In a case of first impression, the Supreme Court of Kentucky joined a majority of states that have found insurance policy anti-assignment clauses inapplicable to losses occurring before any transfer of policy rights. The court’s decision – issued in response to a certification request from a Kentucky federal court – came in Wehr Constructors, Inc. v. Assurance Company of America, 2012-SC-000221 (Ky. 2012). In Wehr, a “builder’s risk” policy was issued by an insurer to a hospital when it was building an addition. The policy contained an anti-assignment clause that stated, “Your rights and duties under this policy may not be transferred without [Assurance’s] written consent except in the case of death of an individual.”
During construction of the addition, the hospital hired a contractor to install the sub-surfaces and floors. At some point after the installation, the floors were damaged and the hospital claimed a loss under the policy. The insurer denied the claim, prompting the hospital to file a state court damages action against the contractor. Subsequently, the contractor and the hospital reached a settlement, the terms of which required the hospital to assign its claim under the policy to the contractor. After finalizing the settlement, the contractor sued the insurer in the U.S. District Court, Western District of Kentucky, as the hospital’s assignee. The insurer immediately moved for a judgment on the pleadings, citing the anti-assignment clause and arguing that its prior written consent was necessary before the hospital assigned its claim. Because this issue was a matter of first impression in Kentucky, the federal court certified the question to the Supreme Court of Kentucky for decision.
The court in Wehr first outlined the majority and minority rules regarding the enforceability of policy anti-assignment clauses absent prior written consent from the insurer before assignment of a claim. The majority rule holds that anti-assignment clauses such as the one at issue here are unenforceable as to losses that have already occurred. The rationale for the court’s ruling is as follows: The purpose of anti-assignment clauses is to protect the insurer from unforeseen exposure and increased liability that could result from assigning the entire policy to an assignee that is a less desirable insured or that would have required a higher premium. These risks do not exist when, as here, the assignment involves a specific loss that has already occurred and a simple transfer of the right to a claim for money; indeed, to hold otherwise under such circumstances, the court ruled, would amount to a restraint on the alienation of property rights. On the other hand, the minority view holds that long-standing contract law requires enforcement of unambiguous provisions and that these types of anti-assignment clauses unambiguously forbid assignment of claims prior to written consent of the insurer – particularly in transactions where the parties have equal bargaining power.
In embracing the majority rule, the Kentucky high court first recognized that the minority rule ignores crucial public policy considerations that aim to avoid restraints on alienability of “choses in actions” (i.e., actions involving personal property). The court also noted that the majority rule advances one of Kentucky’s important public policies: promoting and facilitating settlement agreements among litigating parties.
In adopting the majority rule, the court in Wehr held:
[W]e conclude that under Kentucky law, an anti-assignment clause in an insurance policy that requires an insured to obtain the insurer’s prior written consent before assigning the claim under the policy is not enforceable or applicable when the claimed loss occurs before the assignment; such a clause would, under those circumstances, be void as against public policy. (Emphasis supplied)
Wehr teaches this practical lesson of Kentucky law: Where, as here, the relevant loss has already occurred, then a clause prohibiting the assignment of policy rights absent the insurer’s prior written consent cannot be used to bar the transfer of policy rights to a third party because presumably that transfer would not increase the insurer’s liability and/or present any risk of some unforeseen exposure. On the other hand, where an insured seeks to transfer policy rights to a third party before the occurrence of a covered loss, the insurer faces the real potential for increased liability and/or a risk of some unforeseen exposure. Under those circumstances, any assignment of policy rights by the insured to a third party would appear to require the insurer’s prior written consent.