what is an insurance assignment clause

• Insurance Clause

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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.

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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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• Assignment of Rights and Obligations Under a Contract
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What Is an Anti-Assignment Clause?

Anti-Assignment Clauses Explained

• Definition and Example

How Anti-Assignment Clauses Work

• State Laws and Anti-Assignment Clauses

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An anti-assignment clause is a provision in an insurance policy that bars the policyholder from transferring their rights under the policy to another party. The clause prohibits the insured from authorizing someone else to file claims, make changes, or take other actions under the policy.

Many  small businesses  purchase insurance policies that contain an anti-assignment clause, which may affect their ability to conduct certain routine business transactions. For instance, if your property is damaged and you hire a contractor to make repairs, the clause may bar you from allowing the contractor to collect loss payments directly from your insurer. In addition, some restrictions found in anti-assignment clauses may be overridden by state laws. Below, we’ll explore further what an anti-assignment clause is and how it works.

Definition and Example of an Anti-Assignment Clause

An anti-assignment clause is language found in an insurance policy that forbids the policyholder from assigning their rights and interests under the policy to someone else without the insurer’s consent. The clause is usually found in the policy conditions section.

Alternate name : Assignment clause, Non-assignment clause

An example of an anti-assignment clause is wording contained in the standard Insurance Services Office (ISO) business owners policy (BOP) . You can find it in the Common Policy Conditions (Section III) under the heading “Transfer of Your Rights and Duties Under This Policy.” The clause states that your rights and duties under the policy may not be transferred without the insurer’s written consent. However, if you are an individual named on the policy and you die, your rights will be transferred to your legal representative.

An anti-assignment clause may not include the word “assignment” but instead refer to a transfer of rights under the policy.

Anti-assignment clauses prevent policyholders from transferring their rights under the policy to someone else without the insurer’s permission. The clauses are designed to protect insurers from unknown risks. Insurers evaluate insurance applicants carefully before they agree to provide coverage. They consider an applicant’s business experience, loss history, and other factors to gauge their susceptibility to claims. When an insurer issues a policy, the premium reflects the insurer’s assessment of the applicant’s risks. If the policyholder transfers their rights under the policy to another party, the insurer’s risk increases. This is because the insurer hasn’t had an opportunity to evaluate the new party’s risks.

The following example demonstrates how an anti-assignment clause in an insurance policy can affect a business.

Theresa is the owner of Tasty Tidbits, a pastry shop she operates out of a commercial building she owns. She has insured her business for liability and property under a business owners policy. Theresa decides to take a one-year sabbatical from her business and asks her friend Ted to manage Tasty Treats during her absence. Theresa signs a contract assigning her rights under Tasty Tidbits’ BOP to Ted.

If a loss occurs, Ted may have no right to file a claim or collect benefits under the policy on Tasty Treats’ behalf. The assignment is barred by the anti-assignment clause in the BOP.

Effect of State Laws on Anti-Assignment Clauses

Many states have enacted laws via a statute or court ruling that override anti-assignment clauses in insurance policies. These laws may invalidate all or a portion of a policy’s anti-assignment provision. While the laws vary, many bar pre-loss assignments but permit assignments made after a loss has occurred. Assignments made before any losses have occurred are prohibited because they increase the insurer’s risks. Post-loss assignments don’t increase the insurer’s risks, so they generally are permitted.

Some states prohibit any assignment of benefits made without the insurer’s consent, whether the assignment occurred before or after a loss.

Here's an example of how a state law can impact an anti-assignment clause in an insurance policy. Suppose that Theresa (in the previous scenario) has returned from her sabbatical and is again operating her business. Tasty Treats is located in a state that bars pre-loss assignments but allows assignments made after a loss has occurred.

Late one night, a fire breaks out in the pastry shop and a portion of the building is damaged. Theresa files a property damage claim under her BOP and hires Rapid Reconstruction, a construction company, to repair the building. At the contractor’s suggestion, Theresa assigns her rights to receive benefits for the claim under the BOP to Rapid Reconstruction. Because Theresa has assigned her rights after a loss has occurred, the assignment is permitted by law and should be accepted by Theresa’s insurer.

Key Takeaways

• Many policies purchased by small businesses contain an anti-assignment clause.
• An anti-assignment clause bars the policyholder from assigning their rights and interests under the policy to someone else without the insurer’s consent.
• Many states have a statute or court ruling that overrides anti-assignment clauses in insurance policies.
• State laws vary, but many prohibit pre-loss assignments yet permit assignments made after a loss has occurred.

Canopy Claims. " Business Owners Coverage Form ," Page 53.

Penn State Law Review. " If You Give a Shop a Claim: The Unsustainable Inequity of Pennsylvania’s Unbridled Post-Loss Assignments ."

Stahl, Davies, Sewell, Chavarria & Friend. " Buyers and Sellers Beware - Assignment of Hurricane Claims May Be Invalid in Texas ."

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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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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.”

Topics Lawsuits Carriers Profit Loss Claims Louisiana Homeowners Hurricane

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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 insurance policies and claims | Practical Law

Assignment of insurance policies and claims

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

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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What is an Assignment Clause?

Jennifer Tsai • January 12, 2023 • 8 minute read

Anti-assignment clauses are common because without them, generally, contracts are freely assignable. (The exceptions are (i) contracts that are subject to statutes or public policies prohibiting their assignment, such as intellectual property contracts, or (ii) contracts where an assignment without consent would cause material and adverse consequences to non-assigning counterparties, such as employment agreements and consulting agreements.) For all other contracts, parties may want an anti-assignment clause that allows them the opportunity to review and understand the impact of an assignment (or change of control) before deciding whether to continue or terminate the relationship.

In the mergers and acquisitions context, an assignment of a contract from a target company entity to the relevant acquirer entity is needed whenever a contract has to be placed in the name of an entity other than the existing target company entity after consummation of a transaction. This is why reviewing contracts for assignment clauses is so critical.

