Wehr Constructors, Inc. v. Assurance Co. of Am.

• Decision Date: 20 December 2012
• Docket Number: No. 2012–SC–000221–CL.,2012–SC–000221–CL.
• Parties: In re WEHR CONSTRUCTORS, INC. v. ASSURANCE COMPANY OF AMERICA.
• Court: United States State Supreme Court — District of Kentucky

384 S.W.3d 680

In re WEHR CONSTRUCTORS, INC.

v.ASSURANCE COMPANY OF AMERICA.

No. 2012–SC–000221–CL.

Supreme Court of Kentucky.

Oct. 25, 2012.

As Modified on Denial of Rehearing

Dec. 20, 2012.

Kenneth Allen Bohnert, Richard M. Sullivan, Edward Francis Busch, Conliffe, Sandmann & Sullivan, Louisville, KY, Counsel for Wehr Constructors, Inc.

Vanessa Lynn Armstrong, U.S. District Court, Paducah, KY, Counsel for United States District Court, Western District of Kentucky.

Rickard L. Walter, Nicholas Dean Kafer, Boehl, Stopher & Graves, LLP, Paducah, KY, Counsel for Assurance Company of America.

Opinion of the Court by Justice VENTERS.

Pursuant to CR 76.37(1),¹ this Court granted the certification request of the United States District Court for the Western District of Kentucky to answer the following question of Kentucky law:

Whether an anti-assignment clause in an insurance policy that requires an insured to obtain the insurer's prior written consent before assigning a claim under the policy is enforceable or applicable when the claimed loss occurs before the assignment, or whether such a clause would, under those circumstances, be void as against public policy.

For the reasons stated below, we conclude that under Kentucky law, a clause in an insurance policy that requires the insured to obtain the insurer's prior written consent before assigning a claim for an insured loss under the policy is not enforceable or applicable to the assignment of a claim under the policy where the covered loss occurs before the assignment, and that such a clause would, under those circumstances, be void as against public policy.

I. FACTUAL AND PROCEDURAL BACKGROUND

Murray Calloway County Hospital Corp. (Hospital) planned to build an addition onto its facilities. It purchased from Assurance Company of America (Assurance) a “builder's risk” insurance policy. The builder's risk policy included this provision:

F. Transfer of Your Rights and Duties Under This Policy Your rights and duties under this policy may not be transferred without [Assurance's] written consent except in the case of death of an individual named insured.

The Hospital contracted with Wehr Constructors, Inc. (Wehr) for the installation of concrete subsurfaces and vinyl floors as part of a project to expand the hospital. After installation, a portion of the floors and subsurface done by Wehr was damaged. The Hospital claimed a loss exceeding $75,000.00 and sought recompense under the builders risk policy, but Assurance denied the claim.

As a result of a dispute over its contract with the Hospital, Wehr filed suit against the Hospital in state court to recover money alleged to be due from the Hospital. Eventually, Wehr and the Hospital settled the claim. As part of that settlement, the Hospital agreed to, and did, assign to Wehr any claim or rights the Hospital had against Assurance arising out of the builder's risk insurance policy. More specifically, the assignment states as follows:

[The Hospital] hereby transfers and assigns to [Wehr], free and [clear] of any claims, liens and encumbrances, all of [the Hospital's] right, title and interest, legal or equitable, in any and all claims and causes of action for insurance coverage and insurance proceeds which [the Hospital] had, or may have had, under a Builders [sic] Risk Insurance policy No. EC43657395, believed to have been issued by Zurich Insurance Company, Inc.,[ ²] and which arose out of certain damage to the floor and subfloor that occurred at a construction project known as Murray Calloway County Hospital, located in Murray, Kentucky.

It is undisputed that this assignment occurred after the damage to the floors had occurred. Therefore, if the loss was in fact covered under the builders risk policy, Assurance was at the time of the assignment already liable for payment under the contract.

Wehr, as the Hospital's assignee, brought suit in federal court against Assurance seeking to recover payment due under the builder's risk policy for the damaged floor claim.³ After filing an answer to the complaint, Assurance moved for judgment on the pleadings, invoking the anti-assignment provision of the policy quoted above. Assurance argued that because it had not consented to the assignment of the Hospital's claim to Wehr, the assignment was unenforceable against Assurance. In opposition to the motion Wehr argued that since the loss for which the Hospital sought coverage had already occurred at the time of the assignment and the basis for the insurer's potential liability was fixed, the Hospital's right to the proceeds under the policy was a chose in action that was freely assignable and, as such, the assignment did not require the insurer's consent, and that pursuant to the rule applicable in the vast majority of states, such an anti-assignment clause is unenforceable.

