Case Briefs

CPR advanced two arguments on appeal: The assignment of benefits was a valid contract between it and Witherspoon; and the insurance policy's anti-assignment clause did not render the assignment of benefits invalid. Id. The New Jersey appellate division agreed. Id. at *11.

The court found that the agreement between the parties was not an assignment of the policy, as the insurer had argued, but an assignment of the right to receive payments under the policy. Id. at *6. The court explained that, once a loss occurs, any assignment undertaken by the policyholder is an assignment of the loss, not an assignment of the policy. Id. (citing Elat, Inc. v. Aetna Cas. & Sur. Co., 280 N.J. Super. 62, 67 (App. Div. 1995)). Citing New Jersey law and the Restatement (Second) of Contracts, the court noted that contractual rights are generally freely assignable and that the amount of loss, to the extent it is covered by the policy, “may be transferred or assigned like any other debt.” Id. *7 (internal citations omitted). Although the court recognized that contractual rights may not be assigned if “the substitution of a right of the assignee for the right of the assignor would materially change the duty of the obligor,” the court found this was not the case here. Id. at *7-8. It observed that once a loss has occurred, a policyholder's assignment of the right to collect proceeds under an insurance policy “does not alter, in any meaningful way, the obligations the insurer accepted under the policy.” Id. at *8 (quoting Elat, Inc., 280 N.J. Super. at 67). The court, therefore, determined that Witherspoon's assignment of rights did not materially change the insurer's duty. Id.

The appellate division rejected the insurer's argument that the policy's anti-assignment provision precluded an assignment of benefits by the insured. Id. Crucial to the court's analysis was the Supreme Court's ruling in Owen v. CNA Insurance/Continental Casualty Co., 167 N.J. 450 (2001), which had adopted the “general rule” embodied in the Restatement (Second) of Contracts ' 322 that “contractual provisions limiting or prohibiting assignments operate only to limit a party's right to assign the contract, but not their power to do so, unless the parties manifest an intent to the contrary with specificity.” Id. at *9-10 (citing Restatement (Second) of Contracts ' 322 (1981)). The court explained that “[t]o reveal the intent necessary to preclude the power to assign, or cause an assignment violative of contractual provisions to be wholly void, an anti-assignment clause must state that non-conforming assignments (i) shall be 'void' or 'invalid,' or (ii) 'that the assignee shall acquire no rights or the non-assigning party shall not recognize any such assignment.'” Id. *10 (internal quotation marks and citations omitted). The CPR court emphasized that where such language is not included in the insurance contract, any provision purporting to limit or prohibit assignments “will be interpreted merely as a covenant not to assign, the breach of which may render the assigning party liable in damages to the non-assigning party.” Id. at *10-11 (internal quotation marks and citations omitted). More importantly, the policyholder's assignment will be valid and enforceable against both the assignor and the assignee. Id. at *11.

Applying the law to the facts, the court concluded that the policyholder's assignment to CPR was valid and enforceable. Id. at *11. Because Franklin Mutual's policy contained no specific prohibition on the power to make an assignment, the court determined the policy did not “reveal the intent necessary to preclude the power to assign, or cause an assignment violative of contractual provisions to be wholly void.” Id. The court also rejected Franklin Mutual's claim that the assignment was invalid because there was a lack of privity between it and CPR. The court therefore reversed the trial court's ruling and remanded the matter for further proceedings consistent with its opinion. Id. at *12-13.

Notwithstanding the New Jersey Appellate Division's willingness to enforce anti-assignment provisions in certain, narrow and specific circumstances, the court's decision is at least a partial victory for policyholders and third-party assignees litigating under New Jersey insurance law. The court made clear that an anti-assignment clause will not restrict a policyholder's power to assign policy benefits unless its policy's terms clearly and expressly manifest such an intention. Thus, unless an anti-assignment clause explicitly provides that non-conforming assignments of policy proceeds shall be void and invalid, or that the assignee shall acquire no rights to policy benefits and the non-assigning party shall not recognize any assignment of benefits, a policyholder's assignment of benefits under a policy likely will be found valid and enforceable. The precise terms of the insurance policy will, of course, control. Furthermore, caution is warranted if and when a policyholder offers an assignment, if it is in violation of a contract's terms, as the policyholder may be held liable for damages for violation of a policy's covenant against assignments.

