The widespread devastation of Hurricane Florence brought to a recent discussion the question of whether assignment of benefits contracts for property insurance proceeds are enforceable in North Carolina. This is a great question. In a general setting, vendors, services providers and contractors begin their work with a down payment and receive additional payments as work progresses, with many jurisdictions recognizing a contractor’s lien or service lien against the benefactor if they are not paid in full.
In the wake of a natural disaster, many of the affected are struggling to meet their basic needs as they put their lives back together and are relying heavily on insurance proceeds and benefits to begin the work to repair their homes. The realty of the time it takes to receive an insurance payment has led to the institution of a well-worn-page out of the medical insurance practice book—the assignment of benefits.
An assignment is “a transfer of property or some other right from one person to another, which confers a complete and present right in the subject matter to the assignee.”1 Insurance policy benefits are contractual rights belonging to the insured. The leading case in North Carolina recognizing the validity of transferring insurance proceeds by an assignment of the policy benefit is Alaimo Chiropractic.2 The patient in Alaimo Chiropractic executed an “Assignment of Proceeds, Lien and Authorization” in favor of Alaimo. Allstate refused to recognize the assignment, ignored the notice of assignment, and settled directly with the patient for less than the claims submitted by Alaimo. Alaimo sued Allstate. The court held that the assignment was valid and “obligated the Defendant to acknowledge the rights of the Plaintiff to receive payment out of the insurance proceeds for the medical treatment the Plaintiff provided.”3
The court found that an assignment is a formal transfer of property or property rights from one person (the assignor) to another (the assignee).4 And that “Principles of general contract law determine whether an assignment is valid.”5 So, yes, in North Carolina you can do that with property insurance proceeds. You can receive the immediate services of a contractor by assigning the benefits of the insurance policy proceeds to the contractor, so he may seek direct payment from the insurer for services rendered. As easy as that may seem, it comes with many additional considerations and sometimes complications. For one, the insurer now has an additional party to the contract, which is not always well-received.
So, in typical fashion, since this ruling, many insurance contracts have been written with anti-assignment clauses, which prohibit assignment of benefits without the insurer’s consent. Jurisdictions across the country differ regarding the validity of anti-assignment clauses. Some jurisdictions invalidate pre-loss assignments but allow post-lost assignments. The well-known treatise, Couch on Insurance, clearly explains the rationale: “[t]he purpose of a no assignment clause is to protect the insurer from increased liability, and after events giving rise to the insurer’s liability have occurred, the insurer’s risk cannot be increased by a change in the insured’s identity.”6
Assignment of benefits is generally valid in North Carolina. There are prohibitions on the transferability of some rights. Some rights are deemed to be so personal as not to transfer. For example, the right to recover in tort for personal injury, bad faith refusal to settle a claim, and breach of fiduciary duty are personal to the one injured by that conduct and only the one directly affected should recover.7 So, even though a policyholder may be forced into a position to assign his insurance proceeds to a contractor in exchange for a timely repair, the duty of the insurer to act in good faith and to treat its insured fairly is not extinguished with the transfer of those policy benefits.
If this option presents itself, remember well, every contract should be read carefully to understand the proposed assignment and the terms of the contract before signing it. Some of the assignment of benefits contracts I have reviewed are overly broad for the service proposed. For example, I have seen poorly drafted assignments of benefits, intended to transfer insurance proceeds to a roof contractor only for the replacement of the roof, but the terms of the assignment provide for the assignment of all policy benefits and proceeds. The intent of parties in that instance was for the assignment of insurance proceeds to the roof contractor for his work related to the roof replacement, and not also the insurance proceeds related to repair of floors, ceilings and walls, which work was not to be performed by the roof contractor. There are many policy benefits available to the insured. Assignments can be beneficial to both parties in working through a catastrophe, but they should be narrowly tailored to the services to be provided. And with that consider:
The bargain that yields mutual satisfaction is the only one that is apt to be repeated.
1 6 Am. Jur. 2d Assignments § 1 (2012).
2 Alaimo Chiropractic v. Allstate Ins. Co., 574 S.E.2d 496, 155 NC App. 194 (N.C. App., 2002).
3 Id. at 498.
4 Id. citing, Hinshaw v. Wright, 105 N.C.App. 158, 164, 412 S.E.2d 138, 143 (1992).
5 Id. citing, Martin v. Ray Lackey Enterp., Inc., 100 N.C.App. 349, 354, 396 S.E.2d 327, 330 (1990).
6 Couch on Insurance § 35:7 (3d ed. 2010).
7 Horton v. New South Ins. Co., 468 S.E.2d 856, 858, 122 N.C.App. 265 (N.C. App., 1996) [We hold that Horton’s claims for bad faith refusal to settle, breach of fiduciary duty, and tortious breach of contract are not assignable. An action “arising out of contract” generally can be assigned. See N.C.Gen.Stat. § 1-57 (1983). However, assignments of personal tort claims are void as against public policy because they promote champerty. See Charlotte-Mecklenburg Hosp. Auth. v. First of Georgia Ins. Co., 340 N.C. 88, 91, 455 S.E.2d 655, 657 (1995); Investors Title Ins. Co., 330 N.C. at 688, 413 S.E.2d at 271.]