Why Do Assignment Clauses Matter?

How do you review assignment clauses in contracts.

After locating all the assignment language in each agreement, the following variables should be noted as part of the review: (1) Scope of assignment provision, (2) Consequences of failure to obtain consent, (3) Standard for refusing consent, and (4) Differences among counterparties in rights to assign.

1. Scope. Assignment provisions may provide exclusions or inclusions to a counterparty’s right to approve an assignment of a contract. See the examples in the following section below.

2. Consequences of Failure to Obtain Consent. Assignment provisions may specify that, if one party attempts to assign the agreement without the required consent of the counterparty:

• The purported assignment is null and void; and/or
• The applicable contract is void and terminated.

Contracts should be carefully reviewed to determine which of the foregoing scenarios may apply.

3. Standard for Refusing Consent. Assignment provisions frequently include limitations stating that any counterparty’s consent that is required shall not be “unreasonably withheld,” although the reasonableness standard is rarely defined more specifically in the contract.

In an M&A context, the effect of this language is that it provides a target company with some opportunity to challenge a counterparty that withholds its consent to an assignment. Winning this challenge is far from guaranteed, and this opportunity generally comes at a cost of time and expense since it usually involves a legal challenge to the counterparty’s refusal to grant a consent. Consequently, a target company is incentivized to undertake this challenge only when the applicable contract is material to its post-acquisition business or to the consummation of its proposed transaction. Still, undertaking such a challenge may buy the target company time and provide it with some negotiating leverage in seeking a reversal of a counterparty’s refusal to consent to an assignment.

Determining whether consent has been unreasonably withheld is specific to the facts and circumstances underlying each request for consent. For example, in Athar v. Hudson Serv. Mgmt., Inc., 853 N.Y.S.2d 170 (N.Y. App. Div. 2008), a New York appellate court held that this standard requires the non-consenting party to show some reasonable and objective basis for withholding consent. The withholding of consent cannot be arbitrary or based on unique and personal preferences of the non-consenting party. Generally, the burden of proof to show an unreasonable withholding of consent is on the party requesting consent. Also, the party requesting consent is responsible for providing all information required or necessary to determine whether consent should be granted.

4. Differences Among Counterparties in Rights to Assign. It is important to note any differences in assignment rights between and among contracting parties and the consequences of those differences, as parties with greater negotiating power often have broader assignment rights. These differences can become important if there is a lag of time between signing and closing an M&A transaction. If a target company is required to obtain consent in order to assign an agreement, but the counterparty has rights to freely assign, care should be taken to ensure that any consent granted to a target company to assign a contract does not become subject to review or alteration by any parties to whom the counterparty may freely assign its rights after it has granted its consent to assignment. This is particularly relevant to consents that may lapse or lose their effectiveness if transactions do not close within a certain period of time. For example, if (i) a landlord or licensor subsequently transfers the contract after granting its initial consent, and (ii) such consent lapses pursuant to its terms, the target company might have to re-submit consent requests to completely different parties.

Software that uses AI to identify and extract Assignment clauses can accelerate the work of finding these clauses, and enables a more comprehensive review than can otherwise be done manually.

Examples of Common Exclusions and Inclusions in Assignment Clauses

A simple anti-assignment provision provides that a party may not assign the agreement without the consent of the other party. Assignment provisions may also provide specific exclusions or inclusions to a counterparty’s right to consent to the assignment of a contract. Below are five common occurrences in which assignment provisions may provide exclusions or inclusions.

Exclusion for Change of Control Transactions

In negotiating an anti-assignment clause, a company would typically seek the exclusion of assignments undertaken in connection with change of control transactions, including mergers and sales of all or substantially all of the assets of the company. This allows a company to undertake a strategic transaction without worry. If an anti-assignment clause doesn’t exclude change of control transactions, a counterparty might materially affect a strategic transaction through delay and/or refusal of consent. Because there are many types of change of control transactions, there is no standard language for these. An example might be:

In the event of the sale or transfer by [Party B] of all or substantially all of its assets related to this Agreement to an Affiliate or to a third party, whether by sale, merger, or change of control, [Party B] would have the right to assign any or all rights and obligations contained herein and the Agreement to such Affiliate or third party without the consent of [Party A] and the Agreement shall be binding upon such acquirer and would remain in full force and effect, at least until the expiration of the then current Term.

Exclusion for Affiliate Transactions

A typical exclusion is one that allows a target company to assign a contract to an affiliate without needing the consent of the contract counterparty. This is much like an exclusion with respect to change of control, since in affiliate transfers or assignments, the ultimate actors and responsible parties under the contract remain essentially the same even though the nominal parties may change. For example:

Either party may assign its rights under this Agreement, including its right to receive payments hereunder, to a subsidiary, affiliate or any financial institution, but in such case the assigning party shall remain liable to the other party for the assigning party’s obligations hereunder. All or any portion of the rights and obligations of [Party A] under this Agreement may be transferred by [Party A] to any of its Affiliates without the consent of [Party B].

Assignment by Operation of Law

Assignments by operation of law typically occur in the context of transfers of rights and obligations in accordance with merger statutes and can be specifically included in or excluded from assignment provisions. An inclusion could be negotiated by the parties to broaden the anti-assignment clause and to ensure that an assignment occurring by operation of law requires counterparty approval:

[Party A] agrees that it will not assign, sublet or otherwise transfer its rights hereunder, either voluntarily or by operations of law, without the prior written consent of [Party B].

while an exclusion could be negotiated by a target company to make it clear that it has the right to assign the contract even though it might otherwise have that right as a matter of law:

This Guaranty shall be binding upon the successors and assigns of [Party A]; provided, that no transfer, assignment or delegation by [Party A], other than a transfer, assignment or delegation by operation of law, without the consent of [Party B], shall release [Party A] from its liabilities hereunder.