This month's Case Brief was contributed by Sherilyn Pastor and Mario Russo. Pastor, a member of this newsletter's Board of Editors, is a partner at McCarter & English, LLP, where she is practice group leader of the firm's Insurance Coverage Group. She is co-chair of the ABA Section of Litigation's Insurance Coverage Litigation Committee. Russo is a law student at Seton Hall University School of Law, where he is senior articles editor of the Seton Hall Circuit Review. He also is a law clerk in McCarter & English's Insurance Coverage Group. This publication is not intended to provide legal advice. Issues relating to insurance coverage are fact-specific, and their resolution will depend on the precise policy terms involved and the law governing the disputes, which varies from state to state. The views expressed in this publication are not necessarily those of McCarter & English, LLP or its clients.

NJ Appellate Division Upholds Assignment of Homeowner's Policy's Benefits

The New Jersey Appellate Division, on June 21, 2012, held a homeowner's insurance policy's anti-assignment clause did not invalidate a policyholder's assignment of policy benefits in CPR Restoration & Cleaning Service., L.L.C. v. Franklin Mutual Insurance Company, No. A-3858-10T2, 2012 N.J. Super. Unpub. LEXIS 1454 (App. Div. June 21, 2012).

Homeowner Luke Witherspoon purchased a homeowner's insurance policy from Franklin Mutual Insurance Co. (“Franklin Mutual”), covering, among other things, loss resulting from fire. Id. at *1. The policy also contained the following provision: “No assignment of this policy or an interest here is binding on us without our written consent.” Id. at *1-2. After a fire destroyed his residence in 2008, Witherspoon hired CPR Restoration and Cleaning Services (“CPR”) to perform emergency cleanup of his property. Id. at *2. In exchange for CPR's services, Witherspoon offered three agreements, each assigning CPR his rights and benefits under Franklin Mutual's policy. Id. Franklin Mutual was not a party to the agreements, which nonetheless authorized and directed it to make direct payments to CPR for all its work. Id. at *2-3. When CPR submitted invoices totaling more than $32,000 to Franklin Mutual, Franklin Mutual refused to issue payment to CPR in accordance with the assignment of benefits and, instead, paid the insured. Id. Because CPR never received payment from the homeowner or insurer, CPR filed suit. Id. at *3. The trial court granted summary judgment in favor of Franklin Mutual, concluding the assignment was invalid. Id. at *4. The homeowner filed for bankruptcy and was dismissed from the action, and CPR appealed. Id. at *5.

CPR advanced two arguments on appeal: The assignment of benefits was a valid contract between it and Witherspoon; and the insurance policy's anti-assignment clause did not render the assignment of benefits invalid. Id. The New Jersey appellate division agreed. Id. at *11.

The court found that the agreement between the parties was not an assignment of the policy, as the insurer had argued, but an assignment of the right to receive payments under the policy. Id. at *6. The court explained that, once a loss occurs, any assignment undertaken by the policyholder is an assignment of the loss, not an assignment of the policy. Id. (citing Elat, Inc. v. Aetna Cas. & Sur. Co. , 280 N.J. Super. 62, 67 (App. Div. 1995)). Citing New Jersey law and the Restatement (Second) of Contracts, the court noted that contractual rights are generally freely assignable and that the amount of loss, to the extent it is covered by the policy, “may be transferred or assigned like any other debt.” Id. *7 (internal citations omitted). Although the court recognized that contractual rights may not be assigned if “the substitution of a right of the assignee for the right of the assignor would materially change the duty of the obligor,” the court found this was not the case here. Id. at *7-8. It observed that once a loss has occurred, a policyholder's assignment of the right to collect proceeds under an insurance policy “does not alter, in any meaningful way, the obligations the insurer accepted under the policy.” Id. at *8 (quoting Elat, Inc., 280 N.J. Super. at 67). The court, therefore, determined that Witherspoon's assignment of rights did not materially change the insurer's duty. Id.

