Can Post-Loss Benefits be Assigned to a Mitigation/Restoration Vendor if the Policy Contains an Anti-Assignment Provision? Can the Vendor then Sue the Insurance Company?

The Arizona Court of Appeals in a recent opinion said, Yes to both. In Farmers Insurance Exchange v. Udall,¹ four homeowners insured by Farmers Insurance Exchange (“Farmers”) sustained separate losses, which required water damage mitigation and restoration services. The homeowners hired a vendor to perform the mitigation and restoration services. In each case, the insureds assigned to the vendor their “rights, benefits, proceeds and causes of action” under their respective insurance policies.

Each assignment read, in pertinent part:

[The insured] hereby assigns any and all insurance rights, benefits, proceeds and causes of action under any applicable insurance policies to [Vendor]. This assignment is made in consideration of [Vendor] performing the services and in consideration of [Vendor] not requiring a down payment from [the insured] prior to starting work. . . .

[The insured] further authorizes and instructs [the insured’s] insurance company to pay directly to [Vendor] the amount shown on the final billing for the work done by [Vendor] in connection with this claim. . . .

After the work was completed, the vendor submitted its repair bills directly to Farmers, but Farmers refused to pay the bills in full. In each case, Farmers directly paid the vendor an amount less than the invoice total. The vendor sued the insurer, alleging that the insureds had assigned their “post-loss rights” under the policies to the vendor, and that Farmers breached the policies by “refus[ing] to pay the reasonable, usual, and customary charges to restore the insured property to pre-loss condition.”

As a defense to the lawsuit, Farmers maintained that the vendor neither had a contractual relationship with Farmers nor did it have a valid assignment. Each insurance policy contained an anti-assignment provision stating that the insured’s “interest in this policy may not be transferred to another person without [Farmers’] written consent” and Farmers did not consent to the assignments. In rejecting Farmers’ contention that the anti-assignment provisions were enforceable, the court explained,

An assignment made after a loss occurs, however, “is not of the policy itself, but of a claim under, or a right of action on, the policy.” Thus, “[a]fter 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.²

Farmers also suggested that the court should narrowly construe the existing case law to permit an insured to assign a claim against an insurer only when the amount of the claim is undisputed. The court dismissed that argument, reasoning:

[T]he legislature [in 2004] amended a statute barring specified “unfair claim settlement practices” to expressly recognize the right of an insured to assign a claim. As amended, the statute states that a property or casualty insurer cannot:

[W]ith such a frequency to indicate as a general business practice … fail [ ] to recognize a valid assignment of a claim. The property or casualty insurer shall have the rights consistent with the provisions of its insurance policy to receive notice of loss or claim and to all defenses it may have to the loss or claim, but not otherwise to restrict an assignment of a loss or claim after a loss has occurred.

Ariz. Rev. Stat. (“A.R.S.”) § 20-461(A)(7). Although § 20-461 does not provide a private cause of action, A.R.S. § 20-461(D), the statute evidences the legislature’s intent to allow insureds to assign claims arising under an insurance policy.

The court further explained,

An assignment of a chose-in-action transfers the assignor’s interest in the claim to the assignee. “The assignee then ‘stands in the shoes’ of the assignor, taking his rights and remedies as described in the assignment, subject to any defenses which the obligor or debtor has against the assignor prior to notice of the assignment.”

Here, the insureds executed the assignments after water damaged their homes, giving rise to their claims under the policies. The insureds did not assign their insurance policies to [the vendor], but rather they each assigned a claim under and a right of action on the policy.³

In addition, Farmers and the amici also suggested that acknowledgement of these types of assignments would cause more expense and higher payouts by insurers, suggesting that over time, insureds will suffer higher premiums.⁴ The court made short haste of that argument, stating “[T]he assignments do not grant [the vendor] any rights greater than those held by the insureds-assignors. The policies obligate Farmers to pay the reasonable costs of repair, regardless of whether the claim for coverage is pressed by an insured or by [the vendor].”

Adopting the majority rule, the court held that the assignments were valid post-loss assignments of benefits under the insurance policies and, as the recipient of a post-loss assignment of benefits, the vendor stood in the shoes of the insureds and had standing to enforce the policy against Farmers for breach of contract.⁵

Equally noteworthy is that the court accepted special action jurisdiction to resolve this issue, noting there were over 150 similar cases involving water restoration contractors and insurance companies filed in Maricopa County superior and justice courts since April 2017. Suffice to say, it is a recurring concern.⁶

Too often, we represent insureds who not only did not receive adequate payments from the carriers to make the repairs, but who are also facing lawsuits, mechanic liens, and other collection enforcement from mitigation and remediation vendors because the insurance company also refuses to pay those vendors (even though the loss is a covered event). By failing to timely pay the mitigation services, the insurance company, whether intentionally or unintentionally, places the insureds in a catch-22. The carriers, while failing to make the necessary approvals and advances, in the same breath, will often argue that the insured did not do enough or did not act quickly enough to mitigate the loss and thus, seek to undervalue its liability for the loss. By expressly acknowledging a mitigation company’s ability to collect directly from the insurance company through a post-loss assignment, this case is hopefully a step in the right direction and disincentives carriers from delaying vendor payments.
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¹ Farmers Insurance Exchange v. Udall, No. 1 CA-SA 18-0081, 2018 WL 2931906 (Ariz. App. Div. 1, June 12, 2018).
² Id. (emphasis and alterations in the original; citations omitted).
³ Id. (emphasis in the original; citations omitted).
⁴ Amicus briefs were filed by Arizona Association of Defense Counsel and Pekin and Stillwater Insurance Companies.
⁵ The court refused to address whether the assignments at issue purport to assign a claim for breach of the implied duty of good faith and fair dealing.
⁶ In fact, my colleague, Lawrence Moon, wrote about the Assignment of Contingent Benefits in Arizona a few months earlier. See https://www.propertyinsurancecoveragelaw.com/2017/09/articles/insurance-claim/assignment-of-contingent-benefits-in-arizona-2/.