This helps settle any ambiguity regarding assignments and their effects under mergers statutes (particularly in forward triangular mergers and forward mergers since the target company ceases to exist upon consummation of the merger).

Direct or Indirect Assignment

More ambiguity can arise regarding which actions or transactions require a counterparty’s consent when assignment clauses prohibit both direct and indirect assignments without the consent of a counterparty. Transaction parties will typically choose to err on the side of over-inclusiveness in determining which contracts will require consent when dealing with material contracts. An example clause prohibiting direct or indirect assignment might be:

Except as provided hereunder or under the Merger Agreement, such Shareholder shall not, directly or indirectly, (i) transfer (which term shall include any sale, assignment, gift, pledge, hypothecation or other disposition), or consent to or permit any such transfer of, any or all of its Subject Shares, or any interest therein.

“Transfer” of Agreement vs. “Assignment” of Agreement

In some instances, assignment provisions prohibit “transfers” of agreements in addition to, or instead of, explicitly prohibiting “assignments”. Often, the word “transfer” is not defined in the agreement, in which case the governing law of the contract will determine the meaning of the term and whether prohibition on transfers are meant to prohibit a broader or narrower range of transactions than prohibitions on assignments. Note that the current jurisprudence on the meaning of an assignment is broader and deeper than it is on the meaning of a transfer. In the rarer case where “transfer” is defined, it might look like this:

As used in this Agreement, the term “transfer” includes the Franchisee’s voluntary, involuntary, direct or indirect assignment, sale, gift or other disposition of any interest in …

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Simply Speaking (May 2020) — Insurance Assignments

May 28, 2020

Simply Speaking (May 2020)

Insurance Assignments

As security for the Obligations, the Assignor hereby grants, sells, transfers, assigns and sets over unto the Assignee, for the benefit of the Lender, a continuing, first priority security interest in and to all of the Assignor’s right, title and interest in, to and under the following property, whether now owned or existing or hereafter from time to time acquired or coming into existence:

• all insurances (including, without limitation, all certificates of entry in protection and indemnity and war risks associations or clubs) in respect of the vessel, whether heretofore, now or hereafter effected, and all renewals of or replacements for the same;
• all claims, returns of premium and other moneys and claims for moneys due and to become due under or in respect of said insurances;
• all other rights of the Assignor under or in respect of said insurances; and
• any proceeds of any of the foregoing.

What is it and what does it do?

A standard ship finance loan agreement requires that the borrower maintain certain insurances with respect to the vessel and grant the lender (or security agent/trustee on behalf of the lender) a security interest in such insurances. Typically, this is accomplished through an insurance assignment executed by the borrower/owner that grants a security interest in the insurances to the lender, as assignee, and sets out specific undertakings and perfection requirements relating to the insurances.

Why is it there and how is it relevant to shipping?

An insurance assignment is required in ship finance transactions because it helps protect the lender’s interest if there is a casualty affecting the vessel. Maritime casualties are an inherent risk in shipping, and there is always the possibility that the vessel may cause damage or be damaged or lost. The vessel is the primary collateral for a loan, and the lender will insist that it is protected in the unlikely event that the vessel causes damage or is damaged or lost.

More practically, an insurance assignment specifies what insurances are being assigned and set out how the security interest is perfected. The insurance assignment also sets out what terms the loss payable clauses endorsed onto the insurance policies include. The loss payable clauses, discussed further below, specify in what circumstances a loss payable by an insurer under a policy may be paid to the borrower/owner and in what circumstances such loss must be paid to the lender.

Why is it important (or not so important) to the lender?

Unlike many other types of collateral, security interests in insurance policies are carved out of Article 9 of the Uniform Commercial Code which governs perfection of security interests. Therefore, a so-called “UCC financing statement” does not perfect the lender’s security interest, and the lender must take other actions to protect its interests in respect of the assigned insurance policies.

The perfection of a lender’s security interest in insurances is governed by state law, and generally requires that, together with the execution of an insurance assignment, notice be provided to the insurers. Therefore, an insurance assignment will include a form notice of assignment that the borrower must execute and deliver to the insurers as part of the borrower’s obligations under the insurance assignment. As additional protection, the lender also commonly requires the insurance underwriters to execute a letter of undertaking in favor of the lender and that the lender be named as an additional insured or loss payee on the policy, as further discussed below.

How does it affect the borrower in practical terms?

The insurance assignment affects the borrower primarily by (a) restricting under what circumstances a loss payable by an insurer may be paid to the borrower/owner, and (b) by placing certain initial and ongoing obligations on the borrower/owner. Initially, among other requirements, the borrower must provide notice of the assignment to the insurers to perfect the lender’s security interest. The insurance assignment also contains (if they are not set out in the loan agreement itself) restrictions on amending the insurances and include certain ongoing lender notification requirements. The borrower must be careful not to technically default under a loan agreement by failing to comply with the ongoing insurance notification requirements and undertakings.

How is it negotiated?

Insurance assignments are a standard element of any ship finance transaction. However, specific insurance coverage requirements are frequently negotiated between the borrower and the lender. While lender insurance coverage requirements often reflect insurance coverage the borrower already maintains, in some cases the lender may require more insurance cover or different types of cover (such as protection against loss of hire) than the borrower deems necessary, and the coverage requirements are then negotiated.

Unlike loan agreements and some of the other security documents in a ship finance transaction, an insurance assignment also commonly includes obligations on third parties. Under a typical insurance assignment, the insurance underwriters must (a) execute letters of undertaking in favor of the assignee, and/or (b) endorse loss payable clauses onto their policies. The insurance underwriters are not party to the insurance assignment itself, but must agree to provide these letters of undertaking and endorse the loss payable clauses. As such, when negotiating an insurance assignment, it is typical for the letters of undertaking and the loss payable clauses to be negotiated and agreed with the insurance underwriters during the documentation stage. Many insurers have preferred form letters of undertaking and will not agree to a letter of undertaking that does not follow such insurer’s preferred form.

