Can You Assign Your Rights Under an Insurance Contract that Prohibits Assignment? Only for Prior, Fixed Losses
June 03, 2021
Parties to a contract generally can include in their agreement a provision preventing assignment of the agreement’s rights and remedies without the consent of both parties. Because a party’s assignment of rights under a contract to a third party may have serious implications for both sides in the performance of that agreement, anti-assignment clauses protect the contracting parties by ensuring that no transfer of the agreement’s rights occurs without the consent of all involved. Dance with the date you brought. And absent fraud, unconscionability, or some other reason to invalidate the contract, courts generally enforce those anti-assignment clauses.
In the insurance context, however, the enforcement of anti-assignment clauses are more complicated. Because insurers—like any contractual party—have a legitimate interest in protecting themselves from insureds assignment of the insurance agreement to a different, perhaps more risky party, anti-assignment clauses in insurance agreements are enforceable against assignments that occur prior to a covered loss. Arrowood Indem. Co. v. Atlantic Mut. Ins. Co., 96 AD3d 693, 694 [1st Dept 2012]. But in circumstances where the assignment occurs after the covered loss, New York courts are more critical of anti-assignment clauses. In those circumstances, courts reason, there is no increased risk to the insured; the loss already occurred, and the only thing that changes as a result of the assignment is who the insurer will need to pay for that loss.
Certain Underwriters At Lloyd’s, London v AT&T, Corp., 2021 N.Y. Slip Op. 31740[U], a recent decision by New York Commercial Division Justice Cohen, the Court explores the exceptions to the general rules regarding anti-assignment clauses in insurance policies. Ultimately, the case underscores the difficulties insurers face in disclaiming coverage by enforcement of an anti-assignment clause in the policy.
The dispute in Certain Underwriters stems from the coverage dispute between Nokia of America Corporation and the several insurers who issued policies to Nokia’s predecessor, AT&T, for a series of asbestos liabilities that Nokia inherited from AT&T.
In 1996, AT&T restructured its global organization into three independent businesses by execution of a tri-party Separation and Distribution Agreement (the “SDA”). As part of the SDA, AT&T transferred to Lucent (now Nokia) all “right, title, and interest in all Lucent Assets.” The SDA clarified:
[T]he parties intend by this Agreement that Lucent and each other member of the Lucent Group be successors-in-interest to all rights that any member of the Lucent Group may have as of the Closing Date as a subsidiary, affiliate, division or department of AT&T prior to the Closing Date under any policy of insurance issued to AT&T by any insurance carrier unaffiliated with AT&T[,] . . . including any rights such member of the Lucent Group may have as an insured or additional named insured, subsidiary, affiliate, division or department, to avail itself of any such policy of insurance . . . as in effect prior to the Closing Date.
(SDA § 7.1 [c] [emphasis added]). The SDA also provided for Nokia to assume all of certain liabilities arising out of certain lines of AT&Ts businesses.
Since at least 1996, Nokia has been sued in thousands of asbestos-related lawsuits stemming from pre-1996 operations of certain AT&T businesses. AT&T (what remains after the SDA) also is sued in these asbestos cases; often times, Nokia and AT&T are named as codefendants by the same plaintiff.
AT&T sought coverage for the asbestos-related suits under its insurance policies. The massive and protracted Certain Underwriters case consolidates all of coverage-related disputes between AT&T and its insurers.
Nokia, as successor in interest to AT&T’s insurance policies, also sought coverage for the asbestos-related suits in which it is named as a defendant. The insurers who issued loss policies to AT&T denied Nokia coverage, arguing that: (i) the plain language of the SDA did not assign to Nokia the rights under their policies, and (ii) even if the SDA did assign those rights, the insurance agreements’ anti-assignment clauses prohibited such assignments.
Justice Cohen Grants Nokia’s Motion for Summary Judgment
Nokia moved for summary judgment on a narrow issue: is it an insured party under AT&Ts legacy policies by virtue of AT&T’s assignment of those policies in the SDA? Or, as the insurers argue, was AT&T’s purported assignment of its insurance policies to Nokia in the SDA invalid?
Justice Cohen made short work of the insurers’ argument that the plain language of the SDA was insufficient to assign to Nokia the rights under the operative insurance policies. The fact that the SDA did not use “use talismanic words like ‘assign’ or ‘transfer’ is immaterial,” the Court held, since “[t]he text of the SDA demonstrates, in several ways, the contracting parties’ intent to assign AT&T’s rights under the Legacy Policies.”
A much closer question, however, was the effect of the anti-assignment clauses in the operative policies. The Court acknowledged that the general rule—anti-assignment clauses in insurance agreements do not prohibit assignments occurring after the covered loss—is subject to a critical exception: a post-loss assignment may nonetheless be barred by an anti-assignment clause where the assignment materially increases the risk on the insured. See Globecon Group, LLC v Hartford Fire Ins. Co., 434 F3d 165, 171 [2d Cir 2006] [“Under New York law, a no-transfer clause may, in certain unusual circumstances, remain valid as to some pre-transfer claims even though the loss occurred before the transfer]).
For example, in Holt v. Fidelity Phoenix Fire Ins. Co, 273 AD 166, 168 [3d Dept 1948], a fire forced the closure of a movie theatre and the theatre’s owner made a claim for lost profits under its business interruption insurance. When the theatre owner sold the business a few days later, the new owner tried to make a claim for the lost profits that he incurred after he bought the business. In the subsequent coverage suit, the Third Department sided with the insurer, reasoning that although the fire occurred before the assignment, the assignment of the lost profits policy was invalid because it materially increased the risk to the insurers, who never agreed to pay the lost profits of some other business.
Here, the insurers argued that even though the covered losses (i.e., the alleged asbestos exposure) occurred before the SDA, AT&T’s assignment to Nokia was invalid under the policies’ anti-assignment clauses because that assignment materially increased the insurers’ risk and costs under the policies. Specifically, the assignment to Nokia wrongly the insureds to insure two corporations instead of one, AT&T and Nokia. And because the two corporations are often named in the same suit, defense costs and potential liabilities were multiplied. The insurers pointed to a case in which Nokia and AT&T, as co-defendants, failed to cooperate in the defense of an asbestos claim and instead reached separate settlements with the plaintiff for vastly different sums. Having to pay both of those settlements, the insureds argued, was proof positive of their increased risk.
The Court rejected the insurers’ argument that the increased costs of having to defend Nokia and AT&T materially increased the insurers risk such that the anti-assignment clause should be enforced. The Court reasoned that unlike the business interruption losses claimed in Holt, the asbestos-based losses here are the same now as if the assignment had not occurred. Increased defense costs, standing alone, is not grounds to invalidate the assignment. If that were the case, the Court reasoned, there would never be a permissible assignment of “insurance rights between entities that face common litigation threats, because any such assignment could drive up total defense costs to the insurer.”
Moreover, the Court held that the Insurers had plenty of contractual mechanisms to keep defense costs in check, including defense cooperation provisions. With sharp oversight, the insureds can keep their defense costs from ballooning.
Those restructuring their business or otherwise considering assigning their rights under an insurance agreement must tread carefully. The agreement’s anti-assignment provision likely will invalidate coverage for any after-arising claims and for prior claims with losses that are speculative at the time of assignment (such as loss profits). But Certain Underwriters offers some measure of comfort; that the assignment may potentially result in increased defense costs is, without more, insufficient to invalidate an assignment.