Insurance Law Hawaii

Policy's Anti-Assignment Provision Enforced

   After suffering hurricane damage and having repairs made, the insured sought to assign rights under its policy to the contractor performing the remediation work. The anti-assignment provision, however, prevented the contractor's recovery under the policy. Paramount Disaster Recovery, Inc. v. Axis Surplus Ins. Co., 2011 U.S. Dist. LEXIS 98272 (S.D. Texas. Aug. 31, 2011).

   Hurricane Ike damaged the insured's shopping center. Paramount was hired to perform remediation work to protect the properties from additional damage. The insured then filed a claim with Axis for hurricane-related damages. The insured subsequently attempted to assign all insurance proceeds payable to it under the policy to Paramount.

   Paramount filed suit against Axis. Axis moved for summary judgment and no opposition was filed by Paramount. Axis argued the anti-assignment provision barred Paramount's right to proceeds under the policy. The provision read,

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

The court determined the provision would be enforced precluding the assignment of any rights and duties under the policy without Axis's consent.

   Next, the court considered whether anti-assignment provisions were enforceable under Texas law. A review of Texas decisions indicated that Texas courts had consistently enforced anti-assignment clauses in insurance policies. Therefore, the anti-assignment clause in Axis's policy precluded the assignment to Paramount absent Axis's written consent. Axis was entitled to judgment as a matter of law.

Assignee of Policy Rights Entitled To Defense

   The insurer argued it had no duty to defend the assignee of a policy because it was not a named insured. While the trial court agreed, the Appellate Court of Illinois reversed. Illinois Tool Works, Inc. v. Commerce and Indus. Ins. Co., 2011 Ill. App. LEXIS 881 (Ill. Ct. App. Aug. 16, 2011).

   The Enssles owned property in Boulder, Colorado, which was leased to Binks Manufacturing Company in 1959. Binks manufactured electrostatic coating application equipment and related industrial products. In 1998, plaintiff Illinois Tool Works purchased Binks' operations. After Binks dissolved, plaintiff continued to lease and use the Enssles' property until 2003.

   In 2003, the Enssles sued plaintiff, alleging that Binks' and plaintiff's business activities caused soil and water contamination. The Enssles contended that plaintiff was assigned the lease and thereby assumed all the obligations under the lease. The lease required that tenants indemnify the Enssles and hold them harmless from any liabilities arising from the tenants' conduct.

   The Binks' liability insurers refused to defend plaintiff in the Enssles' lawsuit. Under the purchase agreement, the Binks had assigned to plaintiffs all rights under its liability policies. Plaintiff also argued it was a successor to Binks, entitling it to coverage. On cross-motions for judgment on the pleadings, the court found the insurers had no duty to defend plaintiff.

   The appellate court reversed. First, nothing in the pleadings demonstrated that plaintiff sought anything beyond the scope of the Binks' rights under the policies, i.e. anything more than a defense for occurrences during the policy periods. Therefore, the insurers' scope of coverage was not increased by the assignment.

   The insurers, however, argued they never consented to the assignment of the policies. The court first noted that the insurers had failed to indicate where in the record the assignment provisions were located. The court, therefore, refused to consider the insurers' argument that plaintiff failed to comply with the policy's consent provision.

   Moreover, notwithstanding the existence of an anti-assignment or consent provision, a policy could be assigned after a loss without notice to or consent of the insurer. An assignment after loss was not the assignment of the policy but the assignment of a claim or debt - a chose in action. Here, the chose in action came into existence when the contamination of the property occurred, i.e., when the loss for which Binks had arguably bought coverage came about. Once the injury or loss occurred, the chose in acton was established and assignable without the consent of the insurer.

   Consequently, the insurers had a duty to defend plaintiff.

Fifth Circuit Revisits Interpretation of Anti-Assignment Provision

   Our prior post reported on the Fifth Circuit's certified question to the Louisiana Supreme Court regarding anti-assignment provisions in policies assigned to the State. Louisiana distributed funds from the "Road Home" program to Louisiana homeowners to repair uninsured and under-insured property damaged by hurricanes. Before funds were issued, the homeowners had to sign a "Limited Subrogation/Assignment Agreement" whereby any claims of future rights to reimbursement were assigned to the State. However, there was a one billion dollar projected shortfall in the Road Home program.

   To remedy the situation, the State sued more than 200 insurance companies pursuant to the assignments to recover the funds granted under the Road Home program. The insurers moved to dismiss, arguing that the State's claims failed as a matter of law because anti-assignment clauses in the policies invalidated the purported assignments. The federal district court denied the motion to dismiss, holding that the contractual anti-assignment provisions did not bar post-loss assignments under Louisiana law.

