what does assignment clause mean in insurance

What Is an Assignment Clause?

An assignment clause spells out which contractual obligations, rights, and duties may be transferred from one of the contractual parties to another party. 3 min read updated on February 01, 2023

Updated October 29, 2020:

An assignment clause spells out which contractual obligations, rights, and duties may be transferred from one of the contractual parties to another party. The assignment may be in whole or in part, and the clause also details the conditions under which a party can assign these duties.

U.S. law dictates that most contractual rights can be freely assigned or delegated, unless an agreement states otherwise.

The assignment clause often overlaps with two other clauses:

• Parties in Interest
• Successors and Assigns

These control who assumes contractual rights and obligations.

Legal Background and Freely Assignable Rights

When one party in a contract “assigns” the agreement to someone else, this means the first party — the assignor — transfers its contractual rights and obligations to the second party — the assignee.

In some instances, one party will not want the other contractual party to freely assign its duties. Contracts will then include language that states this.

One exception to the general assignability rule is intellectual property licenses . Legally, a licensor must first give consent before an IP licensee can assign or delegate its rights or obligations, even in the case where the license agreement is silent.

Requirements for Assignment Consent

There are different ways to say the same thing in a contract. Some people prefer lengthier statements, and others like to keep things brief. The following are various ways to make the same points.

• One contractual party isn't allowed to assign its agreement to another person without prior written consent of the other contractual party, except as provided for in the contract. If an assignment is made without this consent, it won't be considered valid.
• One party may not assign any interest or right arising out of this contract — in whole or in part — without prior consent.
• To keep all doubts at bay, no consent is required for an assignment — including collateral, absolute, or other — for a contractual right to payment.

These are the takeaways from these stipulations:

• This type of requirement for an assignment clause can create obstacles for the non-assigning party in corporate reorganizations or future mergers.
• The party that's being asked to consent to an assignment clause requirement may want to negotiate its position. For instance, it may find negotiations helpful in a situation when the assignment involves a substantial sale.

A Party May Not Unreasonably Withhold or Delay Consent

It's not permissible to hold up consent to unreasonable delays.

Other ways to state this include:

• To avoid doubt, a party that suffers damage due to the unreasonable delay or withholding of consent by the other party can treat them as direct damages.
• To avoid doubt, damages that arise to one party from the unreasonable delay or withholding of consent by the other party aren't excluded from remedies.

Even when these provisions aren't in place, the law may still impose a reasonableness requirement. This requirement may not hold a lot of practical value, whether it's implied by the law or contractual. A reasonableness requirement can't guarantee that the non-assigning party will give consent when the assigning party wants it. By the time a case has worked its way through the court system to a decision, the deal that the assigning party was working on could have fallen through or otherwise be negated or moot.

However, this provision for unreasonable withholding should get the non-assigning party to carefully consider taking too much time due to the prospect of being held liable for damages. This can result in costly consequences.

On the other hand, having an unreasonable delay provision could create conflict with the provision concerning material breach of contract.

When you enter into a contract, it's important that you know what your rights and obligations are, as well as the other party's rights and obligations. If you don't want certain outcomes — assignment of duties, for instance — you must usually make it clear in the agreement. Getting help from a legal professional in the contract law field is a good idea when writing up a contract . That way, you increase the chances of covering everything you want covered, from the finer points to the bigger ones.

If you need help with contracts, you can post your legal need on UpCounsel's marketplace. UpCounsel accepts only the top 5 percent of lawyers to its site. Lawyers on UpCounsel come from law schools such as Harvard Law and Yale Law and average 14 years of legal experience, including work with or on behalf of companies like Google, Menlo Ventures, and Airbnb.

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Can You Assign Your Insurance Benefits to Someone Else?

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Most business insurance policies contain a so-called anti-assignment clause. This clause prohibits policyholders from transferring any of their rights under the policy to someone else. This means that the insured business cannot cede its right to collect claim payments to another party. However, laws in most states permit policyholders to transfer their rights to another party under certain circumstances.

Anti-Assignment Clause

In the standard ISO policies , the anti-assignment clause is located in a separate form called the Common Policy Conditions. These conditions apply to all coverages that are included in the policy. For instance, if a policy includes business auto , general liability , and commercial property coverages, the anti-assignment clause applies to all three coverages.

The clause is entitled Transfer of Your Rights and Duties Under This Policy. It includes the following provision:

Your rights and duties under this policy may not be transferred without our written consent except in the case of death of an individual named insured.

The anti-assignment clause prohibits the  named insured from transferring any of its rights or obligations under the policy to someone else without the insurer's permission. The only exception is if the named insured is an individual (sole proprietor) and he or she dies. An assignment is permitted in this case because a sole proprietorship and the individual owner are one and the same. If the individual dies, the business cannot survive unless it is sold to someone else.

An anti-assignment clause is intended to prevent the insurer from unwittingly assuming risks it never intended to take on. Commercial insurers review business insurance applicants carefully. Before they issue policies, underwriters consider the knowledge and experience of a company's owners and managerial staff. If a business is sold to someone else, the new owners may not be as skilled or attentive as the previous ones. From the insurer's perspective, the new owners are an unknown risk.

Post-Loss Assignments Permitted

The anti-assignment clause doesn't distinguish between assignments made before a loss and those made afterward. Even so, courts in most states have allowed policyholders to assign their rights to another party after a loss has occurred. Pre-loss assignments are still prohibited. Here is an example of a post-loss assignment of insurance benefits.

Victor operates a restaurant called Vital Vittles out of a building he owns. Late one January night two water pipes in the building freeze. The pipes subsequently burst, causing considerable water damage to Victor's building. Victor is forced to close his restaurant until the repairs are completed.

Victor hires a water damage contractor called Rapid Restoration to repair the damage to his building. He tells the contractor that he needs the repairs done quickly as he is anxious to reopen his restaurant. The contractor says that the repairs can be expedited if Victor signs over his rights under the policy to Rapid Restoration. The contractor will then proceed with the repairs and negotiate a claim settlement with Vital Vittles' commercial property insurer. Victor agrees to the assignment and the contractor begins the repair work.

While Vital Vittles' commercial property policy contains an anti-assignment clause, Victor has assigned his rights to Rapid Restoration after a loss has occurred. Thus, in most states, Victor's insurer cannot reject the assignment (assuming post-loss assignments are permitted in Victor's state).

Problems With Assignments of Benefits

In recent years, assignment of benefits (AOB) agreements have been problematic in some states, particularly Florida. Unscrupulous contractors have preyed on unsuspecting homeowners and business owners who have suffered water damage . Some contractors work alone while others operate in cahoots with crooked lawyers. In either event, the contractor convinces the policyholder to assign his or her rights under the policy over to the contractor. The contractor then exaggerates the cost of the repairs and collects the inflated amount from the insurer. The policyholder is left with a large claim on his or her loss history. When the policy expires, the insurer may refuse to renew it.

In the previous example, Victor has assigned his rights under the policy to Rapid Restoration. Suppose that Rapid Restoration completes only half of the repair work on Victor's building. The actual cost is $15,000 but the contractor submits a bill to the insurer for $30,000. Alternatively, the contractor never submits a bill but sues the insurer for $30,000. In either case, the insurer may refuse to pay on the basis that the contractor has committed insurance fraud. Victor cannot intervene because he has signed his rights over to the contractor. If the contractor is unsuccessful in its lawsuit against the insurer, it may demand payment from Victor's company.

Avoiding Problems With AOBs

As a business owner, you can avoid problems associated with AOBs and unscrupulous contractors by taking the following steps:

• Report any loss or accident directly to your insurer (or your agent or broker ). Notify your insurer immediately. Don't allow a contractor to do the notification on your behalf.
• Take photos of the damage.
• Don't allow any contractor to begin work until an insurance adjuster has documented the damage
• Vet contractors thoroughly before hiring them. Make sure they are properly licensed. If your area has suffered a natural disaster, watch out for construction scams.
• Don't sign an AOB unless you have reviewed it carefully. If you don't understand it, ask your agent, insurer, or attorney for assistance.
• If your contractor won't do any work until you've signed an AOB, find another contractor.

AOBs in Health Insurance

Assignment of benefit agreements are common in health insurance. Patients are often asked to agree to such clauses before they receive treatment from a physician, hospital, or another healthcare provider. The assignment of benefits clause transfers a patient's right to collect benefits under his or her health policy to the provider. By signing the document, the patent agrees that payments will be made directly to the provider for the services rendered. The clause states that the patient is ultimately responsible for the charges if the insurer fails to pay.

Once the treatment has been performed, the provider submits the AOB along with a claim to the patient's health insurer. The insurer pays the provider for services rendered to the patient.

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Post-Loss Assignments of Claims Under Insurance Policies

In the settlement of lawsuits involving insured claims, it is not uncommon that one condition of the settlement is that the defendant assign his or her claims under all applicable insurance policies to the party that filed suit.

Indeed, it is frequently the case that the defendant, particularly when the defendant is an individual, has a limited ability to pay a judgment and insurance coverage offers the best opportunity for a recovery by the suing party. Usually, such settlements are made without any serious thought being given to whether the defendant’s claim against its insurer is assignable; the assumption being that it is assignable.

However, insurance policies generally have anti-assignment clauses which prohibit the assignment of the policy, or an interest in the policy, without the insurer’s consent. These clauses come into play in determining the validity or enforceability of the assignment of a claim under an insurance policy and should be considered when such an assignment is part of a settlement.

When considering the enforceability of anti-assignment clauses in insurance policies, the courts generally draw a distinction between an assignment made prior to the occurrence of a covered loss (a “pre-loss” assignment) and an assignment made after the occurrence of a covered loss (a “post-loss” assignment).

In analyzing pre-loss assignments, the courts recognize that requiring an insurer to provide coverage to an assignee of its policy prior to the occurrence of a covered loss would place the insurer in the position of covering a party with whom it had not contracted nor been allowed to properly underwrite to assess the risks posed by that potential insured, and, accordingly, determine the appropriate premium to charge for the risks being undertaken or choose to decline coverage.

