferentem

This doctrine applies in a situation when a provision in the contract can be interpreted in more than one way, thereby creating ambiguities. It attempts to provide a solution to interpreting vague terms by laying down, that a party which drafts and imposes an ambiguous term should not benefit from that ambiguity. Where there is any doubt or ambiguity in the words of an exclusion clause, the words are construed more forcibly against the party putting forth the document, and in favour of the other party. [xv]

The doctrine of contra proferentem attempts to protect the layman from the legally knowledgeable companies which draft standard forms of contracts, in which the former stands on a much weaker footing with regard to bargaining power with the latter. This doctrine has been used in interpreting insurance contracts in India. [xvi]

If litigation ensues as a result of this uncertainty, there are high chances that the Courts will tend to favour the assignor and not the drafter of the documents.

POSSIBLE DEFENSES AGAINST DISPUTES FOR THE SECURITY DOCUMENTS AS THEY ARE NOW

This section of the paper attempts to give defences which the Bank may raise in case of any disputes arising out of silence on the matter of assignability of obligations.

Interpretation of the Security Documents

UNIDROIT principles expressly provide a method for interpretation of contracts. [xvii] The method consists of utilizing the following factors:

This defence relates to the concept of estoppel embodied in Section 115 of the Indian Evidence Act, 1872. According to the Section, when one person has, by his declaration, act or omission, intentionally caused or permitted another person to believe a thing to be true and to act upon such belief, neither he nor his representative shall be allowed, in any suit or proceeding between himself and such person or his representatives, to deny the truth of that thing.

If a man either by words or by conduct has intimated that he consents to an act which has been done and that he will not offer any opposition to it, and he thereby induces others to do that which they otherwise might have abstained from, he cannot question legality of the act he had sanctioned to the prejudice of those who have so given faith to his words or to the fair inference to be drawn from his conduct. [xviii] Subsequent conduct may be relevant to show that the contract exists, or to show variation in the terms of the contract, or waiver, or estoppel. [xix]

Where the meaning of the instrument is ambiguous, a statement subsequently interpreting such instrument is admissible. [xx] In the present case, where the borrower has never raised any claims with regard to non assignability of obligations on him, and has consented to the present conditions and relations with ICICI Bank, he cannot he cannot be allowed to raise any claims with respect to the same.

Internationally, the doctrine of post contractual conduct is invoked for such disputes. It refers to the acts of parties to a contract after the commencement of the contract. It stipulates that where a party has behaved in a particular manner, so as to induce the other party to discharge its obligations, even if there has been a variation from the terms of the contract, the first party cannot cite such variation as a reason for its breach of the contract.

Where the parties to a contract are both under a common mistake as to the meaning or effect of it, and therefore embark on a course of dealing on the footing of that mistake, thereby replacing the original terms of the contract by a conventional basis on which they both conduct their affairs, then the original contract is replaced by the conventional basis. The parties are bound by the conventional basis. Either party can sue or be sued upon it just as if it had been expressly agreed between them. [xxi]

The importance of consensus ad idem has been concretized by various case laws in India. Further, if the stipulations and terms are uncertain and the parties are not ad idem there can be no specific performance, for there was no contract at all. [xxii]

In the present case, the minds of the assignor and assignee can be said to have not met while entering into the assignment. The assignee never had any intention of undertaking any obligations of the assignor. In Hartog v Colin & Shields, [xxiii] the defendants made an offer to the plaintiffs to sell hare skins, offering to a pay a price per pound instead of per piece.

AVOIDING THESE RISKS

To concretize ICICI Bank’s stand on the assignment of obligations in the matter of loans secured by insurance policies, the relevant security documents could be amended to include such a clause.

For instances where loans are secured by life insurance policies, a standard set by the American Banker’s Association (ABA) has been followed by many Indian commercial institutions as well. [xxvi] The ABA is a trade association in the USA representing banks ranging from the smallest community bank to the largest bank holding companies. ABA’s principal activities include lobbying, professional development for member institutions, maintenance of best practices and industry standards, consumer education, and distribution of products and services. [xxvii]

There are several ICICI security documents which have included clauses denying any assignment of obligations to it. An extract of the deed of hypothecation for vehicle loan has been reproduced below:

“ 3. In further pursuance of the Loan Terms and for the consideration aforesaid, the Hypothecator hereby further agrees, confirms, declares and undertakes with the Bank as follows:

(i)(a) The Hypothecator shall at its expenses keep the Assets in good and marketable condition and, if stipulated by the Bank under the Loan Terms, insure such of the Assets which are of insurable nature, in the joint names of the Hypothecator and the Bank against any loss or damage by theft, fire, lightning, earthquake, explosion, riot, strike, civil commotion, storm, tempest, flood, erection risk, war risk and such other risks as may be determined by the Bank and including wherever applicable, all marine, transit and other hazards incidental to the acquisition, transportation and delivery of the relevant Assets to the place of use or installation. The Hypothecator shall deliver to the Bank the relevant policies of insurance and maintain such insurance throughout the continuance of the security of these presents and deliver to the Bank the renewal receipts / endorsements / renewed policies therefore and till such insurance policies / renewal policies / endorsements are delivered to the Bank, the same shall be held by the Hypothecator in trust for the Bank. The Hypothecator shall duly and punctually pay all premia and shall not do or suffer to be done or omit to do or be done any act, which may invalidate or avoid such insurance. In default, the Bank may (but shall not be bound to) keep in good condition and render marketable the relevant Assets and take out / renew such insurance. Any premium paid by the Bank and any costs, charges and expenses incurred by the Bank shall forthwith on receipt of a notice of demand from the Bank be reimbursed by the Hypothecator and/or Borrower to the Bank together with interest thereon at the rate for further interest as specified under the Loan Terms, from the date of payment till reimbursement thereof and until such reimbursement, the same shall be a charge on the Assets…”

The inclusion of such a clause in all security documents of the Bank can avoid the problem of assignability of obligations in insurance policies used as security for any facility sanctioned by it.

