Posted on: 11/17/2011
David H. Shaw II, Catherine C. Ackerman
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It is an axiomatic principal of law that the assignee of a contract "steps into the shoes of the assignor." However assignees in many first party property insurance claims are attempting to step into a better pair of shoes than those provided by the assignor. In Florida, there has been an increasing trend by third party contractors to take an assignment of insurance benefits from the insured at the time the vendor performs services at the insured's property.
The assignment transfers "rights" to collect on the claim to the assignee/vendor. The assignment language commonly includes a provision that the insured will never be liable to the assignee for amounts the insurance company does not pay. Thus, it is completely the assignee/ vendor's claim. Further, because it is the assignee/vendor that does the work, and pursues the claim, it is the assignee/vendor with the most knowledge regarding the scope and pricing of the work performed. It is also the assignee/ vendor that has the most interest on the ultimate resolution and settlement of the claim including the invocation of the appraisal process.
Thus, for quite some time, insurers have been requesting, and in fact demanding, that assignee/vendors comply with certain duties after loss, including submission of Sworn Statements in Proof of Loss, general cooperation, and Examinations Under Oath. Insurers have also invoked appraisal on such assignee/vendor claims when they cannot resolve the claim through the adjustment process.
Recently property insurers have faced a new argument from third party assignees. These assignee/vendors are now arguing that they are not required to comply with any insurance policy provisions in order to recover against the insurer. Even as the argument is stated, it seems ridiculous! The assignee/vendor seeks payment for its services from the carrier based on the insured's assignment, while arguing that it may rightfully refuse to participate in the insurance carrier's investigation of the loss and refuse to comply with the provisions of the policy. So, what right does the carrier have to enforce the duties after loss provisions of the insurance contract or other requirements of the policy against an assignee of the claim benefits?
Creation of the Assignment:
The vast majority of the assignment cases where this argument has been raised have been in the context of a water damage claim at a residential dwelling. Typically, the insured suffers some type of water loss at their residence, like a pipe break, a hot water heater failure or some other water related loss. As a result of the loss, the insured's residence is flooded and in need of water remediation and dry-out. Often due to the desperation of the insured and the necessity of finding someone to help dry-out their home, the insured goes directly to the phone book or internet and contacts one of the first water remediation contractors they find.
Shortly after being contacted by the insured, the water remediation contractor arrives at the residence, assesses the damage, and begins placing equipment into the insured's home to dry-out the property. In conjunction with its work, the water remediation contractor executes a contract directly with the insured to perform its work. What makes this scenario unusual is that, as part of the contract, the remediation contractor takes an assignment of the insurance benefits related to its work, along with the right to sue the insurer to collect up to the amount of its invoiced work. In a number of cases, the remediation contractor initiates the claim with the insurance carrier and communicates directly with the carrier regarding the water damage loss, thus completely bypassing the insured.
Many of these claims are resolved without incident. However, in too many of these claims, the water remediation contractor submits an invoice to the carrier that is well in excess of what the carrier estimated it should cost to remediate and dry-out the insured's residence. It is those claims where the carrier has no choice but to investigate the claim, determine why the invoice is excessive, and identify whether all the work indicated in the invoice was performed.
Under normal circumstances, the insurance policy would provide the carrier tools to investigate the loss by way of Examinations Under Oath, Proofs of Loss, and/or records production. Unfortunately, many remediation contractor/assignees are refusing to comply with the duties after loss provisions of the insurance policy. These remediation contractors routinely argue that they have agreed to an assignment of the insurance benefits only, and have not agreed to assume any of the duties of the insurance contract.
The remediation contractors have also argued that they do not have to comply with the appraisal provision of the insurance policy to resolve any of the disputed losses. Instead, the assignee/vendors elect to institute a lawsuit against the insurance carrier to recover the full amount of its dry-out invoice, and in Florida, statutory attorney fees.
Assignee's Alleged Authority:
Surprisingly, there has not been any authority identified throughout the United States that specifically addresses an assignee's duties under a property insurance policy. In Florida, much of the support for the assignees position comes from a Florida Fifth District Court of Appeals personal injury protection ("PIP") case, Shaw v. State Farm Fire & Casualty, Co., 37 So. 3d 329 (Fla. 5th DCA 2010). In Shaw, State Farm issued an automobile insurance policy to the insured, Renard St. Louis ("St. Louis"). St. Louis was injured in an auto accident and received medical treatment from David Shaw of David G. Shaw, D.C., P.A. d/b/a Central Florida Chiropractic Center ("Shaw"). At the time of the treatment, Shaw received an assignment of St. Louis's insurance benefits under the State Farm insurance policy.