Post-loss assignments, on the other hand, take place after the insurer’s obligations under its policy have become fixed by the occurrence of a covered loss, thus the risk factors applicable to the assignee are irrelevant with regard to the covered loss in question. For these reasons, the majority of the courts enforce anti-assignment clauses to prohibit or restrict pre-loss assignments, but refuse to enforce anti-assignment clauses to prohibit or restrict post-loss assignments.

Katrina Cases

The Louisiana Supreme Court, which had not previously addressed the enforceability of anti-assignment clauses for post-loss assignments, was recently confronted with this issue in the In re: Katrina Canal Breaches Litigation, litigation involving consolidated cases arising out of Hurricane Katrina. The issue arose as a result of a lawsuit brought by the State of Louisiana as the assignee of claims under numerous insurance policies as part of the “Road Home” Program. The Road Home Program was set up following Hurricanes Katrina and Rita to distribute federal funds to homeowners suffering damage from the hurricanes. In return for receiving a grant of up to $150,000, homeowners were required to execute a Limited Subrogation/Assignment agreement, which provided in pertinent part:

Pursuant to these Limited Subrogation/Assignments, the State of Louisiana brought suit against more than 200 insurance companies to recover funds dispensed under the Road Home Program. The suit was removed to Federal Court under the Class Action Fairness Act and the insurers filed motions to dismiss, arguing that the assignments to the State of Louisiana were invalid under the anti-assignment clauses in the homeowner policies at issue.

On appeal, the United States Fifth Circuit Court of Appeals certified the following question to the Louisiana Supreme Court: “Does an anti-assignment clause in a homeowner’s insurance policy, which by its plain terms purports to bar any assignment of the policy or an interest therein without the insurer’s consent, bar an insured’s post-loss assignment of the insured’s claims under the policy when such an assignment transfers contractual obligations, not just the right to money due?”

In answering this question, the Louisiana Supreme Court began by noting that, as a general matter, contractual rights are assignable unless the law, the contract terms or the nature of the contract preclude assignment. Specific to the certified question, Louisiana Civil Code article 2653 provides that a right “cannot be assigned when the contract from which it arises prohibits the assignment of that right.” The Louisiana Supreme Court observed that the language of article 2653 is broad and, on its face, applies to all assignments, including post-loss assignments of insurance claims. The Court, therefore, construed the issue confronting it as whether Louisiana public policy would enforce an anti-assignment clause to preclude post-loss assignments of claims under insurance policies.

In addressing the public policy question, the Louisiana Supreme Court recognized the distinction between pre-loss assignments and post-loss assignments discussed by courts from other states and noted that the prevailing view was that anti-assignment clauses were invalid and/or unenforceable when applied to post-loss assignments. Notwithstanding this weight of authority, the Louisiana Supreme Court stated:

“[W]hile the Louisiana legislature has clearly indicated an intent to allow parties freedom to assign contractual rights, by enacting La. C.C. art. 2653, it has also clearly indicated an intent to allow parties freedom to contractually prohibit assignment of rights. We recognize the vast amount of national jurisprudence distinguishing between pre-loss and post-loss assignments and rejecting restrictions on post-loss assignments, however we find no public policy in Louisiana favoring assignability of claims over freedom of contract.”

Thus, Court refused to invalidate the enforceability of the anti-assignment clauses to the post-loss assignments before it based on public policy, adding that public policy determinations are better suited to the legislature.

Nonetheless, after having recognized the general enforceability of anti-assignment clauses to post-loss assignments, the Court immediately placed limits on when those clauses would be applicable, stating that to be applicable, they “must clearly and unambiguously express that the non-assignment clause applies to post-loss assignments.” The Court refused “to formulate a test consisting of specific terms or words,” which would satisfy this condition and remanded the case to the federal courts to determine whether the individual anti-assignment clauses in the various policies were sufficiently clear and explicit to be enforced with respect to post-loss assignments at issue.

A Broad Application

It should be noted that the Court’s opinion appears to apply broadly to all post-loss assignments irrespective of what specific rights are being assigned, despite the fact that the certified question was narrower and asked only about the applicability of a post-loss assignment where the assignment “transfers contractual obligations, not just the right to money due.”

In a footnote at the beginning of its opinion, the Louisiana Supreme Court observed that in certifying the question to it, the Fifth Circuit “disclaimed any intent” that the Court “confine its reply to the precise form or scope of the legal questions certified.” The footnote indicates that the Court’s opinion was not intended to be limited to only those post-loss assignments involving the assignment of contractual obligations.

Louisiana has departed from the majority view in holding that as a matter of general law, anti-assignment clauses are not inherently void with regard to post-loss assignments. However, it may be that in practical application, the results of individual cases may well be consistent with the majority rule of not enforcing anti-assignment clauses with regard to post-loss assignments because Louisiana courts may be reluctant to find that the anti-assignment clauses are sufficiently “clear and explicit” unless they specifically state that they apply to post-loss assignments, notwithstanding the Louisiana Supreme Court’s unwillingness to “formulate a test consisting of specific terms or words.”

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Assignment of insurance policies and claims | Practical Law

Assignment of insurance policies and claims

Practical law uk practice note w-031-6021  (approx. 19 pages).

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Insurance Policy Consent to Assignment Clauses

Many policyholders forget that their insurance policy is a contract and is subject, with exceptions, to the usual laws of contract. An issue that frequently arises is whether the named insured is able to assign insurance proceeds under the policy to another. The answer to that question is dependent on the type of coverage sought.

Most insurance policies have a “consent to assignment clause” that typically provides: “Assignment of interest under this policy shall not bind the Company until its consent is endorsed hereon.” 1 This clause is designed to protect the insurer from having to extend coverage to an entity it never agreed to cover. In California, the enforceability of the clause depends on both the timing of the assignment and whether the claim is a first party loss – where the insured is seeking benefits for a sunk ship or a burned building, or a third party claim, which protects insured in certain instances when the insured might be liable to another.

With respect to first party claims, insurers have a vested interest in their personal relationships with the named insureds, and before a loss , a legally recognized need to prevent non-consensual assignments to less responsible insureds. 2 After a first party loss , however, the insurer’s need to consent dissipates, because any assignment is only of money already due under the contract and any right of the insured as a result of the loss may be assigned with or without the consent of the insurer; thus the consent to assignment clause is deemed unenforceable. 3 With respect to third party claims, the California Supreme Court held in Henkel that the consent to assignment clause is enforceable and, as a result, a company that acquired a policyholder’s assets and liabilities could not receive the benefits of the policyholder’s liability coverage in the absence of an insurer-approved assignment regardless of when the assignment took place. 4

The enforceability of “consent-to-assignment” clauses is dependent on the law of each particular state. Always check with an attorney before making an assignment of policy benefits to another, regardless of the situation.

1    Henkel Corp. v. Hartford Accident & Indemnity Co. (2003) 29 Cal.4th 934 , 943. 2 Bergson v. Builders Ins. Co. (1869) 38 Cal. 541, 545. 3 Vierneisel v. Rhode Island Ins. Co. (1946) 77 Cal.App.2d 229 , 232 [house destroyed by fire before close of escrow; affirming assignment by sellers to buyers of right to recover proceeds under fire insurance policy]. 4 Henkel , supra , 29 Cal.4th at p. 944.

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Assignment of Claim after a Loss: What Homeowners Should Know

Let’s start with the basics. If you, as a homeowner, sustain property damage or losses because of a covered event (like a fire, for example), you will need your home repaired. You choose a contractor or restoration company to do the work – but the check from the insurance company has not come through yet, and you need them to start right away. So, what can you do?

You can sign an “assignment of claim,” which assigns your rights (as the policyholder) to benefits and proceeds from the loss, to the company or contractors. In the simplest of terms, the assignment of claim allows your contractor to get paid directly from the insurance company.

What is the anti-transfer clause in insurance?

However, many contractors and purchasers of the damaged property have found themselves in a tight spot over the years, because of something called the anti-transfer clause. As explained on the Tennessee Insurance Litigation Blog ,  the anti-transfer clause usually reads something like this: “Your rights and duties under this policy may not be transferred without our written consent except in the case of death of an individual named insured.” Sometimes, the insurance company requires written consent before an assignment of claim can be made.

This clause routinely allows insurers to deny payments to contractors – but it shouldn’t, when an assignment of claim is made post-loss.

What’s the difference between pre-loss vs. post-loss assignments?

The Courts of Tennessee have routinely ruled on behalf of contractors and purchasers who were assigned the claim after the loss occurred. That is because the original assignee – the homeowner – was approved by the insurance company in the first place, and because the damage occurred regardless. There was no additional risk for the insurance company. Therefore, even if the contractor has a long and storied history of rule-breaking (or even criminal activity), the homeowner can assign the claim however he or she chooses; after all, the loss already happened.

Where insurance companies can (and do) have a leg up is for pre-loss assignments. The insurance company underwrote the risk on Bob and Jane Homeowner because it felt confident enough to do so. Bob and Jane cannot assign their policy to another person without the approval of the insurer, even when no loss has occurred.

Even if there is an anti-transfer clause in your policy, the chances are very good that a post-loss assignment cannot be legally denied by your insurer. If it is, seek out an experienced insurance dispute lawyer to help you argue the denial.

One last note for Tennessee policyholders

In some cases, the insurance company may decide that the amount of your loss is worth less than the cost of the renovations for which the contractor is charging. If this happens, you could be on the hook for the remainder of the costs, depending, of course, on the language of the deal with your contractor.

Because of this risk, it’s wise to contact an attorney before making any decisions. Get informed about your rights from the start, and let your lawyer address any potential hiccups along the way. If your insurer lowballs your claim, your attorney can  handle the dispute , to ensure that you are compensated fairly.