An assignment of securities is of utmost importance to any lender to secure the facility, without which the lender will not be entitled to any interest in the securities so deposited.

In this paper, one has seen the need for assignment of securities of a facility. Risks involved in not having a separate clause dealing with non assignability of obligations have been discussed. Certain defences which ICICI Bank may raise in case of the dispute have also been enumerated along with solutions to the same.

Formatted by March 2nd, 2019.

BIBLIOGRAPHY

[i] J.H. Tod v. Lakhmidas , 16 Bom 441, 449

[ii] http://www.licindia.in/policy_conditions.htm#12, last visited 30 th June, 2014

[iii] Headwaters Construction Co. Ltd. v National City Mortgage Co. Ltd., 720 F. Supp. 2d 1182 (D. Idaho 2010)

[iv] Indian Contract Act and Specific Relief Act, Mulla, Vol. I, 13 th Edn., Reprint 2010, p 968

[v] Khardah Co. Ltd. v. Raymond & Co ., AIR 1962 SC 1810: (1963) 3 SCR 183

[vi] Principles of Insurance Law, M.N. Srinivasan, 8 th Edn., 2006, p. 857

[vii] Ram Baran v Ram Mohit , AIR 1967 SC 744: (1967) 1 SCR 293

[viii] Sri Sarada Mills Ltd. v Union of India, AIR 1973 SC 281

[ix] Lala Kapurchand Godha v Mir Nawah Himayatali Khan, [1963] 2 SCR 168

[x] Velayudhan v Pillaiyar, 9 Mad LT 102 (Mad)

[xi] Hindustan Ideal Insurance Co. Ltd. v Satteya, AIR 1961 AP 183

[xii] Mulraj Khatau v Vishwanath, 40 IA 24 – Respondent based his claim on a mere deposit of the policy and not under a written transfer and claimed that a charge had thus been created on the policy.

[xiii] Insure Policy Plus Services (India) Pvt. Ltd. v The Life Insurance Corporation of India, 2007(109)BOMLR559

[xiv] Transfer of Property Act, Sanjiva Row, 7 th Edn., 2011, Vol II, Universal Law Publishing Company, New Delhi

[xv] Ghaziabad Development Authority v Union of India, AIR 2000 SC 2003

[xvi] United India Insurance Co. Ltd. v M/s. Pushpalaya Printers, [2004] 3 SCR 631, General Assurance Society Ltd. v Chandumull Jain & Anr., [1966 (3) SCR 500]

[xvii] UNIDROIT Principles, Art 4.3

[xviii] B.L.Sreedhar & Ors. v K.M. Munireddy & Ors., 2002 (9) SCALE 183

[xix] James Miller & Partners Ltd. v Whitworth Street Estates (Manchester) Ltd., [1970] 1 All ER 796 (HL)

[xx] Godhra Electricity Co. Ltd. v State of Gujarat, AIR 1975 SC 32

[xxi] Amalgamated Investment & Property Co. Ltd. v Texas Commerce International Bank Ltd., [1981] 1 All ER 923

[xxii] Smt. Mayawanti v Smt. Kaushalya Devi, 1990 SCR (2) 350

[xxiii] [1939] 3 All ER 566

[xxiv] Terrell v Alexandria Auto Co., 12 La.App. 625

[xxv] http://www.uncitral.org/pdf/english/CISG25/Pamboukis.pdf, last visited on 30 th June, 2014

[xxvi] https://www.phoenixwm.phl.com/shared/eforms/getdoc.jsp?DocId=525.pdf, last visited on 30 th June, 2014

[xxvii] http://www.aba.com/About/Pages/default.aspx, last visited on 30 th June, 2014

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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 – Assignment of Benefits: Ultimate Guide for Contractors & Policyholders

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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Observations of Other Insurance Clauses and Overlapping Coverages

Steve Coombs should be at least nominated for membership into the Insurance Nerds Hall of Fame. He read my post, What Is an “Other Insurance” Clause and Why Do They Exist In Property Insurance Policies?  and sent Mara Essick and me numerous articles about “other insurance” clauses. Steve Coombs co-authored The Builders Risk Book with the late Don Malecki, as noted in The Builders Risk Book—A Great Reference Source For Those Involved With Builders Risk Insurance and Coverage Issues . His biography on IRMI notes the following:

Mr. Coombs writes on builders risk insurance for IRMI.com. He also coauthored, along with Donald S. Malecki, The Builders Risk Book. Mr. Coombs has 45 years of industry experience, with the last 38 years in a consulting environment. He joined Risk Resources as president in 1992. Risk Resources is a risk management and commercial insurance consulting firm. Risk Resources does not sell insurance and provides consulting services on a fee-for-service basis. Common projects include risk management and insurance audits, insurance requests for proposals/proposal management, agent/broker selection, risk financing studies, litigation support, and testimony. Prior to joining Risk Resources, Mr. Coombs served as a risk management consultant with a consulting firm. Prior to that, he spent 7 years developing his skills as a national accounts underwriter for a large international insurance group. He has extensive knowledge and experience regarding various aspects of construction insurance and is an author and speaker. He is also a former president of the Society of Risk Management Consultants. Mr. Coombs is a graduate of Western Michigan University with a bachelor of business administration degree. He also holds a master of arts degree from DePaul University with a concentration in risk management and insurance. He has earned the Associate in Risk Management (ARM) and Associate in Claims (AIC) certificates from the Insurance Institute of America and has received the Chartered Property Casualty Underwriter (CPCU) designation.