Shaw sought payment of St. Louis's insurance benefits from State Farm for the services rendered. Pursuant to the terms of the insurance policy with St. Louis, State Farm requested that Shaw, as assignee, appear for an Examination Under Oath ("EUO"). Shaw refused to participate in the EUO, and State Farm refused to pay based on Shaw's failure to comply with the policy. Shaw filed a declaratory judgment action against State Farm seeking a judgment that, as assignee of the insurance benefits, he was not required to participate in an EUO. The trial court entered judgment in favor of State Farm. However, the 5th DCA reversed. Specifically, the appellate court looked at the issue of "whether an EUO clause in an automobile insurance policy is binding on an assignee of the right to payment of no-fault benefits." Id. at 331. The court questioned whether an insurer can extend the duty of an insured to participate in an EUO to an assignee of the insurance proceeds. Ultimately, the appellate court took the position that "an assignment of a contract right does not entail the transfer of any duty of the assignee, unless the assignee assents to assume the duty." Id. at 332.
In arriving at its decision, the court relied heavily on two prior PIP cases decided by the Florida Third District Court of Appeals and the Circuit Court for the Eleventh Judicial Circuit in and for Miami-Dade County, Florida, sitting in its appellate capacity. The first case was the 3d DCA case of Marlin Diagnostics v. State Farm Mutual Auto. Ins. Co., 897 So. 2d 469 (Fla. 3d DCA 2004). In Marlin,the 3d DCA reversed the trial court's ruling which required a PIP medical provider to submit to an EUO when it has accepted an assignment of benefits from an insured. The appellate court held "when an insured assigns his benefits to a healthcare provider, the obligation to attend an EUO remains with the insured." Shaw, 37 So. 3d at 334. In its ruling, the court noted that the Florida Legislature created a PIP statute that provided the insurer with a mechanism to obtain the information it sought at the EUO from the healthcare provider.
The Shaw court also relied on the Florida 11th Circuit trial court's decision of Advanced Diagnostics Testing, Inc. v. State Farm Insurance Co., 11 Fla. L. Weekly Supp. C964 (Fla. 11th Cir. Ct., August 17, 2004). Similar to Marlin, the court in Advanced Diagnostics ruled that the assignor of the rights to proceeds does not assign the entire policy. Therefore, an assignment of benefits "could not transfer the insured's obligation to attend an EUO to the health care provider." Shaw, 37 So. 3d at 334.
Similar to the Marlin court, the Shaw court also extensively reviewed the Florida PIP Statutes and stated that State Farm had the ability to demand information from the health care provider by virtue of the statutory language. "The very reason for the existence of this statutory scheme is that the insurers have no right to obtain it otherwise from assignees like Shaw." Id. at 336. These statutes strike a balance between the insurance carrier's request for information and the burden of the assignee who accepts insurance proceeds in lieu of direct payment from the insured. Id.
Shaw was considered by the Fifth District Court of Appeals en banc. The decision was not unanimous, and the court recognized the potential impact of the issue, so it certified the following question to the Florida Supreme Court: "Whether a health care provider who accepts an assignment of no fault insurance proceeds in payment of services provided to an insured can be required by a provision in the policy to submit to an examination under oath as a condition to the right of payment?" Id.
There is support for the Shaw ruling found in Selective Insurance Co. of America v. Hudson East Pain Management Osteopathic Medicine & Physical Therapy, et al., 5 A.3d 166 (N.J. Sup. Ct. 2010). In Selective, the defendants were assignees of automobile insurance policies containing PIP benefits. During the investigation of several claims involving the defendants/assignees, Selective noticed a common treatment pattern for several of the insureds/assignors and sought to further investigate the claims under suspicion of fraud. To that end, Selective sought production of records, pursuant to the New Jersey PIP statute, as well as the cooperation clause of the insurance policy.
Selective filed a declaratory judgment action seeking a judgment that the assignees must provide information and documents pursuant to both the New Jersey PIP statutes and the cooperation clause of the policy. The trial court denied a motion to dismiss filed by the assignees and permitted the insurer to obtain records it needed to investigate the suspicion of fraud. The assignees appealed and argued that a cooperation clause in an automobile insurance policy is not binding on the assignee. The appellate court agreed.
The court found that "the assignment of a contract right does not also delegate its duties." Id. at 170. The only way the duties of a contract are assumed by the assignee is if the assignee expressly agrees to be bound by same. The court did not find any evidence to suggest the assignees to the insurance policy agreed to be bound by any of the duties of the insurance contract. The obligation to comply with the insurance contract remained with the insured, not the assignees.
Thus, the water mitigation contractors/assignees in this type of property insurance claim have found some support for their position that they do not have to comply with any of the duties imposed by the insurance policy. None of these cases that may lend support for the assignees' position are in the setting of a property insurance policy. Instead, these are PIP claims involving an automobile insurance policy, circumstances where the state legislatures have clearly defined the rights and duties of the parties. That is not the case in a property insurance claim. In a property insurance setting, allowing an assignee's failure to comply with any of the duties of the insurance policy interferes with the carrier's ability to investigate the claims because there is no statutory scheme that allows the carrier to obtain the necessary information to properly investigate the claims asserted by the assignee.