With respect to the loss payable clauses, the borrower and lender often negotiate the thresholds and circumstances under which a loss payable may be paid to the borrower/owner. The borrower typically seeks to increase the threshold under which the insurer is permitted to make a payment directly to the borrower/owner without the consent of the lender. Conversely, the lender seeks a lower threshold to help protect its interest in the collateral. The lender typically requires losses payable in connection with a major casualty to be paid directly to the lender or requires that the lender first consent to any such payment to the borrower/owner, but allows payment of certain amounts directly to the borrower/owner, for example to affect repairs in the case of a smaller casualty.  The threshold varies based on the value of the vessel, the anticipated size of any potential casualties, the size of the facility and the value of the other collateral securing the loan, and the financial strength of the borrower.

Related Attorneys

Lawrence Rutkowski

(212) 574-1206 [email protected]

Michael S. Timpone

(212) 574-1342 [email protected]

Related Practices

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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

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

Related posts.

• assignments basic law

Assignments: The Basic Law

The assignment of a right or obligation is a common contractual event under the law and the right to assign (or prohibition against assignments) is found in the majority of agreements, leases and business structural documents created in the United States.

As with many terms commonly used, people are familiar with the term but often are not aware or fully aware of what the terms entail. The concept of assignment of rights and obligations is one of those simple concepts with wide ranging ramifications in the contractual and business context and the law imposes severe restrictions on the validity and effect of assignment in many instances. Clear contractual provisions concerning assignments and rights should be in every document and structure created and this article will outline why such drafting is essential for the creation of appropriate and effective contracts and structures.

The reader should first read the article on Limited Liability Entities in the United States and Contracts since the information in those articles will be assumed in this article.

Basic Definitions and Concepts:

An assignment is the transfer of rights held by one party called the “assignor” to another party called the “assignee.” The legal nature of the assignment and the contractual terms of the agreement between the parties determines some additional rights and liabilities that accompany the assignment. The assignment of rights under a contract usually completely transfers the rights to the assignee to receive the benefits accruing under the contract. Ordinarily, the term assignment is limited to the transfer of rights that are intangible, like contractual rights and rights connected with property. Merchants Service Co. v. Small Claims Court , 35 Cal. 2d 109, 113-114 (Cal. 1950).

An assignment will generally be permitted under the law unless there is an express prohibition against assignment in the underlying contract or lease. Where assignments are permitted, the assignor need not consult the other party to the contract but may merely assign the rights at that time. However, an assignment cannot have any adverse effect on the duties of the other party to the contract, nor can it diminish the chance of the other party receiving complete performance. The assignor normally remains liable unless there is an agreement to the contrary by the other party to the contract.

The effect of a valid assignment is to remove privity between the assignor and the obligor and create privity between the obligor and the assignee. Privity is usually defined as a direct and immediate contractual relationship. See Merchants case above.

Further, for the assignment to be effective in most jurisdictions, it must occur in the present. One does not normally assign a future right; the assignment vests immediate rights and obligations.

No specific language is required to create an assignment so long as the assignor makes clear his/her intent to assign identified contractual rights to the assignee. Since expensive litigation can erupt from ambiguous or vague language, obtaining the correct verbiage is vital. An agreement must manifest the intent to transfer rights and can either be oral or in writing and the rights assigned must be certain.

Note that an assignment of an interest is the transfer of some identifiable property, claim, or right from the assignor to the assignee. The assignment operates to transfer to the assignee all of the rights, title, or interest of the assignor in the thing assigned. A transfer of all rights, title, and interests conveys everything that the assignor owned in the thing assigned and the assignee stands in the shoes of the assignor. Knott v. McDonald’s Corp ., 985 F. Supp. 1222 (N.D. Cal. 1997)

The parties must intend to effectuate an assignment at the time of the transfer, although no particular language or procedure is necessary. As long ago as the case of National Reserve Co. v. Metropolitan Trust Co ., 17 Cal. 2d 827 (Cal. 1941), the court held that in determining what rights or interests pass under an assignment, the intention of the parties as manifested in the instrument is controlling.

The intent of the parties to an assignment is a question of fact to be derived not only from the instrument executed by the parties but also from the surrounding circumstances. When there is no writing to evidence the intention to transfer some identifiable property, claim, or right, it is necessary to scrutinize the surrounding circumstances and parties’ acts to ascertain their intentions. Strosberg v. Brauvin Realty Servs., 295 Ill. App. 3d 17 (Ill. App. Ct. 1st Dist. 1998)

The general rule applicable to assignments of choses in action is that an assignment, unless there is a contract to the contrary, carries with it all securities held by the assignor as collateral to the claim and all rights incidental thereto and vests in the assignee the equitable title to such collateral securities and incidental rights. An unqualified assignment of a contract or chose in action, however, with no indication of the intent of the parties, vests in the assignee the assigned contract or chose and all rights and remedies incidental thereto.

More examples: In Strosberg v. Brauvin Realty Servs ., 295 Ill. App. 3d 17 (Ill. App. Ct. 1st Dist. 1998), the court held that the assignee of a party to a subordination agreement is entitled to the benefits and is subject to the burdens of the agreement. In Florida E. C. R. Co. v. Eno , 99 Fla. 887 (Fla. 1930), the court held that the mere assignment of all sums due in and of itself creates no different or other liability of the owner to the assignee than that which existed from the owner to the assignor.

And note that even though an assignment vests in the assignee all rights, remedies, and contingent benefits which are incidental to the thing assigned, those which are personal to the assignor and for his sole benefit are not assigned. Rasp v. Hidden Valley Lake, Inc ., 519 N.E.2d 153, 158 (Ind. Ct. App. 1988). Thus, if the underlying agreement provides that a service can only be provided to X, X cannot assign that right to Y.