One quizzical certification of his impressive CV is an Associate of Claims (AIC) designation that he received in 2021. He already had a CPCU designation obtained in 1986, which most consider the Holy Grail of insurance certifications. Only an Insurance Nerd or insurance academic masochist would go back to get the inferior AIC designation 35 years later. Why?

Coombs has this observation about “other insurance” clauses in builders risk policies, as noted in Chapter 11 of The Builders Risk Book :

Eliminate Other Insurance Provisions in Builders Risk Policies. Builders risk policies have changed significantly over time. These policies increasingly are project specific in nature and cover multiple insureds. Having another insurance condition in the policy applicable to the intended beneficiaries of the insurance defeats one of the goals of builders risk insurance: a single policy that reduces litigation between the stakeholders and provides funds to repair the damaged property on a timely basis. Another argument for eliminating other insurance clauses is the builders risk insurance requirements contained in construction contracts. The standardized contracts from the leading providers—the American Institute of Architects, ConsensusDocs LLC, Engineers Joint Contract Documents Committee, and Design-Build Institute of America—require either the owner or the contractor to provide the insurance. Such insurance is not allowed to be ‘excess insurance.’ The required insurance is to be primary for all those parties intended to be protected by the policy ( i.e. , the owner, general contractor, and subcontractors). Otherwise, why have insurance requirements at all? An insurer enforcing an ‘other insurance’ clause against an insured party under a builders risk policy would most likely put the sponsor of the policy in breach of its obligations in the construction contract. The other insurance condition is such a longstanding part of property and inland marine policies that underwriters often do not know how to respond to requests to eliminate or modify their respective clause(s). Slowly, the industry is beginning to recognize the conflicts and potential problems. Some insurance brokers are paying attention and, particularly on large projects, are negotiating special provisions that expressly eliminate these potential problems.

My view is that Coombs is suggesting that the construction insurance industry try to eliminate needless disputes caused by “other insurance” clauses. This was the same purpose for The Guiding Principles as noted in Overlapping Insurance and Other Insurance Clauses—The Guiding Principles .

There are very bright and well-meaning people in the insurance claims industry trying to reduce disputes and get policyholders paid. The problem is that the number of them and their culture or attitude seem to be much greater in the past. There seems to be a new culture that has sophisticated leadership guiding property claims departments, as referenced in Why the Property Insurance Industry Is Dominated by Bean Counters —Why Is Your Hurricane Ian Claim Underpaid and Delayed :

Our law firm library is brimming with insurance company chronicles from books published long ago by the insurance industry. In these, company executives of yesteryears boasted about the swiftness with which they compensated their claimants. They painted pictures of drained company treasuries and the extraordinary efforts of their claims staff, working overtime to ensure prompt payments. These tales often shined a light on a business ethic that put the policyholder first. Fast forward to today, and the narrative has shifted dramatically. Contemporary insurance company cultures lean heavily on cost containment. Their prime focus? Limiting indemnity dollars disbursed to policyholders, managing allocated expenses tied to a particular claim, and overseeing unallocated expenses essential for operating their claims departments. This is a stark contrast to the customer-focused ethos of the past.

For those interested in further treatise research regarding “other insurance” and overlapping coverages, Coombs sent a copy of a discussion about these forms from the first edition of Property Loss Adjusting , published in 1990, which is attached for your study.

Thought For The Day

When you find yourself stuck in an oversimplified polarized conflict, a useful first step is to try to become more aware of the system as a whole: to provide more context to your understanding of the terrain in which the stakeholders are embedded, whether they are disputants, mediators, negotiators, lawyers, or other third parties. This can help you to see the forest and the trees; it is a critical step toward regaining some sense of accuracy, agency, possibility, and control in the situation. —Peter T. Coleman

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That’s On You: Indemnification Clauses In Distribution Agreements

Understand whose checkbook may need to be opened when claims or liabilities arise with a contract.

As is the case with any commercial contract, one of the many purposes of a distribution agreement is the minimization, management, and allocation of risk between the parties. When things go sideways – because one party did or failed to do something that leads to potential exposure for the other party – a well-drafted distribution agreement will contain indemnification clauses to clarify and place limits on the responsibility and costs for wrongful conduct.

Indemnification clauses are critical components in distribution agreements. In the most basic sense, they delineate where fingers should be pointed and whose checkbook may need to be opened when claims or liabilities from either party or third parties arise. These provisions are often buried within the later pages of a typical distribution agreement, along with other “boilerplate.” I touched on the significance of “boilerplate” in my January/February 2024 article “The Risk of Glossing Over Contract 'Boilerplate,'” including how certain other boilerplate provisions can play a determinative role in the outcome of contract disputes, which necessarily includes indemnification provisions. Indemnification provisions can be a shield and a sword, so regardless of size, all distributors should not shrug off the details of these provisions as just part of the “boilerplate.”