The appellate division rejected the insurer's argument that the policy's anti-assignment provision precluded an assignment of benefits by the insured. Id. Crucial to the court's analysis was the Supreme Court's ruling in Owen v. CNA Insurance/Continental Casualty Co. , 167 N.J. 450 (2001), which had adopted the “general rule” embodied in the Restatement (Second) of Contracts ' 322 that “contractual provisions limiting or prohibiting assignments operate only to limit a party's right to assign the contract, but not their power to do so, unless the parties manifest an intent to the contrary with specificity.” Id. at *9-10 (citing Restatement (Second) of Contracts ' 322 (1981)). The court explained that “[t]o reveal the intent necessary to preclude the power to assign, or cause an assignment violative of contractual provisions to be wholly void, an anti-assignment clause must state that non-conforming assignments (i) shall be 'void' or 'invalid,' or (ii) 'that the assignee shall acquire no rights or the non-assigning party shall not recognize any such assignment.'” Id. *10 (internal quotation marks and citations omitted). The CPR court emphasized that where such language is not included in the insurance contract, any provision purporting to limit or prohibit assignments “will be interpreted merely as a covenant not to assign, the breach of which may render the assigning party liable in damages to the non-assigning party.” Id. at *10-11 (internal quotation marks and citations omitted). More importantly, the policyholder's assignment will be valid and enforceable against both the assignor and the assignee. Id. at *11.

Applying the law to the facts, the court concluded that the policyholder's assignment to CPR was valid and enforceable. Id. at *11. Because Franklin Mutual's policy contained no specific prohibition on the power to make an assignment, the court determined the policy did not “reveal the intent necessary to preclude the power to assign, or cause an assignment violative of contractual provisions to be wholly void.” Id. The court also rejected Franklin Mutual's claim that the assignment was invalid because there was a lack of privity between it and CPR. The court therefore reversed the trial court's ruling and remanded the matter for further proceedings consistent with its opinion. Id. at *12-13.

Notwithstanding the New Jersey Appellate Division's willingness to enforce anti-assignment provisions in certain, narrow and specific circumstances, the court's decision is at least a partial victory for policyholders and third-party assignees litigating under New Jersey insurance law. The court made clear that an anti-assignment clause will not restrict a policyholder's power to assign policy benefits unless its policy's terms clearly and expressly manifest such an intention. Thus, unless an anti-assignment clause explicitly provides that non-conforming assignments of policy proceeds shall be void and invalid, or that the assignee shall acquire no rights to policy benefits and the non-assigning party shall not recognize any assignment of benefits, a policyholder's assignment of benefits under a policy likely will be found valid and enforceable. The precise terms of the insurance policy will, of course, control. Furthermore, caution is warranted if and when a policyholder offers an assignment, if it is in violation of a contract's terms, as the policyholder may be held liable for damages for violation of a policy's covenant against assignments.

This month's Case Brief was contributed by Sherilyn Pastor and Mario Russo. Pastor, a member of this newsletter's Board of Editors, is a partner at McCarter & English, LLP, where she is practice group leader of the firm's Insurance Coverage Group. She is co-chair of the ABA Section of Litigation's Insurance Coverage Litigation Committee. Russo is a law student at Seton Hall University School of Law, where he is senior articles editor of the Seton Hall Circuit Review. He also is a law clerk in McCarter & English's Insurance Coverage Group. This publication is not intended to provide legal advice. Issues relating to insurance coverage are fact-specific, and their resolution will depend on the precise policy terms involved and the law governing the disputes, which varies from state to state. The views expressed in this publication are not necessarily those of McCarter & English, LLP or its clients.