II. MAJORITY AND MINORITY RULES

There are two primary views concerning the issue we address, one of which is overwhelmingly endorsed as the legally sound position upon general considerations of contract law, principles relating to the assignment of debt, restraints on the alienability of personal property, and public policy. The resolution of the District Court's question depends upon whether we adopt the majority rule, which favors Wehr, or the minority rule, which favors Assurance. Both sides agree that no Kentucky appellate court has spoken to the issue. We therefore begin our discussion with a synopsis of the majority and minority rules.

A. The Majority Rule

In summary, the majority rule holds that an anti-assignment clause such as the one we examine is unenforceable once an insured occurrence takes place because at that point the insured is entitled to recovery under the policy; that right is a chose in action; a chose in action is a form of personal property; the anti-assignment provision amounts to a restraint upon the alienation of this property right; and, a restraint upon the alienation of property is in opposition to public policy. As further noted below, other public policy considerations likewise weigh against the enforcement of an anti-assignment clause once a loss has occurred.

We begin by noting that Couch on Insurance identifies the majority rule relating to anti-assignment clauses such as the one we review as follows:

Although there is some authority to the contrary, the great majority of courts adhere to the rule that general stipulations in policies prohibiting assignments of the policy, except with the consent of the insurer, apply only to assignments before loss, and do not prevent an assignment after loss[.]

3 Couch on Ins. § 35:8 (footnotes omitted). See also 5A John Alan Appleman & Jean Appleman, Insurance Law & Practice § 3458, at 408 (1970) (“A provision in a policy providing that the policy shall be void if assigned without the company's consent applies to assignment before loss. Such a clause restricting assignment does not in any way limit the right of assignment after the loss has occurred, and the rights of the parties become fixed thereby.”).

Thus, the rationale, for the majority view is that an anti-assignment clause ordinarily only prohibits the assignment of the policy itself, but does not apply to assignment of a claim arising under the policy. The purpose of an anti-assignment clause is to protect the insurer from unforeseen exposure and increased liability that may ensue if the policy was assigned to an entity that the insurer would prefer not to insure; or, would have insured only at a higher premium. However, after an insured loss that gives rise to the insurer's liability, the insurer's risk cannot be increased by a change in the identity of the party to whom payment is to be made. An assignment of the policy, or rights under the policy, before the loss is incurred transfers the insurer's contractual relationship to a party with whom it never intended to contract, but an assignment after loss is simply the transfer of the right to a claim for money. The entity asserting the claim under those circumstances has no effect upon the insurer's duty under the policy. See3 Couch on Ins. § 35:9.

A cogent explanation for the majority rule is found in Conrad Brothers v. John Deere Ins. Co., 640 N.W.2d 231, 237–38 (Iowa 2001), which describes the rationale for this view as follows:

[O]nce the loss has triggered the liability provisions of the insurance policy, an assignment is no longer regarded as a transfer of the actual policy. Instead, it is a transfer of a chose in action under the policy. At this point, the insurer-insured relationship is more analogous to that of a debtor and creditor, with the policy serving as evidence of the amount of debt owed. Moreover, if we permitted an insurer to avoid its contractual obligations by prohibiting all post-loss assignments, we could be granting the insurer a windfall. (Internal citations omitted).

The public policy invoked to avoid the effect of an anti-assignment clause after a loss has occurred is that enforcement of the provision unduly “restricts the relation of debtor and creditor by restricting or rendering, subject to the control of the insurer, an absolute right in the nature of a chose in action.” 3 Couch on Ins. § 35:9. Thus, under the majority rule, once a loss occurs and the insurer's liability becomes fixed, the insured may assign its rights under the policy regardless of an anti-assignment clause.

In Antal's Restaurant, Inc. v. Lumbermen's Mut. Casualty Co., 680 A.2d 1386 (D.C.1996), the District of Columbia Court of Appeals considered a post-loss assignment by the property owners to the restaurant owners following a fire at the business,a situation substantially analogous to this case. The insurance company sought to enforce an anti-assignment agreement identical to the one we review. In explaining the difference between the enforceability of a pre-loss assignment and a post-loss assignment, the Court stated as follows:

The reason for the distinction is...