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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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New York Commercial Division Practice

Procedure & Practice for the Commercial Division Litigator

Can You Assign Your Rights Under an Insurance Contract that Prohibits Assignment? Only for Prior, Fixed Losses

In the insurance context, however, the enforcement of anti-assignment clauses is more complicated.  Because insurers—like any contractual party—have a legitimate interest in protecting themselves from insureds’ assignment of the insurance agreement to a different, perhaps more risky party, anti-assignment clauses in insurance agreements are enforceable against assignments that occur prior to a covered loss .   Arrowood Indem. Co. v. Atlantic Mut. Ins. Co . , 96 AD3d 693, 694 [1st Dept 2012].  But in circumstances where the assignment occurs after the covered loss , New York courts are more critical of anti-assignment clauses.  In those circumstances, courts reason, there is no increased risk to the insured; the loss already occurred, and the only thing that changes as a result of the assignment is who the insurer will need to pay for that loss.

In Certain Underwriters At Lloyd’s, London v AT&T, Corp. , 2021 N.Y. Slip Op. 31740[U] , a recent decision by New York Commercial Division Justice Cohen , the Court explores the exceptions to the general rules regarding anti-assignment clauses in insurance policies.  Ultimately, the case underscores the difficulties insurers face in disclaiming coverage by enforcement of an anti-assignment clause in the policy.

The dispute in Certain Underwriters stems from the coverage dispute between Nokia of America Corporation and the several insurers who issued policies to Nokia’s predecessor, AT&T, for a series of asbestos liabilities that Nokia inherited from AT&T.

In 1996, AT&T restructured its global organization into three independent businesses by execution of a tri-party Separation and Distribution Agreement (the “SDA”).  As part of the SDA, AT&T transferred to Lucent (now Nokia) all “right, title, and interest in all Lucent Assets.”  The SDA clarified:

[T]he parties intend by this Agreement that Lucent and each other member of the Lucent Group be successors-in-interest to all rights that any member of the Lucent Group may have as of the Closing Date as a subsidiary, affiliate, division or department of AT&T prior to the Closing Date under any policy of insurance issued to AT&T by any insurance carrier unaffiliated with AT&T[,] . . . including any rights such member of the Lucent Group may have as an insured or additional named insured, subsidiary, affiliate, division or department, to avail itself of any such policy of insurance . . . as in effect prior to the Closing Date.

(SDA § 7.1 [c] [emphasis added]).  The SDA also provided for Nokia to assume all of certain liabilities arising out of certain lines of AT&T’s businesses.

Since at least 1996, Nokia has been sued in thousands of asbestos-related lawsuits stemming from pre-1996 operations of certain AT&T businesses.  AT&T (what remains after the SDA) also is sued in these asbestos cases; often times, Nokia and AT&T are named as codefendants by the same plaintiff.

AT&T sought coverage for the asbestos-related suits under its insurance policies.  The massive and protracted Certain Underwriters case consolidates all of coverage-related disputes between AT&T and its insurers.

Nokia, as successor in interest to AT&T’s insurance policies, also sought coverage for the asbestos-related suits in which it is named as a defendant.  The insurers who issued loss policies to AT&T denied Nokia coverage, arguing that: (i) the plain language of the SDA did not assign to Nokia the rights under their policies, and (ii) even if the SDA did assign those rights, the insurance agreements’ anti-assignment clauses prohibited such assignments.

Justice Cohen Grants Nokia’s Motion for Summary Judgment

Nokia moved for summary judgment on a narrow issue: is it an insured party under AT&T’s legacy policies by virtue of AT&T’s assignment of those policies in the SDA?  Or, as the insurers argue, was AT&T’s purported assignment of its insurance policies to Nokia in the SDA invalid?

Justice Cohen made short work of the insurers’ argument that the plain language of the SDA was insufficient to assign to Nokia the rights under the operative insurance policies.  The fact that the SDA did not use “use talismanic words like ‘assign’ or ‘transfer’ is immaterial,” the Court held, since “[t]he text of the SDA demonstrates, in several ways, the contracting parties’ intent to assign AT&T’s rights under the Legacy Policies.”

A much closer question, however, was the effect of the anti-assignment clauses in the operative policies.  The Court acknowledged that the general rule—anti-assignment clauses in insurance agreements do not prohibit assignments occurring after the covered loss—is subject to a critical exception: a post-loss assignment may nonetheless be barred by an anti-assignment clause where the assignment materially increases the risk on the insured.  See Globecon Group, LLC v Hartford Fire Ins. Co. , 434 F3d 165, 171 [2d Cir 2006] [“Under New York law, a no-transfer clause may, in certain unusual circumstances, remain valid as to some pre-transfer claims even though the loss occurred before the transfer”]).

For example, in Holt v. Fidelity Phoenix Fire Ins. Co , 273 AD 166, 168 [3d Dept 1948], a fire forced the closure of a movie theatre and the theatre’s owner made a claim for lost profits under its business interruption insurance.  When the theatre owner sold the business a few days later, the new owner tried to make a claim for the lost profits that he incurred after he bought the business.  In the subsequent coverage suit, the Third Department sided with the insurer, reasoning that although the fire occurred before the assignment, the assignment of the lost profits policy was invalid because it materially increased the risk to the insurers, who never agreed to pay the lost profits of some other business.

Here, the insurers argued that even though the covered losses ( i.e ., the alleged asbestos exposure) occurred before the SDA, AT&T’s assignment to Nokia was invalid under the policies’ anti-assignment clauses because that assignment materially increased the insurers’ risk and costs under the policies.  Specifically, the assignment to Nokia wrongly caused the insureds to insure two corporations instead of one, AT&T and Nokia.  And because the two corporations are often named in the same suit, defense costs and potential liabilities were multiplied.  The insurers pointed to a case in which Nokia and AT&T, as co-defendants, failed to cooperate in the defense of an asbestos claim and instead reached separate settlements with the plaintiff for vastly different sums.  Having to pay both of those settlements, the insureds argued, was proof positive of their increased risk.

The Court rejected the insurers’ argument that the increased costs of having to defend Nokia and AT&T materially increased the insurers’ risk such that the anti-assignment clause should be enforced.  The Court reasoned that unlike the business interruption losses claimed in Holt , the asbestos-based losses here are the same now as if the assignment had not occurred.  Increased defense costs, standing alone, is not grounds to invalidate the assignment.  If that were the case, the Court reasoned, there would never be a permissible assignment of “insurance rights between entities that face common litigation threats, because any such assignment could drive up total defense costs to the insurer.”

Moreover, the Court held that the Insurers had plenty of contractual mechanisms to keep defense costs in check, including defense cooperation provisions.  With sharp oversight, the insureds can keep their defense costs from ballooning.

The Takeaway

Those restructuring their business or otherwise considering assigning their rights under an insurance agreement must tread carefully.  The agreement’s anti-assignment provision likely will invalidate coverage for any after-arising claims and for prior claims with losses that are speculative at the time of assignment (such as lost profits).  But Certain Underwriters offers some measure of comfort; that the assignment may potentially result in increased defense costs is, without more, insufficient to invalidate an assignment.

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Can You Assign Your Insurance Benefits to Someone Else?

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Most business insurance policies contain a so-called anti-assignment clause. This clause prohibits policyholders from transferring any of their rights under the policy to someone else. This means that the insured business cannot cede its right to collect claim payments to another party. However, laws in most states permit policyholders to transfer their rights to another party under certain circumstances.

Anti-Assignment Clause

In the standard ISO policies , the anti-assignment clause is located in a separate form called the Common Policy Conditions. These conditions apply to all coverages that are included in the policy. For instance, if a policy includes business auto , general liability , and commercial property coverages, the anti-assignment clause applies to all three coverages.

The clause is entitled Transfer of Your Rights and Duties Under This Policy. It includes the following provision:

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.

The anti-assignment clause prohibits the  named insured from transferring any of its rights or obligations under the policy to someone else without the insurer's permission. The only exception is if the named insured is an individual (sole proprietor) and he or she dies. An assignment is permitted in this case because a sole proprietorship and the individual owner are one and the same. If the individual dies, the business cannot survive unless it is sold to someone else.

An anti-assignment clause is intended to prevent the insurer from unwittingly assuming risks it never intended to take on. Commercial insurers review business insurance applicants carefully. Before they issue policies, underwriters consider the knowledge and experience of a company's owners and managerial staff. If a business is sold to someone else, the new owners may not be as skilled or attentive as the previous ones. From the insurer's perspective, the new owners are an unknown risk.

Post-Loss Assignments Permitted

The anti-assignment clause doesn't distinguish between assignments made before a loss and those made afterward. Even so, courts in most states have allowed policyholders to assign their rights to another party after a loss has occurred. Pre-loss assignments are still prohibited. Here is an example of a post-loss assignment of insurance benefits.

Victor operates a restaurant called Vital Vittles out of a building he owns. Late one January night two water pipes in the building freeze. The pipes subsequently burst, causing considerable water damage to Victor's building. Victor is forced to close his restaurant until the repairs are completed.

Victor hires a water damage contractor called Rapid Restoration to repair the damage to his building. He tells the contractor that he needs the repairs done quickly as he is anxious to reopen his restaurant. The contractor says that the repairs can be expedited if Victor signs over his rights under the policy to Rapid Restoration. The contractor will then proceed with the repairs and negotiate a claim settlement with Vital Vittles' commercial property insurer. Victor agrees to the assignment and the contractor begins the repair work.

While Vital Vittles' commercial property policy contains an anti-assignment clause, Victor has assigned his rights to Rapid Restoration after a loss has occurred. Thus, in most states, Victor's insurer cannot reject the assignment (assuming post-loss assignments are permitted in Victor's state).

Problems With Assignments of Benefits

In recent years, assignment of benefits (AOB) agreements have been problematic in some states, particularly Florida. Unscrupulous contractors have preyed on unsuspecting homeowners and business owners who have suffered water damage . Some contractors work alone while others operate in cahoots with crooked lawyers. In either event, the contractor convinces the policyholder to assign his or her rights under the policy over to the contractor. The contractor then exaggerates the cost of the repairs and collects the inflated amount from the insurer. The policyholder is left with a large claim on his or her loss history. When the policy expires, the insurer may refuse to renew it.

In the previous example, Victor has assigned his rights under the policy to Rapid Restoration. Suppose that Rapid Restoration completes only half of the repair work on Victor's building. The actual cost is $15,000 but the contractor submits a bill to the insurer for $30,000. Alternatively, the contractor never submits a bill but sues the insurer for $30,000. In either case, the insurer may refuse to pay on the basis that the contractor has committed insurance fraud. Victor cannot intervene because he has signed his rights over to the contractor. If the contractor is unsuccessful in its lawsuit against the insurer, it may demand payment from Victor's company.

Avoiding Problems With AOBs

As a business owner, you can avoid problems associated with AOBs and unscrupulous contractors by taking the following steps:

• Report any loss or accident directly to your insurer (or your agent or broker ). Notify your insurer immediately. Don't allow a contractor to do the notification on your behalf.
• Take photos of the damage.
• Don't allow any contractor to begin work until an insurance adjuster has documented the damage
• Vet contractors thoroughly before hiring them. Make sure they are properly licensed. If your area has suffered a natural disaster, watch out for construction scams.
• Don't sign an AOB unless you have reviewed it carefully. If you don't understand it, ask your agent, insurer, or attorney for assistance.
• If your contractor won't do any work until you've signed an AOB, find another contractor.

AOBs in Health Insurance

Assignment of benefit agreements are common in health insurance. Patients are often asked to agree to such clauses before they receive treatment from a physician, hospital, or another healthcare provider. The assignment of benefits clause transfers a patient's right to collect benefits under his or her health policy to the provider. By signing the document, the patent agrees that payments will be made directly to the provider for the services rendered. The clause states that the patient is ultimately responsible for the charges if the insurer fails to pay.

Once the treatment has been performed, the provider submits the AOB along with a claim to the patient's health insurer. The insurer pays the provider for services rendered to the patient.

• assignments basic law

Assignments: The Basic Law

The assignment of a right or obligation is a common contractual event under the law and the right to assign (or prohibition against assignments) is found in the majority of agreements, leases and business structural documents created in the United States.

As with many terms commonly used, people are familiar with the term but often are not aware or fully aware of what the terms entail. The concept of assignment of rights and obligations is one of those simple concepts with wide ranging ramifications in the contractual and business context and the law imposes severe restrictions on the validity and effect of assignment in many instances. Clear contractual provisions concerning assignments and rights should be in every document and structure created and this article will outline why such drafting is essential for the creation of appropriate and effective contracts and structures.

The reader should first read the article on Limited Liability Entities in the United States and Contracts since the information in those articles will be assumed in this article.

Basic Definitions and Concepts:

An assignment is the transfer of rights held by one party called the “assignor” to another party called the “assignee.” The legal nature of the assignment and the contractual terms of the agreement between the parties determines some additional rights and liabilities that accompany the assignment. The assignment of rights under a contract usually completely transfers the rights to the assignee to receive the benefits accruing under the contract. Ordinarily, the term assignment is limited to the transfer of rights that are intangible, like contractual rights and rights connected with property. Merchants Service Co. v. Small Claims Court , 35 Cal. 2d 109, 113-114 (Cal. 1950).

An assignment will generally be permitted under the law unless there is an express prohibition against assignment in the underlying contract or lease. Where assignments are permitted, the assignor need not consult the other party to the contract but may merely assign the rights at that time. However, an assignment cannot have any adverse effect on the duties of the other party to the contract, nor can it diminish the chance of the other party receiving complete performance. The assignor normally remains liable unless there is an agreement to the contrary by the other party to the contract.

The effect of a valid assignment is to remove privity between the assignor and the obligor and create privity between the obligor and the assignee. Privity is usually defined as a direct and immediate contractual relationship. See Merchants case above.

Further, for the assignment to be effective in most jurisdictions, it must occur in the present. One does not normally assign a future right; the assignment vests immediate rights and obligations.

No specific language is required to create an assignment so long as the assignor makes clear his/her intent to assign identified contractual rights to the assignee. Since expensive litigation can erupt from ambiguous or vague language, obtaining the correct verbiage is vital. An agreement must manifest the intent to transfer rights and can either be oral or in writing and the rights assigned must be certain.

Note that an assignment of an interest is the transfer of some identifiable property, claim, or right from the assignor to the assignee. The assignment operates to transfer to the assignee all of the rights, title, or interest of the assignor in the thing assigned. A transfer of all rights, title, and interests conveys everything that the assignor owned in the thing assigned and the assignee stands in the shoes of the assignor. Knott v. McDonald’s Corp ., 985 F. Supp. 1222 (N.D. Cal. 1997)

The parties must intend to effectuate an assignment at the time of the transfer, although no particular language or procedure is necessary. As long ago as the case of National Reserve Co. v. Metropolitan Trust Co ., 17 Cal. 2d 827 (Cal. 1941), the court held that in determining what rights or interests pass under an assignment, the intention of the parties as manifested in the instrument is controlling.

The intent of the parties to an assignment is a question of fact to be derived not only from the instrument executed by the parties but also from the surrounding circumstances. When there is no writing to evidence the intention to transfer some identifiable property, claim, or right, it is necessary to scrutinize the surrounding circumstances and parties’ acts to ascertain their intentions. Strosberg v. Brauvin Realty Servs., 295 Ill. App. 3d 17 (Ill. App. Ct. 1st Dist. 1998)

The general rule applicable to assignments of choses in action is that an assignment, unless there is a contract to the contrary, carries with it all securities held by the assignor as collateral to the claim and all rights incidental thereto and vests in the assignee the equitable title to such collateral securities and incidental rights. An unqualified assignment of a contract or chose in action, however, with no indication of the intent of the parties, vests in the assignee the assigned contract or chose and all rights and remedies incidental thereto.

More examples: In Strosberg v. Brauvin Realty Servs ., 295 Ill. App. 3d 17 (Ill. App. Ct. 1st Dist. 1998), the court held that the assignee of a party to a subordination agreement is entitled to the benefits and is subject to the burdens of the agreement. In Florida E. C. R. Co. v. Eno , 99 Fla. 887 (Fla. 1930), the court held that the mere assignment of all sums due in and of itself creates no different or other liability of the owner to the assignee than that which existed from the owner to the assignor.

And note that even though an assignment vests in the assignee all rights, remedies, and contingent benefits which are incidental to the thing assigned, those which are personal to the assignor and for his sole benefit are not assigned. Rasp v. Hidden Valley Lake, Inc ., 519 N.E.2d 153, 158 (Ind. Ct. App. 1988). Thus, if the underlying agreement provides that a service can only be provided to X, X cannot assign that right to Y.

Novation Compared to Assignment:

Although the difference between a novation and an assignment may appear narrow, it is an essential one. “Novation is a act whereby one party transfers all its obligations and benefits under a contract to a third party.” In a novation, a third party successfully substitutes the original party as a party to the contract. “When a contract is novated, the other contracting party must be left in the same position he was in prior to the novation being made.”

A sublease is the transfer when a tenant retains some right of reentry onto the leased premises. However, if the tenant transfers the entire leasehold estate, retaining no right of reentry or other reversionary interest, then the transfer is an assignment. The assignor is normally also removed from liability to the landlord only if the landlord consents or allowed that right in the lease. In a sublease, the original tenant is not released from the obligations of the original lease.

Equitable Assignments:

An equitable assignment is one in which one has a future interest and is not valid at law but valid in a court of equity. In National Bank of Republic v. United Sec. Life Ins. & Trust Co. , 17 App. D.C. 112 (D.C. Cir. 1900), the court held that to constitute an equitable assignment of a chose in action, the following has to occur generally: anything said written or done, in pursuance of an agreement and for valuable consideration, or in consideration of an antecedent debt, to place a chose in action or fund out of the control of the owner, and appropriate it to or in favor of another person, amounts to an equitable assignment. Thus, an agreement, between a debtor and a creditor, that the debt shall be paid out of a specific fund going to the debtor may operate as an equitable assignment.

In Egyptian Navigation Co. v. Baker Invs. Corp. , 2008 U.S. Dist. LEXIS 30804 (S.D.N.Y. Apr. 14, 2008), the court stated that an equitable assignment occurs under English law when an assignor, with an intent to transfer his/her right to a chose in action, informs the assignee about the right so transferred.

An executory agreement or a declaration of trust are also equitable assignments if unenforceable as assignments by a court of law but enforceable by a court of equity exercising sound discretion according to the circumstances of the case. Since California combines courts of equity and courts of law, the same court would hear arguments as to whether an equitable assignment had occurred. Quite often, such relief is granted to avoid fraud or unjust enrichment.

Note that obtaining an assignment through fraudulent means invalidates the assignment. Fraud destroys the validity of everything into which it enters. It vitiates the most solemn contracts, documents, and even judgments. Walker v. Rich , 79 Cal. App. 139 (Cal. App. 1926). If an assignment is made with the fraudulent intent to delay, hinder, and defraud creditors, then it is void as fraudulent in fact. See our article on Transfers to Defraud Creditors .

