Assignment of benefits
Is Florida an omen or an outlier?
Will increased loss costs and rates from assignment of homeowners insurance benefits spread from Florida to other states? Learn about the issues so you can be ready to advise.
From 408 in 2006 to more than 28,000 in 2016.
Those figures represent the annual number of lawsuits—an increase of nearly 7,000%–arising from the “assignment of benefits” under insurance policies in Florida, according to the Florida Office of Insurance Regulation.
Most of the increase arises from water losses under homeowners policies in the state’s southern counties, where it has become routine for homeowners to assign payments under a policy to repair contractors who handle the claims.
The trend is blamed for increased loss costs and rates, and adds more stress to an already distressed market for residential property coverage. Insurers are anxious to know if assignment of homeowners insurance benefits will become an acute issue in other states.
“Several states… have seen an influx in predatory public adjusters and contractors,” wrote Kevin Poll, director of product development, personal property, and farm at Verisk, in an article on his company’s website. What may seem “predatory” to insurers, however, might be characterized by consumer groups as empowering claims-savvy policyholder advocates.
While insurers are alarmed by the systematic use of assignment of benefits in Florida, the concept itself is long-established. It is a common feature of health insurance, wherein practitioners bill health insurers directly. It’s also seen in auto physical damage claims when carriers make direct payments to preferred vendors of repair services.
Courts throughout the country have enforced assignments of benefits under property insurance policies, including those with explicit restrictions on assignment of the policy without the insurer’s permission. There’s a big difference, however, between assigning a policy contract and assigning the benefits derived from that contract.
Contracts vs. benefits
Basic legal principles prohibit a party to a contract from altering it without agreement from the other parties. Otherwise, the latter could incur greater risks or burdens than they originally agreed to. In the case of insurance, an insurer might become exposed to a greater level of risk.
The benefits owed under an insurance policy are a different matter. Once an insured loss occurs, the policyholder is entitled to the benefit of a payment. The right to that payment becomes his or her property, even before the payment made, and an insured can assign its property however it wishes.
Conversely, the payment becomes a debt of the insurer, and the law widely recognizes the right of creditors to assign debt payments to third parties.
Pre-loss and post-loss
The distinction described above is referred to as “pre-loss” and “post-loss” assignment.
Restrictions on assignment written into policies are almost universally enforced by courts against any attempt to transfer the contractual obligations of an insurer without the insurer’s permission. This is known as “pre-loss” assignment.
Once a loss has occurred, however, and an insured is entitled to some recovery, courts have generally ruled that policy restrictions on assignment do not and cannot apply to assignment of the benefit to come from the policy. This is “post-loss” assignment.
The logic of the distinction is explained in a 2015 New Jersey appeals court ruling in the case of Givaudan Fragrances v. Aetna:
The purpose behind a no-assignment clause is to protect the insurer from having to provide coverage for a risk different from what the insurer had intended…. But if there has been an assignment of the right to collect… after a loss has occurred, the insurer’s risk is the same because the liability of the insurer becomes fixed at the time of the loss…. Moreover, once the insurer’s liability has become fixed due to a loss, an assignment of rights to collect under an insurance policy is not a transfer of the actual policy but a transfer of the right to a claim of money….
What’s up in Florida?
The reasoning expressed in the New Jersey ruling is broadly shared by jurisdictions across the country, including several state supreme courts. Insurers would beg to differ, however, that the amount of a loss is “fixed” at the time it occurs if the right to collect is assigned to someone with a financial interest in increasing the amount of the loss.
Yet in no state—to date, at least—has the assignment of homeowners benefits been as frequent or severe in its impact as in Florida.
Joseph Petrelli, president of the rating agency Demotech, has monitored Florida insurers as they grapple with assignment of benefits and other challenges, and he sees little danger to date that the trend will spread elsewhere.
“Currently, outside of Florida, the abuse of assignment of benefits for P&C insurance policies is all but non-existent,” he says. “Established claims procedures, protocols and practices have been honored by the courts.”
Equally important, in Petrelli’s view, is that courts in other states have been more vigilant in requiring that mortgagees and lienholders give their approval to any assignment of benefits. It may be easy for a canvassing contractor to get homeowners to sign over their policy benefits; it’s not so easy for them to get their mortgage holders to sign off.
“The rights of mortgage holders under homeowners policies have been eviscerated in Florida,” says Petrelli. “Their rights have been ignored or subjugated to the perceived rights of the holder of the assignment of benefits.”
Yet, whatever is unique about Florida, the experience of the Sunshine State has drawn attention to the expanded recourse to assignment of benefits, and to the questions it raises about the duties of insureds after a loss and mutual obligations to act in good faith.