The well-established principle that a policyholder may assign benefits under an insurance policy following a loss was recently reaffirmed by state supreme courts in two jurisdictions:  South Carolina and Puerto Rico. These two jurisdictions join the majority rule, which holds that assignments following an insured loss are permissible because they do not change the scope of the insured risk.  The majority rule makes commercial sense, as it ensures the free alienability of property, while at the same time maintaining the benefit of the bargain that was struck when the insurance company underwrote the policy. 

San Luis Center Apartments v. Triple-S Propiedad, Inc., 2022 WL 611245 (P.R. Feb. 15, 2022)

In a February 2022 decision, the Supreme Court of Puerto Rico, addressing an issue of first impression, ruled that an insured property owner’s assignment of both the prosecution of its claim and a portion of claim proceeds to an investment company was proper, notwithstanding a non-assignment clause in the policy, because the assignment was made after the policyholder’s property sustained damage during Hurricane Maria.  The court rejected the insurance company’s argument that the suit against it could not proceed because the policyholder, in making the assignment, had purportedly breached the insurance policy’s non-assignment clause, which provided that “[y]our rights and duties under this policy may not be transferred without our written consent.”  In reaching its holding, the court reasoned that because the assignment was made after the property damage occurred, the change in the claimant’s identity did not alter the risk that had been underwritten, the scope of the policy’s coverage or the amount the insurance company would be obligated to pay. Therefore, the policyholder did not breach the contract by making the assignment. 

PCS Nitrogen, Inc. v. Continental Casualty Co., 871 S.E.2d 590 (S.C. Apr. 13, 2022)

In a decision published last month, the South Carolina Supreme Court applied the majority rule in the third-party liability context.  PCS was the successor by merger to a company that had purchased a fertilizer production business.  As part of the purchase, PCS’s predecessor had assumed certain liabilities and taken an assignment of rights under certain insurance policies issued to the fertilizer business.  After being held liable under CERCLA for remediation at the premises of a fertilizer plant that had ceased operations in 1972, PCS sought declaratory relief against the insurance companies on the risk before that time.  The insurers defended against the claim, contending that the assignment had been made without their consent, and therefore violated language in the policies providing that “[a]ssignment of interest under this policy shall not bind the company until its consent is endorsed hereon.”  Id. at 594.

In reaching its holding that the assignment was not a bar to coverage, the court reasoned that “‘[t]he purpose of a no assignment clause is to protect the insurer from increased liability, and after events giving rise to the insurer’s liability have occurred, the insurer’s risk cannot be increased by a change in the insured’s identity.’”  Id. (quoting Narruhn v. Alea London Ltd., 745 S.E.2d. 90, 94 (S.C. 2013)).  The court also rejected the insurance companies’ argument that the assignment at issue was not a post-loss assignment because the loss purportedly does not occur until the insurer’s obligation to pay is fixed by judgment.  Rather, the court correctly recognized the loss to be the occurrence (i.e., the contamination of the fertilizer plant).

The decisions by the state supreme courts in San Luis and PCS make commercial sense.  They prevented the insurance companies from obtaining windfalls, by escaping their coverage obligations based on technical interpretations of policy language.  They also recognized business realities.  Without the ability to assign claims following a loss, corporate transactions would be impeded.  Companies looking to transfer liabilities to a successor entity cannot do so without the ability to transfer rights to access insurance providing coverage for those liabilities.  Real estate transactions would also be hampered if policyholders could not effect post-loss assignments.  Sales of damaged properties could not go forward until insurance claims were resolved—a process that can drag on for years.