   The Fifth Circuit asked the Louisiana Supreme Court whether the anti-assignment provisions were valid. The Louisiana Supreme Court responded there was no public policy in Louisiana which precluded an anti-assignment clause from applying to post-loss assignments. The court warned, however, that the anti-assignment clause must clearly and unambiguously state that it applies to post-assignment losses.

   Given this response, the Fifth Circuit determined in it was unable to resolve the parties' dispute on appeal. In Re: Katrina Canal Breaches Litigation, 2011 U.S. App. LEXIS 13169 (5th Cir. June 28, 2011). The district court's judgment denying the insurers' motion to dismiss was vacated and and the case was remanded for further proceedings.

   Thanks to Damon Key blogging colleague Rebecca Copeland (http://www.recordonappeal.com/) for notice of this case.

Post-Loss Assignment Without Consent Of Insurers Invalid

   Following recent Fifth Circuit precedent, the federal district court ruled that the assignment made after the loss without the insurers consent was invalid.  See Nautilus Ins. Co. v. Concierge Care Nursing Centers, Inc., 2010 U.S. Dist. LEXIS 136842 (S. D. Tex. Dec 28, 2010).

   In 1999, Brae Burn Construction Company Inc. entered into a contract to build a skilled nursing facility for Concierge.  Brae Burn had several subcontractors who were insured by their own insurers.  In August 2000, Concierge took possession of the building.

   Thereafter, Concierge sued Brae Burn for alleged damage to the building, including water leaks and mold.  In August 2008, Concierge and Brae Burn settled for $3 million.  As part of the settlement, Brae Burn assigned its claims against the subcontractor's insurers. 

   The insurers filed suit for a declaratory judgment seeking to establish that Concierge did not have coverage under any of the relevant policies.  The insurers movedfor summary judgment arguing that any purported assignment of Brae Burn's claims against the insurers was invalid under the anti-assignment provisions of the policies.  These provisions barred assignment of any rights and duties under the policy without the insurer's written consent.

   Concierge argued that the anti-assignment provisons did not apply to post-loss assignments.  The court disagreed, determining that the Fifth Circuit's decision in Keller Found., Inc. v. Wausau Underwriters Ins. Co. [post here] held that non-assignment clauses were enforceable in Texas even for assignments made post-loss.  The Fifth Circuit rejected the argument that the insurance company must show prejudice in order to enforce the anti-assignment clause.

   Here, the anti-assignment provisions of the policies precluded assignment of Brae Burn's rights to Concierge absent written consent of the insurers.  Because there was no written consent, there were no valid assignments.

 

Fifth Circuit Concurs with Hawaii Supreme Court In Upholding Anti-Assignment Provision

   In Del Monte Fresh Produce (Haw.), Inc. v. Fireman's Fund Ins. Co., 183 P.3d 734, 745 (Haw. 2007), the Hawaii Supreme Court held that recognizing the assignment of an insurance policy by operation of law to a party acquiring liabilities through contract was inconsistent with Hawaii law.  Citing Del Monte, the Fifth Circuit reached a similar conclusion while interpreting Texas law.  See Keller Found., Inc. v. Wausau Underwriters Ins. Co., 2010 U.S. App. LEXIS 23838 (5th Cir. Nov. 19, 2010). 

   In Keller, the new company entered into a purchase agreement to purchase certain assets and assume certain liabilities of the old company.  The purchase agreement transferred all of the assets of the old company to the new company, except for "excluded assets," which included "all . . . insurance policies."  The agreement further provided that the new company would "assume and agreed to perform, pay and discharge when due the assumed obligations."  Finally, the old company was solely responsible for all "retained obligations," which included specific lawsuits listed in the agreement.

   The old company held general liability policies with Wausau, which included an anti-assignment provision, stating, "Your rights and duties under this policy may not be transferred without our written consent  . . . ."  Consent to an assignment of the policies to the new company was never obtained from Wausau.

   After the sale, several lawsuits were filed in various states for defects and property damage allegedly arising from the old company's work prior the asset purchase and during the term of the Wausau policies.  Wausau refused to defend or indemnify the new company based on the anti-assignment provision.  When the new company sued, the court granted its summary judgment motion, determining that Wausau's coverage transferred from the old company to the new company as a chose in action with the general transfer of all assets in the purchase agreement or by operation of law.