Indemnification clauses in distribution agreements should be carefully tailored to the specific needs, circumstances, services (such as value-add work), and products implicated by the relationship. An agreement that involves multijurisdictional territories, greater distributor responsibility for managing customer and manufacturer or representative relationships, and other matters that pose more significant risks of harm or loss may alter the risk allocation calculus in ways different from other arrangements. That said, indemnification clauses in distribution agreements typically include the following components:

Scope of Indemnification

This clause defines the specific circumstances, claims, and liabilities under which one party (the “indemnitor”) agrees to compensate the other (the “indemnitee”) as well as potential limits on the amount of and types of damages an indemnitee may recover, including:

• Product Liability and General Negligence: If a distributor sells a defective product that causes bodily injury, property damage, or other losses that lead to a claim against the distributor, the manufacturer agrees to indemnify and hold the distributor harmless for any damages incurred by the distributor for claims, damages, or losses arising from that defect or other contract obligations. Similarly, the manufacturer may agree to indemnify the distributor for damages caused by the manufacturer’s negligence in connection with the performance of its obligations under the contract.
• Intellectual Property Infringement: The manufacturer may indemnify the distributor if a third party claims that the distributed product infringes on their trademark, patent, or other intellectual property rights.
• Breach of Contract: Either party may indemnify the other for losses resulting from a breach of the distribution agreement or a breach of contract involving a third party, including some or all representations and warranties. 

Indemnification obligations also usually include a duty to defend, meaning the indemnitor must defend the indemnitee against claims covered by the clause and bear responsibility for attorneys’ fees and costs incurred doing so. While it is not uncommon to see “duty to defend” language in an indemnification provision, most often, there is no detail to the scope and nature of the obligations flowing from this duty, which leaves that duty essentially unenforceable.

Limitations on Amount and Types of Damages Recoverable

Risk management not only involves allocating responsibility for specific types of errors or omissions but also defining the scope of that liability and carving out circumstances under which indemnification obligations do not arise or are not applicable. 

Most distribution agreements limit the amount and types of damages that are recoverable in an indemnification claim and establish timelines and notification obligations for invoking the provision. These limitations include:

• Cap on Liability: A common limitation is the imposition of a cap on the indemnifying party's liability. This cap is often a predetermined amount or a function of contract value. Caps help to ensure that the indemnifying party is not exposed to unlimited financial risk, which could be disproportionate to the benefits derived from the agreement.
• Exclusion of Certain Damages: Many indemnification clauses exclude liability for consequential or indirect damages, such as lost profits, loss of business opportunities, or reputational harm. This exclusion helps to limit the scope of indemnity to direct damages, which are more predictable and quantifiable (and help avoid battles of experts).
• T ime and Notice Limitations: Similar to statutes of limitations, indemnification provisions often place time limits on when the indemnitee must provide the indemnitor with notice of any claims for which indemnification is sought. Failure to give timely notice can result in the forfeiture of indemnification rights.

Indemnification provisions also typically insulate a putative indemnitor from responsibility if a claim arises from an indemnitee’s conduct that involves:

• Gross Negligence and Willful Misconduct: This exclusion prevents parties from being indemnified for their egregious behavior, promoting accountability and fair dealing.
• Non-Compliance with Laws: Damages resulting from the indemnitee’s failure to comply with applicable laws and regulations are typically excluded. This encourages such compliance and avoids indemnification for unlawful conduct.
• Breach of Representations and Warranties: Some agreements exclude indemnification for damages arising from breaches of certain representations and warranties by a contracting party. Caution is warranted as such affects the scope of an indemnification agreement.

The interpretation and application of indemnification provisions are matters of state law, and while generally narrowly construed, they may be affected by other boilerplate, such as what law applies to any contract dispute. When coupled with the risk of a less than adequately drafted indemnification provision, dispute resolution outcomes are more likely to be inconsistent or less predictable. It is, therefore, crucial to consider the legal environment in which the distribution agreement will operate and draft indemnification clauses accordingly. Further, distributors should consider the nature and scope of insurance policies that provide coverage for various acts, as certain risks might well be covered by a distributor’s insurance coverages or that to which the distributor is a named insured.

If you have questions or concerns about indemnification provisions or issues, please contact me at 312-840-7004 or [email protected] .

The information contained in this article is provided for informational purposes only, and should not be construed as legal advice on any subject matter. The author expressly disclaims all liability in respect to actions taken or not taken based on any or all the contents of this article.

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Key terms and definitions

Obtaining landlord permission, tenants and subtenants responsibilities and liabilities, protecting the tenant from sublease pitfalls, putting the agreement in writing, alternatives to subleasing, final takeaways, templates and examples to download in word and pdf formats, tenants and subtenants obligations under a sublease agreement.

From finding a new job in another state to returning home to care for a sick family member to taking the big step of moving in with a new partner, many people find themselves in a situation where they need to cancel their existing lease so they can move somewhere else. Unfortunately, many landlords are reluctant to cancel existing leases, since that puts them in the position of potentially losing money while they look for a new tenant to fill the space. However, there is a solution that is workable for tenants while also being amenable to many landlords: a Sublease Agreement , also known as a sublet. There are many misconceptions about how subleases work and the responsibilities of people involved. This guide will walk through the most important terms to know and the main issues to be aware of when creating a sublease arrangement:

1. Differences between a sublease and an assignment

2. How to get permission from a landlord to sublet

3. Responsibilities and liabilities of the tenant and subtenant

4. Protective measures for the tenant

5. Sublease alternatives

There are many terms used in subleasing that are often used interchangeably and in confusing ways. However, the key distinction is between subleases and assignments . Both of these can be easily created, but have different legal implications and responsibilities for the involved parties that will be explored further in this guide.

What is a "sublease"?

A Sublease Agreement involves a transfer of less than all of the lease . For example, if a person living alone in a leased two bedroom apartment decides to rent out the spare bedroom to a new roommate, that would be a sublease. Or, if a person rents their whole apartment to someone for a couple of months while they travel for the Summer, but then return to the apartment in the Fall, that would also be considered a sublease. The main parties involved in a sublease are:

1. the original tenant , also known as the sublessor , who is the person who first rented the property and plans to rent the space to a new renter, and

2. the subtenant , also known as the sublessee , who is the person who rents their property from the sublessor.