Novation Compared to Assignment:

Although the difference between a novation and an assignment may appear narrow, it is an essential one. “Novation is a act whereby one party transfers all its obligations and benefits under a contract to a third party.” In a novation, a third party successfully substitutes the original party as a party to the contract. “When a contract is novated, the other contracting party must be left in the same position he was in prior to the novation being made.”

A sublease is the transfer when a tenant retains some right of reentry onto the leased premises. However, if the tenant transfers the entire leasehold estate, retaining no right of reentry or other reversionary interest, then the transfer is an assignment. The assignor is normally also removed from liability to the landlord only if the landlord consents or allowed that right in the lease. In a sublease, the original tenant is not released from the obligations of the original lease.

Equitable Assignments:

An equitable assignment is one in which one has a future interest and is not valid at law but valid in a court of equity. In National Bank of Republic v. United Sec. Life Ins. & Trust Co. , 17 App. D.C. 112 (D.C. Cir. 1900), the court held that to constitute an equitable assignment of a chose in action, the following has to occur generally: anything said written or done, in pursuance of an agreement and for valuable consideration, or in consideration of an antecedent debt, to place a chose in action or fund out of the control of the owner, and appropriate it to or in favor of another person, amounts to an equitable assignment. Thus, an agreement, between a debtor and a creditor, that the debt shall be paid out of a specific fund going to the debtor may operate as an equitable assignment.

In Egyptian Navigation Co. v. Baker Invs. Corp. , 2008 U.S. Dist. LEXIS 30804 (S.D.N.Y. Apr. 14, 2008), the court stated that an equitable assignment occurs under English law when an assignor, with an intent to transfer his/her right to a chose in action, informs the assignee about the right so transferred.

An executory agreement or a declaration of trust are also equitable assignments if unenforceable as assignments by a court of law but enforceable by a court of equity exercising sound discretion according to the circumstances of the case. Since California combines courts of equity and courts of law, the same court would hear arguments as to whether an equitable assignment had occurred. Quite often, such relief is granted to avoid fraud or unjust enrichment.

Note that obtaining an assignment through fraudulent means invalidates the assignment. Fraud destroys the validity of everything into which it enters. It vitiates the most solemn contracts, documents, and even judgments. Walker v. Rich , 79 Cal. App. 139 (Cal. App. 1926). If an assignment is made with the fraudulent intent to delay, hinder, and defraud creditors, then it is void as fraudulent in fact. See our article on Transfers to Defraud Creditors .

But note that the motives that prompted an assignor to make the transfer will be considered as immaterial and will constitute no defense to an action by the assignee, if an assignment is considered as valid in all other respects.

Enforceability of Assignments:

Whether a right under a contract is capable of being transferred is determined by the law of the place where the contract was entered into. The validity and effect of an assignment is determined by the law of the place of assignment. The validity of an assignment of a contractual right is governed by the law of the state with the most significant relationship to the assignment and the parties.

In some jurisdictions, the traditional conflict of laws rules governing assignments has been rejected and the law of the place having the most significant contacts with the assignment applies. In Downs v. American Mut. Liability Ins. Co ., 14 N.Y.2d 266 (N.Y. 1964), a wife and her husband separated and the wife obtained a judgment of separation from the husband in New York. The judgment required the husband to pay a certain yearly sum to the wife. The husband assigned 50 percent of his future salary, wages, and earnings to the wife. The agreement authorized the employer to make such payments to the wife.

After the husband moved from New York, the wife learned that he was employed by an employer in Massachusetts. She sent the proper notice and demanded payment under the agreement. The employer refused and the wife brought an action for enforcement. The court observed that Massachusetts did not prohibit assignment of the husband’s wages. Moreover, Massachusetts law was not controlling because New York had the most significant relationship with the assignment. Therefore, the court ruled in favor of the wife.

Therefore, the validity of an assignment is determined by looking to the law of the forum with the most significant relationship to the assignment itself. To determine the applicable law of assignments, the court must look to the law of the state which is most significantly related to the principal issue before it.

Assignment of Contractual Rights:

Generally, the law allows the assignment of a contractual right unless the substitution of rights would materially change the duty of the obligor, materially increase the burden or risk imposed on the obligor by the contract, materially impair the chance of obtaining return performance, or materially reduce the value of the performance to the obligor. Restat 2d of Contracts, § 317(2)(a). This presumes that the underlying agreement is silent on the right to assign.

If the contract specifically precludes assignment, the contractual right is not assignable. Whether a contract is assignable is a matter of contractual intent and one must look to the language used by the parties to discern that intent.

In the absence of an express provision to the contrary, the rights and duties under a bilateral executory contract that does not involve personal skill, trust, or confidence may be assigned without the consent of the other party. But note that an assignment is invalid if it would materially alter the other party’s duties and responsibilities. Once an assignment is effective, the assignee stands in the shoes of the assignor and assumes all of assignor’s rights. Hence, after a valid assignment, the assignor’s right to performance is extinguished, transferred to assignee, and the assignee possesses the same rights, benefits, and remedies assignor once possessed. Robert Lamb Hart Planners & Architects v. Evergreen, Ltd. , 787 F. Supp. 753 (S.D. Ohio 1992).

On the other hand, an assignee’s right against the obligor is subject to “all of the limitations of the assignor’s right, all defenses thereto, and all set-offs and counterclaims which would have been available against the assignor had there been no assignment, provided that these defenses and set-offs are based on facts existing at the time of the assignment.” See Robert Lamb , case, above.

The power of the contract to restrict assignment is broad. Usually, contractual provisions that restrict assignment of the contract without the consent of the obligor are valid and enforceable, even when there is statutory authorization for the assignment. The restriction of the power to assign is often ineffective unless the restriction is expressly and precisely stated. Anti-assignment clauses are effective only if they contain clear, unambiguous language of prohibition. Anti-assignment clauses protect only the obligor and do not affect the transaction between the assignee and assignor.