   The Fifth Circuit reversed.  The non-assignment clause barred any assignment of coverage without Wausau's approval, rendering invalid any attempted transfer.  Although the majority of courts did not enforce non-assignment clauses for assignments made post-loss, Texas diverged from this majority.  Therefore, no transfer of the insurance coverage for the pre-acquisition losses were valid without the consent of Wausau.

   Nor could the coverage be caste as the transfer of a "chose in action."  Prior cases from the Fifth Circuit rejected the argument that the non-assignment clause had no effect on the assignment of "proceeds" of insurance rather than a claim or demand. 

   Finally, the court rejected the argument that the policy transferred by operation of law with the new company acquiring the assets of the old company.  The Ninth Circuit held that insurance coverage for pre-acquisition losses transferred by operation of law when liabilities in question were transferred by operation of law, thereby disregarding the policy's non-assignment clause.  See N. Ins. Co. of New York v. Allied Mut. Ins. Co., 955 F.2d 1353 (9th Cir. 1992).  But the California Supreme Court refused to extend the N. Ins. rule to instances where the successor corporation assumed liability by contract, as opposed to by operation of law.  See Henkel Corp. v. Hartford Accident & Indem. Co., 62 P.3d 69 (Cal. 2003).   Hawaii, in the Del Monte decision, and other jurisdictions had also rejected the N. Ins. rule where the acquiring company assumed liability through contract.  Therefore, the Fifth Circuit predicted that Texas courts would also reject the N. Ins. rule where the liabilities in question were assumed through a contract that also specifically excluded the transfer of the insurance policy covering those liabilities.

Fifth Circuit Certifies Question to Louisiana Supreme Court on Assignment of Policies

   The Fifth Circuit asked the Louisiana Supreme Court whether a policy's anti-assignment clause prohibited post-loss assignments of policy rights.  See In Re: Katrina Canal Breaches Litigation, 2010 U.S. App. LEXIS 15603 (5th Cir. July 28, 2010).

   After Hurricanes Katrina and Rita, Louisiana distributed federal funds to homeowners under its "Road Home" program for repair of uninsured or under-insured property damage.  In return for such funds, recipients executed an assignment to the State all claims and future rights to reimbursement from any casualty, property or flood policy on their residence.  The program was popular and eventually created a one billion dollar shortfall.  To remedy the problem, the State sued various insurers, relying on the assignments to argue for recovery of funds expended under the Road Home program. 

   The district court denied the insurers' motion to dismiss, holding that the anti-assignment provisions did not bar post-loss assignments under Louisiana law.   The Fifth Circuit noted there were conflicting decisions from Louisiana courts.  An old case from 1936 invalidated an anti-assignment clause as applied to the post-loss assignment of rights to life insurance proceeds.  On the other hand, a Katrina case enforced an anti-assignment clause to invalidate a post-loss assignment of all claims arising out of the ownership of the insured property.  The Fifth Circuit noted that this more recent case was consistent with cases from several other jurisdiction and specifically cited the Hawaii Supreme Court's decision in Del Monte Fresh Produce (Haw.) Inc. v. Fireman's Fund Ins. Co., 183 P.3d 734, 747 (Haw. 2007).

   Given this inconsistency, the Fifth Circuit asked the Louisiana Supreme Court whether an anti-assignment clause barred an insured's post-loss assignment of claims under the policy when the assignment transferred contractual obligations, not just the right to money due?

Merger Statute's Impact on Anti-Assignment Clause Considered

   The Fourth Circuit recently asked the West Virginia Supreme Court of Appeals whether a state law stating that contract rights vest in the survivor of a merger nullified a non-assignment provision in an auto policy that was transferred to a successor corporation.  See State Auto Prop. and Cas. Ins Co., No. 08-1481, 2009 U.S. App. LEXIS 25053  (4th Cir. Nov. 16, 2009).

  In February 2000, Eastern Data Systems, Inc. (EDSI) purchased an auto liability policy from State Auto.  In October 2002, Engineering Profession Services (EPS) purchased 100% of EDSI's stock.  In January 2003, EDSI merged into one of EPS's companies, EPS Network Solutions, Inc.   In light of the merger, EDSI's vehicles were retitled to Network Solutions in February 2003.  The policy with State Auto, listing EDSI as a named insured, was renewed until its cancellation in May 2004.

   On May 26, 2003, a Network Solutions employee caused a multiple vehicle accident while driving a Ford van which had been owned by EDSI prior to the merger, but was now owned by Network Solutions.  The Ford van was listed on the schedule of vehicles in the policy. 