But note that the motives that prompted an assignor to make the transfer will be considered as immaterial and will constitute no defense to an action by the assignee, if an assignment is considered as valid in all other respects.

Enforceability of Assignments:

Whether a right under a contract is capable of being transferred is determined by the law of the place where the contract was entered into. The validity and effect of an assignment is determined by the law of the place of assignment. The validity of an assignment of a contractual right is governed by the law of the state with the most significant relationship to the assignment and the parties.

In some jurisdictions, the traditional conflict of laws rules governing assignments has been rejected and the law of the place having the most significant contacts with the assignment applies. In Downs v. American Mut. Liability Ins. Co ., 14 N.Y.2d 266 (N.Y. 1964), a wife and her husband separated and the wife obtained a judgment of separation from the husband in New York. The judgment required the husband to pay a certain yearly sum to the wife. The husband assigned 50 percent of his future salary, wages, and earnings to the wife. The agreement authorized the employer to make such payments to the wife.

After the husband moved from New York, the wife learned that he was employed by an employer in Massachusetts. She sent the proper notice and demanded payment under the agreement. The employer refused and the wife brought an action for enforcement. The court observed that Massachusetts did not prohibit assignment of the husband’s wages. Moreover, Massachusetts law was not controlling because New York had the most significant relationship with the assignment. Therefore, the court ruled in favor of the wife.

Therefore, the validity of an assignment is determined by looking to the law of the forum with the most significant relationship to the assignment itself. To determine the applicable law of assignments, the court must look to the law of the state which is most significantly related to the principal issue before it.

Assignment of Contractual Rights:

Generally, the law allows the assignment of a contractual right unless the substitution of rights would materially change the duty of the obligor, materially increase the burden or risk imposed on the obligor by the contract, materially impair the chance of obtaining return performance, or materially reduce the value of the performance to the obligor. Restat 2d of Contracts, § 317(2)(a). This presumes that the underlying agreement is silent on the right to assign.

If the contract specifically precludes assignment, the contractual right is not assignable. Whether a contract is assignable is a matter of contractual intent and one must look to the language used by the parties to discern that intent.

In the absence of an express provision to the contrary, the rights and duties under a bilateral executory contract that does not involve personal skill, trust, or confidence may be assigned without the consent of the other party. But note that an assignment is invalid if it would materially alter the other party’s duties and responsibilities. Once an assignment is effective, the assignee stands in the shoes of the assignor and assumes all of assignor’s rights. Hence, after a valid assignment, the assignor’s right to performance is extinguished, transferred to assignee, and the assignee possesses the same rights, benefits, and remedies assignor once possessed. Robert Lamb Hart Planners & Architects v. Evergreen, Ltd. , 787 F. Supp. 753 (S.D. Ohio 1992).

On the other hand, an assignee’s right against the obligor is subject to “all of the limitations of the assignor’s right, all defenses thereto, and all set-offs and counterclaims which would have been available against the assignor had there been no assignment, provided that these defenses and set-offs are based on facts existing at the time of the assignment.” See Robert Lamb , case, above.

The power of the contract to restrict assignment is broad. Usually, contractual provisions that restrict assignment of the contract without the consent of the obligor are valid and enforceable, even when there is statutory authorization for the assignment. The restriction of the power to assign is often ineffective unless the restriction is expressly and precisely stated. Anti-assignment clauses are effective only if they contain clear, unambiguous language of prohibition. Anti-assignment clauses protect only the obligor and do not affect the transaction between the assignee and assignor.

Usually, a prohibition against the assignment of a contract does not prevent an assignment of the right to receive payments due, unless circumstances indicate the contrary. Moreover, the contracting parties cannot, by a mere non-assignment provision, prevent the effectual alienation of the right to money which becomes due under the contract.

A contract provision prohibiting or restricting an assignment may be waived, or a party may so act as to be estopped from objecting to the assignment, such as by effectively ratifying the assignment. The power to void an assignment made in violation of an anti-assignment clause may be waived either before or after the assignment. See our article on Contracts.

Noncompete Clauses and Assignments:

Of critical import to most buyers of businesses is the ability to ensure that key employees of the business being purchased cannot start a competing company. Some states strictly limit such clauses, some do allow them. California does restrict noncompete clauses, only allowing them under certain circumstances. A common question in those states that do allow them is whether such rights can be assigned to a new party, such as the buyer of the buyer.

A covenant not to compete, also called a non-competitive clause, is a formal agreement prohibiting one party from performing similar work or business within a designated area for a specified amount of time. This type of clause is generally included in contracts between employer and employee and contracts between buyer and seller of a business.

Many workers sign a covenant not to compete as part of the paperwork required for employment. It may be a separate document similar to a non-disclosure agreement, or buried within a number of other clauses in a contract. A covenant not to compete is generally legal and enforceable, although there are some exceptions and restrictions.

Whenever a company recruits skilled employees, it invests a significant amount of time and training. For example, it often takes years before a research chemist or a design engineer develops a workable knowledge of a company’s product line, including trade secrets and highly sensitive information. Once an employee gains this knowledge and experience, however, all sorts of things can happen. The employee could work for the company until retirement, accept a better offer from a competing company or start up his or her own business.

A covenant not to compete may cover a number of potential issues between employers and former employees. Many companies spend years developing a local base of customers or clients. It is important that this customer base not fall into the hands of local competitors. When an employee signs a covenant not to compete, he or she usually agrees not to use insider knowledge of the company’s customer base to disadvantage the company. The covenant not to compete often defines a broad geographical area considered off-limits to former employees, possibly tens or hundreds of miles.

Another area of concern covered by a covenant not to compete is a potential ‘brain drain’. Some high-level former employees may seek to recruit others from the same company to create new competition. Retention of employees, especially those with unique skills or proprietary knowledge, is vital for most companies, so a covenant not to compete may spell out definite restrictions on the hiring or recruiting of employees.

A covenant not to compete may also define a specific amount of time before a former employee can seek employment in a similar field. Many companies offer a substantial severance package to make sure former employees are financially solvent until the terms of the covenant not to compete have been met.

Because the use of a covenant not to compete can be controversial, a handful of states, including California, have largely banned this type of contractual language. The legal enforcement of these agreements falls on individual states, and many have sided with the employee during arbitration or litigation. A covenant not to compete must be reasonable and specific, with defined time periods and coverage areas. If the agreement gives the company too much power over former employees or is ambiguous, state courts may declare it to be overbroad and therefore unenforceable. In such case, the employee would be free to pursue any employment opportunity, including working for a direct competitor or starting up a new company of his or her own.

It has been held that an employee’s covenant not to compete is assignable where one business is transferred to another, that a merger does not constitute an assignment of a covenant not to compete, and that a covenant not to compete is enforceable by a successor to the employer where the assignment does not create an added burden of employment or other disadvantage to the employee. However, in some states such as Hawaii, it has also been held that a covenant not to compete is not assignable and under various statutes for various reasons that such covenants are not enforceable against an employee by a successor to the employer. Hawaii v. Gannett Pac. Corp. , 99 F. Supp. 2d 1241 (D. Haw. 1999)

It is vital to obtain the relevant law of the applicable state before drafting or attempting to enforce assignment rights in this particular area.

Conclusion:

In the current business world of fast changing structures, agreements, employees and projects, the ability to assign rights and obligations is essential to allow flexibility and adjustment to new situations. Conversely, the ability to hold a contracting party into the deal may be essential for the future of a party. Thus, the law of assignments and the restriction on same is a critical aspect of every agreement and every structure. This basic provision is often glanced at by the contracting parties, or scribbled into the deal at the last minute but can easily become the most vital part of the transaction.

As an example, one client of ours came into the office outraged that his co venturer on a sizable exporting agreement, who had excellent connections in Brazil, had elected to pursue another venture instead and assigned the agreement to a party unknown to our client and without the business contacts our client considered vital. When we examined the handwritten agreement our client had drafted in a restaurant in Sao Paolo, we discovered there was no restriction on assignment whatsoever…our client had not even considered that right when drafting the agreement after a full day of work.

One choses who one does business with carefully…to ensure that one’s choice remains the party on the other side of the contract, one must master the ability to negotiate proper assignment provisions.

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Insurance Policy Assignment Provisions: What They Are and When Insurers Have to Consent

Many policyholders forget that their insurance policy is a contract and is subject, with exceptions, to the usual laws of contract. An issue that frequently arises is whether the named insured is able to assign insurance proceeds under the policy to another. The answer to that question is dependent on the type of coverage sought.

What Is an Assignment Provision?

An assignment provision is a contractual clause that allows the policyholder to transfer their rights and obligations under the policy to another party. Assignment provisions enable things like transferring property insurance from one homeowner to another in case of a sale or assigning a life insurance policy to a beneficiary as a gift. Assignment provisions also allow business insurance to be assigned as part of a merger.

Can I Assign My Insurance Policy Without the Insurer’s Consent?

You cannot assign an insurance policy without the insurer’s consent before a loss has occurred. Because insurance policies are a contract, each party must consent to the terms of the contract. In fact, most insurance policies have a “consent to assignment clause” that typically provides that: “Assignment of interest under this policy shall not bind the Company until its consent is endorsed hereon.” 1 This clause is designed to protect the insurer from having to extend coverage to an entity it never agreed to cover. There are, of course, exceptions .

Can an Insurance Company Refuse to Honor an Assignment?

Yes, an insurance company can refuse to honor an assignment, though the exact circumstances vary by state and by policy. In California, for instance, the enforceability of the clause depends on both the timing of the assignment and whether the claim is a first party loss — where the insured is seeking benefits for, say, a sunk ship or a burned building — or a third party claim, which protects insured in certain instances when the insured might be liable to another.

With respect to first-party claims, insurers have a vested interest in their personal relationships with the named insureds, and before a loss , a legally recognized need to prevent non-consensual assignments to less responsible insureds. 2 Remember that a policy is a contract; the insurer has the right to understand and agree to any underwriting risks they may be taking on with the transference of the policy.

After a first-party loss , however, the insurer’s need to consent dissipates, because any assignment is only of money already due under the contract; any right of the insured as a result of the loss may be assigned with or without the consent of the insurer . Thus, the consent to assignment clause is deemed unenforceable after a first-party loss has occurred. 3

In a 2003 California Supreme Court Case, Henkel Corp. v. Hartford Accident & Indemnity Co. , the Court determined that a company that acquired a policyholder’s assets and liabilities could not receive the benefits of the policyholder’s liability coverage in the absence of an insurer-approved assignment regardless of when the assignment took place. 4 However, the court overturned that precedent in 2015’s Fluor Corp. v. Superior Ct. , in which the Court found that “after personal injury (or property damage) resulting in loss occurs within the time limits of the policy, an insurer is precluded from refusing to honor an insured’s assignment of the right to invoke defense or indemnification coverage regarding that loss.” 5

Are Assignment Clauses Enforceable?

As we saw above, the enforceability of “consent-to-assignment” clauses is dependent on the law of each particular state . Always check with an attorney before making an assignment of policy benefits to another, regardless of the situation.

What Is an Anti-Assignment Clause in an Insurance Policy?

An anti-assignment clause is a contractual provision that prohibits or restricts the policyholder from transferring their rights or obligations under the policy to another party. There can be exceptions; for example, some policies may allow assignments in certain circumstances in case of the death or incapacitation of the policyholder. Like assignment provisions, anti-assignment clauses vary by policy, state , and circumstance; it is a good idea to consult an experienced attorney when dealing with insurance.

Further Resources on Insurance Coverage Law

Navigating the complexities of insurance claims can feel overwhelming. Whether you’re facing unpaid claims or simply filing for the first time, our eBooks equip you with the crucial information you need to advocate for yourself with confidence.

• Filing A Property Insurance Claim
• Insurance Company Response Time
• What To Do When You Have a Denied/Underpaid Claim
• Wildfire Claims
• Flood Claims Handbook
• More Information on Hurricane Deductible and Policy Limits
• Condominium Hurricane Preparedness

Why Merlin?

Are you fighting an insurance company that won’t pay up on claims? With nearly 40 years of practice and $2 billion in recovered claims, our team stands by your side to ensure you can face any insurance challenge with confidence. Contact us today for a consultation, or read more about how we’re your trusted advocate .

1 Henkel Corp. v. Hartford Accident & Indemnity Co. (2003) 29 Cal.4th 934 , 934. 2 Bergson v. Builders Ins. Co. (1869) 38 Cal. 541, 545. 3 Vierneisel v. Rhode Island Ins. Co. (1946) 77 Cal.App.2d 229 , 232 [house destroyed by fire before close of escrow; affirming assignment by sellers to buyers of right to recover proceeds under fire insurance policy]. 4 Henkel Corp. v. Hartford Accident & Indemnity Co. (2003) 29 Cal.4th 934 , 934. 5 Fluor Corp. v. Superior Ct. , 61 Cal. 4th 1175, 1183, 354 P.3d 302, 305 (2015).

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17 Transfer of Insurance Contracts

• Published: March 2018
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This chapter studies insurance contracts. A contract of insurance is one whereby one party (the insurer) promises in return for a money consideration (the premium) to pay to the other party (the assured) a sum of money or provide him with some corresponding benefit, upon the occurrence of one or more specified events. Their assignability is complicated by two factors. First, there are a number of different rules whereby an assignment can be effected, in addition to the equitable and statutory (section 136 of the Law of Property Act 1925) methods. Second, when considering the assignment of insurance contacts, it is important to be clear about what it is that is being assigned. The chapter then considers the transferability of the assured's right under four types of insurance: indemnity insurance; life insurance; marine insurance; and reinsurance.

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Assignment of Benefits for Contractors: Pros & Cons of Accepting an AOB

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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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Assigning Your Life Insurance Policy

Getting approval on a loan can sometimes depend on one or two very important issues. For example, lenders often ask borrowers the question, “How will this loan be repaid in the event of your death?” Your answer may be to suggest assigning your life insurance policy.* This useful feature of a life insurance contract can help provide the necessary comfort level and security for a lender.

You can freely assign your life insurance policy unless some limitation is specified in your contract (your insurance company can furnish the required assignment forms). Through an assignment, you can transfer your rights to all or a portion of the policy proceeds to an assignee. The extent to which these rights are transferable depends on the assignment provisions in the policy, the intention of the parties as expressed in the assignment form, and the actual circumstances of the assignment.

In general, no interest deduction is allowed when the indebtedness is used to purchase or carry a life insurance contract. However, there is an exception that will allow the interest deduction as long as the indebtedness is incurred in connection with a trade or business.

Types of Assignments

There are two types of conventional insurance policy assignments:

•  An absolute assignment is normally intended to give the assignee every right in the policy that you possessed prior to the assignment. When the transaction is completed, you have no further financial interest in the policy.

The terminology of absolute assignments differs from contract to contract. In essence, it states that you transfer all rights, title, and interest in the policy to the assignee. Some insurance companies use an “ownership clause” to accomplish this transfer.

• A collateral assignment is a more limited type of transfer. It is a security arrangement to protect the assignee (lender) by using the policy as security for repayment. After the indebtedness is repaid, the assignee releases his or her interest in the policy.

In other words, the assignee will revert to you the rights transferred by the assignment. Under the usual procedure, if the collateral assignment is still in force at your death, the assignee informs the insurance company of the remaining indebtedness, including interest, and receives that amount in a lump sum. Any excess proceeds are then payable to your named beneficiary in accordance with the beneficiary designation in your policy.

To fully protect the assignee, notice must be given to the life insurance company that the assignment has been made. If a company with no notice of assignment makes payment of the proceeds to another assignee or to a named beneficiary, the insurance company cannot be made to pay a second time.

Policy Provisions

Some typical policy provisions concerning assignments may include the following:

• The assignment will not be binding until the original, or a duplicate thereof, is filed at the insurance company’s home office. 
• The insurance company assumes no obligation as to the effect, sufficiency, or validity of the assignment. 
• The assignment is subject to any indebtedness to the insurance company on the policy. Thus, it is important to ensure that an assignment is made properly, regardless of whether it is absolute or collateral.

*Although loans generally are not taxable, there may be tax consequences if the policy lapses or is surrendered (even as part of a 1035 exchange) with a loan or assignment outstanding. The taxable income from the surrender, 1035 exchange, or lapse of the policy may exceed the cash proceeds received from it. If the policy is a modified endowment contract (MEC), pre-death distributions from the policy, including loans and assignments, are taxed on an income-first basis, and there may also be a 10% federal income tax penalty for distributions prior to age 59½.

Post-Loss Assignments of Benefits: An Easier Way for Contractors to Get Paid

Contractors face an endless stretch of legal and business hurdles on a daily basis. They have to deal with weather, safety, personnel, material acquisition, permits, and needy homeowners. But, getting paid on residential construction work covered by a homeowner’s insurance policy should not be one of those hurdles because there is an easier way for contractors to get paid.

When a homeowner suffers a loss covered by their insurance policy, they have the right to assign their insurance benefits to the contractor making the repairs to their home. By doing this, the homeowner authorizes the insurance company to make the contractor a co-payee for that loss.

In most states, the law permits contractors to ask homeowners to assign their post-loss benefits to the contractor for the work they bid. This allows the contractor to receive payment directly from the homeowner’s insurance company. And, most importantly, helps the contractor avoid those dreaded situations where a homeowner receives their insurance payout but refuses to pay their contractor for its work.

Contractors, however, must beware of the many pitfalls that they can fall into with these post-loss assignments of benefit agreements. Failure to follow laws designed to protect insured homeowners can lead to a contractor’s entire contract becoming voided.

For example, a post-loss assignment of benefits has to be a written agreement. That agreement must contain certain language as set forth by statute, and the contractor has to place the homeowner’s insurance on notice of the assignment within a certain number of days depending on the jurisdiction.

Contractors also have to be careful not take certain forbidden actions on behalf of the homeowner. Some states like Iowa forbid a contractor from negotiating with a homeowner’s insurance company on the homeowner’s behalf. Other states strictly forbid a residential contractor from offering rebates on their deductible as an incentive for choosing their construction company for their job. Mistakes like these can cause a court to find the residential contractor’s entire agreement is void and unenforceable.

Finally, post-loss assignment of benefits under an insurance policy must include specific language depending on the jurisdiction that the contract is contemplated. For example, in Nebraska, a contractor must include the following language in all caps and in 14 pt. font for its assignment to be proper:

YOU ARE AGREEING TO ASSIGN CERTAIN RIGHTS YOU HAVE UNDER YOUR INSURANCE POLICY. WITH AN ASSIGNMENT, THE RESIDENTIAL CONTRACTOR SHALL BE ENTITLED TO PURSUE ANY RIGHTS OR REMEDIES THAT YOU, THE INSURED HOMEOWNER, HAVE UNDER YOUR INSURANCE POLICY. PLEASE READ AND UNDERSTAND THIS DOCUMENT BEFORE SIGNING.

