Analyzing AOBs: Are the Courts Splitting Hairs or Seeking Statutory Compliance?
February 23, 2024
This article is originally a publication of the Claims and Litigation Management Alliance (CLM) Construction Claims magazine, Fall 2019. Legal opinions may vary when based on subtle factual differences. All rights reserved.
One of the most challenging topics in first-party property insurance over the last decade has been the increase in assigned claims. They are often called “assignments of benefits” or just AOBs. The purpose of this article is to explain what AOBs are, discuss how different states approach AOBs, and highlight the recent legislative change in Florida regarding AOBs. Florida has been ground zero in terms of AOB use and litigation, so its new legislative change may be a sign of things to come in other states.
An assignment of benefits or AOB is a process whereby an insured transfers her rights to post-loss insurance proceeds to somebody else. Often the person who gets the insurance benefits is a contractor who has either done repairs to the insured’s property after a loss or has promised to so. AOBs are commonly used by water extraction contractors after plumbing losses as well as roofers following hail and storm losses.
The assignment usually takes the form of a one-page document. It often says something to the effect of “for and in exchange of the contractor’s work, the insured assigns her insurance rights to the contractor.” The contractor then makes a claim to the insurer directly for payment of the contractor’s work.
Most states allow AOBs, but the way they are used varies. States can be grouped into three categorical approaches regarding AOBs: the Texas approach, the Louisiana approach, and the pre-2019 Florida approach. The difference between each of these approaches can be explained by the different interpretations of an insurance policy’s anti-assignment clause.
The anti-assignment clause found in many insurance policies often says something to the effect of “the insured may not assign the rights under this insurance policy to another without the written consent of the insurer.” In most states, the anti-assignment clause is interpreted to be a protection on the underwriting of the insurance policy. In other words, the anti-assignment clause is intended to prohibit the insured from assigning its insurance policy to a stranger that the insurer did not underwrite. But, as noted above, different states interpret the anti-assignment clause differently.
Texas has interpreted the anti-assignment clause to bar both pre-loss assignments of the insurance policy as well as post-loss assignments of insurance proceeds. The most commonly cited case in support of that position is Tex. Farmers Ins. Co. v. Gerdes, 880 S.W. 2d 215, 218 (Tex.App.-Fort Worth 1994, writ den’d). In Gerdes, an injured insured sought treatment from a chiropractor. The chiropractor requested the injured insured execute an AOB so the chiropractor could be assured of payment for his services from the insurer. The insured executed the AOB without seeking the insurer’s permission to do so.
The insurer received the bill from the chiropractor. The insurer sent payment for the bill to the injured insured. She refused to pay the chiropractor. The chiropractor sought payment from the insurer directly arguing that he was entitled to payment from the insurer based on the AOB. The insurer refused to pay the chiropractor. The insurer argued the AOB was invalid because the injured insured failed to get the insurer’s permission before executing the AOB. The chiropractor sued the insurer for payment.
The Texas court agreed with the insurer and held that the assignment was invalid. The Texas court began by stating that “[n]on-assignment clauses have been consistently enforced by Texas courts.” The particular anti-assignment clause in this case said “[y]our rights and duties under this policy may not be assigned without our written consent.” The Texas court reasoned that there is nothing in that anti-assignment clause that differentiated between pre-loss rights and post-loss rights. As such, the Texas court held that that anti-assignment provision barred the AOB that the insured executed because she did not first get the insurer’s permission. So, under the Texas approach, assignments of post-loss benefits are not allowed absent the insurer’s permission.
The Louisiana approach
Louisiana took a slightly different approach than Texas. In Louisiana, the traditional anti-assignment clause will not bar an insured from assigning post-loss insurance benefits to another person unless the anti-assignment clause clearly and unambiguously states that it applies to post-loss benefits. The case most commonly cited for this approach is In re Katrina Canal Breaches Litig., 63 So. 3d 955 (La. 2011).
The Katrina Canal case grew out of a complicated dispute between the State of Louisiana, the federal government, and a group of insurers in the aftermath of Hurricane Katrina. The federal government issued disaster relief funds to Louisiana. Louisiana then made those funds available to homeowners in grants up to $150,000 per homeowner. However, as a condition of receiving that money, the homeowner had to assign any insurance benefits that were available to the homeowner to Louisiana. This was done to prevent double recoveries and conserve the grant money. The program was called “Road Home.”
Unfortunately, the program was a disaster. Louisiana believed insureds were choosing to take the grant money instead of seeking money from their insurers first. Also, Louisiana believed insurers were issuing low claim payments to insureds knowing that the insureds would just seek the grant money rather than pursue more money from the insurer. As a result, Louisiana brought a class action lawsuit against the insurers to recover money that Louisiana believed the insurers owed to the homeowners. Louisiana argued that it was entitled to that insurance money based on the assignments of benefits executed by the homeowners as a condition of getting the grant money.