   At the time of the accident, EPS also had an auto policy with Federal Insurance Company which covered Network Solutions' vehicles.  Federal settled all of the claims arising from the accident for a total of $851,510.  Federal then sought contribution from State Auto for one-half of the total settlement amount.  State Auto disputed the contribution claims because its policy contained a non-assignment clause which provided, "Your rights and duties under this policy may not be transferred without our written consent . . . . " 

   Federal argued the State Auto policy transferred to Network Solutions by operation of law under a West Virginia statute which read, "When a merger takes effect . . . all property owned by and every contract right possessed by, each corporation . . .  that merges into the survivor is vested in the survivor . . . . " 

   State Auto filed a declaratory judgment action against EDSI and Network Solutions, and Federal intervened as a defendant.  On cross-motions for summary judgment, the district court held in favor of Federal, reasoning that EDSI's rights under the State Auto policy transferred to Network Solutions by operation of law despite the non-assignment clause.

   Finding no guidance in West Virginia's case law, the Fourth Circuit sought assistance from the West Virginia high court regarding the statute's impact on the non-assignment provision.  The certified question asked, "When two corporate entities have merged, does [the statute] operate on its face to void an otherwise applicable non-assignment clause in a business auto insurance policy issued pre-merger to the non-surviving corporation?" 

   We will keep a look out for West Virginia's answer to this question.

Assignee of Policy Must Comply with Request for Examination Under Oath

   Whether an assignee is required to respond to the insurer's invocation of an Examination Under Oath ("EUO") clause was at issue in Shaw v. State Farm Fire and Casualty Co., 2009 Fla. App. LEXIS 15930 (Fla. Ct. App. Oct. 23, 2009). 

   After the insured was involved in an auto accident, he received medical care from appellants.  The insured assigned of his No-Fault benefits and cause of action to recover those benefits to appellants, the insured's health care providers. 

   When appellants presented a claim to State Farm for services rendered to the insured, State Farm requested that appellants appear for an EUO pursuant to the terms of the policy.  The policy required "any person or organization making claim or seeking payment. . . must, at our option, submit to an examination under oath . . . ."  State Farm suspected the claim submitted by appellants was fraudulent.  Appellants then filed an action for declaratory relief seeking a judgment that they were not required under the policy provision to attend the EUO.  The trial court entered a final summary judgment concluding appellants failed and refused to comply with the EUO provisions, which was a condition precedent to making a claim for policy benefits.

   The appellate court affirmed.  Prior Florida cases which did not require the assignee to attend an EUO were distinguishable based on the policy language.  In one case, the EUO provision required "a person who suffers a bodily injury and makes a claim under the policy shall answer questions under oath."  See Marlin Diagnostics v. State Farm Mut. Auto. Ins. Co., 897 So.2d 469 (Fla. Ct. App. 2004).  Unlike the EUO in this case, the specific provision in Marlin required only the person who suffered the bodily injury to attend the EUO.  In response to Marlin, State Farm amended its policies to require that "any person or organization making claim or seeking payment" be examined.  Therefore, once the assignment was made, State Farm could no longer require the insured to attend the EUO, but could require the assignees of the policy to do so.

   The following question was certified to the Florida Supreme Court: Whether the EUO provision in State Farm's policies is a condition precedent that must be complied with when a medical care provider takes an assignment of no-fault benefits and cause of action from the insured without specifically agreeing to be bound by that condition?

  

Delaware Court Delves into Anti-Assignment and Allocation Issues

   The Delaware Court of Chancery recently issued a detailed, scholarly opinion addressing anti-assignment provisions and the proper allocation for asbestos-related claims.  See Viking Pump, Inc. v. Century Indemn. Co., 2009 Del. Ch. LEXIS 180 (Del. Ct. Ch. Oct. 14, 2009).  Significantly, in determining the anti-assignment clauses did not bar assignment of the policies, the court departed from the reasoning utilized by the the Hawai`i Supreme Court in Del Monte Fresh Produce (Hawaii), Inc. v. Firemans' Fund Ins. Co., 117 Haw. 357, 183 P.3d 734 (2007).

   Prior to the mid-1980's, both Warren Pumps and Viking Pump were independent companies that had been acquired by Houdaille Industries, Inc.  Houdaille divested itself of Warren Pumps in 1985 through an asset sale to New Warren.  Subsequently, Houdaille sold Viking Pump to New Viking in 1987. 