What is an "assignment"?

An Assignment Agreement involves the entire remainder of the lease being transferred to a new tenant. For example, if someone was required to move to a new state for their job and a new tenant takes over the remaining six months on their lease, that would be called an assignment. The main parties involved in an assignment are:

1. the assignor , who is the person who originally rented the property, and

2. the assignee , who is the person renting the property from the assignor and taking over the remainder of their lease.

The first, and most important step, in arranging a sublease or assignment agreement is getting permission from the landlord. The landlord must consent to the arrangement and put this consent in writing using a Consent to Sublease form. If a tenant does not get the consent of the landlord, they leave both themselves and their subtenant or assignee in danger. The landlord would have the option of evicting the tenant, in the case of a sublease, or evicting the assignee, in the case of an assignment, for violation of the original lease agreement. Further, the landlord would feel less obligated to correct defects with the property, such as fixing leaky faucets or broken appliances, given that they do not have a valid agreement with the subtenant or assignee to provide these services.

Unless it says otherwise, when the lease prohibits tenants from subletting or assigning without their landlord's consent, ordinarily the landlord can arbitrarily refuse to permit a sublease or assignment according to their own discretion . However, some states and many leases now provide that the landlord must not unreasonably refuse to give consent to a sublease or assignment. In these instances, if the tenant is able to find a new person who will be at least as good a tenant -- able to pay rent on time, not play the stereo too loud, and follow the other agreements in the lease -- the landlord must accept that person as a subtenant.

If a person's lease prohibits them from assigning the lease without permission from the landlord but does not mention anything about subletting, would that person still be able to sublet the apartment to their friend? Yes, if the lease states only that an assignment is forbidden, the person would still be able to sublet their apartment. Conversely, if the lease prohibits only subletting, the tenant would be able to assign the lease without their landlord's approval. Both actions are prohibited only if the lease says that the tenant cannot sublease the property OR assign the lease without the landlord's consent. Note, however, that some cities, such as New York, have ordinances regulating subleases that take precedence over private agreements.

When subleasing an apartment, the original tenant should try their best to find a person who they think is trustworthy and will continue to pay the rent. The main reason for doing this is that the original tenant remains responsible for making sure the rent gets paid . The subtenant usually does not have to answer to the landlord, only the original tenant; the landlord can generally only sue the original tenant for the rent . If the subtenant does not pay the rent on time, the landlord can start eviction proceedings against the original tenant. If the subtenant owes several months of back rent, the original tenant is responsible for making sure it is paid. In the same way, the original tenant is responsible for making sure the rental is in good shape even if they are not currently living there.

What can a tenant do if they end up paying for the outstanding rent or damage a subtenant did to the property? The tenant can then go to the subtenant to ask that they be reimbursed for this money and take them to small claims court if they refuse to pay.

Unlike in a sublease, in an assignment, if the assignee fails to pay the rent, the landlord can go directly after the assignee for the unpaid rent . The landlord can also sue the assignee for any damage to the apartment that they are responsible for. Be aware, however, that the landlord can still sue the assignor, or original tenant, as well, even if the landlord consented to the assignment. The landlord has their choice of who to go to when they are looking to get paid.

Before subleasing a property or assigning a lease, the original tenant should make sure their subtenant or assignee is a responsible person who will pay the rent on time and will not damage the apartment. In a sublease or assignment, the original tenant essentially steps into the role of landlord to their subtenant or assignee. Therefore, it's important for them to protect themselves the same way a landlord would. When entering into sublease or assignment agreements, the original tenant often puts protective measures in place , including requiring payment of a security deposit, often equal to at least one month's rent, and putting the terms and agreements of the sublease in writing, including details like the length of the sublease or assignment, the amount of rent, when and to whom it must be paid, late charges, payment for damages, and so on.

Since the original tenant is acting as a landlord when subleasing, they are bound by some of the same laws that apply to the landlord . For example, each state has different rules and guidelines about the maximum amount that may be charged for a security deposit. In most cases, the original tenant may not reenter the property without giving appropriate notice to the subtenant. However, particular to assignments, those agreements often include a provision that the original tenant has the right to reenter the property and retake possession of it if the assignee fails to pay the rent. This gives the assignor some additional protection if the assignee defaults on the lease.

Once all parties, including the original tenant, subtenant, and landlord agree to the sublease or assignment, it should be put in writing. A written agreement works to protect all of the parties and their rights and obligations under the lease agreement . An oral agreement is enforceable in some states, but in all cases is subject to potential misunderstandings and challenges in court. A written Lease Assignment Agreement is usually relatively brief since it incorporates all of the provisions included in the original Residential Lease Agreement or Commercial Lease Agreement . A Sublease Agreement is more extensive and includes specifics related to when and to whom rent payments will be made, whether the subtenant will pay a security deposit to the original tenant and if so the method and amount of that payment, who will receive notices related to the rental. Once a Sublease Agreement or Lease Assignment Agreement has been put into writing, it should be signed by all involved parties. The Agreement must always be signed by the tenant and subtenant or assignee. However, the document may also be signed by the landlord to serve as a written record that the landlord grants their permission and is aware of the arrangement.

What if a tenant must move out of their rental property for some reason, say, six months before the lease expires, but they don't want to worry about the potential hassle and risk of finding a subtenant or assignee? The lease may give the tenant the right to cancel their lease by giving a certain amount of notice, usually two to three months. In a month-to-month lease, the tenant usually must give only thirty days notice. If the lease does not allow for this, the tenant has the option of finding a new tenant, subject to their landlord's approval, and the tenant's own trouble and expense. When the tenant finds a suitable person, they can ask their landlord to sign a document releasing them from their original lease . The landlord will then have the new tenant pay a deposit and sign a new lease. If the landlord agrees to do this, the original tenant will no longer be liable for the rent or acts of the new tenant. This solution is often acceptable to reasonable landlords.