At McWherter Scott & Bobbitt, we have spent years fighting against unfair insurance claims policies in Tennessee and Mississippi. Let  Brandon McWherter ,  Jonathan Bobbitt  and  Clint Scott   put their knowledge and experience to work for you. Please call  731-664-1340 or fill out our  contact form . We maintain offices in Nashville, Chattanooga, Memphis, Jackson and Knoxville.

Brandon McWherter has dedicated his practice to assisting insurance policyholders with their claims against insurance companies, including claims for bad faith. He is licensed in Tennessee, Arkansas, and Mississippi. Learn More

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Contract Clauses

• Acceleration Clause
• Arbitration Clause
• Assignment Clause
• Cancellation Clause
• Choice of Law Clause
• Confidentiality Clause
• Consideration Clause
• Definitions Clause
• Dispute Resolution Clause
• Entire Agreement Clause
• Escalation Clause
• Exclusivity Clause
• Exculpatory Clause
• Force Majeure Clause
• Governing Law Clause
• Indemnification Clause
• Indemnity Clause
• Integration Clause
• Merger Clause
• Non-Competition Clause
• Non-Disparagement Clause
• Non-Exclusivity Clause
• Non-Solicitation Clause
• Privacy Clause
• Release Clause
• Severability Clause
• Subordination Clause
• Subrogation Clause
• Survival Clause
• Termination Clause
• Time of Essence Clause

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Insurance clause defined.

Insurance clauses, also called general insurance clauses and insurance provisions, are the limitations of liability policy conditions and general liability risks an insurance provider takes. They’re also applied when more than one commercial property policy is in place by assigning financial liability in claims proportionately.

Here is another article that defines insurance clauses.

Insurance Clause Explained

Insurance clauses are used whenever parties are taking on insurable risks. They can prevent disastrous business consequences in the future.

Types of Insurance Clauses

There are four types of insurance clauses, including:

• Type 1: Indemnification agreements
• Type 2: Contract exclusions
• Type 3: Severability provisions
• Type 4: Limitations of liability

See this web article for more information about the different types of insurance clauses.

Purpose of an Insurance Clause

The purpose of an insurance clause is to assign risk associated with services rendered. If there are risk notes, both parties generally accept liability. However, the insurance clause shifts the risk away from clients.

Insurance Clause Examples

Examples of how you can use insurance clauses include:

• Example 1: Requiring tenants to hold renter’s insurance
• Example 2: Financial services firms assigning loss payable clauses
• Example 3: Insurance policies specifying covered losses
• Example 4: Business partners protecting their assets from legal mistakes
• Example 5: Construction companies providing for specific bodily injuries

Insurance Clause Samples

Sample 1 – Construction Contract:

34. Contractor’s Insurance Obligations . The Contractor shall purchase from and maintain insurance for protection from claims under workers’ compensation acts and other employee benefit acts which are applicable, claims for damages because of bodily injury, including death, and claims for damages, other than to the Work itself, to property which may arise out of or result from the Contractor’s operations under this Agreement, whether such operations be by the Contractor or a Subcontractor or anyone directly or indirectly employed by any of them. This insurance shall be written for not less than limits of liability specified in this Section 34 or required by law, whichever coverage is greater, and shall include contractual liability insurance applicable to the Contractor’s obligations under Sections 23 and 33. Certificates of such insurance shall be filed with the Owner prior to the commencement of the Work.

34.1 The insurance required by this Section 34 shall be provided by an insurance company or companies lawfully authorized to conduct business in the state where the Project is located which have a policy-holder’s rating of not less than “A” in the most recent edition of Best’s Rating Guide. Such insurance shall be written on an occurrence basis and shall be maintained without interruption from the date of commencement of the Work until at least one (1) year following the date of Final Payment and at all times thereafter when the Contractor may be correcting, removing or replacing defective or rejected Work, or longer if required below. The Contractor shall name the Owner and its agents and employees as additional insureds on all insurance policies, except the Workers’ Compensation policy. The Contractor shall obtain from the Owner the list of names to appear on the insurance policies. The Contractor shall pay all deductibles. The insurance shall be written for not less than the following limits, or greater if required by law, and otherwise shall comply with the following requirements:

34.1.1 Workers’ Compensation:

• State: Statutory.
• Employer’s Liability: $1,000,000.

34.1.2 Commercial General Liability, applicable to all premises and operations, including Bodily Injury, Property Damage, Independent Contractors, Blanket Contractual, Personal Injury, Products and Completed Operations, Broad Form Property Damage (including Completed Operations) and coverage for explosion, collapse, and underground hazards, with limits of liability of not less than the following:

• $1,000,000 combined single limit per occurrence.
• $2,000,000 aggregate applicable specifically to the Project.
• The Commercial General Liability insurance shall be primary and non-contributory with the Owner’s policies carried for their sole benefit and include umbrella liability coverage of not less than $10 million for per occurrence.

34.1.3 Comprehensive Automobile Liability, applicable to any automobile, including owned, non-owned, and hired automobiles, with limits of liability of not less than $1,000,000 combined single limit for Bodily Injury and Property Damage each accident.

34.1.4 Builders All-Risk insurance, with limits of liability as specified in Exhibit A (the “Builders All-Risk Insurance Limits of Liability”) naming Owner as the insured.

34.1.5 Each policy shall contain a provision that the policy will not be canceled or allowed to expire until at least thirty (30) days’ prior written notice to the Owner. Such notices and any endorsements subsequently issued amending coverage or limits shall be delivered to the Owner by certified mail. Upon receipt of any notice of cancellation, non-renewal or reduction in coverage, the Contractor shall within five (5) days procure other policies of insurance, similar in all respects to the policy or policies about to be canceled, non-renewed or reduced in coverage. If the Contractor fails to provide acceptable policies of insurance, the Owner may obtain such insurance at the cost and the expense of the Contractor.

34.1.6 The Contractor shall require each Subcontractor to purchase and maintain insurance of the types and for the durations stipulated hereinabove with policy limits as established by Contractors Master Subcontract Agreements. All general liability policies carried by Subcontractors shall be endorsed to include as additional insured parties the Owner and its agents and employees.

Reference :

Security Exchange Commission - Edgar Database, EX-10.7 11 dex107.htm CONSTRUCTION AGREEMENT , Viewed April 5, 2021, < https://www.sec.gov/Archives/edgar/data/1381697/000119312507121562/dex107.htm >.

Sample 2 – Lease Agreement:

INSURANCE; CASUALTY . Throughout the entire Term of this Lease, Tenant will obtain and maintain in good standing, at Tenant’s expense: (a) public liability insurance with respect to the Premises, and the business operated by Tenant, with such insurance companies and in such form as are acceptable to Landlord with minimum limits with respect to bodily injury of One Million Dollars ($1,000,000.00) per person, and One Million Dollars ($1,000,000.00) per accident or occurrence, and Five Hundred Thousand Dollars ($500,000.00) with respect to property damage; (b) all workmen’s compensation or employer’s liability insurance as may be required by law. Tenant will have all liability policies endorsed to show Landlord as an additional insured with respect to all occurrences and no insurance provided under this Lease will be subject to cancellation or reduction of limits unless at least ten (10) days written notice is given to Landlord. Certificates of all policies evidencing the insurance required must be delivered to Landlord within five (5) business days of Tenant’s execution of this Lease. Tenant will furnish Landlord with a copy of Tenant’s policy or policies of insurance or certificates thereof, within ten (10) days of Landlord’s request for same. If Tenant does not comply with the provision of this Section, Landlord may at its option, cause insurance as aforesaid to be issued, and in such event, Tenant agrees to pay the premium for the insurance within five (5) business days of Tenant’s receipt of Landlord’s demand along with a fee of three percent (3%) of the annual premium for any such policy in order to reimburse Landlord for the administrative cost of coordinating and ensuring Tenant’s compliance with this provision, which such cost would otherwise be extremely difficult and impractical to determine with certainty. In no event shall Landlord be liable for any loss occasioned by fire or other casualty to personal property or fixtures of Tenant, its agents, employees, assignees, sub lessees, bailers, licensees, invitees or of any other person, firm or corporation upon any part of the Premises. Tenant’s insurance will provide primary coverage to Landlord when any policy issued to Landlord provides duplicate or similar coverage; it being the intent of the foregoing that in such circumstance Landlord’s policy will provide excess coverage over Tenant’s policy. Tenant is advised that Tenant’s personal property and fixtures are not covered under any of Landlord’s property insurance policies.

Security Exchange Commission - Edgar Database, EX1A-6 MAT CTRCT.2 8 d33449dex1a6matctrct2.htm LEASE AGREEMENT , Viewed April 5, 2021, < https://www.sec.gov/Archives/edgar/data/1652238/000119312515311712/d33449dex1a6matctrct2.htm >.

Common Contracts with Insurance Clauses

Here are a few common contracts with insurance clauses:

Construction Contract

An insurance clause in construction contracts often deals with limitations around:

• Property damage
• Bodily harm
• Profit losses
• Third-party claims

The insurance policy often specifies covered events and waivers.

Lease Agreement

An insurance clause in lease agreements can require commercial tenants to hold renter’s insurance. These clauses protect the real estate property owner and tenant in case of fire, flood, or storm damage in lease agreements.

Learn more about an “other” insurance clause here .

Insurance Clause FAQs

Insurance clauses carry specific legal implications. Below, you can find important insurance clause FAQs:

Which elements are included in an insurance clause?

There are three elements included in an insurance clause:

• A party makes an offer
• Another party accepts it
• They both exchange consideration

What makes an insurance contract legally binding?

Insurance contracts are legally binding when they include the elements of an insurance clause with affixed party signatures. However, legal mistakes can render them unenforceable.

If you need legal advice, speak with insurance lawyers clauses in insurance policy today.

ContractsCounsel is not a law firm, and this post should not be considered and does not contain legal advice. To ensure the information and advice in this post are correct, sufficient, and appropriate for your situation, please consult a licensed attorney. Also, using or accessing ContractsCounsel's site does not create an attorney-client relationship between you and ContractsCounsel.

