With recent economic issues in Illinois, those doing repair work for property damage caused by weather have sought ways to ensure they will be paid for the work they do. This has resulted in a large uptick in the use of assignments of claims by property owners seeking to assign the benefits of their insurance coverage to others (their contractors) in order to have repair work completed. The use of these assignments, however, has outpaced the dissemination of the rules applicable to them. As a result, there is confusion in Illinois as to just what effect these assignments have on those involved in the process. This article aims to clear up any possible confusion for those who may come across situations where an assignment of claim is employed.
Some attorneys are familiar with the assignment of a claim in a litigation context where, through settlement, the claim of one party is assigned to another. This has been fairly common in Illinois for some time, and is a well-recognized practice. In other parts of the country, however, various other types of claims, specifically property damage insurance claims, are often assigned by an insured to another party where litigation is nowhere on the horizon. While that practice has been recognized in Illinois for many years, it was not something that was often employed. The practice has, however, been common in areas on the Gulf coast for decades in connection with storm damage claims. The practice is moving north, and as a result, the use of assignments of benefits or claims is growing in Illinois, and creating difficulties for many involved who are unfamiliar with the practice, including both seasoned attorneys and major insurers.
Background Law. The current keystone case on the issue of post loss assignments of insurance claims in Illinois is Illinois Tool Works, Inc. v. Commerce And Industry Insurance Co.1 That 1st District case essentially held that a post loss assignment by an insured is valid.2 The Court further found that such assignments are valid even if the relevant insurance policy contains a clause requiring insurer consent to assignment, and the insured does not seek the insurer’s consent before assigning the claim.3 The issue in that case was the defense of a third party environmental contamination suit in which, through a purchase of assets, the original policyholder transferred the rights to the defense to the purchasing party without the consent of the insurer (and long after the underlying contamination at issue had taken place).4 “Because the contamination existed well before the sale of Binks’ assets in 1998, any chose in action, i.e., any future claim by Binks for its agreed-to defense and indemnification necessitated by that contamination, was assignable in 1998.”5 The court made this determination while holding that even if the final dollar amount of the defense or liability was in question, the underlying risk was the same. Thus, no consent to the assignment was needed from the insurance company who wrote the coverage.6 The court in Illinois Tool Works expanded the first district appellate court holding in Loyola University Medical Center v. Med Care HMO, where that earlier case found, in a similar fashion, that post loss health insurance benefits can be assigned without advanced permission of the insurer.7 However, the holding in Illinois Tool Works was nothing new, as the validity of a post loss assignment of a policy of insurance for property loss without notice or consent to the insurer is something that was set forth by the Illinois Supreme Court in Ginsburg v. BullDog Auto Fire Ins. Ass’n Of Chicago in the 1920s.8 The Illinois Tool Works decision relies heavily on Ginsburg as both involved underlying claims and coverage for property loss or damage.
Practical Application And Problems. Despite the long lineage of Illinois cases establishing that a post loss assignment of an insurance policy or claim is valid, many still wrongly believe that if an insurance policy contains language requiring insurer approval for assignment, that even if the assignment happens post loss, the assignment is not valid unless agreed to by the insurer in advance. This confusion stems in part from a lack of statutory authority on the practice, making it a nebulous concept for those outside of the legal profession.
The logic employed by many is that an insurance policy is a contract, and that since that contract is with the original policyholder, all that matters is the language of the contract as between those two parties. Thus, the insurer sometimes believes it is only required to deal with the party with whom they contracted no matter what. It was clear in language quoted in Ginsburg, “An assignment after loss does not violate the clause in the policy forbidding a transfer even if the clause reads before or after a loss.”9 Ginsburg rationalized this by saying: “ After the contract has been fully executed and nothing remains to be done except to pay the money, a different rule applies. The element of the personal character, credit, and substance of the party with whom the contract is made is no longer material, because the contract has been completed and all that remains to be done is to pay the amount due. The claim becomes a chose in action, which is assignable and enforceable…”10
Thus, it is incontrovertible that if an insured executes an assignment of a policy or claim post loss, the insurer is obligated to honor that assignment, as, to whom the insurance proceeds are paid is not a concern of the insurer as it is not impacted by that issue. Disregarding a proper assignment post loss is itself improper, as an assignment of a property damage claim, post-loss, is entirely valid, based on the language of cases such as Ginsburg and Illinois Tool Works. This is the case even when the policy at issue contains language requiring approval by the insurer for the claim to be assigned, and the original policy holder never asks permission.