   The new companies, New Warren and New Viking, were sued for asbestos exposure claims by plaintiffs who asserted that they were injured by Viking and Warren's use of asbestos while those businesses were operated by Houdaille.  Houdaille had three layers of insurance coverage: primary liability policies; umbrella excess policies; and additional layers of excess coverage.  Liberty Mutual provided the first two layers of insurance, while the Excess Policies were provided by twenty separate insurers who issued forty-five separate policies.  The policies all provided "occurrence-based" coverage, protecting Houdaille from liability for any injury for which Houdaille was liable that occurred during the policy period.  This phase of the litigation addressed coverage of the new companies under the Excess Policies.

   Anti-Assignment Provisions

   The court first considered whether Houdaille agreed to assign its rights under the Excess Policies to New Warren and New Viking.  An amendment to the asset sale agreement to New Warren specifically gave the buyer Houdaille's insurance rights under the Excess Policies.  After a detailed analysis of the Assignment and Assumption Agreement and the Stock Purchase Agreement with the New Viking, the court determined the insurance rights to the Excess Policies for pre-existing liabilities were assigned to New Viking.

   The Excess Insurers argued the assignments to New Warren and New Viking were void because the Excess Insurers did not consent.  The policies typically provided, "assignment of interest under this policy shall not bind the insurer until its consent is endorsed hereon."  The Excess Insurers relied on the California Supreme Court's holding in Henkel Corp. v. Hartford Accident and Indemn. Co., 129 Cal. Rptr. 2d 828 (Cal. 2003), to argue the anti-assignment provisions barred assignment of rights under the policies.  The Hawai`i Supreme Court followed Henkel in Del Monte v. Firemans' Fund.  In Henkel and Del Monte, the courts found the anti-assignment clauses barred a transfer of insurance claims because even though the underlying tort had already occurred, the insured loss had not been reduced to a fixed amount at the time of the assignment.

   Nevertheless, applying New York law, the Delaware court determined the anti-assignment clauses were unenforceable.  New York law did not permit anti-assignment clauses to bar the transfer of "post-loss claims," or claims for losses that had already happened.  Once the insured-against loss occurred, there was no issue of an insurer having to insure against an additional risk. 

   Allocation of Coverage

  Turning to the allocation issue, the insurers promoted the "pro rata" approach, while the insureds urged the "all sums" concept.  The "pro rata" formula meant any given insurer, having agreed to insure Houdaille for a fixed period of time, was only responsible for some "pro rata" share of the liability the insured owed to an asbestos plaintiff who suffered harm due to exposure through several policy periods.  In contrast, under the "all sums" approach, a policy would be responsible for all liability that flowed from a covered occurrence up to policy limits.  

   The court noted that New York courts look to the intent of the parties to resolve competing interpretations of policy language.  The all sums approach was the one embraced by the Houdaille Policies.  Reading the policies in their entirety, they included either a "non-cumulation provision" or a "prior insurance provision."  Under these clauses, recovery under one policy reduced an insured's recovery from policies in effect in other periods from the same occurrence (e.g., continuous asbestos exposure), and an insurer had to pay for injuries caused by that occurrence that continued into other periods.  The non-cumulation and prior insurance provisions could not sensibly be applied within a pro rata allocation scheme.  Instead, the effect of these clauses was to keep an insured from "stacking" coverage so as to exceed the limits of individual policies.

Reconsideration of Decision Upholding Transfer of Policies Upheld Despite Anti-Assignment Provisions

   We previously reviewed Pilkington N.A. Inc. v. Travelers Cas. & Sur. Co., 2009 U.S. Dist. LEXIS 67291 (N.D. Ohio July 27, 2009) [here], where the court determined there was coverage for a successor corporation under the predecessor's CGL policy despite the policies' anti-assignment provision.  In the recent sequel, the court denied the insurers' motion for reconsideration.  Pilkington N.A. Inc. v. Travelers Cas. & Sur. Co., No. 3:01CV7617, 2009 U.S. Dist. LEXIS 94322 (N.D. Ohio July 27, 2009).

   By way of background, the predecessor corporation transferred all of its assets and liabilities to the successor corporation through a Transfer and Assumption Agreement.  The successor demanded coverage for environmental damage that occurred prior to 1986 when the predecessor held policies with the insurers.   In July 2009, the court held that the Transfer and Assumption Agreement transferred all of the choses in action to the successor, including the CGL policies, irregardless of the anti-assignment provisions.

  Nothing in the insurers' motion for reconsideration indicated the court had made a clear error of law, overlooked binding precedent, or needed to look at newly developed evidence.  Therefore, the insurers were not entitled to reconsideration of the prior decision.