Usually, a prohibition against the assignment of a contract does not prevent an assignment of the right to receive payments due, unless circumstances indicate the contrary. Moreover, the contracting parties cannot, by a mere non-assignment provision, prevent the effectual alienation of the right to money which becomes due under the contract.

A contract provision prohibiting or restricting an assignment may be waived, or a party may so act as to be estopped from objecting to the assignment, such as by effectively ratifying the assignment. The power to void an assignment made in violation of an anti-assignment clause may be waived either before or after the assignment. See our article on Contracts.

Noncompete Clauses and Assignments:

Of critical import to most buyers of businesses is the ability to ensure that key employees of the business being purchased cannot start a competing company. Some states strictly limit such clauses, some do allow them. California does restrict noncompete clauses, only allowing them under certain circumstances. A common question in those states that do allow them is whether such rights can be assigned to a new party, such as the buyer of the buyer.

A covenant not to compete, also called a non-competitive clause, is a formal agreement prohibiting one party from performing similar work or business within a designated area for a specified amount of time. This type of clause is generally included in contracts between employer and employee and contracts between buyer and seller of a business.

Many workers sign a covenant not to compete as part of the paperwork required for employment. It may be a separate document similar to a non-disclosure agreement, or buried within a number of other clauses in a contract. A covenant not to compete is generally legal and enforceable, although there are some exceptions and restrictions.

Whenever a company recruits skilled employees, it invests a significant amount of time and training. For example, it often takes years before a research chemist or a design engineer develops a workable knowledge of a company’s product line, including trade secrets and highly sensitive information. Once an employee gains this knowledge and experience, however, all sorts of things can happen. The employee could work for the company until retirement, accept a better offer from a competing company or start up his or her own business.

A covenant not to compete may cover a number of potential issues between employers and former employees. Many companies spend years developing a local base of customers or clients. It is important that this customer base not fall into the hands of local competitors. When an employee signs a covenant not to compete, he or she usually agrees not to use insider knowledge of the company’s customer base to disadvantage the company. The covenant not to compete often defines a broad geographical area considered off-limits to former employees, possibly tens or hundreds of miles.

Another area of concern covered by a covenant not to compete is a potential ‘brain drain’. Some high-level former employees may seek to recruit others from the same company to create new competition. Retention of employees, especially those with unique skills or proprietary knowledge, is vital for most companies, so a covenant not to compete may spell out definite restrictions on the hiring or recruiting of employees.

A covenant not to compete may also define a specific amount of time before a former employee can seek employment in a similar field. Many companies offer a substantial severance package to make sure former employees are financially solvent until the terms of the covenant not to compete have been met.

Because the use of a covenant not to compete can be controversial, a handful of states, including California, have largely banned this type of contractual language. The legal enforcement of these agreements falls on individual states, and many have sided with the employee during arbitration or litigation. A covenant not to compete must be reasonable and specific, with defined time periods and coverage areas. If the agreement gives the company too much power over former employees or is ambiguous, state courts may declare it to be overbroad and therefore unenforceable. In such case, the employee would be free to pursue any employment opportunity, including working for a direct competitor or starting up a new company of his or her own.

It has been held that an employee’s covenant not to compete is assignable where one business is transferred to another, that a merger does not constitute an assignment of a covenant not to compete, and that a covenant not to compete is enforceable by a successor to the employer where the assignment does not create an added burden of employment or other disadvantage to the employee. However, in some states such as Hawaii, it has also been held that a covenant not to compete is not assignable and under various statutes for various reasons that such covenants are not enforceable against an employee by a successor to the employer. Hawaii v. Gannett Pac. Corp. , 99 F. Supp. 2d 1241 (D. Haw. 1999)

It is vital to obtain the relevant law of the applicable state before drafting or attempting to enforce assignment rights in this particular area.

Conclusion:

In the current business world of fast changing structures, agreements, employees and projects, the ability to assign rights and obligations is essential to allow flexibility and adjustment to new situations. Conversely, the ability to hold a contracting party into the deal may be essential for the future of a party. Thus, the law of assignments and the restriction on same is a critical aspect of every agreement and every structure. This basic provision is often glanced at by the contracting parties, or scribbled into the deal at the last minute but can easily become the most vital part of the transaction.

As an example, one client of ours came into the office outraged that his co venturer on a sizable exporting agreement, who had excellent connections in Brazil, had elected to pursue another venture instead and assigned the agreement to a party unknown to our client and without the business contacts our client considered vital. When we examined the handwritten agreement our client had drafted in a restaurant in Sao Paolo, we discovered there was no restriction on assignment whatsoever…our client had not even considered that right when drafting the agreement after a full day of work.

One choses who one does business with carefully…to ensure that one’s choice remains the party on the other side of the contract, one must master the ability to negotiate proper assignment provisions.

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• Corporate Insurance

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.

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• Russian Exclusive Jurisdiction Clauses Fail to Stop Aviation Insurance Litigation in England

The English High Court found that a current risk of unfair trial in Russia justified declining to enforce Russian exclusive jurisdiction clauses.

The English High Court has cleared the way for major aviation insurance litigation to proceed in England. In an important judgment on jurisdiction, the High Court refused to stay a group of claims based on the alleged total loss of aircraft formerly leased to Russian airlines. The defendants contended that any such claims could only be brought in Russia, due to exclusive jurisdiction clauses (EJCs) in the aircraft reinsurance contracts, but the High Court found multiple “strong reasons” why a stay was unwarranted. [1]

While this decision arises from an unusual set of facts, it highlights the value of strategic thinking in the use of EJCs, as well as, arguably, an increasingly “open for business” attitude of the English Courts towards Russia-related litigation when they consider justice might not be served in Russia. A considered approach is particularly important in a complex commercial context when multiple related agreements are in operation, such as the leases, insurance contracts, and reinsurance contracts at issue in this case.