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I have been practicing law for 35 years. In addition to my law degree, I hold an MBA. I've created six companies, currently act as outside counsel to another 12, and have been an advisor to more than 500 startups and entrepreneurs.

I am a licensed and active NY and CT Contracts Attorney, with over 20 years of diverse legal and business experience. I specialize in reviewing, drafting and negotiating commercial agreements. My practice focuses on working with small business clients as well as clients from international brokerage firms on acquisitions, especially in the Ecommerce space; drafting, negotiating, reviewing and advising on business agreements; ; breach of contract issues, contract disputes and arbitration. I am licensed to practice in New York and Connecticut, and am a FINRA and NCDS Arbitrator. My experience includes serving as General Counsel to small businesses. This entails reviewing, updating and drafting contracts such as employments agreements, asset purchase agreements, master services agreements, operating agreements and a variety of business and commercial contracts. Additionally, I assist clients with business strategies, contract disputes and arbitration. My diverse experience allows me to give my clients a well-rounded approach to the issues they face. I have been at top AML law firms; a Vice President at an Investment Bank, a Civil Court Arbitrator presiding over cases in contract law, commercial law, a Hearing Officer, presiding over cases and rendering written decisions, and a Judicial Clerk to a Civil Court Judge. It would be a privilege to assist you and your business with my services.

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John Benemerito is the Founder and Managing Partner of Benemerito Attorneys at Law. Admitted to practice in New York and New Jersey, John represents small business owners and startups in the areas of Business and Securities Law. John received his Bachelors Degree at John Jay College of Criminal Justice where he majored in Criminal Justice. Afterwards, he attended New York Law School where he focused his studies on Corporate and Securities Law. John comes from a family of entrepreneurs. From as far back as he can remember he was always involved in his family’s numerous businesses. At the age of fifteen, John entered into a new business venture with his father and managed to grow and maintain that business through high school, college and law school.John is currently a co founder in over five different businesses. After law school, John decided that he wanted to help people like himself. He opened his own law practice and began working primarily with small business owners until he was introduced into the startup world. Ever since that time, John has worked with hundreds of startups and thousands of entrepreneurs from all different backgrounds in helping them achieve their goals. Having been an entrepreneur his entire life, John understands what it takes to create and maintain a successful business. He enjoys sitting down and working with his clients in figuring out each of their unique challenges.

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How Does Your Insurance Policy’s “Assignment of Benefits” Clause Affect You?

When homeowners suffer a property loss, one of the first things they do – even before they know the amount of coverage they will receive from their insurer – is call a contractor. The contractor looks at the damage, and estimates the likely cost of repairing the property. Maybe that estimate is greater than the coverage amount the homeowner expects the insurance company to pay out.

In this instance, the contractor will sometimes suggest that the homeowner enter into an “assignment of benefits” (AOB) arrangement. Under this side contract, the contractor agrees to accept as payment whatever the insurance company pays for the insured’s property loss claim.

Such AOB deals can be a major problem.

For one thing, most contractors know very little about insurance coverages and the art of negotiating optimal coverage payouts. The insurance company may initially offer $60K, for example, in a situation where an experienced public adjuster could have secured almost twice that amount. The contractor might take the $60K, and then discover that amount isn’t enough to get the repair job done properly. The contractor then must skimp and cut corners, resulting in a shoddy repair job for the unsuspecting homeowner.

At common law, insureds were prohibited from assigning their insurance policy benefits and other underlying rights. State legislatures, however, have allowed AOB, and many state courts will permit the assignment of insurance policies.

The problems stemming from AOB have led to a mountain of litigation and debates about whether it should be allowed at all. Insurance carriers are happy to allow AOB, because contractors present an easy mark and often accept low-ball claim offers. The contractors, meanwhile, are serving two masters – handling the insured’s claim, as well as taking money to do repairs. That’s exactly why the National Association of Public Insurance Adjusters (NAPIA) doesn’t allow contractors to be PAs and do this type of work.

We recently spoke with Brian Goodman, General Counsel of NAPIA, who calls the practice of AOB “ripe with the possibility of harming consumers and making it so the insured never gets properly indemnified.”  We agree.

NAPIA is working with the National Association of Insurance Commissioners (NAIC) to eradicate the practice of AOB. There is some resistance because of an unwillingness to infringe on an individual’s right to contract with somebody. But, in our view, any use of AOB really harms consumers.

Diane Swerling

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An assignment clause (AC) is an important part of many contracts, especially for real estate. In this article we discuss:

• What is an Assignment Clause? (with Example)
• Anti-Assignment Clauses (with Example)
• Non-Assignment Clauses
• Important Considerations
• How Assets America ® Can Help

Frequently Asked Questions

What is an assignment clause.

An AC is part of a contract governing the sale of a property and other transactions. It deals with questions regarding the assignment of the property in the purchase agreement. The thrust of the assignment clause is that the buyer can rent, lease, repair, sell, or assign the property.

To “assign” simply means to hand off the benefits and obligations of a contract from one party to another. In short, it’s the transfer of contractual rights.

In-Depth Definition

Explicitly, an AC expresses the liabilities surrounding the assignment from the assignor to the assignee. The real estate contract assignment clause can take on two different forms, depending on the contract author:

• The AC states that the assignor makes no representations or warranties about the property or the agreement. This makes the assignment “AS IS.”
• The assignee won’t hold the assignor at fault. It protects the assignor from damages, liabilities, costs, claims, or other expenses stemming from the agreement.

The contract’s assignment clause states the “buyer and/or assigns.” In this clause, “assigns” is a noun that means assignees. It refers to anyone you choose to receive your property rights.

The assignment provision establishes the fact that the buyer (who is the assignor) can assign the property to an assignee. Upon assignment, the assignee becomes the new buyer.

The AC conveys to the assignee both the AC’s property rights and the AC’s contract obligations. After an assignment, the assignor is out of the picture.

What is a Lease Assignment?

Assignment Clause Example

This is an example of a real estate contract assignment clause :

“The Buyer reserves the right to assign this contract in whole or in part to any third party without further notice to the Seller; said assignment not to relieve the Buyer from his or her obligation to complete the terms and conditions of this contract should be assigning default.”

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Assignment provision.

An assignment provision is a separate clause that states the assignee’s acceptance of the contract assignment.

Assignment Provision Example

Here is an example of an assignment provision :

“Investor, as Assignee, hereby accepts the above and foregoing Assignment of Contract dated XXXX, XX, 20XX by and between Assignor and ____________________ (seller) and agrees to assume all of the obligations and perform all of the duties of Assignor under the Contract.”

Anti-Assignment Clauses & Non-Assignment Clauses

An anti-assignment clause prevents either party from assigning a contract without the permission of the other party. It typically does so by prohibiting payment for the assignment. A non-assignment clause is another name for an anti-assignment clause.

Anti-Assignment Clause Example

This is an anti-assignment clause example from the AIA Standard Form of Agreement:

” The Party 1 and Party 2, respectively, bind themselves, their partners, successors, assigns, and legal representatives to the other party to this Agreement and to the partners, successors, assigns, and legal representatives of such other party with respect to all covenants of this Agreement. Neither Party 1 nor Party 2 shall assign this Agreement without the written consent of the other.”

Important Considerations for Assignment Contracts

The presence of an AC triggers several important considerations.

Assignment Fee

In essence, the assignor is a broker that brings together a buyer and seller. As such, the assignor collects a fee for this service. Naturally, the assignor doesn’t incur the normal expenses of a buyer.

Rather, the new buyer assumes those expenses. In reality, the assignment fee replaces the fee the realtor or broker would charge in a normal transaction. Frequently, the assignment fee is less than a regular brokerage fee.

For example, compare a 2% assignment fee compared to a 6% brokerage fee. That’s a savings of $200,000 on a $5 million purchase price. Wholesalers are professionals who earn a living through assignments.

Frequently, the assignor will require that the assignee deposit the fee into escrow. Typically, the fee is not refundable, even if the assignee backs out of the deal after signing the assignment provision. In some cases, the assignee will fork over the fee directly to the assignor.

Assignor Intent

Just because the contract contains an AC does not obligate the buyer to assign the contract. The buyer remains the buyer unless it chooses to exercise the AC, at which point it becomes the assignor. It is up to the buyer to decide whether to go through with the purchase or assign the contract.

Nonetheless, the AC signals the seller of your possible intent to assign the purchase contract to someone else. For one thing, the seller might object if you try to assign the property without an AC.

You can have serious problems at closing if you show up with a surprise assignee. In fact, you could jeopardize the entire deal.

Another thing to consider is whether the buyer’s desire for an AC in the contract will frighten the seller. Perhaps the seller is very picky about the type of buyer to whom it will sell.

Or perhaps the seller has heard horror stories, real or fake, about assignments. Whatever the reason, the real estate contract assignment clause might put a possible deal in jeopardy.

Chain of Title

If you assign a property before the closing, you will not be in the chain of title. Obviously, this differs from the case in which you sell the property five minutes after buying it.

In the latter case, your name will appear in the chain of title twice, once as the buyer and again as the seller. In addition, the latter case would involve two sets of closing costs, whereas there would only one be for the assignment case. This includes back-to-back (or double) closings.

Enforceability

Assignment might not be enforceable in all situations, such as when:

• State law or public policy prohibits it.
• The contract prohibits it.
• The assignment significantly changes the expectations of the seller. Those expectations can include decreasing the value of the property or increasing the risk of default.

Also note that REO (real estate owned) properties, HUD properties, and listed properties usually don’t permit assignment contracts. An REO property is real estate owned by a bank after foreclosure. Typically, these require a 90-day period before a property can be resold.

How Assets America Can Help

The AC is a portion of a purchase agreement. When a purchase involves a commercial property requiring a loan of $10 million or greater, Assets America ® can arrange your financing.

We can finance wholesalers who decide to go through with a purchase. Alternatively, we can finance assignees as well. In either case, we offer expedient, professional financing and many supporting services. Contact us today for a confidential consultation.