THE INSURER MAY ONLY PAY FOR THE COST TO REPAIR OR REPLACE DAMAGED PROPERTY CAUSED BY A COVERED PERIL, SUBJECT TO THE TERMS OF THE POLICY.

IT IS A VIOLATION OF THE INSURANCE LAWS OF NEBRASKA TO REBATE ANY PORTION OF AN INSURANCE DEDUCTIBLE AS AN INDUCEMENT TO THE INSURED TO ACCEPT A RESIDENTIAL CONTRACTOR'S PROPOSAL TO REPAIR DAMAGED PROPERTY. REBATE OF A DEDUCTIBLE INCLUDES GRANTING ANY ALLOWANCE OR OFFERING ANY DISCOUNT AGAINST THE FEES TO BE CHARGED FOR WORK TO BE PERFORMED OR PAYING THE INSURED HOMEOWNER THE DEDUCTIBLE AMOUNT SET FORTH IN THE INSURANCE POLICY.

THE INSURED HOMEOWNER IS PERSONALLY RESPONSIBLE FOR PAYMENT OF THE DEDUCTIBLE. THE INSURANCE FRAUD ACT AND NEBRASKA CRIMINAL STATUTES PROHIBIT THE INSURED HOMEOWNER FROM ACCEPTING FROM A RESIDENTIAL CONTRACTOR A REBATE OF THE DEDUCTIBLE OR OTHERWISE ACCEPTING ANY ALLOWANCE OR DISCOUNT FROM THE RESIDENTIAL CONTRACTOR TO COVER THE COST OF THE DEDUCTIBLE. VIOLATIONS MAY BE PUNISHABLE BY CIVIL OR CRIMINAL PENALTIES.

The contractor must have the homeowner sign and date below this language as well. Then, after the  post-loss assignment of benefits is executed, a residential contractor in Nebraska must provide a copy of the assignment to the homeowner’s insurance company within five business days.

By taking advantage of post-loss assignments of rights under an insurance policy, contractors can keep revenue streams open cand collections moving. And often times, these simple assignments can help a contractor avoid the headache of executing liens as well. Residential contractors, however, should remember that contracts can be tricky. Assignments like the one described above need to be properly incorporated into the contractor’s underlying contract and those contracts need to meet all necessary formalities under the law to be binding. Therefore, contractors should never hesitate to reach out to a construction lawyer who is familiar with construction contracts and litigation when they have questions about their contracts.

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Home > Finance > How Is A Collateral Assignment Used In A Life Insurance Contract?

How Is A Collateral Assignment Used In A Life Insurance Contract?

Published: October 14, 2023

Discover how collateral assignments are utilized in life insurance contracts, providing financial security and peace of mind. Learn about the benefits and considerations involved in this strategic financial tool.

(Many of the links in this article redirect to a specific reviewed product. Your purchase of these products through affiliate links helps to generate commission for LiveWell, at no extra cost. Learn more )

Table of Contents

Introduction, what is a collateral assignment, understanding life insurance contracts, how a collateral assignment works, benefits and uses of collateral assignments, risks and considerations, limitations and restrictions, how to set up a collateral assignment.

When it comes to financial matters, having a solid understanding of various concepts and strategies is crucial. One such concept is a collateral assignment, which plays a significant role in the world of life insurance contracts. Understanding how a collateral assignment works can provide you with valuable insights into how to manage and leverage your life insurance policy to meet your financial needs.

A collateral assignment involves using your life insurance policy as collateral for a loan or other financial transaction. It allows you to borrow against the cash value of your policy without surrendering the policy itself. This strategy can be particularly useful if you need access to funds for a specific purpose, such as starting a business, financing education expenses, or facing unexpected medical bills.

In order to grasp the significance of collateral assignments, it’s important to have a solid understanding of life insurance contracts. Life insurance is a contractual agreement between a policyholder and an insurance company. The policyholder pays regular premium payments, and in return, the insurance company provides a death benefit to the policy’s beneficiaries upon the policyholder’s death. Additionally, certain types of life insurance policies, such as whole life or universal life insurance, accumulate a cash value over time.

The cash value in a life insurance policy can be used in various ways. One option is to surrender the policy and receive the accumulated cash value. However, this may result in the termination of the policy and the loss of its associated benefits. Another option is to take a policy loan against the cash value. This allows the policyholder to access funds while keeping the policy intact.

This is where a collateral assignment becomes relevant. Instead of taking a policy loan, a policyholder can use a collateral assignment to borrow money from a lender by assigning a portion of the life insurance policy’s death benefit as collateral. In this arrangement, the lender becomes the assignee of the policy and is entitled to receive a portion of the death benefit if the policyholder passes away before the loan is repaid. This arrangement provides security to the lender and allows the policyholder to access funds without surrendering the policy.

In the following sections, we will delve deeper into how a collateral assignment works, its benefits and uses, as well as the considerations, limitations, and steps involved in setting it up.

A collateral assignment is a legal agreement that allows a policyholder to assign a portion of the death benefit from a life insurance policy as collateral for a loan or other financial obligation. It serves as a way to secure the loan by providing the lender with a potential source of repayment in the event of the policyholder’s death. This arrangement allows the policyholder to access funds without surrendering the policy or disrupting its financial benefits.

With a collateral assignment, the policyholder remains the owner of the life insurance policy and retains control over other aspects of the policy, such as changing beneficiaries or making withdrawals from the cash value. The assigned portion of the death benefit serves as collateral for the loan or debt, and if the policyholder passes away before the loan is repaid, the lender has the right to receive the assigned portion of the death benefit to satisfy the outstanding debt.

It’s important to note that a collateral assignment does not transfer ownership of the policy to the lender. Instead, it grants the lender a limited interest in the policy specifically for the purpose of securing the loan. Once the loan is repaid, the collateral assignment is released, and the policy returns to the full control of the policyholder.

A collateral assignment can be used for various financial purposes, including personal loans, business financing, or even as a form of security for a surety bond. The flexibility of this arrangement allows policyholders to leverage the accumulated cash value and death benefit of their life insurance policy to meet their financial needs without sacrificing the long-term benefits of the policy.

It’s worth noting that the availability and terms of collateral assignment can vary depending on the insurance company and the specific policy. Some policies may have limitations on the amount that can be assigned or require approval from the insurance company before the assignment can be made. It’s important to review the policy terms and consult with the insurance provider or a financial advisor to understand the specific guidelines and implications of a collateral assignment.

In the next section, we will explore how a collateral assignment works within the context of a life insurance contract.

Before delving deeper into how a collateral assignment works, it’s essential to have a solid understanding of life insurance contracts. A life insurance contract is a legal agreement between a policyholder and an insurance company, wherein the policyholder pays regular premium payments in exchange for financial protection for their loved ones in the event of their death.

Life insurance contracts come in various forms, but the two main types are term life insurance and permanent life insurance. Term life insurance provides coverage for a specific period, typically 10, 20, or 30 years. If the policyholder passes away during the term, the insurance company pays out a death benefit to the beneficiaries named in the policy. Permanent life insurance, on the other hand, provides lifelong coverage and includes a cash value component that accumulates over time.

The cash value in a permanent life insurance policy, such as whole life or universal life insurance, grows gradually over the years through premium payments and potential investment gains. This cash value can be accessed by the policyholder through withdrawals or policy loans, providing a source of liquidity that can be utilized for various financial needs.

One of the key advantages of permanent life insurance policies is their ability to accumulate cash value on a tax-deferred basis. This means that any growth in the cash value is not subject to immediate taxation, allowing the policyholder to potentially build a substantial cash reserve over time.

Furthermore, permanent life insurance policies often provide additional benefits such as the ability to participate in the insurance company’s profits through dividends, the option to increase or decrease the death benefit, and even the flexibility to adjust premium payments.

Given the unique features and advantages offered by permanent life insurance policies, they are often the type of policy chosen for a collateral assignment. The combination of death benefit protection and cash value growth make permanent life insurance policies an ideal asset to use as collateral for loans or other financial obligations.

Now that we have a basic understanding of life insurance contracts and their various components, let’s explore how a collateral assignment works in conjunction with a life insurance policy in the next section.

Now that we understand the basics of life insurance contracts, let’s dive into how a collateral assignment works within the context of these policies. A collateral assignment involves assigning a portion of the death benefit from a life insurance policy as collateral for a loan or other financial obligation.

Here’s a step-by-step breakdown of how a collateral assignment typically works:

• The policyholder identifies a need for funds and seeks a loan or financing.
• The policyholder and the lender determine the amount of the loan and agree on the terms and conditions.
• A collateral assignment agreement is drafted, which outlines the terms of the assignment, including the assigned portion of the death benefit, the loan amount, and the repayment terms.
• The collateral assignment agreement is signed by the policyholder, the lender, and the insurance company, acknowledging the assignment and providing consent for the assignee to receive a portion of the death benefit in the event of the policyholder’s death.
• Upon the policyholder’s passing, the lender files a claim with the insurance company, providing necessary documentation to establish the validity of the claim.
• The insurance company verifies the claim and disburses the assigned portion of the death benefit to the lender to satisfy the outstanding debt.
• If there are remaining funds from the death benefit after repaying the loan, they are distributed to the designated beneficiaries of the policy.

It’s important to note that the policyholder remains the owner of the life insurance policy and retains control over other aspects of the policy, such as changing beneficiaries or making withdrawals from the cash value. The assigned portion of the death benefit is solely used as collateral for the loan, and the lender only has a claim to that specific portion.

It’s crucial for both the policyholder and the lender to understand the terms and conditions of the collateral assignment, including any limitations or restrictions set by the insurance company. Some common restrictions may include a maximum assignment amount, a requirement to maintain the policy in-force, or a provision for the policyholder to replace the collateral assignment with another form of security if requested by the insurance company.

By using a collateral assignment, the policyholder can access funds while keeping the life insurance policy intact. This can be particularly advantageous in situations where surrendering the policy would result in the loss of the accumulated cash value and other benefits.

In the next section, we will explore the various benefits and uses of collateral assignments within the realm of financial planning.

Collateral assignments offer several benefits and serve various uses within the realm of financial planning. Let’s explore some of the key advantages and common uses of collateral assignments:

1. Access to Funds

One of the primary benefits of a collateral assignment is the ability to access funds without surrendering the life insurance policy. By using the death benefit as collateral, the policyholder can secure a loan or obtain financing for personal or business purposes. This allows individuals to meet immediate financial needs without disrupting their long-term insurance coverage.

2. Retention of Policy Benefits

Unlike policy loans, which require repayment with interest, collateral assignments allow policyholders to retain the full benefits of their life insurance policies. These benefits can include the death benefit for beneficiaries, potential cash value growth, and the ability to participate in policy dividends. By using a collateral assignment, policyholders do not have to forfeit these valuable features.

3. Lower Interest Rates

When compared to other types of loans, collateral assignments often offer lower interest rates. This is because the loan is backed by the assigned portion of the life insurance policy’s death benefit, providing additional security for the lender. Lower interest rates can result in significant cost savings for the policyholder over the life of the loan.

4. Flexible Repayment Terms

Collateral assignments provide flexibility in terms of loan repayment. Policyholders and lenders can negotiate repayment terms that align with the borrower’s financial capacity, allowing for customized repayment schedules. This flexibility can help borrowers manage their cash flow effectively and repay the loan on terms that suit their specific needs.

5. Diverse Financial Uses

Collateral assignments can be used for a wide range of financial purposes. Common uses include funding education expenses, starting or expanding a business, purchasing or renovating a property, financing a major purchase, or covering unexpected medical expenses. The versatility of collateral assignments allows policyholders to leverage their life insurance policies to meet various financial goals.

6. Potential Tax Advantages

Collateral assignments may offer potential tax advantages depending on the specific circumstances. For example, if the loan proceeds are used for investment purposes or to generate income, the interest paid on the loan may be tax-deductible. It’s crucial to consult with a tax advisor or financial expert to understand the tax implications of a collateral assignment in your specific situation.

By leveraging the benefits and uses of collateral assignments, policyholders can maximize the value of their life insurance policies and utilize them as a valuable financial asset. However, it’s essential to consider the potential risks and limitations associated with collateral assignments, which we will explore in the next section.

While collateral assignments offer several advantages, it’s important to fully understand the potential risks and considerations before entering into such an arrangement. Here are some key factors to keep in mind:

1. Impact on Death Benefit

Assigning a portion of the death benefit as collateral can reduce the overall amount payable to beneficiaries upon the policyholder’s death. It’s crucial to assess the impact of this reduction on the intended financial protection for loved ones and ensure that the remaining portion of the death benefit is still sufficient to address their needs.

2. Default Risk

If the policyholder fails to repay the loan, the lender may have the right to claim the assigned portion of the death benefit, potentially leaving beneficiaries with a reduced payout. It’s important to have a robust repayment plan in place and make timely payments to avoid default and the potential loss of policy benefits.

3. Policy Lapse

If the policy lapses due to missed premium payments or other reasons, the collateral assignment may become void, and the lender loses their security interest in the life insurance policy. Policyholders should ensure they have a sufficient plan in place to maintain premiums and keep the policy in force to protect the collateral assignment.

4. Limited Flexibility

Once a collateral assignment is in place, it restricts the policyholder’s ability to make changes to the policy, such as increasing or decreasing coverage, accessing the cash value, or changing beneficiaries. It’s important to evaluate whether the potential benefits of a collateral assignment outweigh the loss of flexibility in managing the life insurance policy.

5. Complex Documentation

Collateral assignments involve drafting and signing complex legal documents, including the collateral assignment agreement. It’s crucial to fully understand the terms and conditions of the agreement and consider seeking professional advice to ensure that all parties involved are clear on their rights and obligations.

6. Insurance Company Regulations

Each insurance company may have specific regulations and requirements regarding collateral assignments. It’s important to review the policy terms and consult with the insurance provider to understand any restrictions, limitations, or approval processes associated with collateral assignments.

Considering these risks and considerations is essential to make informed decisions when considering a collateral assignment. Seeking guidance from a financial advisor or insurance professional can help assess the suitability of a collateral assignment and its potential impact on your overall financial plan.

In the next section, we will explore any limitations and restrictions that may apply to collateral assignments.

While collateral assignments can be valuable tools, there are certain limitations and restrictions that policyholders should be aware of. These limitations can vary depending on the insurance company and the specific policy. Here are some common limitations and restrictions to consider:

1. Assignment Limits

Insurance companies often impose limits on the amount that can be assigned from a life insurance policy. This limit is typically a percentage of the policy’s death benefit. It’s essential to review the policy terms to understand the maximum allowable assignment amount.

2. Policy Approval

In some cases, insurance companies require policyholder approval before a collateral assignment can be implemented. This approval process may involve submitting an application, providing financial information, or meeting certain criteria determined by the insurance company.

3. Maintaining Policy In-Force

To retain the collateral assignment, policyholders must keep the life insurance policy in force, which includes paying premiums on time. If the policy lapses or is terminated, the collateral assignment may become void, and the policyholder may lose the associated benefits.

4. Replacement of Collateral

In certain situations, insurance companies may require the policyholder to replace the collateral assignment with another form of security if requested. This requirement ensures that the insurance company is adequately protected against potential losses.

5. Removing the Collateral Assignment

If the policyholder wishes to remove the collateral assignment, they will need to follow the specified procedure outlined by the insurance company. This often involves submitting a formal request, providing necessary documentation, and obtaining the insurance company’s approval.

6. Financial Institution Requirements

Financial institutions, such as banks or lenders, may have their own specific requirements for collateral assignments. These requirements may include minimum loan amounts, credit checks, or additional documentation. It’s important to familiarize yourself with the lender’s guidelines to ensure a smooth collateral assignment process.

7. Legal and Financial Advice

Due to the complex nature of collateral assignments, it’s wise to seek advice from legal and financial professionals. They can provide guidance on the legal implications, tax considerations, and overall suitability of a collateral assignment based on your specific circumstances.

Understanding these limitations and restrictions is crucial when considering a collateral assignment. It’s important to review the policy documents, consult with the insurance company and relevant professionals, and ensure compliance with all applicable regulations to navigate the process successfully.

In the next section, we will outline the general steps involved in setting up a collateral assignment.

Setting up a collateral assignment requires careful consideration and following specific steps. While the exact process may vary depending on the insurance company and the lender, here are some general guidelines to help you navigate the setup process:

1. Assess Your Financial Needs

Determine the amount of funds you need and the purpose for which you require the loan or financing. Assess your financial situation and ensure that a collateral assignment aligns with your overall financial goals and needs.

2. Identify the Lender

Research potential lenders that offer collateral assignments and select one that best meets your requirements. Consider factors such as interest rates, loan terms, and reputation when making your decision.

3. Consult with professionals

Seek the advice of financial and legal professionals who specialize in life insurance policies and collateral assignments. They can guide you through the process, provide expert recommendations, and ensure that you fully understand the implications and obligations associated with a collateral assignment.

4. Review Policy Terms

Review the terms of your life insurance policy, paying particular attention to any provisions related to collateral assignments. Understand the limitations, restrictions, and requirements set by your insurance company.

5. Draft the Collateral Assignment Agreement

Work with legal professionals to draft a collateral assignment agreement that outlines the terms and conditions of the assignment. This agreement should clearly specify the assigned portion of the death benefit, the loan amount, the repayment terms, and any other relevant provisions.

6. Obtain Signatures and Consent

Ensure that all parties involved, including yourself, the lender, and the insurance company, sign the collateral assignment agreement. The insurance company’s consent is crucial to acknowledge and approve the assignment.

7. Submit Documentation

Provide the necessary documentation to the insurance company and the lender to establish the collateral assignment. This may include copies of the collateral assignment agreement, policy documents, and any other requested information.

8. Stay Informed and Compliant

Keep track of your loan repayments and stay informed about any updates or changes related to the collateral assignment. Comply with the terms and conditions stated in the collateral assignment agreement, including making timely payments to the lender and maintaining the life insurance policy in force.

Remember that these steps are general guidelines, and the specific process may vary based on your unique situation and the requirements set by the insurance company and the lender. Consulting with professionals experienced in collateral assignments will ensure a smooth and successful setup process.

In the final section, we will conclude our discussion on collateral assignments and summarize the key points to remember.

Collateral assignments serve as a valuable tool in leveraging the benefits of a life insurance policy while accessing funds for various financial needs. By assigning a portion of the death benefit as collateral, policyholders can secure loans or financing without surrendering their policies or disrupting the benefits associated with them.

We began by understanding the basics of collateral assignments and the concept of life insurance contracts. We then explored how a collateral assignment works within the context of a life insurance policy, outlining the steps involved in setting one up.

