Wehr Constructors, Inc v. Assurance Company Of America: Anti-Assignment Clause In Builder’s Risk Policy Violates Public Policy
On October 25, 2012, the Supreme Court of Kentucky held that an anti-assignment clause in a builder’s risk policy which requires an insured to obtain the insurer’s consent before assigning a claim under the policy is unenforceable, and void as against public policy, when the claimed loss occurs before the assignment. Wehr Constructors, Inc. v. Assurance Company of America, No. 2012-SC-000221-CL, 2012 WL 5285774 (Ky. Oct. 25, 2012).
Murray Calloway County Hospital Corp. (Hospital) planned to build an addition to its facilities. The Hospital purchased a “builder’s risk” insurance policy from Assurance Company of America (Assurance). The policy included the following provision:
F. Transfer of Your Rights and Duties Under This Policy. Your rights and duties under this policy may not be transferred without [Assurance’s] written consent except in the case of death of an individual named insured.
The Hospital contracted with Wehr Constructors, Inc. (Wehr) for the installation of concrete subsurfaces and vinyl floors as part of the project to expand the hospital. After installation, a portion of the floors and subsurface installed by Wehr was damaged. The Hospital claimed a loss of $75,000.00 and sought that sum under the builder’s risk policy, but Assurance denied the claim.
As a result of a payment dispute, Wehr sued the Hospital to recover money allegedly due from the Hospital. Wehr and the Hospital settled. As part of the settlement, the Hospital assigned to Wehr any claim the Hospital had against Assurance arising out of the builder’s risk policy.
The assignment took place after the damage to the floors had occurred.
Wehr, as the Hospital’s assignee, sued Assurance in the United States District Court for the Western District of Kentucky to recover payment due under the builder’s risk policy for the damaged floor. Assurance moved for judgment on the pleadings invoking the policy’s anti-assignment provision. Assurance argued that because it had not consented to the assignment, the assignment was unenforceable. Wehr argued that since the loss had already occurred at the time of the assignment and the basis for Assurance’s potential liability was fixed, the Hospital’s right to proceeds under the policy was a “chose in action” that was freely assignable and did not require Assurance’s consent.
Because the suit was filed in federal court on the basis of diversity jurisdiction, the substantive state law of Kentucky applied. Pursuant to CR 76.37(1) the district court certified to the Supreme Court of Kentucky, the question of whether the anti-assignment provision was enforceable under Kentucky law. The Kentucky Supreme Court granted the certification and ruled on the question.
The Court first examined the “majority” rule on the issue.
The majority rule holds that an anti-assignment clause such as the one we examine is unenforceable once an insured occurrence takes place because at that point the insured is entitled to recovery under the policy; that right is a chose in action; a chose in action is a form of personal property; the anti-assignment provision amounts to a restraint upon the alienation of this property right; and a restraint upon the alienation of property is in opposition to public policy.
2012 WL 5285774 at * 2.
The court explained the rationale for the majority rule is that an anti-assignment clause only prohibits the assignment of the policy, but not the assignment of a claim arising under the policy.
The purpose of an anti-assignment clause is to protect the insurer from unforeseen exposure and increases liability that may ensue if the policy was assigned to an entity that the insurer would prefer not to insure; … An assignment of the policy … before the loss is incurred transfers the insurer’s contractual relationship to a party with whom it never intended to contract, but an assignment after loss is simply the transfer of a right to a claim for money. The entity asserting the claim under those circumstances has no effect upon the insurer’s duty under the policy.
. . . .
The public policy invoked to avoid the effect of an anti-assignment clause after a loss has occurred is that the enforcement of that provision unduly “restricts the relation of debtor and creditor by restricting or rendering, subject to the control of the insurer, an absolute right in the nature of a chose in action.”
Id. at * 3 (citations omitted).
The court then examined the minority rule which holds that the unambiguous language of an anti assignment clause should be enforced as written. Assurance argued that the Kentucky legislature adopted the minority rule by its enactment of KRS 304.14-250(1) which provides that “[a] policy may be assignable or not assignable, as provided by its terms.” Id. at * 5. The court disagreed and stated,
[T]his statute manifestly does not apply to the issue we review. The statute, rather, obviously provides that a provision prohibiting the assignment of an insurance policy is not assignable if the policy terms so provide. That, however, is far different from a provision prohibiting the assignment of a ripened claim after an insured occurrence has occurred under the policy thereby resulting in a chose in action belonging to the insured.
Id. (emphasis in original).
The court then commented that, “The low esteem for the minority rule may be well-illustrated by the observation that the only cases Assurance cites us to applying the rule are cases applying Texas law.” Id. (citations omitted). The court also noted that the adoption of the minority rule would require adherence to well-established principles of contract interpretation; while ignoring public policy considerations that support the majority rule.
The court thus held:
[W]e believe that the relevant public policy interests are best served by our adoption of the majority rule that a non-assignment clause in an insurance policy, while certainly enforceable prior to the occurrence of a covered loss, is not enforceable for assignments made after the occurrence. this conclusion is fully consistent with our prior holdings adverse to contractual provisions tending to restrain the alienability of choses in action, which … is the principal underpinning of the majority rule.
Id. at * 7 (emphasis in original).
The purpose of the rule against restraint on alienation is to prevent the taking of an owner’s right to dispose of his property. The court explained, that restraints on alienation are not viewed favorably because “[P]ublic policy in Kentucky supports ‘the right of a person to be free and uninhibited in the disposition of his property[.]’ … Assurance has presented no persuasive reason for us to deviate from the settled proposition that that restraints on the alienation of property, including personal property, are to be stringently disfavored.” Id. at * 7 & 8 (citations omitted).
This is also the law in Pennsylvania, Egger v. Gulf Insurance Co., 864 A.2d 1234 (Pa. Super. 2004) (judgment debtor’s assignment of right to recover from insurer was effective, notwithstanding anti-assignment provision in policy) and New Jersey, Elat, Inc. v. Aetna Casualty and Surety Co., 280 N.J. Super. 62, 654 A.2d 503 (N.J. Super. Ct. App. Div. 1995) (anti-assignment clause which states that assignment of interest under policy does not bind insurer without its consent prohibits assignment of policy, not assignment of claim, and therefore did not prohibit insured from assigning to judgment creditor all rights and claims against comprehensive general liability insurers).
For more information regarding this alert, please contact Robert Carlton (215.764.6275; email@example.com).