Subleasing can be a great option for someone looking to move somewhere else, either temporarily or permanently, while they are in the middle of their current lease term. Here are the most important things to remember when setting up a sublease or assignment agreement:

• A sublease is a transfer of less than all of the lease; an assignment is a transfer of the entire remainder of the lease.
• The landlord must grant their permission for the sublease or assignment in writing if the tenant wants to protect themselves from future liability.
• In a sublease, the landlord can only go after the original tenant for rent or damages owed by the subtenant; in an assignment, the landlord can go after either the original tenant or the assignee.
• The original tenant can use measures such as collecting a security deposit to protect themselves in case the subtenant or asignee fails to pay the rent or causes damages.
• The best way to protect all involved parties is to put the agreement in writing.

About the Author: Malissa Durham is a Legal Templates Programmer and Attorney at Wonder .Legal and is based in the U.S.A.

• Sublease Agreement
• Lease Assignment Agreement
• Consent to Sublease

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Sanctions on Russia: what about your contracts?

As you will know, an unprecedented sanctions regime has been imposed by the UK, EU and US in response to Russia’s actions concerning Ukraine.  But what issues could arise for your contracts with Russian or Ukrainian parties or where your supply route relies on those countries? Can you avoid those contracts?

You may be able to take advantage of a force majeure clause if your contract contains one.  A force majeure clause provides for a party to the contract to be excused from performance of their obligations under the contract should a specified event occur which is beyond the party’s control.  Should your contract contain such a clause which covers the events in Ukraine then you may be able to avoid your obligations in circumstances where your inability to perform, caused by the imposition of sanctions and/or the war, are inevitably beyond your control.  You need to bear in mind that your counter-party may also have the benefit of any force majeure clause in your contract.

Interpretation of force majeure clauses

The meaning and effect of a force majeure clause depends entirely on its wording: the question is whether the Court would interpret it to cover the event in question.  The wording of the clause and ultimately its interpretation by a Court will also determine whether the clause, if it covers the event in question, allows a party to cancel the contract, be excused from performance of part or all of its obligations under the contract or be entitled to suspend performance or claim an extension of time for performance.

When interpreting the words of any force majeure clause the Courts will seek to determine objectively what the parties using the words in the clause meant when they made the contract, giving the words their natural and ordinary meaning.  Evidence of what the parties themselves actually subjectively intended is not relevant.  The Court will interpret the words of the contract in the context of the other relevant provisions of the contract, the overall purpose of the provision and the facts and circumstances known to the parties at the time of the contract. 

The Court will not however interpret a contract to relieve a party from a bad bargain: accordingly if your force majeure clause does not, applying the above rules of interpretation, cover the circumstances which you face, then the Court will not where clear language is used allow you to escape your contractual obligations on the basis of the force majeure clause.  When the contract uses unambiguous language, the Courts will apply it.  It is only when the words used are ambiguous that the Court may apply a meaning which makes the most business common sense. 

War and sanctions – are they covered?

It may be that your force majeure clause includes reference to “war” but it could well be considered relevant that in the current situation, there has been no declaration of war by Russia and a question arises as to whether such wording would be sufficient when the broader words “conflict” or “hostilities” would have been available.  Much may depend on the definition given to the word “war” in the contract. 

The imposition of economic sanctions is an even trickier issue: it may be less likely that sanctions are specifically included as a force majeure event but even if they are, the definition of sanctions in the contract and the impact which the sanctions has had on the parties will be key when determining whether a force majeure clause can safely be relied upon. 

If sanctions are not specifically mentioned as a force majeure event, a wide definition of “war”, “hostilities” or “conflict” – which could cover the consequences of such war, hostilities or conflict – may assist.  Of course, your counter-party will be quick to consider whether your inability to perform is actually a consequence of the conflict and seek to argue that your inability to perform is caused by a separate event. 

Consideration will also need to be given to whether your contract includes an “act of government” as a force majeure event and the extent of the definition of this event in the contract. 

Disruption to your supply chain may also be either specifically covered or covered by more general force majeure language commonly found in contracts. 

If your contract does not contain a force majeure clause or your clause is too constrained to be of assistance, all may not be lost since the legal doctrine of frustration or the defence of illegality may assist you.

Illegality and frustration

In the absence of a force majeure clause, the doctrine of frustration or the defence of illegality may be available. 

A contract is frustrated whenever the law recognises that without default of either party a contractual obligation has become incapable of being performed because the circumstances in which performance is called for would render it a thing radically different from that which was undertaken in the contract. 

An English law-governed contract is discharged if its performance becomes illegal under English law provided that the illegality clearly prohibits performance.  If performance is illegal in any specific case, the Court itself may of its own volition – and without the defendant pleading the defence of illegality - refuse a remedy to the counter-party suing in respect of any non-performance since this is a public policy issue.  

Each case would however fall to be considered on its own facts and the availability of the doctrine of frustration or the defence of illegality to assist in any given case is dependent not on the interpretation of the contractual words but on the application of an extensive body of case-law. 

No claims provisions

As with many EU sanctions regimes, the EU’s Russian sanctions contain so-called ‘no claims’ provisions, which protect a party who refuses to perform a contract on the basis that they may breach EU sanctions from claims that they might otherwise face. This prohibits designated parties and, as regards some of the restrictions, any Russian person (whether designated or otherwise) from bringing claims in connection with the performance of a contract or transaction, which has been affected by the EU’s sanctions. The UK’s Russian sanctions regime does not contain these provisions. This is an area of divergence that may be significant depending on the construction of the contract.

