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By David B. Winter
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In Florida and other states, a post-loss assignment of insurance benefits (or AOB) has become commonplace and a hot-topic issue. The typical scenario is that after suffering a loss, the insured assigns the right to policy benefits to the contractor making the repairs. As noted in a recent opinion from a Florida appellate court, there are competing public policy reasons on each side of the AOB debate:

[W]e note that this issue boils down to two competing public policy considerations. On the one side, the insurance industry argues that assignments of benefits allow contractors to unilaterally set the value of a claim and demand payment for fraudulent or inflated invoices. On the other side, contractors argue that assignments of benefits allow homeowners to hire contractors for emergency repairs immediately after a loss, particularly in situations where the homeowners cannot afford to pay the contractors up front.[1]

Most insurance policies contain a provision that prohibits the transfer of an insured’s rights or duties under an insurance policy without the prior written consent of the insurance carrier. However, most states limit the application of such anti-assignment provision to preloss assignments.[2]

Insurers in Texas are seeing a dramatic increase in the number of hail, wind and other weather related claims.[3] Many of these claims originate with a contractor knocking on a building owner’s door with promises of a “free roof”. The homeowner then signs a “roofing contractor contingency agreement” giving the contractor the right to negotiate the claim and complete the roof replacement work with insurance proceeds. Despite being illegal under current Texas law, this model is very common.[4]

Obviously, Texas contractors, like their Florida counterparts, would also like to have an AOB. As a general matter, however, Texas courts enforce anti-assignment provisions regardless of when the assignment occurs. For example, in Dr. Michael Hoffman & Associates v. St. Paul Guardian Insurance Co., an insured sold its building after making an insurance claim for an alleged plumbing leak.[5] As part of the sale, the insured purported to assign its rights under the insurance policy to the purchaser. When the purchaser brought suit against the insurer for denying coverage for the claim, the Dallas Court of Appeals enforced the anti-assignment provision and found that the purchaser had no right to pursue a claim under the insurance policy.[6]

In Texas Farmers Insurance Co. v. Gerdes, Gerdes was a passenger injured in a car accident and sought treatment from a chiropractic clinic.[7] Gerdes assigned her rights to benefits under the driver’s automobile policy to the clinic. However, the insurance company paid the benefits to Gerdes who never paid the clinic. When the clinic brought suit against the carrier, the court specifically recognized that “[n]onassignment clauses have been consistently enforced by Texas courts” and concluded that the nonassignment clause even prevented a third-party beneficiary (such as Gerdes) from assigning any right under the policy.[8]

Purported assignees have attempted to circumvent anti-assignment language in a policy by way of Section 12.014(a) of the Texas Property Code which specifically allows for the assignment of an interest in a cause of action. That section reads as follows:

A judgment or part of a judgment of a court of record or an interest in a cause of action on which suit has been filed may be sold, regardless of whether the judgment or cause of action is assignable in law or equity, if the transfer is in writing.[9]

On its face, Section 12.014 would appear to allow an insured to assign an interest in its claim against an insurer regardless of any language in the policy. However, the Texas Supreme Court has found, on public policy grounds, that certain assignments were invalid despite the existence of Section 12.014. For example, in State Farm Fire & Casualty Co. v. Gandy, the Texas Supreme Court found that public policy prevented a tortfeasor’s assignment of a claim against his liability insurance to the plaintiff.[10] Similarly, in Vinson & Elkins v. Moran, a Houston Court of Appeals found that despite the existence of Section 12.014, the assignment of a legal malpractice claim was against public policy and void.[11]

Assignees have also sought to avoid anti-assignment language by characterizing the assignment as something other than an assignment of rights under an insurance policy. This argument was specifically addressed by the Fifth Circuit in Conoco Inc. v. Republic Insurance Co.[12] In that case, Conoco obtained an assignment of any insurance proceeds that Bonanza Corp. might collect from its liability carrier, Republic. Republic argued that the assignment was invalid based on the following policy language, “[n]o claim or demand against this company under this policy shall be assigned or transferred ...” Conoco attempted to distinguish its assignment from the anti-assignment language by arguing that the assignment was for “proceeds”, not a “claim or demand.” The Fifth Circuit rejected that argument as follows:

Appellee argues in response that its rights as an assignee arise not because Bonanza assigned a “claim or demand,” in contravention of the no-assignment clause, but here Bonanza assigned “proceeds” — a horse of a different color. The distinction is specious. An assignee stands in the boots of his assignor and we have already held that Bonanza's boots do not entitle it to recover from appellant. Appellee cannot enlarge Bonanza's boots by putting the label “proceeds” on its claim. Words cannot change a plugged nickel into a silver dollar.[13]

Ultimately, in light of the fact that Texas courts consistently enforce anti-assignment provisions even in post-loss scenarios, it is doubtful that Texas will see the same contingency agreements taking assignments of rights that are being used by contractors in other states.

—By David B. Winter, Zelle Hofmann Voelbel & Mason LLP

David B. Winter is counsel in Zelle Hofmann's Dallas office.

The opinions expressed are those of the author(s) and do not necessarily reflect the views of the firm, its clients, or Portfolio Media Inc., or any of its or their respective affiliates. This article is for general information purposes and is not intended to be and should not be taken as legal advice.

[1] One Call Property Services Inc. v. Security First Insurance Co., 165 So.3d 749, 755 (Fla. Dist. Ct. App. [4th Dist.] 2015).

[2] 3 Couch on Insurance § 35:8 (3d ed. 2015) (“the great majority of courts adhere to the rule that general stipulations in policies prohibiting assignments of the policy, except with the consent of the insurer, apply only to assignments before loss, and do not prevent an assignment after loss”) (collecting cases).

[3] See G. Brian Odom and Tyler McGuire, Keeping Pace with Texas Hail Claim ‘Case Runners’, Texas Law360, Nov. 21, 2014.

[4] See Todd Tippett, Roofing Contractors, Don’t Mess With Texas Insureds, Texas Law360, Nov. 15, 2013.

[5] No. 05-04-00902-CV, (Tex. App. – Dallas Aug. 16, 2005, no pet.).

[6] Id. at *2.

[7] 880 S.W.2d 215 (Tex.App.-Fort Worth 1994, writ denied).

[8] Id. at 219.

[9] TEX. PROP. CODE ANN. § 12.014(a) (Vernon 2007).

[10] 925 S.W.2d 696 (Tex. 1996).

[11] 946 S.W.2d 381, 396 (Tex.App.-Houston [14th Dist.] 1997, pet. dism’d by agr.).

[12] 819 F.2d 120, 124 (5th Cir. 1987).

[13] Id. See also Keller Foundations Inc. v. Wausau Underwriters Insurance Co., 626 F.3d 871 (5th Cir. 2010) (rejecting the characterization of a transfer of insurance coverage as a “chose in action”); Texas Pacific Indemnity Co. v. Atlantic Richfield Co., 846 S.W.2d 580, 583 (Tex.App.—Houston [14th Dist.] 1993, writ denied) (rejecting argument that “the policy limits only assignments of ‘interests’ in the policy and not fully matured claims based on the policy.”)