Collateral assignments offer several benefits, including access to funds, retention of policy benefits, lower interest rates, flexible repayment terms, and diverse financial uses. However, it’s important to consider the potential risks and limitations associated with collateral assignments, such as the impact on the death benefit, default risk, limited flexibility, and complex documentation.

It’s essential to carefully evaluate your financial needs, consult with professionals, review policy terms, and draft a well-structured collateral assignment agreement. By following these steps and staying compliant with the agreement, you can navigate the collateral assignment process successfully.

To ensure a smooth and efficient setup process, it’s advisable to seek guidance from financial advisors, insurance professionals, and legal experts who can provide personalized advice based on your specific circumstances.

In summary, a collateral assignment can be a powerful strategy to utilize the accumulated cash value and death benefit of a life insurance policy while addressing immediate financial needs. However, it’s crucial to conduct thorough research, seek professional advice, and fully understand the implications and obligations associated with collateral assignments.

By carefully weighing the benefits, risks, and considerations, you can make informed decisions and effectively use collateral assignments to enhance your financial plan and achieve your goals.

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What is assignment of benefits, and how does it impact insurers?

While aob is convenient for policyholders, it has become quite the headache for insurers.

Insurance News

By Bethan Moorcraft

Assignment of benefits, widely referred to as AOB, is a contractual agreement signed by a policyholder, which enables a third party to file an insurance claim, make repair decisions, and directly bill an insurer on the policyholder’s behalf.

The Insurance Information Institute (III) describes AOB as “an efficient and customer-friendly way to settle claims.” Having a problem like a water leak in your home is stressful enough without having to negotiate an insurance claim. By signing an AOB, policyholders can leave that claim to the contractor they’ve brought in to fix the issue - in this case, potentially a plumber or a water remediation firm – and assuming that contractor acts in good faith, the repairs and the claim should be sorted without the policyholder losing too much sleep.

AOB – a fraudster’s playground In recent years, AOB has hit the headlines for all the wrong reasons. Loopholes in the way AOB is being used are enabling contractors and restoration companies to abuse the practice by inflating claims costs and charging insurance companies for work that was either unnecessary or simply wasn’t done at all. These fraudsters then keep any extra money for themselves.

Florida-based insurance brokerage, AssuredPartners, shared the following about AOB: “Once you sign an AOB, you lose control of the direction of your claim. The contractor takes control and can submit whatever they like to your insurance company, sometimes billing the company double, even triple the going market rate for their services, and sometimes including work that was never performed.

Read more: New to the insurance industry? Learn these basic terms.

“You don’t see this, and you can’t verify what was done but you have now committed to this contractor. You now have little to no recourse, nor are you able to comparison shop if you’re not satisfied with their work. Even if their work is incomplete, or you are unsatisfied with the end result, they can still claim compensation from the insurance company, which gets deducted from your benefits.”

A number of things could go wrong with AOB. When a vendor assumes control of a claim, that company is still bound by the terms and conditions of the original insurance policy. If a contractor violates any of those terms, the claim could be deemed void, leaving the policyholder out of pocket for a potentially significant loss.

Also, if the contractor files a claim and the insurance company does not agree with the dollar amount requested, under the AOB the contractor can engage in legal action against the insurer without the policyholder’s consent. According to the III, this can lead to: “a state of affairs in which legal fees can dwarf actual damages paid to the policyholder – sometimes tens of thousands of dollars for a single low-damage claim.”

Protecting policyholders from AOB fraud The National Insurance Crime Bureau, whose mission it is to combat insurance fraud, has published a checklist for policyholders – also something that brokers can share with any clients considering AOB – to consider before hiring a contractor:

• Get multiple estimates for any work / repairs that need doing
• Ask for references and check reviews
• Never let a contractor pressure you into hiring them
• Get everything in writing, including the cost of the work, payment schedules, exactly what work will be done, time schedules for that work, guarantees, and so on
• Read the contract in full. If there are any blanks or concerns, do not sign the contract
• Do not pay a contractor in full or sign a completion certificate until the required work is done
• Check all documents that are sent to your insurance carrier, and make sure you understand them
• Work with an insurance broker to ensure you understand insurance policy language and to get help with the claims process

Impact of AOB on the insurance industry Insurers who choose to dispute inflated AOB bills are up against it in the era of plaintiff-friendly court verdicts. If the insurance companies fight in court and lose, they must pay compensation to the plaintiff’s attorneys, but the opposite is not true if the insurers win their case. So, the cost of the legal expense is prohibitive for the insurance company either way, which is why many insurers opt to settle.

Inflated claims and massive volumes of lawsuits have the predictable result of driving up insurance companies’ legal costs – and insurers are forced to pass those costs on to consumers in the form of higher insurance premiums and more restrictive policy terms and conditions.

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Assignment of Insurance Contracts definition

Related to assignment of insurance contracts.

Assignment of Insurances shall have the meaning provided in the definition of “Collateral and Guaranty Requirements”.

Insurance Contracts means the insurance or annuity policies and contracts, together with all binders, slips, certificates, endorsements and riders thereto, issued or entered into by any Insurance Company prior to the Closing.

contract of insurance means an agreement between the Secretary of Education and either the Trustee or the Seller providing for the insurance by the Secretary of Education of the principal of and accrued interest on a FFELP Loan to the maximum extent permitted under the Higher Education Act.

Insurance Assignment means the valid and effective first legal assignment of the Insurances (together with the notice thereof), to be executed by the Borrower in respect of the Vessel in favour of the Trustee and the Commercial Loan Trustee, such assignment and notice to be in the form and on the terms and conditions required by the Agent, the Hermes Agent and the Commercial Loan Agent and agreed on the signing of the Original Loan Agreement and as specified in paragraph 47 of Schedule 4;

Insurance Contract means a contract (other than an Annuity Contract) under which the issuer agrees to pay an amount upon the occurrence of a specified contingency involving mortality, morbidity, accident, liability, or property risk.

FHA Mortgage Insurance Contract means the contractual obligation of the FHA respecting the insurance of a Mortgage Loan.

Mortgage guaranty insurance means surety insurance under which a mortgagee or other creditor is indemnified against losses caused by the default of a debtor.

Environmental Insurance Policy means, with respect to any Mortgage Loan or the related Mortgaged Property or REO Property, any insurance policy covering pollution conditions and/or other environmental conditions that is maintained from time to time in respect of such Mortgage Loan, Mortgaged Property or REO Property, as the case may be, for the benefit of, among others, the Trustee on behalf of the Certificateholders.

Assignment of Leases With respect to any Mortgaged Property, any assignment of leases, rents and profits or similar agreement executed by the Mortgagor, assigning to the mortgagee all of the income, rents and profits derived from the ownership, operation, leasing or disposition of all or a portion of such Mortgaged Property, in the form which was duly executed, acknowledged and delivered, as amended, modified, renewed or extended through the date hereof and from time to time hereafter.

Lease Assignment has the meaning set forth in Section 3.5(d).

Assignment of Proprietary Lease With respect to a Cooperative Loan, the assignment of the related Cooperative Lease from the Mortgagor to the originator of the Cooperative Loan.

Assignment of Contracts shall have the meaning provided in Section 5.07.

Lease Assignments means the assignments of real property leases and subleases by and between a member of the Nuance Group, as assignor, and a member of the SpinCo Group, as assignee, in each case as set forth on Schedule XII under the caption “Lease Assignments.”

R&W Insurance Policy means the representations and warranties insurance policy issued to Buyer in connection with the transactions contemplated hereby.

Reinsurance Agreements means any agreement, contract, treaty, certificate or other arrangement by which any Insurance Subsidiary agrees to transfer or cede to another insurer all or part of the liability assumed or assets held by it under one or more insurance, annuity, reinsurance or retrocession policies, agreements, contracts, treaties, certificates or similar arrangements. Reinsurance Agreements shall include, but not be limited to, any agreement, contract, treaty, certificate or other arrangement that is treated as such by the applicable Department.

Evidence of coverage means any certificate, agreement or contract issued to an enrollee setting out the coverage to which the enrollee is entitled.

Crew Insurances means insurances against crew risks which shall include but not be limited to death, sickness, repatriation, injury, shipwreck unemployment indemnity and loss of personal effects.

Insurance Policies has the meaning set forth in Section 3.16.

Bond Insurance Policy means the financial guaranty insurance policy issued by the Bond Insurer insuring the payment when due of the principal of and interest on the Bonds as provided therein.

Assignment of Lease means the Assignment of Lease to be executed by the Seller and the Purchaser at the Closing with respect to each parcel of Leased Real Property listed on Section 3.14(b) of the Disclosure Schedule, substantially in the form of Exhibit 1.01(b).

Certificate of Insurance means a document showing that an insurance policy has been written and includes a statement of the coverage of the policy.

Assignment of Earnings shall have the meaning provided in the definition of “Collateral and Guaranty Requirements”.

Collateral Assignments means, collectively, the Assignment of the Development Agreement, and the Assignment of Management Agreement, the Assignment of the Right to Receive Tax Credits, Capital Contributions and Partnership Interests, each in form and substance satisfactory to the Significant Bondholder and the Financial Monitor and as each may be amended or supplemented from time to time with the prior written consent of the Significant Bondholder.

Collateral Assignment means, with respect to any Contracts, the original instrument of collateral assignment of such Contracts by the Company, as Seller, to the Collateral Agent, substantially in the form included in Exhibit A hereto.

Insurance Policy With respect to any Mortgage Loan included in the Trust Fund, any insurance policy, including all riders and endorsements thereto in effect, including any replacement policy or policies for any Insurance Policies.

Endorsement contract means an agreement under which a student athlete is employed or receives consideration to use on behalf of the other party any value that the student athlete may have because of publicity, reputation, following, or fame obtained because of athletic ability or performance.

• Assignments In Insurance Law

Introduction

• 1.1 Nature Of Insurance Policies

1.2 Assignment

• 2. Application Of English Law

2.1 Generally

• 2.2 Policies Of Assurance Act 1867

2.3 Marine Insurance Act 1906

3. marine insurance, 4. property insurance, 5. motor insurance, 6. life insurance, 6.1 legal assignment, 6.2 equitable assignment, 6.3 incomplete assignment, 6.4 priorities.

• 7.1 Assignment Of Insurance Policies
• 7.2 Assignment Of The Proceeds Of Insurance Policies
• 7.3 Assignment Of The Subject Matter Of Insurance Policies
• 7.4 Assignment By Operation Of Law

7.5 Conditions Prohibiting Assignment

8. conclusion, assignments in insurance law.

The concept of assignments in insurance law takes on many forms - firstly due to the various branches of insurance law and secondly due to the various components in an insurance transaction that can be assigned. The format of this discussion, therefore, is reflective of this framework.

Assignments are first discussed in the context of the following branches of insurance law:

(i) marine insurance,

(ii) property insurance,

(iii) motor insurance, and

(iv) life insurance.

The next stage of this discussion focuses on what may be assigned in an insurance transaction and how such assignments are legally effected, namely, the assignment of:

(a) an insurance policy,

(b) the proceeds of an insurance policy, and

(c) the subject matter of an insurance policy.

1.1 Nature of Insurance Policies

A. A. Tarr, Kwai-Lian Liew & W. Holligan writes:

“The origins of insurance date back thousands of years. For example, a central feature of insurance, that of risk interference, was incorporated in commercial arrangements effected by the Babylonians, Phoenicians, Greeks and Romans. However, the infancy of the modern insurance contract is founded on the practices adopted by Italian merchants in the 14th century. These merchants fostered the development of marine insurance and were reluctant to accept the numerous and diverse risks associated with the mercantile adventure of transporting goods across the sea; an early policy entered into in 1385 insured a ship and cargo against loss arising ‘from Acts of God, of the sea, of fire, of jettison, of confiscation by princes or cities or any other person, of reprisal, mishap or any other impediment’. Merchants in their relations with one another tended to uniformity on commercial matters and this tendency led to the rapid dissemination if marine insurance practices to other countries, and, in particular, to the low countries, Spain and England.” [1]

Lord Hailsham of St. Marylebone writes:

“Non-marine insurance first made its appearance in the form of life and fire insurance, but until the middle of the nineteenth century these three [2] types of insurance comprised, in practice, substantially the whole range of insurance.”

The practice of taking insurance and property and later, lives, has a long and rich history. Unsatisfied with leaving the health and safety of property and lives to the capricious whims of fate alone, our ancestors have sought to ‘hedge their bets’ by entering into an insurance transaction.

John Lowry & Philip Rawlings writes:

“The aim of insurance is to shift risk from one person (the insured) to another (the insurers): the owner of a house enters into a fire policy under which an insurer, in exchange for a premium paid by the insured, agrees to pay for damage caused to the property by fire.” [3]

Professor K. S. N. Murthy & K. V. S. Sarma writes:

“The aim of all insurance is to protect the owner from a variety of risks which he anticipates.” [4]

John Birds and Norma J. Hird observe that:

“It is suggested that a contract of insurance is any contract whereby one party assumes the risk of an uncertain event, which is not within his control, happening at a future time, in which event the other party has an interest, and under which contract the first party is bound to pay money or provide its equivalent if the uncertain event occurs.” [5]

In Rayner v Preston [6] , Brett L.J. explained the nature of a contract of insurance in the following terms:

“Now, in my judgment, the subject-matter of the contract of insurance is money, and money only. The subject-matter of insurance is a different thing from the subject-matter of the contract of insurance. The subject-matter of insurance may be a house or other premises in a fire policy, or may be a ship or goods in a marine policy. These are the subject-matter of insurance, but the subject-matter of the contract is money, and money only. The only result of the policy, if an accident which is within the insurance happens, is a payment of money. It is true that under certain circumstances in a fire policy there may be an option to spend the money in rebuilding the premises, but that does not alter the fact that the only liability of the insurance company is to pay money. The contract, therefore, is a contract with regard to the payment of money, and it is a contract made between two persons, and two persons, only, as a contact.” [7]

Poh Chu Chai writes:

“A contract of insurance constitutes a highly personal contract and as a general rule, such a contract is generally not assignable.” [8]

The insurer fixes the premium after considering the particular risks associated with the property and handling of the property in the hands of the insured. As such, as a general rule, an insurance policy is not casually assignable to another party. Nevertheless, assignments are not an unheard of option in an insurance transaction.

Before embarking on the discovery of how assignments in insurance law can be legally effected, it may prove beneficial to consider the nature of what is meant by this phrase which takes centre stage in this discussion, an ‘assignment’.

R. C. Kohli explains:

“Transfer of interest from one to another is called assignment. In insurance also when rights and obligation under the contract are transferred from one to another, the same is called assignment of the policy. There can be another assignment in insurance which is assignment of benefits under the policies. Assignment of policy and assignment of benefits are quite distinct. Whereas in the former all the rights and obligations are transferred, in the latter only benefits (i.e. money due under the policy etc) are transferred. In insurance the assignment means assignment of rights under the contract. An assignee for all purposes becomes the owner of the policy and enjoys all rights thereunder. However, by assignment no change is made in the subject matter insured by the policy and it remains unaltered.” [9]

David Norwood and John P. Weir writes:

“There is no special form of assignment document, no magic words which must be used to create a valid and effective legal assignment. As was expressed in one case [10] : ‘[An assignment] ... may be addressed to the debtor. It may be couched in the language of command, It may be a courteous request. It may assume the form of mere permission. The language is immaterial if the meaning is clear.’

The only important point is that the instrument recording the assignment must make it clear that one party with a contractual right against another party is transferring their right of enforcement of the obligations of the contract to another person.” [11]

Malcolm A. Clarke writes :

“Assignment must have been intended. Intention is ascertained by the substance rather than the form of what is said or done.” [12]

2. Application of English Law

Another introductory matter which must be considered in this discussion is the source of law in the insurance arena in Malaysia.

The governing statute in Malaysia in the field of insurance law is the Insurance Act 1996 [13] . This Act, however, does not seem to mention the issue of assigning insurance policies. As such, the provisions of the Civil Law Act 1956 [14] may be referred to in order to provide valuable guidance on the matter.

Section 3 of the Civil Law Act 1956 provides:

“Save so far as other provision has been made or may hereafter be made by any written law in force in Malaysia, the Court shall -

(a) in West Malaysia or any part thereof, apply the common law of England and the rules of equity as administered in England on the 7 th day of April, 1956;...

Provided always that the said common law, rules of equity and statutes of general application shall be applied so far only as the circumstances of the States of Malaysia and their respective inhabitants permit and subject to such qualifications as local circumstances render necessary.”

Section 5(1) of the Civil Law Act 1956 makes particular reference to life and fire insurance. This section provides that :

“In all questions or issues which arise or which have to be decided in the States of West Malaysia ... with respect to the law of ... marine insurance, average, life and fire insurance ... the law to be administered shall be the same as would be administered in England in the like case at the date of the coming into force of this Act [15] , if such question or issue had arisen or had to be decided in England, unless in any case other provision is or shall be made by any written law.”

With the aid of these provisions, English law has often been referred to for guidance in resolving legal dilemmas in the field of insurance law and since the Malaysian Act on point does not seem to have covered the matter of the assignment of insurance policies, as will be discussed below, many academicians and Malaysian judges have relied on the principles enunciated in the English courts and Parliament on this matter.

2.2 Policies of Assurance Act 1867

There is one particular dilemma highlighted by Nik Ramlah Mahmood with regard to the applicability of the Policies of Assurance Act 1867 [16] of England with regard to the legal assignment of life policies. As this author explains :

“In England, a life policy can be legally assigned in accordance with the Policies of Assurance Act 1867 which deals specifically with such assignment or in accordance with section 136 of the Law of Property Act 1925 [17] which deals with the assignment of a chose in action. [18] ...

As there is no parallel local statute, the Policies of Assurance Act 1867 (UK) is assumed to be applicable in Malaysia and is generally regarded as the only basis for legal assignment of a life policy. The validity of this assumption, however, is questionable. There is in Malaysia a provision similar to section 136 of the Law of Property Act 1925 (UK). This is section 4(3) of the Civil Law Act 1956 which provides for the absolute assignment of a chose in action. The existence of this provision can have two possible effects on the law relating to legal assignment of life policies in Malaysia.

One possible effect is that contrary to popular belief and practice, the Policies of Assurance Act 1867 (UK) is in fact inapplicable in Malaysia. According to section 5 of the Civil Law Act 1856, an English Act like the 1867 Act can only be applied if there are no local statutory provisions on the related issue. As the assignment of a life policy is in fact the assignment of a chose in action and there is a local provision on this, there seems to be no valid justification for applying the Policies of Assurance Act 1867 in Malaysia.

The other possible effect is that there are, in Malaysia as in England, two different statutory provisions relating to the assignment of life policies, one under the Policies of Assurance Act 1867 (UK) and the other under the Civil Law Act 1956. As the Civil Law Act provision deals with the assignment of a chose in action generally, its existence should not prevent the application of an English statute which deals specifically with the assignment of life policies.