What rights can you assign despite a contract clause expressly prohibiting assignment?

Normally, a prohibition against assignment does not curb the right to receive payments due. However, circumstances may cause the opposite outcome. Additionally, prohibition doesn’t prevent the right to money that the contract specifies is due.

What is the purpose of an assignment of rents clause in a deed of trust and who benefits?

The assignment of rents clause is a provision in a mortgage or deed of trust. It gives the lender the right to collect rents from mortgaged properties if the borrower defaults. All incomes and rents from a secured property flow to the lender and offset the outstanding debt. Clearly, this benefits the lender.

What is in assignment clause in a health insurance contract?

Commonly, health insurance policies contain assignment of benefits (AOB) clauses. These clauses allow the insurer to pay benefits directly to health care providers instead of the patient. In some cases, the provider has the patient sign an assignment agreement that accomplishes the same outcome. The provider submits the AOB agreement along with the insurance claim.

What does “assignment clause” mean for liability insurance?

The clause would allow the assignment of proceeds from a liability award payable to a third party. However, the insured must consent to the clause or else it isn’t binding. This restriction applies only before a loss. After a first party loss, the insurer’s consent no longer matters.

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Ronny was a pleasure to work with and is extremely knowledgeable. His hard work was never ending until the job was done. They handled a complex lease and guided us through entire process, including the paperwork. Not to mention a below market lease rate and more than all the features we needed in a site. We later used Assets America for a unique equipment financing deal where once again Ronny and team exceeded our expectations and our timeline. Thank you to Assets America for your highly professional service!

Great experience with Assets America. Fast turn around. Had a lender in place in 30 minutes looking to do the deal. Totally amazing. Highly recommend them to anyone looking for financing. Ronny is fantastic. Give them a call if the deal makes sense they can get it funded. Referring all our clients.

Assets America guided us every step of the way in finding and leasing our large industrial building with attached offices. They handled all of the complex lease negotiations and contractual paperwork. Ultimately, we received exactly the space we needed along with a lower than market per square foot pricing, lease length and end of term options we requested. In addition to the real estate lease, Assets America utilized their decades-long financial expertise to negotiate fantastic rates and terms on our large and very unique multimillion dollar equipment purchase/lease. We were thankful for how promptly and consistently they kept us informed and up to date on each step of our journey. They were always available to answer each and every one of our questions. Overall, they provided my team with a fantastic and highly professional service!

Assets America was responsible for arranging financing for two of my multi million dollar commercial projects. At the time of financing, it was extremely difficult to obtain bank financing for commercial real estate. Not only was Assets America successful, they were able to obtain an interest rate lower than going rates. The company is very capable, I would recommend Assets America to any company requiring commercial financing.

Assets America was incredibly helpful and professional in assisting us in purchasing our property. It was great to have such knowledgeable and super-experienced, licensed pros in our corner, pros upon which we could fully rely. They helped and successfully guided us to beat out 9 other competing offers! They were excellent at communicating with us at all times and they were extremely responsive. Having them on our team meant that we could always receive truthful, timely and accurate answers to our questions. We would most definitely utilize their services again and again for all of our real estate needs.

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Home > Finance > What Is An Assignee On A Life Insurance Policy?

What Is An Assignee On A Life Insurance Policy?

Published: October 14, 2023

Learn the role of an assignee on a life insurance policy and how it can impact your finances. Discover what it takes to become a finance-savvy assignee.

(Many of the links in this article redirect to a specific reviewed product. Your purchase of these products through affiliate links helps to generate commission for LiveWell, at no extra cost. Learn more )

Table of Contents

Introduction, definition of assignee, role of assignee in a life insurance policy, rights and responsibilities of an assignee, process of assigning a life insurance policy, benefits of assigning a life insurance policy, considerations before assigning a life insurance policy, potential challenges and risks for assignees.

Life insurance is a crucial financial tool that provides protection and financial security to individuals and their loved ones in case of unexpected events. While the primary purpose of life insurance is to provide a death benefit to beneficiaries, policy owners also have the flexibility to assign or transfer their policy rights to another person or entity. This is where an assignee comes into play.

An assignee on a life insurance policy refers to the individual or entity who is designated to receive the policy benefits or be the recipient of any policy changes. Assigning a life insurance policy can be a strategic move for policyholders who want to transfer ownership rights or allocate the proceeds to a specific person or organization.

In this article, we will delve deeper into the role of an assignee in a life insurance policy, their rights and responsibilities, as well as the process of assigning a policy. We will also explore the benefits and considerations involved in assigning a life insurance policy, along with potential challenges and risks that assignees may encounter.

Understanding the concept of assignees in life insurance policies is essential for policyholders who may be considering transferring their policy rights or for beneficiaries who need to comprehend the implications of an assigned policy. Without further ado, let’s dive into the details of assignees on a life insurance policy.

An assignee on a life insurance policy is an individual or entity that is designated to receive the policy benefits or take over the ownership rights and responsibilities. When a policyholder assigns their life insurance policy, they transfer their rights to the assignee, who then becomes the new owner of the policy.

The assignee can be a spouse, child, relative, friend, or even a business entity such as a trust or corporation. The assignee can be named at the time the policy is initially taken out, or the policyholder can choose to assign the policy at a later date. In some cases, a policyholder may assign their policy to a lender or creditor as collateral for a loan.

It is important to note that the assignee is distinct from the beneficiary. The beneficiary is the person or entity who receives the death benefit proceeds upon the death of the insured. While the assignee assumes ownership of the policy, they may or may not be the same person as the beneficiary.

Assigning a life insurance policy can be a way for policyholders to ensure that the intended recipient receives the policy benefits or to transfer the financial responsibility and management of the policy to someone else.

Now that we have established the definition of an assignee in a life insurance policy, let’s explore their role in more detail.

The assignee plays a significant role in a life insurance policy once they have been designated as the new owner. Their responsibilities and authority may vary depending on the terms of the policy and the specific agreement between the policyholder and the assignee. Here are some key roles an assignee may have:

• Policy Ownership: As the assignee, they become the legal owner of the life insurance policy. This means they have the rights to manage and make decisions regarding the policy, subject to any limitations or conditions outlined in the assignment agreement.
• Premium Payments: The assignee is generally responsible for paying the premiums to keep the policy in force. They may choose to use their own funds or utilize the policy’s cash value, if available, to cover the premiums.
• Beneficiary Designation: The assignee may have the authority to change the beneficiary designation if permitted by the policy terms. This gives them the ability to redirect the policy’s death benefit to another individual or entity.
• Policy Modifications: Depending on the specific agreement, the assignee may have the power to make changes to the policy, such as increasing or decreasing the coverage amount, adjusting the policy term, or adding additional riders.
• Access to Policy Information: As the new policy owner, the assignee has the right to access and review the policy information, including the policy terms, conditions, and any associated documents.
• Claims Processing: In the event of the insured’s death, the assignee is responsible for initiating the claims process and ensuring that the death benefit proceeds are disbursed to the designated beneficiary.

It’s important to note that the specific roles and authority of the assignee can vary based on the terms of the assignment agreement. It is essential for both the policyholder and the assignee to have a clear understanding of their respective roles and responsibilities to avoid any confusion or disputes in the future.

Now that we have examined the role of an assignee in a life insurance policy, let’s explore the rights and responsibilities they have in more detail.

When an individual or entity becomes the assignee of a life insurance policy, they acquire certain rights and responsibilities associated with the policy. These rights and responsibilities can vary depending on the terms of the assignment agreement and the specific provisions of the policy. Let’s take a closer look at the rights and responsibilities of an assignee:

Rights of an Assignee:

• Ownership Rights: As the assignee, they have the right to the policy benefits and any cash value that has accumulated. They can make decisions regarding the policy, such as changing the beneficiary, modifying coverage, or accessing policy information.
• Premium Payments: The assignee has the right to receive premium payments from the policyholder, which they can use to keep the policy in force. They may also have the right to access the policy’s cash value, if available.
• Policy Modifications: Depending on the terms of the assignment agreement, the assignee may have the right to make changes to the policy, such as adjusting the coverage amount, policy term, or adding additional riders.
• Access to Policy Information: The assignee has the right to access and review the policy information, including the terms, conditions, and any associated documents. This allows them to stay informed about the policy’s provisions and make informed decisions.
• Claims Processing: In the event of the insured’s death, the assignee has the right to initiate the claims process and receive the death benefit proceeds. They are responsible for disbursing the proceeds to the designated beneficiary, if applicable.

Responsibilities of an Assignee:

• Premium Payments: As the assignee, they are responsible for making premium payments to keep the policy in force. This ensures that the policy remains active and the coverage continues.
• Policy Management: The assignee has the responsibility to manage and maintain the policy. This includes reviewing the policy regularly, staying informed about any changes in the terms and conditions, and making decisions that align with the policyholder’s intentions.
• Beneficiary Designation: If authorized by the assignment agreement, the assignee may have the responsibility to change the beneficiary designation if necessary. This involves ensuring that the intended recipient of the death benefit is correctly designated.
• Communication: The assignee has the responsibility to maintain open communication with the policyholder, beneficiaries, and any other parties involved. This helps in addressing any questions, concerns, or changes that may arise regarding the policy.

It’s important for both the assignee and the policyholder to have a clear understanding of these rights and responsibilities to ensure a smooth and effective management of the policy. Now that we have explored the rights and responsibilities of an assignee, let’s move on to understand the process of assigning a life insurance policy.