That is the biggest sticking point in the current era: not the assignment itself, but insured’s assigning their claims or rights to payment to third parties without first asking for the insurer’s approval. Once again, Illinois courts have viewed this as an issue of assumed risk: when the claim is assigned after the loss has been incurred, the insurer is not taking on any additional risk through the assignment, as, at that point, all that is left to determine is the amount of damages and pay the claim. That is why it is treated as a “chose in action.” Who is getting paid for those damages is irrelevant to the reasoning, and thus, the courts have repeatedly found that there is no reason for insurers to restrict the assignment since the assignment has no effect on the position of the insurer.
It is not just insurers that do not understand this process. Attorneys too are not always clear on the validity of a post loss assignments, feeling that the policy language controls, as they are not familiar with the case law with respect to postloss assignments, and property damage insurance policies often seem clear on the issue. Those involved in situations where post loss assignments have been or could be used need to understand the playing field based on the law in Illinois. This includes those to whom the claims can be assigned. The use of assignments of claims and/or benefits is becoming more and more common in situations where third-parties are going to do repair or restoration work related to the loss at issue, and want to be assured of payment. They are the ones to whom these claims are often being assigned. For example, property restoration after a catastrophic loss is a growing area where this is coming to the forefront in Illinois. This stems from the use of such assignments in areas of the country such as the Gulf coast region, where storm damage covered by insurance claims is a regular occurrence. However, in those areas of the country (such as, Florida) the body of law on the use of post loss assignments, and the insurance code under which insurers operate, is much more developed for those types of claims, making the rules as to how and when these assignments can be used much better delineated.
In Illinois, statutory law governing storm repair work covered by insurance is slowly but surely developing and catching up with the times. For example, the Home Repair and Remodeling Act was recently amended to include specific provisions and required disclosures in contracts related to work to be done due to damaging weather, where that work will be paid for through insurance proceeds.11 This new language became effective in 2012.12 The amendment, however, still has not codified the issue as to the enforceability of assignments of claims in these situations, and there is not a statutory framework in place in Illinois guiding the process of assigning these types of claims to those doing the work for which the insurance was designed to pay. At present, the case law described above sets forth the guidelines for practitioners.
Assignment of all policy rights by an insured post loss, as discussed in Illinois Tool Works, can lead to further disputes between insurers and those to whom the insureds assign their rights. While the cases heretofore have indicated that once a loss has been incurred all that is left to do is pay the damages, in practical application, the situation is not always that simple. When the amount of the loss is not clear, or is disputed, further complexity can surface. For example, the process of “appraisal” that is being invoked more and more often by both insurers and insureds is frequently brought into play, and that process itself can become a disputed component of the claim assignment.