This jurisdiction challenge occurred in the context of market-wide litigation brought by aircraft owners, lessors, and others, recently valued at nearly US$10 billion. Following the Russian invasion of Ukraine in 2022, the claimants issued termination notices under the relevant aircraft leases and requested the return of their aircraft. The grounds for termination included Western sanctions imposed on Russia, material adverse change, violations of insurance requirements under the leases, and lack of payment. However, the Russian airlines failed to return many aircraft, which have remained in Russia to this day.

The airlines had insured the aircraft with Russian insurers against “hull all risks” and “war risks” (the former excluding war risks). The Russian insurers, in turn, reinsured a large proportion of their risk with London and international market reinsurers — and it is these reinsurance contracts that apparently contained Russian EJCs. Critically, the underlying leases also required the reinsurance contracts to contain cut-through clauses, giving the claimants direct claims against the reinsurers and leading to the present litigation.

The defendant reinsurers challenged the jurisdiction of the English court, requesting a stay to give effect to the EJCs.

Legal standard

In its judgment, the High Court affirmed a line of previous case law indicating that a stay should be granted to give effect to an EJC, except when the claimant shows “strong reasons” for the court to decline. [2] Certain defendants suggested that the court apply a stricter formulation of the test requiring “overwhelming” or “very strong” reasons, but the High Court felt this went too far (while noting that the facts in this case were nevertheless capable of meeting a higher standard). [3]

Such strong reasons, the High Court found, would be highly fact-specific but could include the likelihood of the claimant not obtaining a fair trial in the relevant foreign jurisdiction. That likelihood would need to be demonstrated based on the preponderance of the evidence. If the prospect of an unfair trial had been foreseeable — meaning that potential unfairness had been “priced into the bargain” — it could weigh in favour of a stay. However, this would only occur when unfair treatment was foreseeable based on the type of dispute likely to arise from the relevant contract. In this case, a “double level of foreseeability” was relevant: foreseeability that Russian law and jurisdiction would apply (given the claimants’ alleged lack of actual knowledge) and foreseeability of the likelihood of an unfair trial.

The parties submitted extensive expert evidence regarding the Russian legal framework and the possibility that the engagement of Russian state interests might improperly influence the courts if this litigation proceeded in Russia. It was common ground that the Russian state was capable of such influence, though the parties disagreed on its likelihood and how it might manifest (e.g., direct interference or self-censorship by judges).

The High Court found a number of case-specific factors to be relevant to the analysis, principally:

• The aviation sector is a key element of the Russian economy.
• A state-owned reinsurer, the Russian National Reinsurance Company, would likely be joined as a party to any action in Russia, with potential exposure exceeding US$1 billion.
• Following the UK, US, EU Member States, and others being designated “Unfriendly Foreign States” by Russia in 2022, the Russian courts have shown a pattern of discriminatory treatment against litigants from those states.
• Russian courts would find it difficult to make objective findings in relation to the war in Ukraine, when the official Russian position is that it did not invade Ukraine and is not involved in a war. Moreover, the claimants and their lawyers could even be subject to criminal or administrative penalties for describing Russian state actions as war or invasion.
• Russian courts would need to grapple with any state role in the fate of the relevant aircraft, including whether that role amounted to confiscation or appropriation under the terms of the relevant reinsurance policies.
• Consideration of whether the Russian airlines had been obliged to return the aircraft would require the Russian courts to examine the effect of Russian export bans and their potential invalidity due to inconsistency with Russia’s obligations under an international convention.
• Successful claims in Russia could give rise to follow-on claims by the defendant reinsurers against the Russian state, on the basis that the state was ultimately responsible for the loss.

Taking these factors in the round, the High Court found that the claimants (all of whom were incorporated in “Unfriendly Foreign States”) were “very unlikely” to obtain a fair trial in Russia.

While the fair trial issue dominated the landscape, the High Court also relied on two additional reasons to decline to grant a stay. First, if the claims were to proceed in Russia, the High Court saw an increased chance of inconsistent findings across multiple jurisdictions. A key factor supporting this reasoning was that a number of defendants had already submitted to the English jurisdiction, while no claims had yet been launched in Russia.

Second, the High Court considered potential safety and security risks for individuals who would likely need to attend or even give evidence at a Russian trial. These included experts, fact witnesses, and client representatives from designated “Unfriendly Foreign States”. The High Court found such risks to be valid concerns that outweighed factors of convenience cited by the defendants in arguing that the claims should proceed in Russia.

The High Court declined to rely on two other reasons proposed by the claimants to refuse a stay: that it would be contrary to English public policy and that the defendants’ challenges to jurisdiction were tactical rather than stemming from a genuine desire for the litigation to proceed in Russia.

The English court’s acceptance of jurisdiction is a significant development in this landmark litigation. While the judgment is likely to be appealed, the High Court’s thorough examination of the expert evidence and case-specific factors, including in relation to recent Russian case law, may make challenging its conclusion difficult. This judgment could also increase the likelihood of further settlements in this litigation; claims approaching US$4 billion of the original US$13.5 billion value of the litigation had already been settled. Moreover, it may even lead to the issue of additional claims.

More broadly, the High Court’s decision helpfully illustrates how justice factors may impact questions of jurisdiction. In the near term, the judgment could have ripple effects across other disputes where Russian EJCs are at issue, supplying a precedent for parties attempting to litigate in England rather than Russia. In relation to non-Russian EJCs, however, the volume of factors and evidence relied upon by the High Court to support its ultimate conclusion in this case may set a high bar for analogous arguments.