The process of assigning a life insurance policy involves transferring the ownership rights and control of the policy from the policyholder to the assignee. While the specific steps may vary based on the insurance company and policy terms, the general process typically includes the following:

• Review Policy Terms: The policyholder should carefully review the terms and conditions of their life insurance policy to understand any limitations or restrictions on assigning the policy.
• Choose an Assignee: The policyholder selects an individual or entity to be the assignee. This can be a family member, friend, trust, or even a business entity. It is essential to consider the long-term goals and intentions when choosing an assignee.
• Obtain Consent: The policyholder must obtain the consent of the proposed assignee to ensure they are willing to assume the responsibilities and obligations associated with the policy.
• Prepare Assignment Agreement: The policyholder and the assignee should work together to prepare an assignment agreement. This is a legal document that outlines the terms of the assignment, including the assignee’s rights, responsibilities, and any potential compensation or considerations involved.
• Notify the Insurance Company: The policyholder must contact their insurance company to inform them of the intention to assign the policy. The insurance company may require specific forms to be filled out, along with a copy of the assignment agreement.
• Insurance Company Approval: The insurance company will review the assignment request and the assignment agreement to ensure they comply with their policies and regulations. Once approved, they will update their records to reflect the new assignee.
• Update Beneficiary Designation: If the assignee is different from the original beneficiary, the policyholder may need to update the beneficiary designation to ensure that the intended recipient receives the death benefit.

It is crucial for both the policyholder and the assignee to consult with legal and financial professionals to ensure that the assignment process is conducted properly, adhering to any legal requirements and optimizing the financial outcomes for all parties involved.

Now that we have discussed the process of assigning a life insurance policy, let’s move on to explore the benefits of assigning a life insurance policy.

Assigning a life insurance policy can offer several benefits for both the policyholder and the assignee. Here are some key advantages of assigning a life insurance policy:

• Control and Flexibility: Assigning a life insurance policy allows the policyholder to have control over who will manage and benefit from the policy. It provides flexibility to designate a specific person or entity to take over the ownership rights and responsibilities.
• Estate Planning: Assigning a life insurance policy can be an effective estate planning strategy. It allows the policyholder to transfer assets outside of their estate, which may help in minimizing estate taxes and ensuring a smooth transfer of wealth to the intended recipients.
• Creditor Protection: By assigning a life insurance policy to a trust or business entity, the policy cash value and death benefit may be protected from potential creditors. This provides an added layer of financial security for the assignee and the intended beneficiaries.
• Financial Assistance: Assigning a life insurance policy can be beneficial in scenarios where the assignee needs financial assistance. For example, if the assignee is facing financial hardship or requires funds for a specific purpose, they may be able to access the policy’s cash value or even borrow against the policy.
• Charitable Giving: Assigning a life insurance policy to a charitable organization can be a meaningful way to support a favorite cause. It allows the policyholder to make a significant charitable contribution, and the assignee, in this case, would be responsible for managing the policy and ensuring that the proceeds benefit the designated charity.

It’s important to note that the benefits of assigning a life insurance policy can vary depending on the specific circumstances and goals of the policyholder. Therefore, it is advisable to consult with financial advisors, estate planning professionals, and insurance experts to assess the suitability of assigning a policy and to maximize the potential benefits.

Now that we have explored the benefits of assigning a life insurance policy, let’s move on to discuss some considerations before making the decision to assign a policy.

Before deciding to assign a life insurance policy, it is crucial to carefully consider a few key factors. These considerations will help ensure that the decision aligns with your financial goals and meets your specific needs. Here are some important points to ponder:

• Impact on Beneficiaries: Assigning a life insurance policy may have implications for the intended beneficiaries. It is essential to consider their needs and financial security before assigning the policy to someone else or an entity. Make sure to have open conversations with the beneficiaries to discuss any changes in the policy ownership and how it may impact them.
• Future Financial Needs: Assess your own future financial needs before assigning a life insurance policy. Life circumstances can change, and it is crucial to determine if the policy’s cash value or death benefit might be required for your own financial stability or long-term goals. Balancing immediate financial needs with the desire to assign the policy is important.
• Trustworthiness of the Assignee: Consider the trustworthiness and reliability of the proposed assignee. Assigning a life insurance policy involves transferring ownership rights and responsibilities, so it is crucial to choose someone who will effectively manage the policy and fulfill the agreed-upon obligations. Conduct thorough due diligence and consider seeking legal advice to ensure the assignee is the right choice.
• Tax Implications: Assigning a life insurance policy may have tax implications. Consult with tax professionals to understand any potential tax consequences of the assignment, such as gift tax or estate tax considerations. Proper planning and knowledge of tax laws will help mitigate any unexpected tax liabilities.
• Insurance Company Policy: Review the terms and conditions of your life insurance policy regarding assignments. Some policies may have restrictions or limitations on assigning a policy, and it’s important to understand these provisions. Contact your insurance company directly to clarify any concerns or questions related to the assignment process.
• Legal Considerations: Assigning a life insurance policy involves legal documentation and agreements. It is advisable to consult with legal professionals who specialize in insurance and estate planning to ensure that the assignment is conducted in compliance with applicable laws and meets your specific needs.

Considering these factors will help you make an informed decision about whether assigning a life insurance policy is the right choice for you. Assess your individual situation, speak with professionals, and review your long-term goals to determine if assigning the policy aligns with your overall financial plan.

Now that we have explored the considerations before assigning a life insurance policy, let’s discuss some potential challenges and risks for assignees.

While assigning a life insurance policy can have its benefits, there are also potential challenges and risks that assignees should be aware of. Understanding these risks will help you make informed decisions and take necessary precautions. Here are some potential challenges and risks for assignees:

• Financial Responsibility: As the assignee, you become responsible for paying the policy premiums to keep the coverage in force. Failure to pay the premiums can result in the policy lapsing, causing loss of coverage and potential loss of the policy’s cash value.
• Potential Conflict: Assigning a life insurance policy may lead to conflicts, especially if the policyholder has multiple beneficiaries or if the assigned policy conflicts with other estate planning arrangements. It is important to communicate and coordinate with all involved parties to minimize potential disputes.
• Changing Circumstances: Life circumstances can change, and the assigned policy may no longer align with the assignee’s needs or financial goals. Review the policy periodically to ensure it still meets your objectives. If necessary, consult with professionals to explore options for policy modifications or changes.
• Loss of Control: By assigning a policy, you relinquish control over certain aspects of the policy. The assignee may need to consult the policyholder or beneficiaries before making any changes or important decisions. This loss of control should be carefully considered before proceeding with the assignment.
• Insurance Company Approval: The insurance company typically has the final say in approving the assignment. They will review and confirm the assignment agreement to ensure compliance with their policies. If the assignment is not approved, it can impede the intended transfer of ownership.
• Tax Implications: Assigning a life insurance policy may have tax consequences for the assignee, such as potential income tax on the policy’s cash value or estate tax implications. Consult with tax professionals before finalizing the assignment to fully understand these potential tax implications.

It is crucial for assignees to carefully weigh these challenges and risks against the potential benefits before accepting the assignment of a life insurance policy. Be proactive in communicating with the policyholder and beneficiaries, stay informed about policy details, and seek professional guidance to navigate any potential challenges or risks.

Now that we have discussed the potential challenges and risks for assignees, let’s wrap up our article.

Assigning a life insurance policy can be a strategic financial move that offers flexibility and control over the policy’s ownership and benefits. By designating an assignee, individuals can ensure that the policy proceeds are directed to the intended recipient or utilize the expertise of an entity to manage the policy. However, before proceeding with an assignment, it is important to carefully consider various factors.

Understanding the role, rights, and responsibilities of an assignee is vital to ensure a smooth transition and effective management of the policy. The assignee assumes ownership of the policy, enjoying benefits such as decision-making authority and control over premiums. They also have responsibilities, including making premium payments, managing the policy, and initiating claims if the insured passes away.

The process of assigning a life insurance policy involves reviewing policy terms, choosing an assignee, obtaining consent, preparing an assignment agreement, and notifying the insurance company. It is crucial to review the policy specifics and consult legal and financial professionals to ensure compliance with regulations and optimize financial outcomes.

Assigning a life insurance policy offers numerous benefits, such as control, estate planning opportunities, creditor protection, and financial assistance. However, there are considerations to keep in mind, including the impact on beneficiaries, future financial needs, and tax implications.

Assignees may face potential challenges, such as financial responsibility, conflicts of interest, changing circumstances, loss of control, and insurance company approval. These risks should be carefully assessed, and open communication with the policyholder and beneficiaries is essential to minimize disputes and ensure a smooth transition.

In conclusion, assigning a life insurance policy requires thoughtful deliberation and consultation with professionals. Assessing your financial goals, considering the needs of beneficiaries, and understanding the potential risks will help make an informed decision. Assigning a life insurance policy can provide peace of mind, but careful consideration and planning are essential to ensure the assigned policy aligns with your long-term financial goals.

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Understanding Assignment Clauses in Contracts

Nov 22, 2023 | Contracts

Contracts are an integral part of our daily lives, governing a wide range of transactions from buying goods and services to entering into employment agreements. One often-overlooked yet crucial aspect of contracts is the assignment clause. Understanding assignment clauses is essential for individuals and businesses alike, as they can significantly impact the parties involved. In this comprehensive guide, we will explore the intricacies of assignment clauses, their significance, and how they can affect contractual relationships.

Table of Contents

What is an Assignment Clause?

An assignment clause, also known as a delegation clause, is a provision in a contract that dictates whether one party (the assignor) can transfer its rights, obligations, or both to another party (the assignee). In simpler terms, it outlines whether the original parties to the contract can delegate their responsibilities or transfer their benefits to a third party.

Key Components of Assignment Clauses:

Consent Requirement:

Some contracts explicitly state that an assignment can only occur with the consent of all parties involved. This ensures that no party is forced into a relationship with an unknown or potentially undesirable third party.

Prohibition of Assignment:

Conversely, some contracts expressly prohibit assignment altogether. In such cases, the parties to the contract are obligated to fulfill their roles personally, without the option to transfer their obligations or benefits.

Automatic Assignment:

In certain instances, contracts may include automatic assignment clauses. This means that rights and obligations are automatically transferred to a third party without the need for explicit consent.

Notice Requirements:

Assignment clauses often include provisions regarding notice requirements. These stipulate that the assignor must inform the other party or parties involved in the contract about the assignment, providing transparency and an opportunity for objection if necessary.