The issue in the lawsuit was whether the anti-assignment clause in the insurance policies barred the post-loss assignments from the homeowners to Louisiana. The Louisiana Supreme Court held that nothing in Louisiana law precludes an anti-assignment clause from applying to post-loss assignments. However, the language of the anti-assignment clause must clearly and unambiguously express that it applies to post-loss assignments in order to bar post-loss benefits. As such, under the Louisiana approach, assignments of post-loss benefits are allowed unless the insurance policy clearly and unambiguously bars them.
The pre-2019 Florida approach
Up until the recent legislative change, Florida took the opposite approach from Texas. Florida began recognizing an insured’s right to assign post-loss insurance proceeds as far back as 1917. In the case of W. Fla. Grocery Co. v. Teutonia Fire Ins. Co., 77 So. 209, 210-11 (Fla. 1917), the Florida Supreme Court held that an insured can freely assign post-loss insurance benefits to another person even without the insurer’s consent. That holding was affirmed nearly 100 years later by a subsequent Florida court in the case of Sec. First Ins. Co. v. State, Office of Ins. Regulation, 177 So. 3d 627, 628 (Fla. 1st DCA 2015). The Court in that case said “we find an unbroken string of Florida cases over the past century holding that policyholders have the right to assign such claims without insurer consent.” However, as noted above, Florida recently enacted legislation that significantly changes how AOBs will be handled in Florida going forward.
Over the past decade, Florida saw an explosion in the number of AOB claims being made by contractors as well as the number of lawsuits being filed by contractors suing pursuant to an AOB. Florida did not have any regulation regarding what was required in terms of form and content for an AOB. As such, insurers were sometimes left trying to figure out if the insurance rights for a particular loss were still with the insured or if they had been assigned to a contractor.
In addition to that, multiple contractors were getting AOBs from the same insured for different aspects of the damage mitigation and repair after a loss. For example, an insured might hire three different contractors following a pipe burst (e.g. a water extraction contractor, a mold remediator, and a contractor to make the repairs once the structure was dry and mold free). Each contractor would have the insured execute a separate AOB. Each contractor would then make a request for payment to the insurer. This created problems for insurers in terms of trying to determine which contractors had which rights for payment, and what (if any) rights remained with the insured.
In some instances, the insured and her contractor would have a falling out after the AOB was executed but before the work was done. Each would demand payment from the insurer. The contractor would rely on the executed AOB, but the insured would argue the AOB was invalid because no work was done. The insurer was caught in the middle.
Making matters even more complicated was the fact that Florida has an attorney-fee shifting statute for first-party insurance disputes. See Florida Statutes §§ 627.428 and 626.9373. In a nutshell, an insurer is required to pay the attorney fees incurred by its insured if the insured is forced to resort to litigation to obtain additional benefits from the insurer. That fee-shifting statue applied to assignees too. Cont’l Cas. Co. v. Ryan Inc. Eastern, 974 So. 2d 368, 374 (Fla. 2008).
It was against that backdrop that the Florida Legislature passed significant AOB reform on April 24, 2019. Florida’s governor signed the legislation into law a month later. Most portions of the legislation became effective on July 1, 2019. It is located in Florida Statutes §§ 627.7152, 627.7153, and 627.422.
The AOB law change does many things. It allows insurers covered by the law to issue insurance policies that restrict or prohibit AOBs. Insurers need to follow certain notice procedures and charge different rates for such policy changes. However, despite those requirements, the ability to issue an insurance policy that prohibits post-loss AOBs is a big relief to some insurers.
The AOB law change creates definitions for many previously undefined terms. It explains what required information needs to be in an assignment in order for it to be valid. And it requires an AOB to have a warning to the insured regarding the effect of the AOB and the insured’s right to rescind it.
The AOB law change prohibits certain language or obligations from being in an AOB. It places a dollar cap on the amount of money for emergency services that an assignee can seek. It requires an assignee to keep certain records regarding its work. It requires work be done to industry standards. And it requires an assignee to submit to an examination under oath and participate in appraisal if requested.
The AOB law change prohibits an assignee from seeking payment from an insured if the insured signs the AOB. It requires the assignee to hold the insured harmless from any payments in the event the insured’s insurance policy prohibits AOBs even if the assignee has already done the work. And it explains that there are a narrow category of people who are exempt from the AOB law change.
Perhaps most importantly, the AOB law change significantly changes how attorney fees are assessed if a case goes into litigation. The assignee is required to make a pre-suit demand to the insurer prior to instituting any legal action. The insurer then has the right to make a pre-suit settlement offer. If the case goes into litigation, the amount of attorney fees awarded (if any) is based on a comparison of the judgment obtained to the assignee’s pre-suit demand and the insurer’s pre-suit offer. This can result in no attorney fee award or even the insurer being awarded its attorney fees if the judgment is less than half of the amount in dispute.
Most states allow some form of AOB. The Texas approach is the minority approach. But the recent AOB legislative reforms in Florida may be a harbinger of things to come as states look to further regulate how AOBs are used in order to strike a balance among the interests of insureds, contractors, and insurers.
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