When an insured assigns its rights to post-loss benefits to a third-party, under the insurance policies, can the third-party bring a breach of contract claim against the insurer? According to an Arizona Court of Appeals holding, post-loss assignments of benefits under insurance policies are valid despite anti-assignment provisions. Farmers v. Hon. Udall and EcoDry, No. 1 CA-SA 18-0081 (June 12, 2018).

In EcoDry, four homeowners insured by Farmers Insurance Exchange (“Farmers”) hired EcoDry Restoration of Arizona, LLC (“EcoDry”) to repair water damage to their homes. The insureds assigned to EcoDry their “rights, benefits, proceeds an causes of action” under the policies. Farmers refused to pay EcoDry’s repair bills in full, which led to EcoDry suing Farmers and alleging breach of the insurance policies.

Under Ariz. R. Civ. P. 12(b)(6), Farmer’s moved to dismiss EcoDry’s complaint for failure to state a claim. Farmers argued EcoDry did not have a contractual relationship with Farmers or a valid assignment of the insureds’ rights under the insurance policies. Each policy contained an anti-assignment provision stating that the insured’s “interest in this policy may not be transferred to another person without [Farmers’] written consent.” The Superior Court denied Farmers’ Motion to Dismiss.

Farmers petitioned the Court of Appeals for special action review. The Court of Appeals accepted the special action jurisdiction after learning over 150 similar cases, involving water restoration contractors, such as EcoDry, and insurance companies, had been filed in Maricopa County Superior and Justice Courts since April 2017. The Court of Appeals considered whether EcoDry may bring a breach of contract claim against Farmers, after its insureds assigned EcoDry their rights to post-loss benefits under the insurance policies, notwithstanding the anti-assignment provisions in the policies.

In Arizona, the general rule is that an indemnity insurance policy “cannot be assigned, especially where an assignment is expressly prohibited by the terms of the policy, unless the insurer consents.” Aetna Cas. & Sur. Co. v. Valley Nat’l Bank of Ariz., 15 Ariz. App. 13, 15 (1971). However, an assignment of a claim made after loss, as in this case, “is not of the policy itself, but of a claim under, or a right of action on, the policy.” Id. Hence, an assignment of the rights under the policy may be made without the consent of insurer, if done after the loss has occurred. St. Paul Fire & Marine Ins. Co. v. Allstate Ins. Co., 25 Ariz. App. 309, 311 (1975). The rule enforcing anti-assignment provisions is not applicable. Aetna, 15 Ariz. App. at 15. In this matter, the Court of Appeals held the insureds did not assign their insurance policies to EcoDry. Instead, they assigned a claim under and right of action on the policy. Id.

Farmers argued the assignments increased the insurer’s risk or altered the duties and obligations under the insurance policies. The Court of Appeals cited to the holding in other states that permit assignment of post-loss benefits due under insurance policies.

Farmers and amici also argued such assignments would cause more expense and higher payouts by insurers. This in time would lead to insureds experiencing higher premiums.  The Court of Appeals noted the assignments did not grant parties such as EcoDry any rights greater than those held by the insured-assignors. The policies require insurers to pay the reasonable costs of repair, regardless of whether the claim for coverage is pressed by an insured or a party like EcoDry.

TM Takeaway

Contrary to the Court of Appeals’ opinion, permitting contractors to accept assignments of claims and bring breach of contract claims against insurers has resulted in a sharp increase in litigation against insurers and higher payouts on water damage claims to avoid litigation. The key to winning these cases is to thoroughly document the water mitigation efforts with photos and moisture readings to ensure the contractor is using the right equipment, only for the time necessary to dry-out the property. Consider asking a trusted contractor to provide a comparative estimate in addition to your own estimate of reasonable charges and document the claim file with your reasoning when paying less than the contractor’s invoice. Contact Tyson & Mendes, with any questions about this ruling and the effect on your insurance policy.

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