Significance of Assignment Clauses:

Risk Management:

Assignment clauses play a crucial role in risk management. For the party assigning its rights or obligations, it’s a way to mitigate potential risks and liabilities associated with the contract.

Flexibility:

From a business perspective, assignment clauses offer flexibility. They allow companies to adapt to changing circumstances, such as mergers, acquisitions, or restructuring, without the need to renegotiate every existing contract.

Investment and Financing:

Assignment clauses are of particular importance in financial transactions. Lenders and investors often look for the ability to assign contractual rights as a way to secure their interests.

Contractual Relationships:

Understanding assignment clauses is crucial for maintaining healthy contractual relationships. When parties are aware of the potential for assignment, they can negotiate terms that protect their interests and maintain the intended balance in the contract.

Common Misconceptions:

Assumption of Liabilities:

One common misconception is that by assigning contractual rights, the assignor is automatically relieved of all liabilities. In many cases, unless explicitly stated otherwise, the assignor may still be responsible for fulfilling the contractual obligations.

Unilateral Assignment:

Parties often assume they can unilaterally assign their rights or obligations. However, many contracts require the consent of all involved parties before an assignment can take place.

Case Studies:

To illustrate the practical implications of assignment clauses, let’s examine a couple of hypothetical scenarios:

Real Estate Transactions:

In real estate, assignment clauses are commonly used. For example, if a buyer signs a purchase agreement and later decides to sell the property before closing, the assignment clause dictates whether such a transfer is allowed and under what conditions.

Business Contracts:

In a business context, consider a company that enters into a service agreement with a third party. If the company undergoes a merger, the assignment clause becomes critical in determining whether the rights and obligations under the service agreement can be transferred to the newly formed entity.

Conclusion:

Understanding assignment clauses is fundamental for anyone entering into a contract, whether as an individual or a business entity. These clauses have far-reaching implications, influencing the flexibility, risk management, and overall dynamics of contractual relationships. By carefully considering and negotiating assignment clauses, parties can ensure that their interests are protected and that the contract remains adaptable to the ever-changing landscape of business and personal transactions.

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Prohibition of assignment clause did not prevent a transfer of rights by operation of law

What happened, what did the court of appeal say, what does this mean for me.

Dassault Aviation SA v Mitsui Sumitomo Insurance Co. Ltd [2024] EWCA Civ 5 involved a contract for the sale of two aircraft and spare parts.

Under the contract, which was governed by English law, Dassault Aviation would sell the aircraft to Mitsui Bussan Aerospace (MBA). Under a separate contract (governed by Japanese law), MBA would subsequently on-sell the aircraft to the Japanese Coastguard.

MBA was concerned that, if Dassault delivered the aircraft late to MBA, this would affect delivery times under MBA’s contract with the Coastguard and MBA could be liable for late delivery to the Coastguard.

To protect itself against this risk, MBA took out an insurance policy from Mitsui Sumitomo Insurance (MSI) (which, despite the name, was not connected in any way with MBA). The insurance policy was governed by Japanese law.

As it happened, the aircraft were delivered late. MBA claimed under the insurance policy, and MSI duly paid the claim.

Under article 25 of the Japanese Insurance Act (No. 56 of 2008), where an insurer pays out under a Japanese policy of insurance, the insurer is automatically subrogated to any claim the policyholder may have in connection with the event that led to the pay-out. In other words, the policyholder’s right to claim damages passes automatically to the insurer.

Essentially, the same position applies in England and Wales under the common law. See the box “ What is subrogation? ” for more information.

In this scenario, this would mean that MBA’s right to claim against Dassault for breach of contract (due to the late delivery by Dassault) would pass to MSI, so that MSI could claim directly against Dassault.

However, the sale contract between Dassault and MBA contained the following clause (the assignment prohibition):

“[T]his Contract shall not be assigned or transferred in whole or in part by any Party to any third party, for any reason whatsoever, without the prior written consent of the other Party and any such assignment, transfer or attempt to assign or transfer any interest or right hereunder shall be null and void without the prior written consent of the other Party.”

Dassault argued that the prohibition prevailed and prevented MBA’s rights under the contract from transferring to MSI under the Insurance Act. If correct, this would mean that MSI would have no right to claim against Dassault to recover the amount it had paid out to MBA.

Subrogation is a broad doctrine which essentially states that, if a person (X) pays or discharges a debt or obligation of someone else (Y), then X steps into Y’s shoes and acquires Y’s rights.

Under English law, subrogation applies in a wide range of circumstances, including the following.

• When an insurer pays out to a policyholder . The insurer is subrogated to the policyholder’s rights and can take action in place of the policyholder. For example, an individual might take out buildings and contents insurance on their property and, at some point during the policy term, a leak develops, flooding the property and causing damage. The damage is caused by faulty workmanship by a plumber. The individual may be able to claim against the plumber in negligence but instead claims under their insurance policy. The insurer is subrogated to the claim in negligence against the plumber in place of the individual.
• When a guarantor pays out under a guarantee . For example, a person (X) borrows a sum of money from a lender. Another person (Y) gives a guarantee for X’s obligation to repay the sum. The lender calls on the guarantee and Y repays the sum instead of X. By way of subrogation, Y can bring proceedings against X to claim back the amount Y has paid out to the lender. (This is also described as a right of reimbursement, rather than subrogation.)
• Where a person pays someone else’s secured debt . For example, a person (K) takes out a mortgage loan from a bank, which is secured by a mortgage over K’s property. The mortgage becomes payable, but K’s colleague (L) pays the mortgage off instead of K. Until K reimburses L, L is subrogated to the mortgage security over the property. If K does not reimburse L, L can enforce the mortgage and take possession of the property (and sell it).
• Where an agent pays out for their principal . For example, an individual appoints an agent to negotiate a purchase of land on the individual’s behalf. The purchase contract is settled and the individual is required to pay the purchase price. However, for whatever reason (perhaps for ease), the agent pays the purchase price. The seller transfers the land to the individual. By virtue of subrogation, until the agent is paid back, the agent has all the rights over the land which the seller had before the sale.

Subrogation can be complicated and how it works in practice varies greatly depending on the legal and factual circumstances. In many respects, subrogation is less a doctrine and more a form of remedy which a person who has discharged someone else’s obligations can seek in an appropriate form. The principal point of subrogation is that the person whose obligations have been discharged should not be unjustly enriched by failing to perform those obligations themselves.

However, one common factor to all types of subrogation is that it involves an automatic transfer of rights , which occurs by operation of law and does not require a specific assignment by anyone.

Initially, the dispute was referred to arbitration at the ICC in London. The arbitration panel held (by a majority) that MBA’s rights under the sale contract had transferred to MSI under the Insurance Act.

Dassault appealed to the High Court of England and Wales. The High Court overturned the arbitrators’ decision, finding that the prohibition was wide enough to capture a transfer by operation of law.

The High Court noted the words “by any Party” in the assignment prohibition were ambiguous and needed to be interpreted. It therefore embarked on the traditional process of contractual interpretation that applies when the wording of a contract is unclear. See the box “ How will the court interpret a contract? ” for more information.

It held that the words indicated an element of action or willingness by a Party, and that this was what was required for the prohibition to apply. A transfer would fall outside the prohibition only if it were outside the voluntary control of the transferring party (here, MBA).

In this case, although MBA had not directly assigned its rights to MSI, it had entered willingly into the insurance policy and made a claim under it, with the direct and predictable result that its rights would be transferred to MSI under the Insurance Act. In the High Court’s view, this amounted to an assignment by MBA and was caught by the prohibition.

MSI appealed to the Court of Appeal of England and Wales.

The court re-examined the words “by any Party” and found that they were unambiguous and clear. They covered a transfer effected by a party to the sale contract, but that did not include a transfer that occurred automatically by operation of law (as was the case under the Insurance Act).

The judges disagreed with the High Court’s approach that the key question was whether the transfer was outside MBA’s voluntary control. Rather, it was a simple case of reading the contract to decide whether the transfer had been made by MBA.

It had not. The transfer had taken place automatically under the Insurance Act and so was not prohibited by the assignment prohibition.

In reaching its decision, the court noted that the sale contract between Dassault and MBA contained provisions that specifically contemplated the parties taking out insurance (Dassault insurance against loss or damage to certain specific equipment, and MBA insurance in connection with ferry flight delivering the aircraft).

Although these specific provisions did not cover the insurance policy that MBA had placed with MSI, they did indicate that the parties were happy for insurance to cover the arrangements, suggesting in turn that they understood that rights under the contract might transfer to an insurer.

The court found, therefore, that MBA’s rights had transferred to MSI and the assignment prohibition did not apply.

If the wording of an agreement is clear, the courts will assume that it reflects the parties’ intentions and enforce the literal word of the contract. This will be the case even if the result is unusual or uncommercial.

The only exception to this is where the parties’ agreement is in some way restricted by law. For example, the court may find that a clause is unenforceable as a restraint of trade, a contractual penalty, and unreasonable exclusion or limitation of liability, or an attempt to carry out unlawful acts. In these cases, the courts may be able to strike parts of the contract out to make it work.

However, if the wording of a contract is ambiguous and could have more than one meaning, the court must embark on a process of contractual interpretation (also called construction).

The law on contractual interpretation is now settled, following three landmark cases ( Rainy Sky SA v Kookmin Bank [2011] UKSC 50; Arnold v Britton [2015] UKSC 36; and Wood v Capita Insurance Services Ltd [2017] UKSC 24).

In short, the court will examine the wording of the contract and ascertain what a reasonable person with all the relevant background knowledge at the time of the contract would have understood.

The court will look not only at the text of the contract, but also the surrounding context at the time. This is a single exercise, and the court will not automatically prefer the wording (textualism) over the surrounding circumstances (contextualism) or vice versa. However, the weight the court will give the text and the context will vary depending on the nature and formality of the contract.

