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An AOB? Can we do that? – Assignment of Benefits in North Carolina
The widespread devastation of Hurricane Florence brought to a recent discussion the question of whether assignment of benefits contracts for property insurance proceeds are enforceable in North Carolina. This is a great question. In a general setting, vendors, services providers and contractors begin their work with a down payment and receive additional payments as work progresses, with many jurisdictions recognizing a contractor’s lien or service lien against the benefactor if they are not paid in full.
In the wake of a natural disaster, many of the affected are struggling to meet their basic needs as they put their lives back together and are relying heavily on insurance proceeds and benefits to begin the work to repair their homes. The realty of the time it takes to receive an insurance payment has led to the institution of a well-worn-page out of the medical insurance practice book—the assignment of benefits.
An assignment is “a transfer of property or some other right from one person to another, which confers a complete and present right in the subject matter to the assignee.” 1 Insurance policy benefits are contractual rights belonging to the insured. The leading case in North Carolina recognizing the validity of transferring insurance proceeds by an assignment of the policy benefit is Alaimo Chiropractic. 2 The patient in Alaimo Chiropractic executed an “Assignment of Proceeds, Lien and Authorization” in favor of Alaimo. Allstate refused to recognize the assignment, ignored the notice of assignment, and settled directly with the patient for less than the claims submitted by Alaimo. Alaimo sued Allstate. The court held that the assignment was valid and “obligated the Defendant to acknowledge the rights of the Plaintiff to receive payment out of the insurance proceeds for the medical treatment the Plaintiff provided.” 3
The court found that an assignment is a formal transfer of property or property rights from one person (the assignor) to another (the assignee). 4 And that “Principles of general contract law determine whether an assignment is valid.” 5 So, yes, in North Carolina you can do that with property insurance proceeds. You can receive the immediate services of a contractor by assigning the benefits of the insurance policy proceeds to the contractor, so he may seek direct payment from the insurer for services rendered. As easy as that may seem, it comes with many additional considerations and sometimes complications. For one, the insurer now has an additional party to the contract, which is not always well-received.
So, in typical fashion, since this ruling, many insurance contracts have been written with anti-assignment clauses, which prohibit assignment of benefits without the insurer’s consent. Jurisdictions across the country differ regarding the validity of anti-assignment clauses. Some jurisdictions invalidate pre-loss assignments but allow post-lost assignments. The well-known treatise, Couch on Insurance, clearly explains the rationale: “[t]he purpose of a no assignment clause is to protect the insurer from increased liability, and after events giving rise to the insurer’s liability have occurred, the insurer’s risk cannot be increased by a change in the insured’s identity.” 6
Assignment of benefits is generally valid in North Carolina. There are prohibitions on the transferability of some rights. Some rights are deemed to be so personal as not to transfer. For example, the right to recover in tort for personal injury, bad faith refusal to settle a claim, and breach of fiduciary duty are personal to the one injured by that conduct and only the one directly affected should recover. 7 So, even though a policyholder may be forced into a position to assign his insurance proceeds to a contractor in exchange for a timely repair, the duty of the insurer to act in good faith and to treat its insured fairly is not extinguished with the transfer of those policy benefits.