“Appraisal” is a dispute resolution process (similar to arbitration) that occurs between an insurer and insured, based on provisions contained in insurance policies. It is considered an efficient method to resolve disputes as to the value of a claim or loss.13 The process generally works with each side retaining an independent appraiser to value a claim, and if those two individuals do not agree on the value of the damage or cost to repair the damage, then a third, neutral appraiser (known as an “umpire”) is enlisted to decide the discrepancies. Illinois treats appraisal clauses similar to arbitration clauses, and enforces them.14 When applicable under the policy language, the appraisal process is favored by courts as an efficient method of resolving disputes outside of a courtroom, as informal methods of dispute resolution like appraisal are the preferred method of resolution, over litigation.15 It has been the case in Illinois for many years that informal procedures to resolve disputes are preferred over formal litigation.16 In fact, Illinois so strongly favors appraisal to resolve disputes as to the value of a claim that, pursuant to statute, when an insured requests appraisal under a fire and extended coverage insurance policy, and the full amount of the appraised loss is upheld by agreement of the appraisers or umpire, the appraisal and umpire fees “shall be paid by the insurer.”17
Appraisal poses a unique wrinkle with respect to the assignments of insurance claims or benefits. Beyond the issue of whether the claim can be assigned at all, many insurers dispute third party assignees of claims having the right to invoke appraisal, believing that is a contractual right of the policy holder that cannot be assigned. The situation becomes even more complicated when, if after a claim is assigned, the question evolves into not just the amount of the covered loss, but if some or all of the loss is covered by the policy at all. Most typical appraisal provisions make reference to the amount of a loss being subject to appraisal, and not whether a loss is covered in the first place being an appraisable matter.18 Even when the issue is simply one of the value of the claim, disputes can arise between insurers and those to whom the claims have been assigned regarding whether the assignee of the claim has the right to invoke appraisal under the policy, despite the fact that the law in Illinois is clear as to the ability to assign all rights under the policy, as set forth in Illinois Tool Works. This creates the troublesome scenario where one party refuses to honor the appraisal provision, based on an assignment of some or all of an insured’s rights, and the only recourse would seem to be to turn to the courts – the very scenario the appraisal provision in the policy was intended to prevent.
Conclusion. Illinois law continues to evolve on this up and coming issue; however, many of the claims involving assignments are smaller in size, resulting in limited litigation and thus, limited appellate decision-making that would clarify how and when the practice is proper. As the practice of claims assignment continues to grow in Illinois, the author hopes that the body of law on the matter will also grow, leading to clarity for contractors, attorneys, and insurers as to what is recognized in Illinois as a proper assignment of claim, as well as what the scope of rights are that can be assigned by an insured to a third party.
1. Illinois Tool Works, Inc. v. Commerce And Industry Insurance Co., 2011 IL App (1st) 093084.
2. Id. at ¶ 47.
3. Id. at ¶¶ 35-38.
4. Id. at ¶¶ 10-12
5. Id. at ¶ 44.
6. Id. at ¶¶ 37-38.
7. Loyola University Medical Center v. Med Care HMO, 180 Ill. App. 3d 471 (1st Dist. 1989).
8. Ginsburg v. Bull Dog Auto Fire Ins. Ass’n Of Chicago, 328 Ill. 571 (1928).
9. Id. at 574.
11. 815 ILCS 513/18
13. See, e.g., Lytle v. Country Mutual Insurance Company, 2015 IL App (1st) 142169.
14. Beard v. Mount Carroll Mut. Fire Ins. Co., 203 Ill. App. 3d 724, (5th Dist., 1990).
15. Hobbs v. State Farm Mutual Automobile Ins. Co., No. 5-01-0427, 335 Ill. App. 3d 1219 (5th Dist. 2003).
16. FTI Intern., Inc. v. Cincinnati Ins. Co., 339 Ill. App. 3d 258 (2nd Dist. 2003), citing, Reed v. Doctor’s Associates, Inc., 331 Ill. App. 3d 618 (5th Dist. 2002).
17. 215 ILCS 5/397.05.
18. Lytle, 2015 IL App (1st) 142169, ¶ 26.
Daniel Fabbri obtained a B.S. in finance from the University of Illinois Urbana-Champaign. Subsequently, Mr. Fabbri graduated from DePaul University with a joint JD/MBA degree. He is the founder of Fabbri Law Offices, P.C. in Wheaton, which focuses on representing small businesses, as well as handling litigation in both commercial disputes and personal injury cases. Mr. Fabbri can be reached at: firstname.lastname@example.org.