You should check any insurances on which claims could arise (including trade credit, travel, property etc.) to see whether they contain sanctions clauses. Typically insurance policies will contain a provision that will suspend cover and payment of existing claims where that cover or claim would be impacted by sanctions. Sometimes the policy will allow insurers to cancel cover on notice.

The UK Government and EU have introduced specific sanctions prohibiting the provision of any insurance for aviation and space goods and technology to a person connected with Russia or for use in Russia. Any insurer of such insurance has to cease to insure such risks as from 28 March 2022. It is possible that other sectors may also be targeted.

You may be able to escape liability for a failure to perform arising out of the imposition of sanctions and/or generally the current conflict in Ukraine by relying on a force majeure clause but careful consideration needs to be given to how a Court is likely to interpret what that clause covers before any reliance is placed on it: wrongful reliance could lead to a liability in damages for repudiatory breach of the contract.

Usually a force majeure clause will provide the most certainty to a party but if it is not sufficiently widely drafted, is badly drafted or you don’t have one, it is important not to forget to consider whether you could be assisted by the doctrine of frustration or the defence of illegality.

We are happy to assist with any queries which you may have.  Please contact  Anthony Lennox if you have any insurance queries; or Chris Bryant if you have any questions about the applicability of sanctions or the sanctions regime generally.

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Trademark Assignment: Legal Insights

Trademark assignment is a nuanced process involving the transfer of ownership rights, titles, and interests in a trademark or service mark from one party to another. A thorough understanding of the legal implications and requirements is vital to facilitate a seamless and legally binding transfer. Key considerations include conducting thorough trademark searches, drafting an exhaustive agreement, and understanding key clauses and provisions such as jurisdiction, trademark scope, and warranties. Failure to address these aspects can lead to common pitfalls, including hidden liabilities and inconsistent ownership records. By grasping these complexities, parties can navigate the assignment process with confidence and precision, harnessing the full potential of their trademark assets.

Table of Contents

Understanding Trademark Assignment

As a vital aspect of intellectual property law, trademark assignment refers to the process of transferring ownership of a trademark or service mark from one party to another. This process involves the assignment of rights, titles, and interests in a trademark or service mark, allowing the assignee to utilize the mark for commercial purposes. In essence, trademark assignment enables businesses to buy, sell, or merge their brand portfolios, thereby expanding their market presence.

Conducting thorough trademark searches is crucial in the assignment process to ensure that the mark is not infringing on existing trademarks. This due diligence helps to mitigate potential legal risks and ensures a smooth transfer of ownership. A comprehensive brand portfolio analysis is also essential to identify potential conflicts and opportunities for growth. By understanding the intricacies of trademark assignment, businesses can strategically manage their intellectual property assets, unlock new revenue streams, and strengthen their competitive edge in the market.

Types of Trademark Transfers

In the context of trademark transfers, there are various types of agreements and transactions that facilitate the transfer of ownership. Two common forms of trademark transfers are asset purchase agreements, which involve the transfer of specific assets, including trademarks, from one party to another. Another type of transfer is merger and consolidation, where two or more entities combine to form a new entity, leading to the transfer of trademarks and other intellectual property rights.

Asset Purchase Agreements

An asset purchase agreement is a type of trademark transfer that occurs when a buyer acquires specific assets, including trademarks, from a seller as part of a larger transaction. This type of transfer is commonly used when a buyer is interested in acquiring a specific business unit or division of the seller, rather than the entire company.

In an asset purchase agreement, the buyer typically assumes only those liabilities that are specifically identified in the agreement. This is in contrast to a stock purchase agreement, where the buyer assumes all liabilities of the seller. As such, the buyer must conduct thorough Due Diligence to identify any potential liabilities associated with the acquired trademarks.

Some key considerations in an asset purchase agreement include:

• Seller Liabilities : The agreement should clearly outline which liabilities the buyer is assuming, and which will remain with the seller.
• Trademark Ownership : The agreement should specify how the trademark ownership will be transferred, including any necessary documentation and filings.
• Licensing Agreements : The agreement should address any existing licensing agreements related to the acquired trademarks.
• Post-Closing Obligations : The agreement should outline any post-closing obligations of the seller, such as providing transitional support or assistance.

Merger and Consolidation

Merger and consolidation agreements involve the transfer of trademarks as a consequence of two or more companies combining to form a new entity, or one company absorbing the assets and liabilities of another. This type of trademark transfer is often a consequence of corporate restructuring efforts aimed at achieving financial synergies and improving operational efficiency.

In a merger or consolidation, the parties involved must verify that all trademarks are properly transferred and registered in the name of the new entity. This may involve updating trademark registrations, assigning trademark licenses, and notifying relevant parties of the change in ownership. Failure to do so can lead to the loss of trademark rights, which can have significant consequences for the new entity's brand identity and reputation.

Drafting a Comprehensive Agreement

When drafting a thorough trademark assignment agreement, it is vital to clearly define key provisions and negotiate assignment terms that accurately reflect the parties' intentions. This involves specifying the scope of the assignment, including the mark's registration details, and outlining the rights and obligations of the assignor and assignee. By carefully crafting these provisions, parties can guarantee a smooth transfer of ownership and minimize potential disputes.

Key Provisions Defined

Typically, a well-drafted trademark assignment agreement includes several key provisions that outline the terms and conditions of the assignment, securing a thorough and enforceable transfer of rights. These provisions are vital in defining the scope and limitations of the assignment, making certain that both parties are aware of their rights and obligations.