If this option presents itself, remember well, every contract should be read carefully to understand the proposed assignment and the terms of the contract before signing it. Some of the assignment of benefits contracts I have reviewed are overly broad for the service proposed. For example, I have seen poorly drafted assignments of benefits, intended to transfer insurance proceeds to a roof contractor only for the replacement of the roof, but the terms of the assignment provide for the assignment of all policy benefits and proceeds. The intent of parties in that instance was for the assignment of insurance proceeds to the roof contractor for his work related to the roof replacement, and not also the insurance proceeds related to repair of floors, ceilings and walls, which work was not to be performed by the roof contractor. There are many policy benefits available to the insured. Assignments can be beneficial to both parties in working through a catastrophe, but they should be narrowly tailored to the services to be provided. And with that consider:
The bargain that yields mutual satisfaction is the only one that is apt to be repeated. —B.C. Forbes _____________________________ 1 6 Am. Jur. 2d Assignments § 1 (2012). 2 Alaimo Chiropractic v. Allstate Ins. Co. , 574 S.E.2d 496, 155 NC App. 194 (N.C. App., 2002) . 3 Id. at 498. 4 Id. citing , Hinshaw v. Wright , 105 N.C.App. 158, 164, 412 S.E.2d 138, 143 (1992) . 5 Id. citing , Martin v. Ray Lackey Enterp., Inc. , 100 N.C.App. 349, 354, 396 S.E.2d 327, 330 (1990) . 6 Couch on Insurance § 35:7 (3d ed. 2010). 7 Horton v. New South Ins. Co. , 468 S.E.2d 856, 858, 122 N.C.App. 265 (N.C. App., 1996) [We hold that Horton’s claims for bad faith refusal to settle, breach of fiduciary duty, and tortious breach of contract are not assignable. An action “arising out of contract” generally can be assigned. See N.C.Gen.Stat. § 1-57 (1983). However, assignments of personal tort claims are void as against public policy because they promote champerty. See Charlotte-Mecklenburg Hosp. Auth. v. First of Georgia Ins. Co ., 340 N.C. 88, 91, 455 S.E.2d 655, 657 (1995) ; Investors Title Ins. Co. , 330 N.C. at 688, 413 S.E.2d at 271.]
Handling Assignment of Benefit (“AOB”) Claims in the Wake of Hurricanes Irma and Harvey
Overview | Blog Posts | First-Party Coverage | Timothy Engelbrecht , T. Nicholas Goanos , L. Andrew Watson | Related | Print | Share
Partner | First-Party Coverage , Extra-Contractual 813-281-1900 [email protected]
T. Nicholas Goanos
Partner | Extra-Contractual , Arson & Fraud , Casualty Defense Litigation , Third-Party Coverage , First-Party Coverage 704-940-9811 [email protected]
L. Andrew Watson
Partner | Extra-Contractual , Casualty Defense Litigation , Arson & Fraud , Construction , First-Party Coverage , Third-Party Coverage 704-543-2321 [email protected]
September 12, 2017
Hurricanes Irma and Harvey have damaged large areas of Florida, Texas, and Louisiana, as well as brought heavy rain and wind to Georgia, North Carolina, and South Carolina. As insurers handle thousands of property damage claims in these areas, they will undoubtedly be presented with claims that have been assigned from insureds to damage-repair contractors. These are often referred to as assignments of benefits or “AOB” claims. This article explains briefly what an AOB claim is, how Florida, Texas, Louisiana, Georgia, North Carolina, and South Carolina address AOB claims, and the best practices for handling AOB claims.
WHAT IS AN AOB CLAIM?
The classic example of an AOB claim is the following: an insured suffers property damage and hires a repair contractor to repair that damage. The repair contractor requires the insured to execute a written document, usually entitled “Assignment of Insurance Benefits”, which says something to the effect of “for and in consideration of the contractor’s agreement to protect the property from further damage and/or make repairs, the insured assigns his/her/its insurance benefits to the contractor.” The contractor thereafter makes a claim directly to the insurer using the AOB.
HOW DOES FLORIDA, TEXAS, LOUISIANA, GEORGIA, NORTH CAROLINA, AND SOUTH CAROLINA ADDRESS AOB CLAIMS?
Florida has allowed AOB claims for over 100 years. Sec. First Ins. Co. v. State, Office of Ins. Regulation , 177 So. 3d 627, 628 (Fla. 1st DCA 2015). Post-loss property damage claims are freely assignable in Florida regardless of whether the insurer consents or not. Start to Finish Restoration, LLC v. Homeowners Choice Prop. & Cas. Ins. Co. , 192 So. 3d 1275, 1276 (Fla. 2d DCA 2016). An insurance policy that has a “non-assignment” clause only bars the assignment of the entire insurance policy, not an assignment of a post-loss insurance claim. Bioscience West, Inc. v. Gulfstream Prop. & Cas. Ins. Co. , 185 So. 3d 638, 640-41 (Fla. 2d DCA 2016).
Texas has adopted the opposite approach to AOBs. The general rule in Texas is that an insured cannot assign an insurance claim if the insurance policy has a non-assignment clause. ARM Props. Mgmt. Group v. RSUI Indem . Co., 642 F.Supp.2d 592, 609-10 (W.D. Tex. 2009) relying on Tex. Farmers Ins. Co. v. Gerdes , 880 S.W. 2d 215, 218 (Tex. App. 1994). This is true even if the non-assignment clause is general and broadly worded.