If, after doing this, the court finds there is still more than one plausible interpretation of the contract, it will prefer the interpretation that is most consistent with business common sense.

The case shows the importance of formulating any prohibition of assignment provisions properly.

Here, the court felt that the wording of the sale contract was clear. By using the words “by any Party”, the prohibition extended only to direct attempts by a party to assign their rights.

Had those words not appeared (e.g. “ [T]his Contract shall not be assigned or transferred in whole or in part to any third party… ”), the court may have been required to embark on a deeper analysis of the clause to understand whether it would have prohibited transfers by operation of law. Indeed, the court might have concluded that it would have done so.

The case revolved around automatic transfers under Japanese law. The position might well be different under English law. This point was not argued – both Dassault and MSI appear to have accepted that, had the contract been governed by English law, the transfer of rights to MSI would have taken place – and so the court did not need to decide the issue.

But that does not mean that it is impossible to exclude the right to subrogation through a prohibition of assignment, and contract parties may wish to ensure any contractual prohibitions are worded broadly enough that they at least make an attempt to do so.

However, whether this is appropriate will need to be judged on a case-by-case basis, and may be more obviously covered by agreeing a subrogation waiver. For example, it is very common for a buyer of a business to deploy warranty and indemnity (W&I) insurance and for the seller(s) to require the W&I insurer to expressly waive any rights of subrogation.

Conversely, most liability insurance policies contain an express obligation on the insured party not to enter into any agreement with a third party that might restrict the insurer’s right of recovery. A prohibition of assignment that excludes a right of subrogation may do exactly that and could, in theory, invalidate the insurance policy itself.

Where insurance arrangements are contemplated under a contract, the parties should have a mind to the potential implications from an insurance-law perspective, including any potential subrogation following a claim under an insurance policy.

Any contractual provisions that do contemplate insurance are unlikely to stipulate a particular governing law for the insurance, so it may not be possible to make an informed assessment. In addition, the party taking out insurance may well not inform the other party that they are doing so and/or might take out insurance of a type not contemplated by the contract.

In each case, this could lead to a contract party facing legal proceedings under the contract by a third party whose identity is not known at the date of the contract.

Ultimately, where a contract party intends in advance to procure insurance in relation to the subject matter of the contract, it is important to seek legal advice to ensure that the policy and the contract operate smoothly and clearly alongside each other.

Access the court’s decision on whether a contract prohibited an assignment by operation of law ( Dassault Aviation SA v Mitsui Sumitomo Insurance Co. Ltd [2024] EWCA Civ 5)

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Assignment in Insurance Policy | Meaning | Explanation | Types

Table of Contents

• 1 What is Assignment in an Insurance Policy?
• 2 Who can make an assignment?
• 3 What happens to the ownership of the policy upon Assignment?
• 4 Can assignment be changed or cancelled?
• 5 What happens if the assignment dies?
• 6 What is the procedure to make an assignment?
• 7 Is it necessary to Inform the insurer about assignment?
• 8 Can a policy be assigned to a minor person?
• 9 Who pays premium when a policy is assigned?
• 10.1 1. Conditional Assignment
• 10.2 2. Absolute Assignment

What is Assignment in an Insurance Policy?

Assignment means a complete transfer of the ownership of the policy to some other person. Usually assignment is done for the purpose of raising a loan from a bank or a financial institution .

Assignment is governed by Section 38 of the Insurance Act 1938 in India. Assignment can also be done in favour of a close relative when the policyholder wishes to give a gift to that relative. Such an assignment is done for “natural love and affection”. An example, a policyholder may assign his policy to his sister who is handicapped.

Who can make an assignment?

A policyholder who has policy on his own life can assign the policy to another person. However, a person to whom a policy has been assigned can reassign the policy to the policyholder or assign it to any other person. A nominee cannot make an assignment of the policy. Similarly, an assignee cannot make a nomination on the policy which is assigned to him.

What happens to the ownership of the policy upon Assignment?

When a policyholder assign a policy, he loses all control on the policy. It is no longer his property. It is now the assignee’s property whether the policyholder is alive or dead, the assignee alone will get the policy money from the insurance company.

If the assignee dies, then his (assignee’s) legal heirs will be entitled to the policy money.

Can assignment be changed or cancelled?

An assignment cannot be changed or cancelled. The assignee can of course, reassign the policy to the policyholder who assigned it to him. He can also assign the policy to any other person because it is now his property. We can think of a bank reassigning the policy to the policyholder when their loan is repaid.

What happens if the assignment dies?

If the assignee dies, the assignment does not get cancelled. The legal heirs of the assignee become entitled to the policy money. Assignment is a legal transfer of all the interests the policyholder has in the policy to the assignee.

What is the procedure to make an assignment?

Assignment can be made only after issue of the policy bond. The policyholder can either write out the wording on the policy bond (endorsement) or write it on a separate paper and get it stamped. (Stamp value is the same, as the stamp required for the policy — Twenty paise per one thousand sum assured). When assignment is made by an endorsement on the policy bond, there is no need for stamp because the policy is already stamped.

Is it necessary to Inform the insurer about assignment?

Yes, it is necessary to give information about assignment to the insurance company. The insurer will register the assignment in its records and from then on recognize the assignee as the owner of the policy. If someone has made more than one assignment, then the date of the notice will decide which assignment has priority. In the case of reassignment also, notice is necessary.

Can a policy be assigned to a minor person?

Assignment can be made in favour of a minor person. But it would be advisable to appoint a guardian to receive the policy money if it becomes due during the minority of the assignee.

Who pays premium when a policy is assigned?

When a policy is assigned normally, the assignee should pay the premium, because the policy is now his property. In practice, however, premium is paid by the assignor (policyholder) himself. When a bank gives a loan and takes the assignment of a policy a security, it will ask the assignor himself to pay the premium and keep it in force. In the case of an assignment as a gift, the assignor would like to pay the premium because he has gifted the policy.

Types of assignment

Assignment may take two forms:

• Conditional Assignment.
• Absolute Assignment.

1. Conditional Assignment

It would be useful where the policyholder desires the benefit of the policy to go to a near relative in the event of his earlier death. It is usually effected for consideration of natural love and affection. It generally provides for the right to revert the policyholder in the event of the assignee predeceasing the policyholder or the policyholder surviving to the date of maturity.

2. Absolute Assignment

This assignment is generally made for valuable consideration. It has the effect of passing the title in the policy absolutely to the assignee and the policyholder in no way retains any interest in the policy. The absolute assignee can deal with the policy in any manner he likes and may assign or transfer his interest to another person.

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Expert Analysis

What Wis. Anti-Assignment Ruling Means For Policyholders

By Brian Scarbrough and Daniel Ergas · August 3, 2022, 6:47 PM EDT

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Loss Payable Clause: What it is, How it Works, Example

Daniel Liberto is a journalist with over 10 years of experience working with publications such as the Financial Times, The Independent, and Investors Chronicle.

Investopedia / Jake Shi

What Is a Loss Payable Clause?

A loss payable clause is an insurance contract endorsement where an insurer pays a third party for a loss instead of the named insured or beneficiary. The loss payable provision limits the rights of the loss payee to be no higher than the rights guaranteed to the insured.

A loss payable clause might also be called a loss payee clause.

Key Takeaways

• A loss payable clause is an insurance contract endorsement where an insurer pays a third party for a loss instead of the named insured or beneficiary.
• The loss payee is usually registered as the recipient because it has an assignment of interest in the property being insured.
• Loss payable clauses are often used to protect lenders who have leased property or extended credit.
• They are commonly found in commercial property, auto, and maritime insurance contracts.

How a Loss Payable Clause Works

A loss payable clause indicates that a third party, referred to as the loss payee, receives funds paid for a loss. Usually, the loss payee is registered as the recipient because there is an assignment of interest in the property being insured.

Loss payable clauses are often used to protect lenders who have leased property or extended credit . They are regularly present in commercial property insurance contracts , specifically for financed properties, where the mortgage holder is the loss payee. Because a lien exists on the property, the loss payee is also known as the lien holder.

A loss payee could be a lender, lessor, buyer, property owner or any other party with interest in the insured property.

Loss payable clauses are also commonly found in personal and commercial auto policies and maritime insurance contracts.

Example of a Loss Payable Clause

When financing a vehicle purchase, the buyer must agree to carry insurance on the secured property. Usually, the financial institution (FI) making the loan will require verification of insurance coverage and insist that it is registered as the loss payee on the policy. Failure to do so could result in the lender implementing forced placed insurance .

Listing the lender as loss payee ensures that it will be compensated, regardless of potential losses. In short, it essentially functions as a safety net for the lender to reduce unpaid loans.

Since the buyer of the vehicle is not the sole owner of the collateral , claim checks will be payable to both the driver and the lender — or directly to a repair shop. In a  total loss , the lender will be paid first.

Loss Payable Clause Requirements

Insurance contracts often limit the amount of time that can pass between the occurrence of a loss and the filing of a claim. The time limitations may vary according to the type of risk covered since some losses take longer to develop.

If a loss occurs, the insured party is often required to file a claim. Should no proof of damage or loss be submitted within the allotted period, the loss payee then becomes responsible for filing the claim.

The insurer may make separate payments to the insured party and the loss payee. When payment is to the loss payee, the insurer earns the legal right to pursue and recoup funds from any third party that caused the damage. In other words, the loss payee waives its right to seek any third party damages as soon as it has been paid by the insurance carrier.

If a policyholder should cancel a policy after funds are submitted to the loss payee, the loss payee must assign the lien to the insurance carrier, to equal losses paid.

Special Considerations

The wording of the loss payable clause often details exceptions when the loss payee's concern is unprotected. These cases include fraud , misrepresentation, or intentional acts committed by the policyholder such as deliberately damaging or destroying the property.

The loss payee may also lose its protection if aware that the property, such as a vehicle, changes ownership or faces an increased risk of damage or loss. If there is a reason for the insurer to deny payment to the policyholder, then the insurer is under no obligation to submit payment to the loss payee.

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