The following key provisions are commonly included in a trademark assignment agreement:

• Trademark Scope : A clear definition of the trademark(s) being assigned, including the mark itself, any variations, and relevant registrations or applications.
• Jurisdictional Limits : Specification of the geographic territory in which the assignment is applicable, limiting the assignee's rights to the agreed-upon jurisdiction.
• Assignment of Goodwill : Provision for the assignment of goodwill associated with the trademark, which is vital for the assignee to capitalize on the mark's reputation and customer loyalty.
• Warranties and Representations : Statements made by the assignor regarding the validity, ownership, and freedom from encumbrances of the trademark, which can impact the assignee's ability to use the mark, thereby guaranteeing that the assignee is properly informed.

Assignment Terms Negotiated

In drafting a comprehensive trademark assignment agreement, the negotiation of assignment terms is a crucial step that requires careful consideration and precision to ensure a seamless transfer of rights. The parties involved must engage in good faith negotiations to reach a mutually beneficial agreement. The assignment terms should clearly outline the rights and obligations of the assignor and assignee, including the scope of the assignment, payment terms, and any conditions precedent to the transfer.

It is essential to address potential third-party interests, such as licenses or security interests, to ensure that the assignee is aware of any encumbrances on the mark. The agreement should also specify the procedures for handling disputes or breaches, including the jurisdiction and governing law applicable to the agreement. Furthermore, the parties should consider including provisions for confidentiality, non-compete, and intellectual property protection to safeguard their interests. By carefully negotiating and drafting the assignment terms, the parties can minimize the risk of disputes and ensure a successful transfer of the trademark rights.

Key Clauses and Provisions

A well-drafted trademark assignment agreement typically includes several key clauses and provisions that address the critical aspects of the assignment, securing a thorough and enforceable transfer of rights. These clauses clarify that the assignor and assignee are clear on their respective obligations and responsibilities, minimizing the risk of disputes and litigation .

Some vital provisions to include are:

• Jurisdiction and Governing Law : Specify the jurisdiction and governing law that will apply in case of disputes, making certain that both parties are aware of the applicable laws and regulations.
• International Compliance : Address the assignor's obligations to comply with international trademark laws and regulations, verifying that the assignment is valid and enforceable globally.
• Representations and Warranties : Include representations and warranties from the assignor regarding the validity and ownership of the trademark, as well as any potential liabilities or disputes.
• Dispute Resolution : Establish a process for resolving disputes, such as arbitration or mediation, to provide a clear and efficient mechanism for addressing any issues that may arise.

Post-Assignment Obligations

Following the assignment of a trademark, the assignor and assignee often have ongoing obligations to secure the successful handover of rights and minimize potential liabilities. One such obligation is the provision of ongoing assistance by the assignor to facilitate a seamless shift. This may involve the assignor providing information, documentation, and guidance to facilitate the assignee's continued use of the trademark. Additionally, the assignee may require ongoing assistance to address potential issues that may arise during the handover period.

Another critical post-assignment obligation is the assumption of successor liability by the assignee. This means that the assignee becomes responsible for any liabilities or disputes associated with the trademark prior to the assignment. The assignee must verify that they have the necessary resources and infrastructure to handle any potential claims or legal actions that may arise. By understanding and fulfilling these post-assignment obligations, parties to a trademark assignment can secure a smooth handover of rights and minimize the risk of disputes or legal issues arising in the future.

Common Pitfalls to Avoid

Despite the importance of fulfilling post-assignment obligations, trademark assignments can still be vulnerable to pitfalls that may compromise the integrity of the transfer. These pitfalls can lead to costly disputes, reputational damage, and even the invalidation of the assignment.

To avoid these consequences, it is crucial to be aware of the following common pitfalls:

• Failure to conduct thorough due diligence : Overlooking hidden liabilities or misconceptions about the trademark's history can lead to unforeseen issues.
• Inadequate documentation : Poorly drafted assignment agreements or incomplete documentation can create ambiguity and disputes.
• Inconsistent trademark ownership records : Failing to update records with the relevant authorities can lead to confusion and challenges in enforcing trademark rights.
• Neglecting to address pending trademark applications : Failing to consider the impact of pending applications on the assignment can result in unexpected consequences.

Frequently Asked Questions

Can a trademark assignment be revoked or terminated?.

A trademark assignment can be revoked or terminated upon a material breach of the agreement, as specified in breach clauses, or through judicial intervention, which may declare the assignment invalid, void, or unenforceable due to legal deficiencies or contractual violations.

Do I Need to Record My Assignment With the Uspto?

To maintain the integrity of your trademark ownership, it is vital to record your assignment with the USPTO, especially for International Filings, leveraging Online Systems such as the Electronic Trademark Assignment System (ETAS) to guarantee accuracy and timely notifications.

What Is the Role of Due Diligence in Trademark Assignment?

In trademark assignment, due diligence plays a vital part in mitigating risks through thorough Risk Assessment, enabling informed Deal Structuring and facilitating a smooth transfer of ownership, thereby protecting the assignor's and assignee's interests.

Can I Assign a Trademark That Is Still Pending Registration?

Prior to registration, a pending trademark can be assigned, but doing so poses pending risks. Employing pre-registration strategies, such as drafting conditional assignment agreements, can mitigate these risks and facilitate a smoother transfer of ownership.

Are There Any Tax Implications for Trademark Assignments?

When transferring trademark ownership, tax implications arise. Assignors may incur Capital Gains tax on the sale, while assignees may claim Tax Deductions for amortization of the acquired intangible asset over its useful life.

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