Louisiana takes a hybrid approach to AOBs. Louisiana allows an insurer to place a clause in an insurance policy that prohibits post-loss assignments. In re Katrina Canal Breaches Litig ., 63 So. 3d 955, 962-63 (La. 2011). However, in order for such a clause to be enforceable, the clause must clearly and unambiguously express that it applies to post-loss assignments. Id . The general and a broadly worded non-assignment clause that has traditionally appeared in most insurance policies is not sufficient. Id.
Georgia , much like many of the States above and across the Country, permits AOBs. See Santiago v. Safeway Ins. Co. , 196 Ga. App. 480, 481, 396 S.E.2d 506, 608 (App. Ct. 1990). Unlike North Carolina and South Carolina, which are discussed below, an assignee in Georgia may pursue his own extra-contractual claim only after first establishing a breach of the insurance policy. Southern Gen. Ins. Co. v. Holt , 262 Ga. 267, 416 S.E.2d 274, 276-77 (1992). Further, before pursuing an extra-contractual claim, an assignee (or insured) in Georgia must provide the insurer an opportunity to “cure” the alleged “bad faith”. See Ga. Code Ann. § 33-4-6.
Lastly, North Carolina and South Carolina also allow AOBs. In upholding the validity of an assignment, courts in these States have ruled not only that assignments of benefits are indeed valid, but also, that they are governed by each State’s general contract law. See e.g., Alaimo Family Chiropractic v. Allstate Ins. Co. , 155 N.C. App. 194, 197, 574 S.E.2d 496, 498 (App. Ct. 2002); Gray v. State Farm Auto. Ins. Co. , 327 S.C. 646, 491 S.E.2d 272 (App. Ct. 1997). The “rubber” meets the proverbial “road”, though, when an extra-contractual claim is alleged. In North Carolina and South Carolina, a plaintiff may assert an extra-contractual claim, even if the insurer has not breached the insurance policy. See Tadlock Painting Co. v. Maryland Cas. Co. , 322 S.C. 498, 473 S.E.2d 52 (1996); Kielbania v. Indian Harbor Ins. Co., 2012 WL 3957926 (M.D.N.C. 2012). However, an assignee is limited in the sense that it may pursue only his own extra-contractual claim, and not the assignors. Horton v. New S. Ins. Co. , 122 N.C. App. 265, 268, 468 S.E.2d 856, 858 (1996); Davis v. Liberty Mut. Ins. Co. , 2015 WL 6163243, at *4 (D.S.C. 2015).
WHAT ARE THE BEST PRACTICES FOR HANDLING AN AOB CLAIM?
First, as noted above, an adjuster needs to know if the state law where the AOB claim is being made allows for AOB claims.
Second, assuming the state allows for AOB claims, the adjuster needs to carefully read what the actual AOB document says. They are not all the same. Some AOBs assign the entire claim. Other AOBs only assign part of the claim. For example, imagine an insured’s property is damaged by water. The insured needs the water extracted and the structure rebuilt. An AOB might assign both the water extraction and the rebuild claim to a single contractor. Or, the insured might execute one AOB to a water extraction contractor and a separate AOB to a different rebuild contractor. Or, an insured might execute an AOB to a water extraction contractor and the insured will retain the remaining rights to make the rebuild claim. If the AOB is unclear what – exactly – is being assigned, it is important for the adjuster to speak with the insured and the contractor to ensure everyone is on the same page.
Third, the adjuster should speak to the insured to gather information necessary to understand and adjust the assigned claim. In Florida, an adjuster likely cannot require a contractor to perform the insurance policy’s post-loss conditions of giving documents, executing a sworn statement in proof of loss, or appearing for an examination under oath. Shaw v. State Farm Fire & Cas. Co., 37 So. 3d 329, 332-33 (Fla. 5th DCA 2010) disapproved on other grounds in Nunez v. Geico Gen. Ins. Co. , 117 So. 3d 388 (Fla. 2013). However, the insured is still responsible for fulfilling those conditions even with regard to the assigned claim. Id. The insured’s failure to do so may bar the assigned claim. Id.