While a finding by a Malaysian court in favour of the first possible interpretation may alarm those in the insurance industry who have always regarded the Policies of Assurance Act 1867 of England to be the sole basis for the legal assignment of a life policy, such a finding may in the long term bring the practices of the industry in Malaysia in line with those in England where such assignments are now more commonly done under the Law of Property Act than under the Policies of Assurance Act.” [19]

There is no statute in Malaysia that deals exclusively with the area of marine insurance. As such, as Salleh Abas C.J. clarified in The “Melanie” United Oriental Assurance Sdn. Bhd. Kuantan v. W.M. Mazzarol [20] :

“... we must refer to ... the Marine Insurance Act 1906 of the United Kingdom. This Act is made applicable to Malaysia as part of our law by virtue of section 5(1) [21] of our Civil Law Act 1956.” [22]

The Marine Insurance Act 1906 [23] contains a few sections dealing with the concept of assignment in marine insurance. Section 50 of this Act states :

“(1) A marine policy is assignable unless it contains terms expressly prohibiting assignment. It may be assigned either before or after loss.

(2) Where a marine policy has been assigned so as to pass the beneficial interest in such policy, the assignee of the policy is entitled to sue thereon in his own name; and the defendant is entitled to make any defence arising out of the contract which he would have been entitled to make if the action had been brought in the name of the person by or on behalf of whom the policy was effected.

(3) A marine policy may be assigned by indorsement thereon or in other customary manner.” [24]

Section 51 of this Act reads :

“Where the assured has parted with or lost his interest in the subject-matter insured, and has not, before or at the time of so doing, expressly or impliedly agreed to assign the policy, any subsequent assignment of the policy is inoperative.

Provided that nothing in this section affects the assignment of a policy after loss.” [25]

In Colinvaux’s Law of Insurance , section 51 of this Act is explained as having the effect such that :

“This rule is an obvious corollary of insurable interest: if the assignor loses insurable interest, the policy lapses and there is thus nothing to assign. In the converse case, where the assured assigns the policy without assigning the subject-matter, the assignee has no insurable interest and is thus unable to sue on the policy.” [26]

Section 15 of this Act provides :

“Where the assured assigns or otherwise parts with his interest in the subject-matter insured, he does not thereby transfer to the assignee his rights under the contract of insurance, unless there can be an express or implied agreement with the assignee to that effect.

But the provisions of this section do not affect a transmission of interest by operation of law.” [27]

In the book, Macgillivray & Parkington on Insurance Law - relating to all risks other than marine [28] , the position when the subject-matter insured is assigned is summarised as :

“If the assured voluntarily parts with all his interest in the subject-matter of the insurance policy, the policy lapses since the assured no longer has any insurable interest and can have suffered no loss [29] . The assignment must, however, be complete [30] and if the assured retains any insurable interest he will be able to recover under the policy; thus, if he enters into a contract to convey the subject-matter and the subject-matter is lost or damaged, the assured can still recover even though the risk has passed to the purchaser [31] ; until the vendor is paid he cannot be certain of receiving the purchase price and it is in effect this risk which, in such a case, is the subject of insurance. [32] The policy will probably remain in force ever after conveyance if the purchase price has not been paid, provided that the vendor has not parted with his lien. The lien will ensure that the assured still has an insurable interest. [33] An assured who enters into a contract of sale will often agree to transfer the insurance policy and, if he effectively does so, the transferee will be able to recover under it.”

Digby C. Jess writes:

“Property and liability insurances are personal contracts, and do not run with the property if it is sold or otherwise disposed of or with a transfer of liabilities of the insured. Therefore, both at common law and equity, as assignment of a policy of insurance can only be valid of the insurer consents to this course, whereby, in truth a new contract of insurance is effected between the assignee and the insurer, and that between the assignor (the original insured) and the insurer lapses.” [34]

In The North of England Pure Oil-Cake Company v The Archangel Maritime Insurance Company, [35] a firm insured a cargo of linseed to be transported by sea. The policy was to cover every stage of the voyage as if each stage of the voyage were separately insured and the policy of insurance was expressed to be for the benefit of the firm and the assignees. During the voyage, the firm sold the cargo. Part of the cargo was sunk due to perils within the terms of the policy. Later, the firm assigned the policy to the purchasers of the linseed.

Cockburn C.J. in this case held :

“We are agreed on one point, which entitles the defendants to judgment, viz. that, the policy not having been assigned until after the interest of the assignors had ceased, an effective assignment was impossible.” [36]

In Sadler’s Company and Badcock, [37] a lessee of a house insured the house from fire. After the lessee’s lease expired but while the insurance policy was still in effect, the house burnt down. Following the destruction of the house, the lessee assigned the policy to the landlords. The landlords then attempted to claim the benefit of the policy from the insurance company.

The Lord Chancellor in this case decided that a policyholder could not assign a policy at a point in time when the policyholder does not have any interest in the insured property. The lessee in this case was not able to assign the policy since at the time the lessee purported to assign the policy the lessee had no longer any interest in the house. In the words of the judge :

“And I am of opinion that the party insured ought to have a property in the thing insured at the time of the insurance made, and at the time of the loss by fire, or he cannot be relieved. Mrs. Strode [the lessee] had no property at the time of the fire, consequently no loss to her; and if she had no interest, nothing could pass to the plaintiffs [landlords] by assignment. ...

If the insured was not to have a property at the time of the insurance or loss, any one might insure another’s house, which might have a bad tendency to burning houses. Insuring the thing from damage is not the meaning of the policy, it must mean insuring Mrs. Strode from damage, and she has suffered none.” [38]

In The Ecclesiastical Commissioners for England v The Royal Exchange Assurance Corporation, [39] one ecclesiastical body sold a farm that was covered by a fire insurance policy to another ecclesiastical body. At the time of the sale, no mention was made about the assignment of the policy. After the sale, the farm burnt down and the purchaser seeks to claim on the policy.

The insurance company argues that there was no valid assignment of the policy and as such, the insurance company is not liable to the seller since the seller had no interest in the insured property and thus have no insurable interest at the time of the accident nor the purchaser since the policy has not been validly assigned to the purchaser. Charles J. in this case agreed with the arguments of the insurance company and held:

“The whole transaction was complete. Can anybody sue? The Commissioners [seller] cannot sue because there has been no assignment of the policy to them. ... In this case the vendors have conveyed away their property and received their consideration ... I must therefore give judgment for the defendants [insurance company], with costs.” [40]

In Collinridge v The Royal Exchange Assurance Corporation, [41] a company which owned a number of buildings insured the same against fire. These buildings were indeed destroyed by fire. However, before the fire took place, these buildings were in the process of being acquired by the Metropolitan Board of Works. There was no mention of an accompanying assignment of the fire insurance policy. The Board had yet to make payments for the conveyance. The insurance company disputes liability.

Mellor J. in this case held:

“It appears that the plaintiff at the time of the fire was in the position of unpaid vendor, and had possession of his premises. Under these circumstances, I think there is nothing to prevent him from bringing an action to recover the amount which he has insured.” [42]

Lush J. in this case concurred :

“The plaintiff is in the position of a person who has entered into a contract to sell his property to another. ... The contract will no doubt be completed, but legally the buildings are still his property. The defendants [insurance company] by their policy undertook to make good any loss or damage to the property by fire. There is nothing to shew that any collateral dealings with the premises, such as those stated in this case, are to limit his liability. If the plaintiff had actually conveyed them away before the fire, that would have been a defence to the action, for he would have then have had no interest at the time of the loss. But in the present case he still has a right to the possession of his property, and the defendants are bound to pay him the insurance money ...” [43]

In Rayner v Preston, [44] a set of buildings covered by a fire insurance policy were contracted to be sold. After the date the contract was signed but before the contract was completed, the buildings were damaged by fire. The contract contained no mention of the fire insurance policy. The insurance company made payments to the seller of the buildings. The purchaser seeks to claim this money or to compel the seller to apply the money received towards making repairs to the buildings.

The first argument proposed by the purchaser was that although the contract made no specific mention of the insurance policy, the contract gave the purchaser a right to all contracts related to the buildings. Cotton L.J. in this case was not in support of this contention and held :

“The contact passes all things belonging to the vendors appurtenant to or necessarily connected with the use and enjoyment of the property mentioned in the contract, but not, in my opinion, collateral contracts; and such, in my opinion, ... the policy of insurance is. It is not a contract limiting or affecting the interest of the vendors in the property sold, of affecting their right to enforce the contract of sale, for it is conceded that, if there were no insurance and the buildings sold were burnt, the contract for sale would be enforced. It is not even a contract in the event of a fire to repair the buildings, but a contract in that event to pay the vendors a sum of money which, if received by them, they may apply in any way they think fit. It is a contract, not to repair the damage to the buildings, but to pay a sum not exceeding the sum insured or the money value of the injury. In my opinion, the contract of insurance is not of such a nature as to pass without apt words under a contract for sale of the thing insured.” [45]

The next argument proposed by the purchaser was that between the time of the contract being made and the conveyance being completed, the seller was a trustee of the property for the purchaser and as such, the seller is a trustee for the purchaser with regard to the money received for the property during this period of trusteeship. This argument did not find favour with the court either and Cotton L.J. held:

“An unpaid vendor is a trustee in a qualified sense only, and is so only because he has made a contact which a Court of Equity will give effect to by transferring the property sold to the purchaser, and so far as he is a trustee he is so only in respect of the property contracted to be sold. Of this the policy is not a part. A vendor is in no way a trustee for the purchaser of rents accruing before the time fixed for completion, and here the fire occurred and the right to recover the money accrued before the day fixed for completion. The argument that the money is received in respect of the property which is trust property is, in my opinion, fallacious.” [46]

Brett L.J. in this case concurred :

“... I venture to say that I doubt whether it is a true description of the relation between the parties to say that from the time of the making of the contract, or at any time, one is ever trustee for the other. They are only parties to a contract of sale and purchase of which a Court of Equity will under certain circumstances decree a specific performance. But even if the vendor was a trustee for the vendee, it does not seem to me at all to follow that anything under the contract of insurance would pass. As I have said, the contract of insurance is a mere personal contact for the payment of money. It is not a contract which runs with the land. If it were, there ought to be a decree that upon completion of the purchaser the policy be handed over. But that is not the law. The contract of insurance does not run with the land; it is a mere personal contract, and unless it is assigned no suit or action can be maintained upon it except between the original parties to it... [47]

“I therefore, with deference, think that the Plaintiffs here [purchaser] cannot recover from the Defendant [seller], on the ground that there was no relation of any kind or sort between the Plaintiff and the Defendant with regard to the policy, and therefore none with regard to any money received under the policy.” [48]

James L.J. in this case gave a dissenting judgment on this point and held that :

“... the relation between the vendor and the purchaser became, and was in law, as from the date of the contract and up to the completion of it, the relation of trustee and cestui que trust , and that the trustee received the insurance money by reason of and as the actual amount of the damage done to the trust property.” [49]

In Castellain v Preston and Others, [50] the defendants owned a piece of land and buildings which were covered by a fire insurance policy. The defendants entered into negotiations to sell the premises to their tenants. In the midst of these negotiations, a fire broke out which damaged a part of the buildings. By the time of the fire the contract of sale was signed, a deposit was paid but the contract was not completely performed as yet. The insurance company made payments to the defendants on the insurance policy for the fire. The tenants paid the full purchase price and proceeded with the slae despite the fire. The insurance company brings the present action.

Brett L.J. commented on the foundation of insurance law :

“The very foundation, in my opinion, of every rule which has been applied to insurance law is this, namely, that the contract of insurance contained in a marine or fire policy is a contract of indemnity, and of indemnity only, and that this contract means that the assured, in case of a loss against which the policy has been made, shall be fully indemnified, but shall never be more than fully indemnified. That is the fundamental principle of insurance, and if ever a proposition is brought forward which is at variance with it, that is to say, which either will prevent the assured from obtaining a full indemnity, or which will give to the assured more than a full indemnity, that proposition must certainly be wrong.” [51]

Cotton L.J. added :

“The policy is really a contract to indemnify the person insured for the loss which he has sustained in consequence of the peril insured against which has happened, and from that it follows, of course, that as it is only a contract of indemnity, it is only to pay that loss which the assured may have sustained by reason of the fire which has occurred. In order to ascertain what that loss is, everything must be taken into account which is received by and comes to the hand of the assured, and which diminishes the loss. It is only the amount of the loss, when it is considered as a contract of indemnity, which is to be paid after taking into account and estimating those benefits or sums of money which the assured may have received in diminution of the loss... [52]

Therefore the conclusion at which I have arrived is, that if the purchase-money has been paid in full, the insurance office will get back that which they have paid, on the ground that the subsequent payment of the price which had been before agreed upon, and the contract for payment of which was existing at the time, must be brought into account by the assured, because it diminishes the loss against which the insurance office merely undertook to indemnify them [53] .”

Mahinder Singh Sidhu observes :

“An assignment of the policy means a ‘change of interest’ i.e., somebody else is substituted for the original insured in the motor insurance contract. All motor policies can be validly assigned but the insurer’s prior consent is essential.” [54]

Mahinder Singh Sidhu also writes :

“A motor insurance contract is always personal in the sense that some human element is inevitably involved, and in a technical sense, the insurer’s decision to enter on the contract depends on the personal qualities of the insured and the insurer’s confidence in him. The insurers have the right to question and investigate the proposed insured and vary the terms of the contract. If an assignment takes place it is termed as a “novation”, since the assignment virtually creates a new contract with the assignee.

A valid assignment gives the assignee the right to sue and gives the insurance company a good legal discharge without the necessity of joining the assignor. Where there is a conditional sale of a car to the new purchaser, the ownership of the car still remains with the insured, and does not amount to any transfer of his insurable interest. But where there has been a complete sale and transfer of the vehicle and handing over of the policy documents to the purchaser, it does not create a valid assignment, though there is a transfer of interest of the subject matter of the insurance. The transfer of the insurable interest causes the policy to lapse, and the purchaser has no insurance cover if he drives the car and meets with an accident.” [55]

In Peters v General Accident Fire & Life Assurance Corporation Ltd. [56] , the owner of a motor van sold the vehicle to another person and purportedly assigned the motor insurance policy for the van to the purchaser. After the sale, the purchaser was involved in an accident and attempted to make a claim to the insurance company based on the motor insurance policy purportedly assigned. The insurance company disputed the purchaser’s right to claim under the insurance policy issued to the seller of the van.

Sir Wilfred Greene M.R. in this case decided that:

“Assuming in his favour that there was an intention to assign the policy, the fundamental remains : Is this policy one which is capable of assignment? The judge held that it was not, and I am in entire agreement with that.” [57]

The effect of the motor insurance policy was that the insurance company undertook to indemnify the policyholder in the case of an accident while the car was driven by the policyholder or anyone else driving the vehicle with the policyholder’s consent or permission.

Sir Wilfred Greene M.R. explained the effect of deciding that such a policy was assignable:

“It appears to me as plain as anything can be that a contract of this kind is in its very nature not assignable. The effect of the assignment, if it were possible to assign, was ... that, from and after the assignment, the name of Mr. Pope, the assignee [the purchaser], would have taken the place of that of Mr. Coomber [the seller] in the policy, and the policy would have to be read as though Mr. Pope’s name were mentioned instead of Mr. Coomber’s. In other words, the effect of the assignment would be to impose upon the insurance company an obligation to indemnify a new assured, or persons ordered or permitted to drive by that new assured. That appears to be altering in toto the character of the risk under a policy of this kind. The risk that A.B. is going to incur liability by driving his motor car, or that persons authorised by A.B. are going to cause injury by driving his motor car, is one thing. The risk that C.D. will incur liability by driving a motor car, or that persons authorised by C.D. will incur liability through driving a motor car, is, or may be, a totally different thing.” [58]

One reason given by Sir Wilfred Greene M.R. for deciding that an insurance policy of this kind was not capable of assignment was that :

“The insurance company in this case, as in every case, make inquiries as to the driving record of the person proposing to take out a policy of insurance with them. The business reasons for that are obvious, because a man with a good record will be received at an ordinary rate of premium and a man with a bad record may not be received at all, or may be asked to pay a higher premium. The policy is, in a very true sense, one in which there is inherent a personal element of such a character as to make it, in my opinion, quite impossible to say that the policy is one assignable at the volition of the assured.” [59]

The second reason given by the judge as the basis of his judgement was that the according to the Road Traffic Act 1930 [60] in the United Kingdom, it is unlawful for anyone to use a motor vehicle or permit anyone else to use the motor vehicle unless that user or other person permitted by the user is covered by a motor insurance policy for the use of the motor vehicle. [61] Additionally under the statute, if a judgment is obtained in respect of a liability covered by the policy against any person insured by the policy, then the insurance company is generally liable to make the required payment to the person who has the benefit of the judgment. [62]

The purchaser of the car in this case argued that he was driving the car with the permission of the policyholder [63] and as such, should receive the same benefit of coverage in terms of the insurance policy. Based on this rationale, the purchaser argued that since judgment was obtained against him in respect of the accident and since he was covered by the policy, the insurance company should be liable under the judgment and make payments to the party who obtained the judgment. The court, however, held that :

“At the date when the accident took place, the entire property in this car was vested in Pope [the purchaser]. He had bought the car. On the sale of the car, the property passed to him ... The property, therefore, passed to the purchaser long before this accident took place. The circumstance that he had not paid the whole of the purchase price is irrelevant for that purpose, because that circumstance does not leave in the vendor, Mr. Coomber, any interest in the car. There is no vendor’s lien, or anything of that sort. The car had become the out-and-out property of Pope. When Pope was using that car, he was not using it by the permission of Coomber [the seller]. It is an entire misuse of language to say that. He was using it as owner, and by virtue of his rights as owner, and not by virtue of any permission of Coomber.” [64]

In Smith v Ralph, [65] the scenario was basically the same as above, namely, that the purchaser of a motor vehicle again tried to claim the coverage of the insurance policy issued to the seller of the motor vehicle on the basis that the purchaser was driving the motor vehicle with the permission or consent of the policyholder.

Lord Parker of Waddington C.J. in this case similarly held that the purchaser was not covered by the policy as the policyholder could not assign any rights in the policy when he no longer had any interest in the vehicle covered by the policy. In the words of the judge :

“Any permission or authority given by the policyholder ... could not extend beyond the time when he ceased to be a policyholder in the sense of having any insurable interest.” [66]

In Nanyang Insurance Co. Ltd. v. Salbiah & Anor, [67] a car was bought on behalf of a company. The company then entered into negotiations to sell the car to the purchaser. The terms of the proposed sale in the written contract included the obligation of the purchaser to make an initial payment and thereafter to continue paying for the car in instalments. The parties varied this term by oral agreement when the purchaser did not make this initial payment in full by allowing him to make this initial payment in instalments. The car was involved in an accident and judgment was obtained against the driver of the car who was the purchaser. The insurance company disputed liability for the claim against them to honour the judgment obtained as they argued that the seller of the car no longer had any insured interest with the proposed sale of the car and as such, the insurance policy has lapsed.