For international insurers and other businesses with cross-border activities, this decision highlights the importance of attention to governing law and jurisdiction clauses in interlocking commercial contracts. The aircraft leases in this case did not require the obligatory insurance and reinsurance to be subject to any particular law or jurisdiction, and the claimants alleged that they had been unaware of the EJCs in the relevant reinsurance contracts. While the High Court has not forced the claimants to litigate in Russia as the EJCs arguably required, this case developed out of a unique geopolitical context. Moreover, the claimants’ alleged lack of actual knowledge of the EJCs appears to have been only a minor factor in the court’s analysis. Therefore, in other cases, lack of awareness of an EJC might not meaningfully assist a party seeking to litigate in a different jurisdiction than called for by the clause. Businesses should carefully consider the enforceability of their law and jurisdiction clauses, particularly for jurisdictions with less legal certainty than England.

[1] Zephyrus Capital Aviation Partners 1D Limited and others v. Fidelis Underwriting Limited and others [2024] EWHC 734 (Comm).

[2] Donohue v. Armco Inc [2001] UKHL 64.

[3] Mercury Communications Ltd v. Communication Telesystems International [1999] 2 All E.R. (Comm) 33 ; Antec International Limited v. Biosafety USA Inc [2006] EWHC 47.

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FTC bans noncompete agreements that limit job switching. Here's how it could impact NJ

3-minute read.

The Federal Trade Commission voted 3-2 on Tuesday to ban noncompete agreements, a practice by which employers prohibit their staff from working for rival companies but which the federal agency argues stifles economic mobility for workers. 

The move will likely be challenged in court by the U.S. Chamber of Commerce , a business lobbying group, which questions the authority of the federal agency to create such a ban. 

Shortly after the vote, tax services firm Ryan LLC filed a lawsuit in a Texas federal court challenging the noncompete ban and claiming that the agreements can benefit businesses, workers and the economy.

“For New Jersey employers, they’re going to need to revisit how they retain talent, rather than with a restrictive covenant,” said Tom Muccifori, a partner at the law firm Archer Greiner, who specializes in trade secrets and restrictive covenants, which is essentially a noncompete agreement.  

That revisit entails looking at “compensation packages, upping those packages, increasing training, mentoring, culture, work-life balance,” Muccifori said. “It’s going to require some out-of-the-box thinking.”

The FTC received nearly 26,000 comments on the proposed ruling. FTC Chair Lina Khan said that health care workers made up a large portion of those comments, according to The Hill . 

“Noncompete clauses keep wages low, suppress new ideas and rob the American economy of dynamism,” Khan said in a statement. 

The FTC ban affects 18% of the U.S workforce, from fast food workers to high level executives — 30 million people — according to estimates by the FTC . 

A Federal Reserve of Minneapolis study from 2021 found that one in 10 workers who earn less than $20 an hour are bound by noncompete agreements. 

“I think employees will be more mobile,” Muccifori said.

But he said that he was deeply opposed to the FTC ruling over concerns it could upend an employer’s means of protecting company secrets. Businesses argue that the measure is necessary to prevent trade secrets from leaking to their competitors. 

What is a noncompete agreement? How will the rule change things?

Noncompetes typically bar a person from going to work for a competitor or starting a business of their own.

The rule would require companies with existing noncompete agreements to scrap them and to inform current and past employees that they will not be enforced. 

The FTC said that employers could still use trade secret laws and non-disclosure agreements to protect company secrets. 

According to the rule, only “senior executives” — those in a “policy-making position” who make at least $151,164 a year — are exempt from the ban. 

The FTC does not regulate certain industries, including nonprofit organizations, some banks and insurance companies, and airlines.

What does NJ law say about noncompete agreements?

State courts have upheld noncompete agreements, according to a post by the Metuchen-based law firm Smith Eibeler . 

But the agreements have to protect a legitimate business interest, and enforce a reasonable scope, duration and geographic area, Muccifori said. 

The impact of the FTC ruling could be felt in New Jersey, which is known for its financial services, pharmaceutical and high tech sectors, all of which would want to protect their trade secrets that could be leaked to competitors by former employees, said Elissa Frank, vice president of government affairs at the New Jersey Business and Industry Association, a trade group. 

“It would just open up that company to that not-assurance that a former employee would take that information elsewhere,” Frank said. 

The rule has the backing of Democratic senators, labor unions such as the AFL-CIO and the Service Employees International Union, as well as 18 state attorneys general, including New Jersey Attorney General Matt Platkin. 

“Employees deserve to move to new jobs or start their own businesses as their careers develop,” Platkin said last April. “The proposed national rule would allow for greater competition and fairness in the marketplace as businesses will have to find better ways to keep talented workers than the yoke of a noncompete clause.”

What happens next?

The FTC rule would not go into effect for 120 days after it enters the Federal Register, though the FTC press release does not indicate when that first step will happen.

If Republican candidate Donald Trump wins the 2024 presidential election he could simply reverse the ruling.

This article contains information from USA TODAY .

Daniel Munoz covers business, consumer affairs, labor and the economy for NorthJersey.com and The Record. 

Email:  [email protected] ; Twitter: @danielmunoz100

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The following outline provides a high-level overview of the FTC’s proposed final rule :

• Specifically, the final rule provides that it is an unfair method of competition—and therefore a violation of Section 5 of the FTC Act—for employers to enter into noncompetes with workers after the effective date.
• Fewer than 1% of workers are estimated to be senior executives under the final rule.
• Specifically, the final rule defines the term “senior executive” to refer to workers earning more than $151,164 annually who are in a “policy-making position.”
• Reduced health care costs: $74-$194 billion in reduced spending on physician services over the next decade.
• New business formation: 2.7% increase in the rate of new firm formation, resulting in over 8,500 additional new businesses created each year.
• This reflects an estimated increase of about 3,000 to 5,000 new patents in the first year noncompetes are banned, rising to about 30,000-53,000 in the tenth year.
• This represents an estimated increase of 11-19% annually over a ten-year period.
• The average worker’s earnings will rise an estimated extra $524 per year. 

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