Fourth, assuming payment will be made on the assigned claim, the adjuster should determine who will be listed on the settlement check. If there is a valid AOB, it may be improper to list the insured on the settlement check since the insured’s rights have been assigned to the contractor. Many AOBs will state that only the contractor be listed on the settlement check. However, it is good for an adjuster to confirm with the insured that the insured understands that he/she/it will not be listed on the settlement check. It is also important for the adjuster to correctly determine if a mortgagee needs to be listed on the settlement check. Situations vary depending on the nature of the work that the contractor is doing (damage prevention versus repair) and whether the work has been completed or is still to be done. The adjuster should discuss the situation with the insured, the contractor, and the mortgagee if the adjuster is at all unsure if the mortgagee needs to be on the settlement check.
Fifth, an adjuster should know whether an assigned claim can be resolved using the insurance policy’s appraisal provision. Appraisal can be an inexpensive and expedient way to resolve a claim. In Florida, an insurer usually can require a contractor with an assigned claim to go to appraisal if the insurance policy provides for the mandatory appraisal upon request. Certified Priority Restoration v. State Farm Florida Ins. Co ., 191 So. 3d 961, 962 (Fla. 4th DCA 2016).
Insurers will continue to be presented with AOB claims in the wake of Hurricanes Irma and Harvey. We have been helping insurers and adjusters navigate the unique issues associated with AOB claims for many years. Please contact us if you have any questions or need assistance.
For any further questions, please contact Timothy Engelbrecht, T. Nicholas Goanos, or L. Andrew Watson.
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Forfeiture of Health Insurance Rights
Hospitals have long pushed for legislative reforms that would allow them to have you sign over your insurance rights through an "Assignment of Benefits." An AOB would raise costs, increase out-of-network surprise billing, and erode quality.
What is an Assignment of Benefits?
An Assignment of Benefits (AOB) is an agreement that, once signed, transfers the insurance claims rights and benefits of the policy from the member to a third party like a hospital.
An AOB gives that third party the authority to file a claim, collect insurance payments, and even file lawsuits without the involvement or awareness of the policyholder and patient.
While this may sound harmless (or even beneficial) to hand over the headache of healthcare payments to the experts, the cost implications are devastating.
Currently in North Carolina, the only way a provider can be paid directly for their services is to be part of an insurance network. Your insurer negotiates lower costs for services with healthcare providers, and in exchange pays the provider directly when an insured patient receives care.
If a provider doesn’t agree to lower negotiated costs then they aren’t part of the insurance network and are not paid directly by the insurer. Instead, the insurer will send a patient a check directly, which the patient then uses to pay the provider.
Hospitals do not like this as payment is much slower and less reliable, which is why they usually agree to negotiate costs and join insurance networks.
With an AOB, however, the hospital is given the right to collect a payment directly from your insurer even if they haven’t negotiated a lower rate.
And since there is no negotiated rate, the hospital can charge whatever they want.
When a provider can collect payment directly from your insurer without a contracted, negotiated rate one of two things will happen.
First, the insurer will use your premiums to pay the hospital the full amount. But since the hospital can charge whatever they want, there is no limit to what the “full amount” can be.
To cover these unchecked amounts, premiums would have to go up considerably. One estimate puts the increase at m ore than $1,000 a year for every single insured member .
Second, the insurer will pay the equivalent of a fair, in-network rate. Since the hospital can charge anything they want, the fair, in-network equivalent will likely not come close to covering the full amount.
For example, at in-network hospitals your insurer has a negotiated rate of $1,000 for Procedure A. But at an out-of-network hospital where there is no agreed-to amount, they change $5,000 for Procedure A. Your insurer will still pay the $1,000 but now you’re responsible for the surprise $4,000 balance.
The combination of higher insurance premiums and surprise balance bills is why estimates put the price tag of Assignment of Benefits north $2 billion .
That is $2 billion out of your pocket and into the back account of big hospital systems, who after they have you forfeit your insurance rights, have no incentive to negotiate fair prices for their services.
Passing a law that allows for AOBs would be the most costly policy change that North Carolina’s elected leaders could make.
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Assignment of Benefits was a bad idea. Let’s hope it never comes back.
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