Azmi C.J. in this case held:

“It is therefore quite clear in my view from the evidence, that the company intended to retain the property in the car until Abdul Karim [the purchaser] has paid in full the initial payment of $1,000 under the D.6 [the contract] when he could execute a hire-purchase agreement with a financial company. ...

For the above reason, I would therefore with respect, agree with the finding of the trial judge that the appellants [seller] had an insurable interest in the car on the date of the accident and the car was being driven by Abdul Karim with the permission of the insured.” [68]

In People’s Insurance Co. of Malaya Ltd. v Ho Ah Kum & Anor, [69] the driver of a van was sued by the estate of a deceased who was killed in an accident due to the negligent driving of this driver. The estate of the deceased obtained judgment against the driver of the van. The driver, it was alleged, was driving the van with the permission of the owner of the van who had an insurance policy on the van. The question that arose in this case was whether the driver was so driving with the permission of the owner or whether the owner of the van had sold the van to the driver and as such parted with possession of the van before the date of the accident.

The driver was actually an employee of the owner of the van who at the time of the accident was using returning from a delivery made on behalf of the employer in the course of his employment. The evidence showed that the owner told the driver that the ownership of the van would not be transferred unless and until the driver made full payment of the purchase price. The owner was aware that the reason the driver bought the van was to use the van in making these deliveries.

Wee Chong Jin C.J. in this case held on the facts that:

“In any event, having regard to the relationship between Foo [driver] and Yeo [owner] throughout the material times; to the purpose for which Foo agreed to purchase from Yeo the motor van; and most important of all to the uncontradicted evidence of Foo that when the accident occurred he was returning after delivering Yeo’s flour and there being no evidence to the contrary, I take the view that there is sufficient evidence on the record for me to find and I do find that at the time of the accident Foo was driving the van on the order of the insured.” [70]

In Tattersall v. Drysdale, [71] the driver of a car was involved in an accident and judgment was obtained against him. The driver had an insurance policy with the London & Edinburgh Insurance Company for a Standard Swallow Saloon car. This Standard car was sold to a company who was in turn selling the driver a Riley Saloon car belonging to the director of this company which was under a Lloyd’s Eclipse insurance Policy. The driver was in the process of having his insurance company, the London & Edinburgh Insurance Company, cover the Riley car and no longer cover the Standard car. However, this change was not made before the accident as yet. The question that arose was which insurance company was liable for the accident.

Goddard J. in this case held :

“As to the question of permission, I am clearly of opinion that he was driving with Gilling’s [the director of the company the Riley car was bought from] permission. ... The truth is that no bargain about insurance was ever made. Gilling, on handing over his car after the bargain had been made, wished the plaintiff [driver] to insure it and he was willing to do so, but he was allowed to drive it as he wished ...” [72]

Both insurance policies contained a clause that coverage is extended to indemnify a person driving the insured car with the assured’s permission provided that the driver is not entitled to indemnity under any other insurance policy. The next question that arose, as such, was whether the Riley car was covered by the insurance policy of the driver. The judge held that it did not. This insurance policy was stated to cover the Standard car which had been sold. The Riley car was not entered on this policy. The coverage was extended to the situation when the assured drove another car temporarily but it is the car stated in the policy which is the subject of the insurance. As such, this insurance policy in the name of the driver lapsed when the car the insurance policy was stated to cover, namely the Standard car, was sold.

The driver held to be driving the Riley car with the permission of the assured, namely the director of the company who owned this car with an insurance policy, the judge went on to direct that the insurance company of the director, namely, the Lloyd’s Eclipse insurance Policy, through the extension clause discussed above, covered the driver of the Riley car and as such, was liable on the judgment obtained for the accident.

In Roslan bin Abdullah v. New Zealand Insurance Co. Ltd, [73] there was a collision between 2 trucks. Judgment was obtained and the appellant then sought to claim against the insurance company who had issued an insurance policy on the respondent’s truck. The insurance company disputed liability as the judgment obtained was not entered against the assured as the assured was the previous owner of the truck and not the current owner, the respondent company.

Wan Suleiman F.J. [74] in this case, with regard to whether there was any assignment or novation of the insurance policy from the previous owner to the new owner, affirmed the following principles from the judgment of Goddard J. in Peters v General Accident Fire & Life Assurance Corporation Ltd. [75]

Goddard J. (as he then was) held:

(a) when the vendor sold the car, the insurance policy automatically lapsed.

(b) at the time of the accident, the purchaser could not be said to be driving the car by the order or with the permission of the vendor, as the car was then the purchaser’s property.

(c) the insured is not entitled to assign his policy to a third party. An insurance policy is a contract of personal indemnity, and the insurer cannot be compelled to accept responsibility in respect of a third party who may be quite unknown to them.” [76]

Wan Suleiman F.J., with regard to whether the driver, as an employee of the current owner of the truck was driving with the permission of the previous owner of the truck, held :

“We are informed by counsel for the appellant that Wee & Wee Realty Sdn. Bhd. [the previous owner of the truck] and United Malaysia Co. Ltd. [the current owner of the truck] the second defendant in C.S. K.124/76 are sister companies. Be that as it may they are distinct entities. The respondents were no longer the owners of the truck and therefore there cannot be any question of them ordering or permitting the first defendant [employee of the current owner of the truck] in C.S. K.124/76 to drive it.” [77]

S. Santhana Dass writes :

“Life insurance seeks to reduce the financial uncertainties arising from the natural contingencies in old age and death and to ease the burden in the case of possible misfortunes - injury and sickness. The principal function of life insurance business is to furnish protection against the financial needs which may be caused by disability and death. It provides food, shelter and clothing, when illness, injury or death cuts off the income of the breadwinner.” [78]

In the book, Colinvaux’s Law of Insurance , it is written:

“Life policies are to be considered something more than a contract. They are treated as securities for money payable at an uncertain but future date which is bound to occur.” [79]

Robert J. Surridge, Sara Forrest, Noleen Dignan, Alison Broadberry & Duncan Backus writes :

“A practical definition might be that a life assurance contract is one whereby one party (the insurer) undertakes for a consideration (the premium) to pay money (the sum assured) to or for the benefit of the other party (the assured) upon the happening of a specified event, where the object of the assured is to provide a sum for himself or others at some future date, or for others in the event of his death.” [80]

Robert J. Surridge, Sara Forrest, Noleen Dignan, Alison Broadberry & Duncan Backus also write with regard to the assignment of life policies that :

“An assignment of a life policy is a document or action which is effective to transfer the ownership of the policy from one person to another. Assignments may be made for a variety of reasons, including:

- Sale of exchange;

- Gift or voluntary transfer;

- Settlement, transferring the policy to trustees to give effect to successive or contingent interests;

- Transfer to existing trustees of a settlement or to beneficiaries in pursuance of the trusts;

- Mortgage; transfer of mortgage; or reassignment on repayment;or

- Assignment to a trustee for the benefit of creditors.” [81]

Nik Ramlah Mahmood writes:

“In relation to life insurance, an assignment means the transfer of one’s interest in the policy to another. Such an assignment commonly happens when an insured under an own life policy uses the policy, which is a valuable piece of property, as security for a loan and assigns it to the creditor. This usually takes the form of a conditional assignment whereby the policy would be reassigned to the insured once he has paid all his debts. Banks and other credit-giving institutions which lend huge sums of money to individuals normally insist that the borrower takes out a policy on his life and assigns it to them as security for the loan.

A life policy can also be unconditionally or absolutely assigned either as a gift or under a contract of sale. Such an assignment is absolute and does not leave any residual rights with the assignor.” [82]

In Dalby v. The India and London Life-Assurance Company, [83] the Anchor Life-Assurance Company insured the life of his late Royal Highness, the Duke of Cambridge. This policy was effected by Wright on behalf of the company.

Parke B. stated in this case:

“The contract commonly called life-assurance, when properly considered, is a mere contract to pay a certain sum of money on the death of a person, in consideration of the due payment of a certain annuity for his life, - the amount of the annuity being calculated, in the first instance, according to the probable duration of the life; and when once fixed, it is constant and invariable. The stipulated amount of annuity is to be uniformly paid on one side, and the sum to be paid in the event of death is always (except when bonuses have been given by prosperous offices) the same, on the other. This species of insurance in no way resembles a contract of indemnity.

Policies of assurance against fire ands against marine risks, are both properly contracts of indemnity, - the insurer engaging to make good, within certain limited amounts, the losses sustained by the assured in their buildings, ships, and effects... [84]

... a contract of indemnity only. But that is not of the nature of what is termed an assurance for life; it really is what it is on the fact of it, - a contract to pay a certain sum in the event of death [85] .”

S. Santhana Dass points out that:

“An assignee under a life insurance contract can re-assign the policy to the original owner.” [86]

The Policies of Assurance Act 1867 [87] defines a life insurance policy as “... ‘any instrument by which the payment of moneys, by or out of the funds of an assurance company, on the happening of any contingency depending on the duration of human life, is assured or secured’. [88] ”

The Policies of Assurance Act 1867 provides that an assignee can sue in his own name if [89] :

(i) the assignee has the right in equity to receive and the right to give a valid discharge to the assurance company for the policy money, that is, it was a precondition that the assignee be beneficially entitled to the policy money or entitled to receive the policy money as a trustee or mortgagee at the time of the claim;

(ii) the assignee has obtained an assignment, either by endorsement on the policy or by separate instrument, in the words or to the effect set forth in the Schedule to this Act; and

(iii) written notice of the assignment had been given to the insurance company.

Cotton L.J. in the case In re Turcan [90] commented :

“Before the Act of 1867 [91] (30 & 31 Vict. C. 144) a policy could not be assigned at law, but now it can ...” [92]

Section 4(3) of the Civil Law Act 1956 [93] states :

“Any absolute assignment, by writing, under the hand of the assignor, not purporting to be by way of charge only, of any debt or other legal chose in action, of which express notice in writing has been given to the debtor, trustee or other person from whom the assignor would have been entitled to receive or claim the debt or chose in action, shall be, and be deemed to have been, effectual in law, subject to all equities which would have been entitled to priority over the right of the assignee under the law as it existed in the State before the date of the coming into force of this Act [94] , to pass and transfer the legal right to the debt or chose in action, from the date of the notice, and all legal and other remedies for the same, and the power to give a good discharge for the same, without the concurrence of the assignor.”

S. Santhana Dass has summarised the requirements under section 4(3) of the Civil Law Act 1956 in order to effect a legal assignment of a life insurance policy as follows :

“The requirements for an absolute assignment of a life policy are as follows:-

(a) the assignment must be in writing and signed by the assignor (the insured);

(b) it must be absolute and not by way of charge only; and

(c) notice in writing of the assignment must be given to the insurer.” [95]

S. Santhana Dass goes on to explain:

“The common practice amongst insurers with respect to assignments (be it under the Section 4(3) of the Civil Law Act 1956 or the Policies of Assurance Act 1867 (U.K.) can be summarised as follows:-

(i) An assignment should be in writing and a life policy can be assigned absolutely or conditionally.

(ii) The written notice of assignment must be sent to the Head Office or the Principal Office of the insurer.

(iii) Upon receipt of the assignment notice the insurer registers each notice.

(iv) If there is no written notice given to the insurer and the insurer has made payment to a person other than the assignee, the insurers shall not be liable to the assignee thereafter. The assignee cannot sue the insurer for recovery of any benefit under the policy unless a notice of assignment has been sent to the insurer.

(v) An assignment can be done by effecting an endorsement and attaching it to the back of the policy. Otherwise it is effected by a separate deed signed by all parties concerned i.e. the assignor, assignee and the insurer.

(vi) If there is more than one assignment, the priority of claims by the assignor will depend upon the priority in the date of receipt of the notice by the insurer. Thus position has now been altered by Section 168(2) of the Insurance Act 1996 where priority is based on the date of the assignment rather than date of the notice.” [96]

Robert J. Surridge, Sara Forrest, Noleen Dignan, Alison Broadberry & Duncan Backus writes:

“Where there has not been a legal assignment but the assignee has given consideration , equity will (subject to the riles on priority) assist him to perfect his title against third parties, even though he may not have obtained formal assignment.

If, however, a voluntary assignee seeks the support of equity, he will succeed only where:

(1) the assignment is complete between assignor and assignee, ie everything necessary has been done to make a present transfer and render the assignment binding; or

(2) the assignor has constituted himself as trustee for the assignee.” [97]

Roy Hodgin writes :

“Assignment can be made in equity ... commonly, under the Policies of Assurance Act 1867, which requires that notice of such assignment be given in writing to the insurer. Under the 1867 Act, the assignment may be made either by an endorsement on the policy or by a separate document using the wording set out in the Schedule to the Act.” [98]

Cohen L.J. in Inland Revenue Commissioners v. Electric and Musical Industries, Ltd. [99] explained :

“It is quite true that as a matter of law there is no special form required to constitute an equitable assignment. Whether or not what has been done in any particular transaction amounts to an equitable assignment is a matter of inference from the facts and documents concerned ...” [100]

“There is no specific method of effecting an equitable assignment of a life policy. The only important requirement is that there must be a clear indication that the object of the transaction is to transfer the benefits in the policy from one party to another. No written document is necessary. A common way of effecting an equitable assignment is by the assignor depositing the policy of insurance with the assignee. An equitable assignee cannot enforce his rights directly against the insurer in his own name, he must either compel the assignor to sue on his behalf or sue the assignor and join the insurer to the action. The equitable assignee is thus not in a position to give a legal disharge to the insurer.” [101]

Tan Lee Meng writes:

“For the assignor to claim under the policy, the assignment must be complete.” [102]

In the case In re Williams [103] , an owner of an insurance policy paid the insurance premiums until his death. The court had to construe a purported assignment of the policy to his housekeeper through the following signed endorsement:

“’I authorise Ada Maud Ball, my housekeeper and no other person to draw this insurance in the event of my predeceasing her this being my sole desire and intention at time of taking this policy out and this is my signature.’” [104]

Lord Cozens-Hardy M.R. held:

“According to my construction it is not an assignment at all. The question whether in the circumstances there is a voluntary gift always involves the consideration not whether the donor might have given the property, but what is the form in which he has purported to give it. Take the case of shares in a limited company which are only transferable by deed, or the case of Consols which are only transferable at the Bank of England; it is quite clear that a mere letter not under seal in either of these cases purporting to assign the property would not have been complete, the donor would not have done all he could to perfect it, and the intended gift would have failed. Of course if there had been valuable consideration for the assignment the position would have been different.” [105]

Warrington L.J. in this case agreed:

“The assignee in the present case is a volunteer, and she claims to have received in the assignor’s lifetime the gift of a certain chose in action, namely, a policy of insurance, the amount secured by which is in its nature only to be paid on the death of the assured. It is a policy on the assignor’s own life. Claiming as she does as a volunteer and alleging that the assignor made this gift to her, she can only succeed if she can show that the assignor did everything which according to the nature of the property comprised in the assignment was necessary to be done in order to transfer the property and render the assignment binding upon him. ...

The question turns largely if not entirely on the construction of the document. Of course the mere form of words is immaterial if the assignor has used any form of words which expressed a final and settled intention to transfer the property to the assignee there and then. That would be sufficient. He need not use the word “give” or “assign” or any particular words.” [106]

Warrington L.J. construed the words of the endorsement and came to the conclusion that it merely created a revocable authority to receive the policy money after the assignor’s death which was a nullity as the authority would be revoked by the assignor’s death [107] . Lord Cozens-Hardy M.R. similarly construed the endorsement as either a mere: [108]

• power of attorney, though not under seal, authorising the person named to receive the money which power becomes inoperative on the death of the person conferring it; or

• mandate which ceased to be operative at death.

In Newman v. Newman, [109] section 3 of the Policies of Assurance Act 1867 was construed. This section states:

“No assignment made after the passing of this Act of a policy of life assurance shall confer on the assignee therein named, his executors, administrators, or assigns, any right to sue for the amount of such policy, or the moneys assured or secured thereby, until a written notice of the date and purport of such assignment has been given to the assurance company liable under such policy at its principal place of business for the time being; and the date on which such notice was received shall regulate the priority of all claims under any assignment; and a payment bona fide made in respect of any policy by any assurance company before the date on which such notice was received shall be as valid against the assignee giving such notice as if this Act had not been passed.” [110]

North J. in this case interpreted this section in the following manner:

“That Act was passed in order to avoid the necessity of joining the assignor of the policy in actions against the insurance office, and it provides that if a certain notice is given to the office then the assignee may sue without joining the assignor. Then these words occur ‘And the date on which such notice shall be received shall regulate the priority of all claims under any assignment.’ It was contended that these words went much further than was necessary for the protection of the insurance office, and affected the rights of the parties inter se . ... In my opinion that is not the meaning of the statute, which was not intended to give a simpler remedy against an insurance office, and also to give facilities to insurance offices in settling claims by enabling them to recognise as the first claim the claim of the person who first gave such notice as required by the statute. It was not intended in my opinion to enact that a person who had advanced money upon a second charge without notice of the first, and made subject to it, should be giving statutory notice of the office exclude the person who had the prior incumbrance.” [111]

In Spencer v. Clarke [112] , a life insurance policy was used as security for two separate loans from separate parties. The contention was then which party had priority in terms of the security.

