Why it matters

Further reinforcing the substantial majority view, the Tenth U.S. Circuit Court of Appeals recently held that a policyholder was entitled to assign a post-loss claim despite an anti-assignment provision in a property policy. The case involved a property owner’s efforts to obtain the insurance proceeds of a loss on the property where the policy at issue was issued to the bank holding a mortgage on the property. When the bank assigned the claim to the property owner, the insurer refused to pay, relying on a standard anti-assignment provision in the policy. But the Tenth Circuit held the insurer’s refusal was improper because it was “well-settled” that the anti-assignment provision did not prohibit assignment of a claim for a loss that already had occurred.

Detailed Discussion

City Center West LP owned a commercial property in Colorado that was subject to a mortgage held by Summit Bank & Trust. When Summit learned that City Center had failed to insure the property, Summit obtained a property policy from American Modern Home Insurance Company.

The policy listed Summit’s parent company, Heartland Financial, as the “named insured mortgagee,” and provided that losses would be paid to the named insured mortgagee. It also included a non-assignment provision that stated: “Assignment of this Policy shall not be valid unless we [American Modern] give our written consent.”

In 2011, the property was damaged by vandalism and burglary. City Center notified American Modern of the loss and requested payment. American Modern refused to make any payment to City Center (although it did issue a partial payment to Summit Bank). Summit Bank then assigned to City Center all their rights with respect to the claim.

City Center sued American Modern, asserting claims for bad faith and breach of contract. A federal district court in Colorado granted summary judgment in favor of American Modern based on the anti-assignment provision. But the Tenth Circuit reversed, focusing on the “this Policy” language of the provision. According to the court, “[i]t is undisputed that the entire policy was not assigned to City Center.” Rather, “[t]he assignment was only the assignment of one claim for a specific piece of property.”

American Modern argued that the term “Policy” also captured any rights flowing from the policy that would not exist otherwise—such as City Center’s claim. The court squarely rejected that argument, citing prominent insurance treatises. “[T]he weight of authority is that assignment of a post-loss claim under an insurance policy is not an assignment of the policy,” the panel reasoned. “The great majority of courts adhere to the rule that general stipulations in policies prohibiting assignments of the policy, except with the consent of the insurer, apply only to assignments before loss, and do not prevent an assignment after loss.”

The court found further support in Colorado law, which recognizes a difference between an assignment of a contract and an assignment of a claim under a contract. “The distinction between assigning a contract and assigning a claim for money due under that contract has particular force in the insurance context,” the court explained. “There is very good reason to forbid pre-loss assignment of a policy, because the insurer’s risk can be greatly altered by a change in the insured. There is ordinarily no such change in risk once the loss has occurred. That context must be considered in interpreting the non-assignment clause.” Because the assignment by Summit Bank clearly occurred after the loss to City Center’s property, the court held, the district court erred in granting summary judgment to American Modern.

To read the decision in City Center West v. American Modern Home Ins. Co., click here.