In insurance, an assignment is the transfer of legal rights under an insurance policy to another party. The legality of assignments became a major issue in the aftermath of hurricanes Katrina and Rita. During this period, the federal government, in an effort to aid rebuilding efforts, issued money through the Road Home program to homeowners who held underinsured properties. In exchange, these homeowners were required to assign their rights to insurance claims under their policies to the the state of Louisiana. The purpose of this assignment was to prevent homeowners from fraudulently receiving duplicate payments. However, the program incentivized insurance companies to estimate damages too low, which in turn forced homeowners to take the higher amount offered through the Road Home program.
The shortfall created within the Road Home program forced the state of Louisiana to bring suit against insurance companies through the policy rights assigned to the state by homeowners. In essence, the state sought to recoup actual insurance claim damages that the homeowners were rightfully owed had they not opted into the Road Home program. Though most, if not all, of the homeowner insurance policy contracts contained an anti-assignment clause, the state maintained that it had the right to post-loss assignment. Therefore, it is critical to distinguish between a pre-loss assignment and a post-loss assignment.
A pre-loss assignment occurs when one transfers a legal right under an insurance policy to another before the injury or loss occurs. An example of a type of pre-loss assignment is found in cases when life insurance is assigned to a bank as collateral for a loan. Here, the assignment has occurred before the loss, in this case the death of the original policy holder, and any benefits that accrue at the time of death are used to repay the bank first. These types of assignments typically require consent from the insurer, but are usually barred by anti-assignment clauses.
A post-loss assignment, on the other hand, is the transfer of a legal right under an insurance policy to another party after the injury or loss occurs. Post-loss assignments frequently give the third party transferee the ability to file a claim against the insurance company for any loss accrued by the original policy holder. Many insurance companies try to block such assignments through broad anti-assignment clauses found in policy contracts. Such clauses were found in most Katrina and Rita policies, and insurance companies pointed to these sections in an attempt to avoid paying actual damage costs homeowners thought they rightfully assigned to the state.
While national jurisprudence holds that pre-loss anti-assignment clauses are valid in favor of contract law and public policy, anti-assignment clauses related to post-loss assignments are held to be invalid. The reasoning behind this difference primarily lies with public policy considerations. A pre-loss assignment, for example, may increase the risk beyond the point that the insurance company had originally contracted for and with a party the insurance company had not originally contracted with. A post-loss assignment, on the other hand, simply assigns an accrued right to payment after a loss has already occurred. There is no change in risk as the loss has already occurred, and since payment is to be made it matters none to whom the payment is made.
The Supreme Court of Louisiana holds that such public policy concerns are better suited for the legislature. However, the Court does state that clauses prohibiting post-loss assignment must be written in clear and unambiguous language. If the language in the policy contract is unclear, then, in accordance with laws regarding contracts of adhesion, the language will be construed against the insurance company and in favor of the insured. If you have entered into a contract with an insurance company and are looking to assign your rights under the policy to a third party, turn to the language in the contract itself. Though there is not specific set of words or test used to determine “clear and unambiguous,” your own judgment is a good starting point in determining whether or not you have the right to assignment.
Though your own judgment is an excellent place to start, insurance law is very complicated and is best suited for a practicing attorney.