Hall, V.C. held:

“I am of the opinion that as between the Plaintiffs [the second creditor] in this action and the Defendant Tranter [the first creditor], the Defendant Tranter is entitled to priority as to the policy in the Westminster and General Life Assurance Association . That policy was deposited with him by way of equitable security. He is first in point of time, and therefore first as regards his security.” [113]

The first creditor then contended that he obtained priority by giving notice to the insurance office of his claim first in accordance with the Policies of Assurance Act 1867 . However, Hall V.C. held on this point that :

“In order to bring the case within the statute, there must, according to the plain words of the statute and the explanatory form of assignment given in the schedule, be an assignment, and an agreement to assign upon request is not an assignment.” [11]

“In essence, whether there has been a valid assignment under the provisions of the Policies of Assurance Act or section 4(6) of the Civil Law Act, all claims to priority amongst the assignees and encumbrances of a policy are dealt with on the basis that all claimants are equitable assignees so long as the proceeds of a policy are with the insurers or have been paid into court. The priority of equitable assignment is dependent on the date of assignment and the fact that there has been notice of prior equities does not affect the position. However, if X is an equitable assignee for value and Y is the holder of a prior equity, X can claim priority over Y if he has no actual or constructive notice of the earlier assignment and if he has given formal notice to the insurers of the assignment before the insurers have come to know of Y’s interest or if X has been misled by Y into taking the assignment or if Y has by his negligence contributed to the creation of the assignment to X.” [115]

Robert M. Merkin writes with regard to priorities of assignments:

“... a number of basic principles may be stated. First, the general equitable rule is that assignments rank in priority in order of their date of creation, but this is subject to the further rule that, where one or more assignees have given notice to the insurer, priority is determined by the date of notice. Secondly, the giving of notice to the insurer will obtain priority only for an assignee, whether legal or equitable, who was unaware of earlier assignments at the date of his own assignment. Knowledge for these purposes may be actual or constructive; the fact, for example, that the assured cannot deposit the policy with the assignee has been held [116] to put him on notice that it may have been deposited by way of assignment earlier. ... Thirdly, it is possible to have a legal assignment only by the giving of notice to the insurer.” [117]

S. Santhana Dass points out that :

“This common law position has been altered by Section 168(2) of the Insurance Act 1996 ... Notice of assignment to the insurers are no more relevant for the purpose of determining priority which puts the insurer in a more difficult position. Do they have to ensure that there are no prior assignment before paying to an assignee? It would be impractical to impose such a duty on the insurers because they would have no means of getting such information. As long as they pay to the assignee, whose assignment they had notice, they would be free of liability in respect of any claim, provided they have no knowledge of any earlier assignment. It may be prudent for insurers to include in their standard assignment form, a declaration by the insured that he has not created any prior assignment in respect of the policy at the time of execution of the assignment.” [118]

Section 168(2) of the Malaysian Insurance Act 1996 [119] provides :

“Where more than one person are entitled under the security or the assignment, the respective rights of the persons entitled under the security or the assignment shall be in the order of priority according to the priority of the date on which the security or the assignment was created, both security and assignment being treated as one class for this purpose.”

7.1 Assignment of Insurance Policies

Francis Tierney and Paul Braithwaite writes:

“An insurance policy is a contract under which the insured has defined rights and obligations. An assignment of an insurance policy may be defined as follows:

An assignment of an insurance policy by an insured is the transfer of the rights and obligations of the insured under the policy to another who then becomes the insured in place of the original insured.” [120]

Ray Hodgin writes:

“Assignment of insurance policies has an important role in commercial life. A common example is where a mortgagee requires the mortgagor to effect a life policy to cover the extent of the loan should the mortgagor die before the loan is repaid. The policy is then assigned to the mortgagee [121] .”

Roy Hodgin points out the “... desire of the courts to make the policy assignable and therefore as flexible as possible ...” [122] In order to illustrate this point, this author discusses the United States case of Grigsby v Russell [123] where a life policy was taken out by someone on his own life. This person paid two premiums and no more as he required the money for medical care. This person assigned the policy to someone else for value and the assignee continued to pay the premiums. Upon the assignor’s death, the question that arose was whether the insurance company should pay the proceeds to the assignor’s estate or the assignee. The Supreme Court of the United Stated held that the proceeds should be paid to the assignee. Mr. Justice Holmes in this case commented:

“Of course, the ground suggested for denying the validity of an assignment for a person having no interest in the life insured is the public policy that refuses to allow insurance to be taken out by such persons in the first place ... the ground for the objection to life insurance without interest in the earlier English cases was not the temptation to murder but the fact that such wagers came to be regarded as a mischievous kind of gaming ... On the other hand, life insurance has become in our days one of the best recognised forms of investment and self-compelled savings. So far as reasonable safety permits, it is desirable to give to life policies the ordinary characteristics of property ... To deny the right to sell except to persons having such an interest is to diminish appreciably the value of the contract in the owner’s hands.”

This indication of the attitude of the American courts as quoted by an English writer is noteworthy. However, in Malaysia, the courts are bound by the beneficiary of a life policy proving that he/she has an insurable interest in the life insured under section 152 of the Insurance Act 1996. [124]

“For a valid assignment of personal contracts such as contracts of fire insurance and liability insurance, the insurer’s consent is required... [125]

To be valid, an assignment by the insured of a non-life policy must be contemporaneous with an assignment of the subject matter of insurance to the assignee. The insured will not be in a position to assign the policy at a later date as he will no longer have an insurable interest in the property, in respect of which the policy was issued [126] . ...

An assignor of a life policy, which is a valuable chose in action, may effect a legal assignment of his policy by virtue of the provisions of the Policies of Assurance Act [127] , which only concerns the assignment of life policies, or by virtue of the provisions of section 4(6) of the Civil Law Act [128] , which concerns the assignment of all choses in action including life policies [129] .”

S. Santhana Dass writes:

“’Choses in action’ or ‘things in action’ are assignable.

Assignment of chose in action take places when the liabilities imposed or the rights acquired under a contract between A and B are transferred to C who is not a party to the original contract.

The expression ‘chose in action’ or ‘thing in action’, in the literal sense, means a thing recoverable by suit or action in law. ...

Rights under a contract of insurance are choses in action.” [130]

As such, it would seem that with regard to property and motor insurance, the assignment or sale of the subject matter of the insurance is insufficient to transfer the insurance policy as well. The insurance company’s consent is required before the policy will change hands. In order for the insured or original policy holder to effect a valid assignment, the insurance company’s consent and resulting assignment of the insurance policy must be contemporaneous with the assignment or sale of the subject matter since once the assignment or sale of the subject matter is complete, the insured no longer has any insurable interest in the subject matter of the insurance and as such, no more insurable interest in the policy to assign.

Nik Ramlah Mahmood explains:

“The contract of insurance itself can only be assigned with the consent of the insurer. This amounts to the substitution of a new contract for the old - a novation - and is allowed under the Contracts Act 1950 [131] . Novation results in the formation of a new contract between the insurer and the assignee and the latter is subject to all the terms and conditions of the new contract and he effectively replaces the assignor as the insured under the policy.” [132]

The assignment of life insurance policies may be effected by the insured through a legal assignment, either under the Policies of Assurance Act 1867 [133] or section 4(3) of the Civil Law Act 1956 .

7.2 Assignment of the Proceeds of Insurance Policies

“The proceeds of a policy may be assigned either in equity or at law in accordance with the provisions of section 4(6) of the Civil Law Act [134] . The insured’s right to the proceeds of a policy is a valuable chose in action and it may be assigned either before or after the occurrence of a loss. For an assignment of the proceeds of a policy, which is distinct from an assignment of the contract or policy of insurance, the consent of the insurer is not required.”

In the case of an equitable assignment of the proceeds of the policy, an action to recover the said proceeds must be brought in the name of the insured.

Where the assignor has effected a legal assignment of the proceeds of the policy in accordance with the requirements of section 4(6) of the Civil Law Act, the assignee may sue in his own name. The assignment must be an absolute assignment in writing under the assignor’s hand and express notice of such assignment must be given in writing to the insurers.

The assignee of the proceeds of the policy cannot acquire rights which are superior to those of the assignor. It follows that all the defences which could have been raised by the insurer against the assignor are equally applicable against the assignee. Thus, the insurers may avoid liability on account of the assignor’s misrepresentation or non-disclosure. Furthermore, all terms which are conditions precedent to the insurer’s liability must be complied with and the insurer may avoid liability to the assignee of the proceeds of a policy on the ground of the assignor’s failure to comply with a condition precedent. For instance, in Re Carr & Sun Fire Insurance Co., [135] the insured’s failure to provide the insurer with proof of loss within the time stipulated under the terms of the policy precluded the trustee in bankruptcy from recovering the proceeds of the policy.” [136]

7.3 Assignment of the Subject Matter of Insurance Policies

E. R. Hardy Ivamy writes:

“Before the assignee of the subject-matter can in his own name enforce the contract contained in the policy, it is necessary that the policy should be validly assigned to him... [137]

On the completion of the assignment, the rights and duties of the original assured devolve on the assignee, who becomes, to all intents and purposes, the assured under the policy which he may accordingly enforce in his own name [138] .”

“The question of an assignment of the subject matter of insurance arises when the insured property has been sold or otherwise disposed of by the insured. It does not arise in the case of life and personal accident policies because the subject matter of such policies is unassignable.

An insured who has voluntarily and completely given up his interest in the subject matter of the insurance ceases to have an insurable interest in the insured property. Such an insured can no longer make a claim under the policy with respect to the property which has been given up as he will not be in a position to suffer any loss with regard to the property.” [139]

7.4 Assignment by Operation of Law

The case of Thomas v. National Farmer’s Union Mutual Insurance Society Ltd. [140] involved the property in hay and straw on a farm being passed from a tenant to a landlord by virtue of the Agricultural Holdings Act 1948 when the landlord served a notice to quit on his tenant. Diplock J. in this case explained:

“Where property passes automatically as the result of statutory provisions when certain circumstances arise, it seems to me that this is a passing of property by operation of law.” [141]

“The insured’s interest in the policy or in the subject matter of interest may be assigned by operation of law. For instance, such an assignment will occur in the event of the death or bankruptcy of the insured.

As far as the insured’s interest in the insured property is concerned, such interest vests in the insured’s personal representative in the event of the insured’s death. On the other hand, in the event of the bankruptcy of the insured, the insured’s interest in the insured property vests in the Official Assignee. In either of these situations, the continued effectiveness of the policy is not in doubt.

Where a loss occurs before an assignment by operation of law, the insured’s personal representatives or trustee in bankruptcy, as the case may be, has the right to claim against the insurers. The position is more complicated where a loss occurs after an assignment by operation of law and after the property has been distributed to those who are entitled to the same. Most policies avoid such complications by providing that the insurer shall indemnify the insured and all other persons to whom his interest in the insured property may pass by means of a will or by operation of law.” [142]

Myint Soe writes :

“The general principle is that on death and bankruptcy, both the subject matter insured and the policy itself pass to the personal representatives or the Official Assignee, as the case may be.

However, the personal representatives or the Official Assignee cannot have a better title than the deceased or the bankrupt. The claim would be liable to be defeated by any non-disclosure or misrepresentation or breach of condition on the part of the insured before the assignment takes effect.” [143]

“Any person who takes an insurance policy should find out whether there is any special clause prohibiting or restricting assignment. Some policies may prohibit the assignment of the subject matter during the currency of the policy. Some policies may prohibit assignment otherwise than by will or operation of law.” [144]

Kenneth Sutton writes :

“A policy of insurance is or evidences a contract and is therefore, like any other agreement, subject to the general law of contract as developed by the common law and modified by statute. In addition, special rules have been developed in relation to insurance contracts. Thus, they are the most common example of that special class of contract known as contracts uberrimae fidei, that is, of utmost good faith, and hence there are special rules in relation to non-disclosure, misrepresentation and the like in respect of them.” [145]

The legal standing of assignments in the field of insurance, thus, is not a straightforward question to answer. It depends on what is being assigned and how assignments are conducted in the various branches of insurance law.

In practical terms, insurance companies themselves may not be certain of the legal stand of various claimants who clamour at their doors demanding payment on insurance claims arising out of purported assignments. Insurance companies, therefore, may demand these eager voices to prove the validity of their claims in court. The insurance company then, will make payment on the claims as directed by the superior wisdom and authority of the court of law. As Irwin M. Taylor writes:

“Insurance companies are frequently presented with conflicting claims advanced by the original beneficiary and a subsequently designated beneficiary or assignee. Rather than pay to either one at its peril, it is the practice of insurance companies to bring both claimants into a law suit, deposit the money into court and leave the two claimants to fight the matter out themselves.” [146]

A. Vijayalakshmi Venugopal*

[*] Advocate & Solicitor

High Court of Malaya

[1] A. A. Tarr, Kwai-Lian Liew & W. Holligan, Australian Insurance Law , Second Edition, The Law Book Company Limited, 1991, at page 1.

[2] Namely marine, life and fire insurance.

[3] John Lowry & Philip Rawlings, Insurance Law: Doctrines and Principles , Hart Publishing (U.S.A), 1999, at page 3.

[4] Professor K. S. N. Murthy & K. V. S. Sarma, Modern Law of Insurance in India , N. M. Tripathi Private Limited (Bombay, India), 1995, at page 3.

[5] John Birds & Norma J. Hird, Birds’ Modern Insurance Law , Fifth Edition, Sweet & Maxwell (London), 2001, at page 13.

[6] (1881) 18 Ch.D 1.

[7] Ibid 9-10.

[8] Principles of Insurance Law , Fifth Edition, Butterworths Asia, 2000, at page 1193.

[9] R. C. Kohli, An Introduction to Insurance Practice and Principles in Singapore and Malaysia, Singapore Insurance Training Centre, 1982, at page 77.

[10] William Brandt’s Sons & Co. v. Dunlop Rubber Co. (1905) A.C. 454 (House of Lords) per Lord Macnaghten, at page 462.

[11] David Norwood & John P. Weir, Norwood on Life Insurance Law in Canada , Second Edition, Carswell Thomson Professional Publishing, 1993, at page 258.

[12] Malcolm A. Clarke, The Law of Insurance Contracts , Second Edition, Lloyd’s of London Press Ltd, 1994, at page 170.

[13] Act 553.

[14] Act 67 (revised 1972).

[15] This Act is declared to come into force on 7 April 1956.

[16] 30 and 31 Victoria, chapter 144.

[17] 15 and 16 Geo. V., chapter 20.

[18] A ‘chose in action’ has been defined by Erin Goh, Valerie Low and Low Kee Yang (editor) in Butterworths Law for Business Series - Insurance Law , Butterworths Asia, 2001, at page 191 in the following manner, “A chose in action is the right to demand payment of a sum of money or to recover damages under a contract.”

[19] Nik Ramlah Mahmood, Insurance Law in Malaysia , Butterworths, 1992, at pages 207-208.

[20] [1984] 1 MLJ 260 (Federal Court).

[21] Quoted and discussed above.

[22] [1984] 1 MLJ 260 (Federal Court), at page 264.

[23] 6 Edw 7, c. 41 (United Kingdom).

[24] Halsbury’s Statutes of England and Wales, Fourth Edition, Volume 22, 2000 Reissue, Butterworths (London), 2000, at page 42.

[25] Ibid 43.

[26] Robert Merkin (Editor), Colinvaux’s Law of Insurance , Sixth Edition, Sweet & Maxwell (London), 1990, at pages 405-406.

[27] Halsbury’s Statutes of England and Wales, Fourth Edition, Volume 22, 2000 Reissue, Butterworths (London), 2000, at page 25.

[28] Michael Parkington, Nicholas Leigh-Jones, Andrew Longmore & John Birds (Editors), Macgillivray & Parkington on Insurance Law - relating to all risks other than marine, Eighth Edition, Sweet & Maxwell (London), 1988, at pages 714-715.

[29] The cases quoted in support of this proposition in this book, at page 714 are Rayner v. Preston (1881) 18 Ch. D. 1, at page 7 per Cotton L,J, Ecclesiastical Commissioners v. Royal Exchange Assurance Corporation (1895) 11 TLR 476, Robson v. Liverpool, London and Globe Insurance Co. (1900) The Times, June 23, Rogerson v. Scottish Automobile and General Insurance Co. Ltd. (1931) 48 TLR 17, Tattersall v. Drysdale [1935] 2 K.B. 174 and Boss and Hansford v. Kingston [1962] 2 Lloyd’s Rep. 431.

[30] The case quoted in support of this proposition, at page 714 of this book is Forbes & Co. v. Border Counties Fire Office (1873) 11 Macph. 278.

[31] The case quoted in support of this proposition in this book, at page 714 is Collingridge v. Royal Exchange Assurance Corporation (1877) 3 QBD 173.

[32] The cases quoted in support of this proposition in this book, at page 715 are Castellain v. Preston (1883) 11 QBD 380, at page 385 per Brett L.J. and A.R. Williams Machinery Co. v. British Crown Assurance Corporation Ltd . (1921) BCR 481.

[33] The case quoted in support of this proposition in this book, at page 715 is the judgment of Bowen L.J. in Castellain v. Preston (1883) 11 Q.B.D. 380, at pages 401 and 405. This author also comments that once the vendor is fully paid, however, his interest will cease and he will be unable to recover as was held in Bank of New South Wales v. North British and Mercantile Insurance Co. (1881) 2 NSWLR 239.

[34] Digby C. Jess, The Insurance of Commercial Risks Law and Practice , Second Edition, Butterworths (London), 1993, at page 15.

[35] (1875) LR 10 QB 249.

[36] (1875) LR 10 QB 249, at page 253.

[37] (1743) 1 Wils. KB 10; 95 ER 463.

[38] (1743) 1 Wils. KB 10, at page 10; 95 ER 463, at page 463.

[39] (1895) 11 TLR 476 (High Court).

[40] Id 476.

[41] (1877) 3 QBD 173.

[42] Ibid 176-177.

[43] Ibid 177.

[44] (1881) 18 Ch.D 1.

[45] Ibid 6.

[46] Ibid 6-7.

[47] (1881) 18 Ch.D 1, at page 11.

[48] Ibid 12.

[49] Ibid 16.

[50] (1883) 11 QBD 380 (Court of Appeal).

[51] (1883) 11 QBD 380 (Court of Appeal), at page 386.

[52] Ibid 393.

[53] Ibid 396-397.

[54] Mahinder Singh Sidhu, Casebook on Motor Insurance Law in Malaysia and Singapore - with synopsis and principles, International Law Book Services, 1995, at page 25.

[55] Ibid 31.

[56] [1938] 2 All ER 267 (Court of Appeal).

[57] Ibid 269.

[58] Ibid 269-270.

[59] Ibid 270.

[60] The equivalent Act in Malaysia is the Road Transport Act 1987 (Act 333).

[61] Refer to section 35 of the United Kingdom Act and section 90 of the Malaysian Act.

[62] Refer to section 10 of the United Kingdom Act and section 91 of the Malaysian Act.

[63] Who was the seller of the car.

[64] [1938] 2 All ER 267 (Court of Appeal), at pages 270-271.

[65] [1963] 2 Lloyd’s Rep. 439 (High Court).

[66] [1963] 2 Lloyd’s Rep. 439 (High Court), at page 440.

[67] [1967] 1 MLJ 94 (Federal Court).

[68] Ibid 96.

[69] [1967] 2 MLJ 134 (Federal Court).

[70] Ibid 136.

[71] [1935] 2 KB 174.

[72] Ibid 178.

[73] [1981] 2 MLJ 324 (Federal Court).

[74] This judgment was delivered by Lee Hun Hoe C.J. (Borneo).

[75] [1937] 4 All ER 628 (High Court). Discussed above is the Court of Appeal judgment.

[76] [1981] 2 MLJ 324 (Federal Court), at page 325.

[77] Ibid 325.

[78] S. Santhana Dass, Law of Life Insurance in Malaysia , Alpha Sigma Sdn Bhd, 2000, at page 1.

[79] Robert Merkin (Editor), Colinvaux’s Law of Insurance, Sixth Edition, Sweet & Maxwell (London), 1990, at page 178.

