Assignment of Benefits (AOB) is certainly a hot button issue in the insurance industry. AOB occurs when an insured assigns its rights to insurance proceeds to a third-party that is not technically an insured under the insurance policy.
This usually comes in the form of a contractor or remediation company that steps in to help the insured after a loss, performs a service, then looks to the insurance company for payment under the insurance policy, rather than payment from the insured out-of-pocket. In its simplest form, many insureds welcome this assistance and the ability to remediate their loss without the exorbitant expense of paying a remediation or construction company. However, AOB could also come into play during the sale of a property to another party.
In August 2011, Liberty Transportation experience wind and water damage to their property in Connecticut due to a hurricane.1 Liberty filed a claim for lost income and lost fair rental value. Massachusetts Bay Insurance Company denied the claim and in September 2017, filed a motion to dismiss arguing that Liberty lacked standing to bring its claim for lost rental income for two commercial units at the property because it sold the property to a third party and had assigned any insurance money for any damages existing at the time of the January 2012 real estate closing. Liberty countered that argument by stating that the loss of rental income occurred before the formation of the real estate purchase agreement and that it retained an interest in the damaged units as a result of its decision to exercise a leaseback provision as set forth in the real estate purchase agreement.
Neither the trial court nor the appellate court were persuaded by Liberty’s arguments. The court stated that “the plaintiff lacks standing in the present case because, by virtue of the assignment, it has no legal interest in alleged insurance proceeds that are due and payable on account of damage to the property.”
I’ve handled many cases where insureds, for one reason or another, decide to sell the property after a loss but before the claim is finalized. It is always a good idea to add a clause in the closing that the seller is maintaining all rights to insurance proceeds for any outstanding claims if that is what was bargained for in the sale of the property. Otherwise, the seller may suffer financial harm from the decrease in price of the damaged property and the inability to recover the insurance proceeds.
I leave you with a quote from American biologist Leroy Hood, who said:
My fundamental philosophy is that you owe it to society to transfer to them any knowledge you have that might be useful.
1 Liberty Transportation, Inc. v. Massachusetts Bay Ins. Co., 189 Conn.App. 595 (2019).