The Holding
In Farmers Ins. Exchange v. The Honorable David Udall, 2018 WL 2931906 (June 12, 2018), the Arizona Court of Appeals accepted special action jurisdiction to hold that Insureds validly assigned post-loss claim/rights under a homeowners policy to a water damage mitigation and remediation contractor.
The Takeaways
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Arizona insureds may validly assign a post-loss breach of contract claim to a contractor.
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The Arizona Court of Appeals did not address whether Arizona insureds may validly assign a post-loss bad faith claim to a contractor.
The Facts
The Insurer issued homeowners policies to Insureds who required damage mitigation and restoration services after water losses. The policies included an anti-assignment provision requiring the Insurer’s written consent to transfer the Insureds’ interests under the policies. The Insureds contracted with a water damage mitigation and restoration contractor (the “Contractor”). The contracts included assignment of benefits provisions. The Contractor submitted invoices directly to the Insurer. The Insurer paid less than the invoiced amount. The Insureds, without consent, assigned their rights against the Insurer to the Contractor. The Contractor filed suit against the Insurer and alleged: (1) the Insureds assigned their “post-loss” rights to the Contractor, and (2) the Insurer breached the polices by failing to pay the “reasonable, usual, and customary charges to restore the [Insureds’] property to pre-loss condition.” The Insurer filed a motion to dismiss and argued the assignments were not valid. The superior court denied the motion to dismiss, and the Insurer sought special action review.
The Rationale
In holding the Insureds validly assigned their breach of contract claims to the Contractor, the Court of Appeals reasoned:
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“It is well settled in Arizona that assignees of a chose-in-action [the “right to bring an action to recover a debt, money, or thing”] have standing to pursue the action in their own name.”
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Arizona also, however, recognizes that contract provisions prohibiting assignment without consent may be enforceable.
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Generally, an Arizona insured cannot assign an insurance policy without insurer consent, especially if the policy prohibits assignment, because an insurer has the right “to choose its insured so as to knows its risks.”
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In Aetna Cas. & Sur. Co. v. Valley Nat’l Bank of Ariz., 15 Ariz. App. 13, 15, 485 P.2d 837, 839 (1971), however, the Arizona Court of Appeals held an “assignment made after a loss occurs....is not of the policy itself, but of a claim under, or a right of action on, the policy. Thus, after a loss has occurred and the rights under the policy have accrued, an assignment may be made without the consent of the Insurer and the rule enforcing anti-assignment provisions is not applicable.”
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Since 2004, Arizona’s Unfair Claims Settlement Practices Act has “expressly recognize[d]” the right of an insured to assign “a loss or claim after a loss has occurred.” ARS § 20-461(A)(7).
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Allowing post-loss assignments appears to be the majority rule.
Ultimately, the Court of Appeals “h[e]ld the assignments were valid post-loss assignments of benefits under the insurance policies” because they occurred after the water damaged the Insureds’ homes, and the Insureds did not assign the policies. Rather, the Insureds “each assigned a claim under and a right of action on the policy.”
In so holding, the Court of Appeals rejected the Insurer’s following arguments:
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an insured may assign post-loss rights only when the claim amount is undisputed;
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the assignments would ultimately increase premiums because the assignments altered policy duties and obligations, increased expenses, and escalated payouts; and
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the assignments allowed the Contractor to pursue the claim “unhampered by the policy’s obligations.”
The Court of Appeals rejected these arguments primarily because an assignee steps into the assignor’s shoes, an assignee assumes no greater rights or obligations than an assignor, and the policies obligated the Insurer to pay the reasonable costs of repair.
The Court of Appeals also carefully limited its decision by stating it only considered assignments of post-loss rights and it did not address whether an insured could assign a post-loss bad faith claim to a contractor.
Read the entire Udall decision here.