[80] Robert J. Surridge, Sara Forrest, Noleen Dignan, Alison Broadberry & Duncan Backus, Houseman and Davies Law of Life Assurance , Eleventh Edition, Butterworths (London), 1994, at page 1.

[81] Ibid 262

[82] Nik Ramlah Mahmood, Insurance Law in Malaysia , Butterworths, 1992, at page 206.

[83] (1854) 15 CB 365; 139 ER 465.

[84] Ibid page 387; 139 ER 465, at page 474.

[85] (1854) 15 C.B. 365, at page 391; 139 E.R. 465, at page 476.

[86] S. Santhana Dass, Law of Life Insurance in Malaysia , Alpha Sigma Sdn Bhd, 2000, at page 287.

[87] An Act in the United Kingdom.

[88] Robert J. Surridge, Sara Forrest, Noleen Dignan, Alison Broadberry & Duncan Backus, Houseman and Davies Law of Life Assurance , Eleventh Edition, Butterworths (London), 1994, at page 263.

[90] (1888) 40 Ch.D 5.

[91] The Policies of Assurance Act 1867.

[92] (1888) 40 Ch.D 5, at page 10.

[93] Act 56.

[94] This Act came into force in West Malaysia on 7 April 1956.

[95] S. Santhana Dass, Law of Life Insurance in Malaysia , Alpha Sigma Sdn Bhd, 2000, at page 276.

[96] Ibid 281-282.

[97] Robert J. Surridge, Sara Forrest, Noleen Dignan, Alison Broadberry & Duncan Backus, Houseman and Davies Law of Life Assurance , Eleventh Edition, Butterworths (London), 1994, at page 265.

[98] Ray Hodgin, Insurance Law - Text and Materials , Cavendish Publishing Limited (United Kingdom), 1998, at page 63.

[99] [1949] 1 All ER 120 (Court of Appeal).

[100] Ibid 126.

[101] Nik Ramlah Mahmood, Insurance Law in Malaysia , Butterworths, 1992, at pages 206-207.

[102] Tan Lee Meng, Insurance Law in Singapore , Second Edition, Butterworths Asia, 1997, at page 415.

[103] (1917) 1 Ch.D 1 (Court of Appeal).

[104] Ibid 2.

[105] Ibid 7.

[106] Ibid 8.

[107] Ibid 8.

[108] Ibid 7.

[109] (1885) 28 Ch.D 674.

[110] Poh Chu Chai, Principles of Insurance Law , Fifth Edition, Butterworths Asia, 2000, at page 1208.

[111] (1885) 28 Ch.D 674, at pages 680 and 681.

[112] (1878) 9 Ch.D 137.

[113] Ibid 140.

[114] Ibid 141.

[115] Tan Lee Meng, Insurance Law in Singapore , Second Edition, Butterworths Asia, 1997, at page 417.

[116] The authority given in this book, at page D.1.2-04, for this proposition is the case of Re Weniger’s Policy (1910) 2 Ch.D 291.

[117] Robert M. Merkin, Kluwer’s Insurance Contract Law , Croner CCH, 2000, at page D.1.2-04.

[118] S. Santhana Dass, Law of Life Insurance in Malaysia , Alpha Sigma Sdn Bhd, 2000, at page 284.

[119] Act 553.

[120] Francis Tierney & Paul Braithwaite, A Guide to Effective Insurance , Second Edition, Butterworths Canada Ltd., 1992, at page 13.

[121] Ray Hodgin, Insurance Law - Text and Materials , Cavendish Publishing Limited (United Kingdom), 1998, at page 63.

[122] Ibid .

[123] 222 US 149 (1911).

[124] Act 553.

[125] Tan Lee Meng, Insurance Law in Singapore , Second Edition, Butterworths Asia, 1997, at page 411

[126] Ibid 413.

[127] According to footnote 27, at page 413 of this book, prior to the coming into force of the English Policies of Assurance Act 1867, a life policy could only be assigned in equity and not through a legal assignment. The equitable assignee could only sue by

having the assignor of the policy joined as a party to the action.

[128] The equivalent Malaysian provision is section 4(3) of the Civil Law Act 1956

[129] Tan Lee Meng, Insurance Law in Singapore , Second Edition, Butterworths Asia, 1997, at page 413.

[130] S. Santhana Dass, Law of Life Insurance in Malaysia , Alpha Sigma Sdn Bhd, 2000, at page 274

[131] Nik Ramlah Mahmood, at page 209, in footnote number 12 clarifies that she is referring to section 63 of the Contracts Act 1950 (Act 136) in this context which states, “If the parties to a contract agree to substitute a new contract for it, or to rescind or alter it, the original contract need not be performed.”

[132] Nik Ramlah Mahmood, Insurance Law in Malaysia , Butterworths, 1992, at page 209.

[133] If that applies in Malaysia as discussed by Nik Ramlah Mahmood, Insurance Law in Malaysia , Butterworths, 1992, at pages 207-208.

[134] The equivalent Malaysian provision is section 4(3) of the Civil Law Act 1956 (Act 65).

[135] (1897) 13 TLR 186.

[136] Tan Lee Meng, Insurance Law in Singapore , Second Edition, Butterworths Asia, 1997, at pages 410-411

[137] E. R. Hardy Ivamy, General Principles of Insurance Law , Sixth Edition, Butterworths (London), 1993, at page 348.

[138] Ibid 353.

[139] Tan Lee Meng, Insurance Law in Singapore , Second Edition, Butterworths Asia, 1997, at page 407.

[140] [1961] 1 WLR 386.

[141] [1961] 1 WLR 386, at page 392.

[142] Tan Lee Meng, Inssurance Law in Singapore , Second Edition, Butterworths Asia, 1997, at pages 430-431.

[143] Myint Soe, The Insurance Law of Malaysia , Quins Pte. Ltd., 1979, at page 62.

[144] Ibid .

[145] Kenneth Sutton, Insurance Law in Australia , Third Edition, LBC Information Services, 1999, at pages 11-12.

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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Insurance Contract Essentials

Contract values, insurable interest, principle of subrogation, the doctrine of good faith, other policy aspects, the bottom line.

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How to Easily Understand Your Insurance Contract

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There are certain types of insurance most people need to have. For example, if you own a home then homeowner's insurance may be standard. Auto insurance covers your vehicle while life insurance protects you and your loved ones in a worst-case scenario.

When your insurer gives you the policy document, it's important to read through it carefully to make sure you understand it. Your insurance advisor is always there for you to help you with the tricky terms in the insurance forms, but you should also know for yourself what your contract says. In this article, we'll make reading your insurance contract easy, so you understand their basic principles and how they are put to use in daily life.

Key Takeaways

• Life insurance contracts spell out the terms of your policy, including what's covered and what's not as well as what you'll pay.
• A life insurance contract can contain terminology and jargon that you may not be immediately familiar with.
• It's important to read through an insurance contract carefully before signing so you understand what you're agreeing to.
• You should also review the contract to check for any errors that may affect your coverage or costs.

When reviewing an insurance contract, there are certain things included that are typically universal.

• Offer and Acceptance.  When applying for insurance, the first thing you do is get the proposal form of a particular insurance company. After filling in the requested details, you send the form to the company (sometimes with a premium check). This is your offer. If the insurance company agrees to insure you, this is called acceptance . In some cases, your insurer may agree to accept your offer after making some changes to your proposed terms.
• Consideration.  This is the premium or the future premiums that you have to pay to your insurance company. For insurers, consideration also refers to the money paid out to you should you file an insurance claim . This means that each party to the contract must provide some value to the relationship.
• Legal Capacity.  You need to be legally competent to enter into an agreement with your insurer. If you are a minor or are mentally ill, for example, then you may not be qualified to make contracts. Similarly, insurers are considered to be competent if they are licensed under the prevailing regulations that govern them.
• Legal Purpose.  If the purpose of your contract is to encourage illegal activities, it is invalid.

You may not want to sign an insurance contract if you don't fully understand the terms without first consulting an insurance expert.

This section of an insurance contract specifies what the insurance company may pay out to you for an eligible claim, as well as what you may pay to the insurer for a deductible. How these sections of an insurance contract are structured often depends on whether you have an indemnity or non-indemnity policy.

Indemnity Contracts

Most insurance contracts are indemnity contracts . Indemnity contracts apply to insurances where the loss suffered can be measured in terms of money.

• Principle of Indemnity.  This states that insurers pay no more than the actual loss suffered. The purpose of an insurance contract is to leave you in the same financial position you were in immediately prior to the incident leading to an insurance claim. When your old Chevy Cavalier is stolen, you can't expect your insurer to replace it with a brand new Mercedes-Benz. In other words, you will be remunerated according to the total sum you have assured for the car.

(To read more on indemnity contracts, see " Shopping for Car Insurance " and " How Does the 80% Rule for Home Insurance Work? ")

There are some additional factors of your insurance contract that create situations in which the full value of an insured asset is not remunerated.

• Under-Insurance.  Often, in order to save on premiums, you may insure your house at $80,000 when the total value of the house actually comes to $100,000. At the time of partial loss, your insurer will pay only a proportion of $80,000 while you have to dig into your savings to cover the remaining portion of the loss. This is called under-insurance , and you should try to avoid it as much as possible.
• Excess.  To avoid trivial claims, the insurers have introduced provisions like excess. For example, you have auto insurance with the applicable excess of $5,000. Unfortunately, your car had an accident with the loss amounting to $7,000. Your insurer will pay you the $7,000 because the loss has exceeded the specified limit of $5,000. But, if the loss comes to $3,000 then the insurance company will not pay a single penny and you have to bear the loss expenses yourself. In short, the insurers will not entertain claims unless and until your losses exceed a minimum amount set by the insurer.
• Deductible . This is the amount you pay in out-of-pocket expenses before your insurer covers the remaining expense. Therefore, if the deductible is $5,000 and the total insured loss comes to $15,000, your insurance company will only pay $10,000. The higher the deductible, the lower the premium and vice versa.

Non-Indemnity Contracts

Life insurance contracts and most personal accident insurance contracts are non-indemnity contracts. You may purchase a life insurance policy of $1 million, but that does not imply that your life's value is equal to this dollar amount. Because you can't calculate your life's net worth and fix a price on it, an indemnity contract does not apply.

A life insurance contract typically includes the following:

• Declarations page : This is often the first page of a life insurance policy and it includes the policy owner's name, the policy type and number, issue date, effective date, premium class or rate class and any riders you've chosen to add on. If you purchased a term life policy, the declarations page should also specify the length of the coverage term.
• Policy terms and definitions: You may see a separate section in your life insurance contract that breaks down terms and definitions, including death benefit, premium, beneficiary and insurance age. Your insurance age may be your actual age or the nearest age assigned to you by the life insurance company.
• Coverage details: The coverage details section of a life insurance contract provides in-depth information about your policy, including how much you'll pay for premiums, when those payments are due, penalties for missing payments and who your policy's death benefits should be paid out to. For example, you may have just one primary beneficiary or a primary beneficiary with several contingent beneficiaries .
• Additional policy details: There may be a separate section in your life insurance contract that covers riders if you've chosen to add any on. Riders expand your policy's coverage. Common life insurance riders include accelerated death benefit riders, long-term care riders and critical illness riders. These add-ons allow you to tap into your death benefit while still living if you need money to cover expenses related to a terminal illness.

When you've determined that life insurance is something you need, it's important to compare the options carefully. For example, you may lean toward term life insurance versus permanent life insurance if you don't need lifetime coverage. Or you may prefer permanent coverage if you're treating life insurance like an investment.

In either scenario, it's important to shop around to find the best life insurance companies .

(For more information on non-indemnity contracts, read " Buying Life Insurance: Term Versus Permanent " and " Shifting Life Insurance Ownership .")

Using a life insurance calculator can help you determine what type and what amount of coverage you need.

It is your legal right to insure any type of property or any event that may cause financial loss or create legal liability for you. This is called insurable interest .

Suppose you are living in your uncle's house, and you apply for homeowners insurance because you believe that you may inherit the house later. Insurers will decline your offer because you are not the owner of the house and, therefore, you do not stand to suffer financially in the event of a loss. When it comes to insurance, it is not the house, car or machinery that is insured. Rather, it is the monetary interest in that house, car or machinery to which your policy applies.

It is also the principle of insurable interest that allows married couples to take out insurance policies on each other's lives, on the principle that one may suffer financially if the spouse dies. Insurable interest also exists in some business arrangements, as seen between a creditor and debtor , between business partners or between employers and employees.

In life insurance contracts, someone with an insurable interest can include your spouse, your children or grandchildren, a special needs adult who is also a dependent or aging parents.

Subrogation allows an insurer to sue a third party that has caused a loss to the insured and pursues all methods of getting back some of the money that it has paid to the insured as a result of the loss.

For example, if you are injured in a road accident that is caused by the reckless driving of another party, you will be compensated by your insurer. However, your insurance company may also sue the reckless driver in an attempt to recover that money.

All insurance contracts are based on the concept of uberrima fides, or the doctrine of utmost good faith . This doctrine emphasizes the presence of mutual faith between the insured and the insurer. In simple terms, while applying for insurance, it becomes your duty to disclose your relevant facts and information truthfully to the insurer. Likewise, the insurer cannot hide information about the insurance coverage that is being sold.

• Duty of Disclosure .  You are legally obliged to reveal all information that would influence the insurer's decision to enter into the insurance contract. Factors that increase the risks — previous losses and claims under other policies, insurance coverage that has been declined to you in the past, the existence of other insurance contracts, full facts and descriptions regarding the property or the event to be insured — must be disclosed. These facts are called material facts. Depending on these material facts, your insurer will decide whether to insure you as well as what premium to charge. For instance, in life insurance, your smoking habit is an important material fact for the insurer. As a result, your insurance company may decide to charge a significantly higher premium as a result of your smoking habits.
• Representations and Warranty.  In most kinds of insurances, you have to sign a declaration at the end of the application form, which states that the given answers to the questions in the application form and other personal statements and questionnaires are true and complete. Therefore, when applying for fire insurance, for example, you should make sure that the information that you provide regarding the type of construction of your building or the nature of its use is technically correct.

Depending on their nature, these statements may either be representations or warranties.

A) Representations: These are the written statements made by you on your application form, which represent the proposed risk to the insurance company. For instance, on a life insurance application form, information about your age, details of family history, occupation, etc. are the representations that should be true in every respect. Breach of representations occurs only when you give false information (for example, your age) in important statements. However, the contract may or may not be void depending on the type of the misrepresentation that occurs

B) Warranties: Warranties in insurance contracts are different from those of ordinary commercial contracts. They are imposed by the insurer to ensure that the risk remains the same throughout the policy and does not increase. For example, in auto insurance, if you lend your car to a friend who doesn't have a license and that friend is involved in an accident, your insurer may consider it a breach of warranty because it wasn't informed about this alteration. As a result, your claim could be rejected.

As we've already mentioned, insurance works on the principle of mutual trust. It is your responsibility to disclose all the relevant facts to your insurer. Normally, a breach of the principle of utmost good faith arises when you, whether deliberately or accidentally, fail to divulge these important facts. There are two kinds of non-disclosure:

• Innocent non-disclosure relates to failing to supply the information you didn't know about
• Deliberate non-disclosure means providing incorrect material information intentionally

For example, suppose that you are unaware that your grandfather died from cancer and, therefore, you did not disclose this material fact in the family history questionnaire when applying for life insurance; this is innocent non-disclosure. However, if you knew about this material fact and purposely held it back from the insurer, you are guilty of fraudulent non-disclosure.

When you supply inaccurate information with the intention to deceive, your insurance contract becomes void.

• If this deliberate breach was discovered at the time of the claim, your insurance company will not pay the claim.
• If the insurer considers the breach as innocent but significant to the risk, it may choose to punish you by collecting additional premiums.
• In case of an innocent breach that is irrelevant to the risk, the insurer may decide to ignore the breach as if it had never occurred.

The Doctrine of Adhesion.  The doctrine of adhesion states that you must accept the entire insurance contract and all of its terms and conditions without bargaining. Because the insured has no opportunity to change the terms, any ambiguities in the contract will be interpreted in their favor.

Principle of Waiver and Estoppel . A waiver is a voluntary surrender of a known right. Estoppel prevents a person from asserting those rights because they have acted in such a way as to deny interest in preserving those rights. Presume that you fail to disclose some information in the insurance proposal form. Your insurer doesn't request that information and issues the insurance policy. This is a waiver. In the future, when a claim arises, your insurer cannot question the contract on the basis of non-disclosure. This is estoppel. For this reason, your insurer will have to pay the claim.

Endorsements are normally used when the terms of insurance contracts are to be altered. They could also be issued to add specific conditions to the policy.

Co-insurance refers to the sharing of insurance by two or more insurance companies in an agreed proportion. For the insurance of a large shopping mall, for example, the risk is very high. Therefore, the insurance company may choose to involve two or more insurers to share the risk. Coinsurance can also exist between you and your insurance company. This provision is quite popular in medical insurance, in which you and the insurance company decide to share the covered costs in the ratio of 20:80. Therefore, during the claim, your insurer will pay 80% of the covered loss while you shell out the remaining 20%.

Reinsurance occurs when your insurer "sells" some of your coverage to another insurance company. Suppose you are a famous rock star and you want your voice to be insured for $50 million. Your offer is accepted by the Insurance Company A. However, Insurance Company A is unable to retain the entire risk, so it passes part of this risk — let's say $40 million — to Insurance Company B. Should you lose your singing voice, you will receive $50 million from insurer A ($10 million + $40 million) with insurer B contributing the reinsured amount ($40 million) to insurer A. This practice is known as reinsurance. Generally, reinsurance is practiced to a much greater extent by general insurers than life insurers.

When applying for insurance, you will find a huge range of insurance products available in the market. If you have an insurance advisor or broker, they can shop around and make sure that you are getting adequate insurance coverage for your money. Even so, a little understanding of insurance contracts can go a long way in making sure that your advisor's recommendations are on track.

Furthermore, there may be times when your claim is canceled because you didn't pay attention to certain information requested by your insurance company. In this case, a lack of knowledge and carelessness can cost you a lot. Go through your insurer's policy features instead of signing them without delving into the fine print. If you understand what you're reading, you'll be able to ensure that the insurance product that you are signing up for will cover you when you need it most.

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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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Exciplex formation in highly excited triplet states

• Physical Chemistry
• Published: 05 July 2013
• Volume 450 , pages 127–129, ( 2013 )

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• M. V. Alfimov 1 ,
• V. G. Plotnikov 1 &
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Original Russian Text © M.V. Alfimov, V.G. Plotnikov, V.A. Smirnov, 2013, published in Doklady Akademii Nauk, 2013, Vol. 450, No. 4, pp. 420–422.

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Alfimov, M.V., Plotnikov, V.G. & Smirnov, V.A. Exciplex formation in highly excited triplet states. Dokl Phys Chem 450 , 127–129 (2013). https://doi.org/10.1134/S0012501613060018

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