The requests from our readers keep coming and in this week’s installment of my blog series on Assignments of Benefits (“AOBs”) we will be discussing the applicability and validity of AOBs in Colorado.
In Parrish Chiropractic Centers, P.C. v. Progressive Casualty Insurance Company,1 the Supreme Court of Colorado outlined the law concerning AOBs:
Contract rights generally are assignable, except where assignment is prohibited by contract or by operation of law or where the contract involves a matter of personal trust or confidence.  Where the contract in question specifically prohibits the assignment of rights or interests under the contract without the consent of one or more of the contracting parties, any purported assignment without such consent will not be enforced.2
Similar to what we’ve seen in other states, the distinction lays with pre or post-loss assignment:
A distinction traditionally has been made, however, between an assignment of an insurance policy before a loss has occurred and the assignment of the benefits due to the insured after a loss.  Non-assignment clauses are strictly enforced against attempted pre-loss transfers of the policy itself, because assignments before loss involve a transfer of a contractual relationship and, in most cases, would materially increase the risk to the insurer.  By contrast, assignments of post -loss benefits are usually found to be valid regardless of any non-assignment clause in the policy.  This rule is explained by the fact that (1) post-loss assignments of the benefits due under the policy are viewed as transfers of a chose in action and public policy favors the free alienability of choses in action, and (2) such assignments would not materially increase the insurer’s risk or obligation under the policy.3
In Parrish, the court was looking at AOBs concerning health care and health insurance policies and ultimately found AOBs void and unenforceable to a health care provider pursuant to a non-assignment clause in a group health care policy as it violates public policy.
However, the courts have addressed the applicability of AOBs in terms of property damage and property insurance. In My Roofer, Inc. v. State Farm Fire and Casualty Company,4 the District Court of Colorado reviewed State Farm’s challenge to a roofer’s AOB following a hail storm. The court cited to Parrish in their opinion, but declined to extend its holding to property damage claims, instead found the reasoning of the United States District Court for the District of Colorado in Rooftop Restoration, Inc. v. Ohio Security Insurance Company,5 persuasive. In Rooftop Restoration, the District Court also declined to following the holding in Parrish relative to a property damage claim and upheld the AOB.
Additionally, in My Roofer, “[the] Roofer brought this lawsuit and assert[ed] two claims against State Farm: a breach of contract claim and a statutory bad faith claim for unreasonable denial of benefits under §§ 10-3-1115 and -1116, C.R.S. 2015.”6 State Farm challenged the roofer’s ability to bring the bad faith claims stating that the bad faith statutes were personal to the policyholders and thus, were not assignable. The court disagreed and held, “a repair vendor who provides services on behalf of an insured — such as a roofing contractor — is a first-party claimant under § 10-3-1115. And, under § 10-3-1116(1), a “first-party claimant … whose claim for payment of benefits has been unreasonably delayed or denied may bring an action in a district court to recover reasonable attorney fees and court costs and two times the covered benefit.”
This holding, however, is in direct conflict with the Federal District Court’s decision on the same issue in Rooftop Restoration, where the roofer, holding a valid AOB, was nonetheless prohibited from bringing an action under §§ 10-3-1115 and -1116. While Rooftop Restoration was decided before My Roofer, the state judge in My Roofer explained his reasoning in not following the Federal Court’s ruling:
The judge in Rooftop relied heavily on the case of Hernandez v. Am. Standard Ins. Co. of Wisc., No. 11-cv-03076-RBJ, 2013 WL 6633392 (D. Colo. Dec. 16, 2013), but did not discuss the Larson case — which had been decided by the Colorado Court of Appeals by that point. See Rooftop Restoration at *4 (“Judge R. Brooke Jackson has recently ruled that although the issue has not yet been decided, he predicts that claims brought under Colo. Rev. Stat §§ 10-3-1115 and 10-3-1116 are statutory penalties and, therefore, are not assignable.”). Likewise, the judge in Hernandez also did not discuss the Larson case, even though it had been decided several months before. So both federal cases avoided the first-party claimant issue and simply assumed that the right to pursue the statutory penalty had been “assigned,” and then applied the analytic framework from Kruse v. McKenna, 178 P.3d 1198 (Colo. 2008), in which the Colorado Supreme Court held that a statutory penalty cannot be assigned under Colorado law.
But the Court of Appeals explicitly held in Larson that a repair vendor who provides services on behalf of an insured — such as a roofing contractor — is a first-party claimant under § 10-3-1115. And, under § 10-3-1116(1), a “first-party claimant … whose claim for payment of benefits has been unreasonably delayed or denied may bring an action in a district court to recover reasonable attorney fees and court costs and two times the covered benefit.”
I am duty-bound to apply the precedent set by the Court of Appeals. See C.A.R. 35(e) (“Opinions designated for official publication [by the Court of Appeals] must be followed as precedent by all lower court judges in the state of Colorado.”). Thus, the Larson case controls my decision here, not the federal cases. I therefore conclude that My Roofer is entitled to bring the statutory claim in its own capacity as a repair vendor, without regard to any assignment.7
On February 8, 2017, the Federal District Court was presented with another action involving Rooftop Restorations, Inc. concerning this issue and whether the bad faith statute was a “penal statute.” Without any binding state court decision, the Federal Court certified this question of law to the Colorado Supreme Court for final determination.8 While this particular issue seems to be developing—and we will certainly do our best to keep you informed as it does—the take is as follows: AOBs are valid and enforceable in Colorado so long as the assignment takes place post-loss. As for bad faith claims, until the courts resolve the discrepancy, plaintiffs should file their actions in state court.
If you have any specific questions on AOBs or would like to see your state come up sooner, please comment below, or send me an email at firstname.lastname@example.org.
As always, I’ll leave you with a (mildly) related tune, here’s Colorado’s own The Lumineers with their hit and major label debut, Ho Hey:
1 Parrish Chiropractic Centers, P.C. v. Progressive Cas. Ins. Co., 874 P.2d 1049 (Colo. 1994).
2 Id. at 1052 (internal citations omitted).
3 Id. at 1053 (internal citations omitted).
4 My Roofer, Inc. v. State Farm Fire and Cas. Co., 2016 WL 6662354 (Colo.Dist.Ct. 2016).
5 Rooftop Restorations, Inc. v. Ohio Security Ins. Co., 2015 WL 9185679 at 3 (D.Colo. 2015).
6 My Roofer, Inc., 2016 WL 6662354 at 1.
7 My Roofer, Inc., 2016 WL 6662354 at 3
8 Rooftop Restorations, Inc. v. American Family Mut. Ins. Co., 2015 WL 9185679 (D.Colo. Feb. 8, 2017).