Carrier's Authority to Demand Compliance With Policy Duties:
As discussed above, the Shaw decision, which certified a question to the Florida Supreme Court, has been heavily relied upon by the assignees to avoid compliance with policy duties. However, the Shaw decision contained an extensive dissenting opinion which vehemently disagreed with the law as outlined by the majority court.
Judge Sawaya wrote the dissenting opinion and stated:
The majority erroneously eliminates a valuable contract provision that State Farm Fire and Casualty Company has every right to enforce against a claimant making a claim for PIP benefits; the majority fails to properly distinguish a condition precedent to recovery or suit that must be complied with by a claimant from a contract obligation that an assignee of benefits must otherwise agree to be bound by…. There is no precedent that the majority can cite for its general holding that an assignee of PIP benefits must actually agree to be bound by an EUO clause in an insurance contract that is a condition precedent to recovery.
Shaw, 37 So. 3d at 336-337.
The Judge opined that the issue of whether the carrier had the right to enforce the EUO provision of the insurance policy against an assignee was a matter of contract rights. State Farm had the right to include in the policy the requirement to attend an EUO as a condition precedent to suit. Further, State Farm had the right to expect that the EUO provision be complied with by any person or entity making a claim or seeking payment so it could determine whether a claim is proper or fraudulent. An assignee is as equally capable of filing a fraudulent claim as an insured. "An assignment of benefits or a cause of action to recover those benefits under a contract does not remove from the assignee the burden of compliance with contract conditions." Id. at 338.
Support for the requirement for the assignee to comply with the terms of the contract is found in Shreve Land Co. v. J & D Fin. Corp., 421 So. 2d 722 (Fla. 3d DCA 1982). In that case, Shreve contracted with Pac-Dor for the purchase of doors for a construction project. Eventually, Pac-Dor assigned its interest in the purchase price of the contract to J & D Financial. Pac-Dor only delivered a portion of the contracted doors to Shreve. Shreve was forced to purchase the remaining doors from a third party and deducted the amount of the purchase price from the original contract price with Pac-Dor. The assignee, J & D Financial, filed a suit against Shreve seeking recovery of the purchase price for the doors that were shipped. The trial court stated that Shreve accepted partial delivery of the doors and was liable for payment without set-off. Shreve appealed, alleging error for the trial court's failure to allow it to set-off for the breach by Pac-Dor.
The Shreve court stated:
The law is well settled that an assignee succeeds to his assignor's rights under the assignment of a contract and takes it with all the burdens to which it is subject in the hands of the assignor. If the assignee seeks to enforce the contract, he must show that all conditions have been performed either by himself or the assignor.
Id. at 724, citing, Florida E. Coast Ry. Co. v. Eno, 128 So. 622 (Fla. 1930) (assignment of rights to proceeds under a contract wherein the court stated that the assignee occupies the same position as did the assignor and had the same rights and was subject to the same equities, conditions and defenses); Alderman Interior Sys., Inc. v. First Nat'l-Heller Factors, Inc., 376 So. 2d 22 (Fla. 2d DCA 1979); Morton v. Morton, 307 So. 2d 835 (Fla. 3d DCA), cert. denied, 324 So. 2d 90 (Fla. 1975); Prestress Erectors, Inc. v. James Talcott, Inc., 213 So. 2d 296 (Fla. 1968), cert. denied, 219 So. 2d 702 (Fla. 1968); see also, Law Office of David J. Stern, P.A. v. Sec. Nat. Serv. Corp., 969 So. 2d 962 (Fla. 2007)("assignee of a non-negotiable instrument takes it with all the rights of the assignor, and subject to all the equities and defenses of the debtor connected with or growing out of the obligation that the obligor had against the assignor at the time of the assignment.").
The court reversed the trial court and found that Shreve properly asserted a set-off against the debt owed to the assignee, J & D Financial, for the failure of Pac-Dor to deliver all of the contracted doors. "The general rule that an assignee steps into the shoes of the assignor … simply means that the assignee acquires no greater rights than the assignor." Shaw, 37 So. 3d at 339. The Shaw dissenting opinion equated the general rule to mean that if the insured cannot refuse compliance with the policy duties, then the assignee has no greater right to refuse compliance. Id.; see also, Prudential Prop. & Casualty Ins. Co. v. Nardone, 752 A. 2d 859 (2000) (since the assignee was filing complaints for arbitration and sought PIP benefits from the insurer, the assignee is bound to the assignor's contract terms and must comply with the policy's cooperation and EUO clauses.).
Finally, the Shaw dissenting opinion addressed the majority opinion's position that the assignees did not agree to be bound by the duties of the insurance policy. The assignment at issue in the Shaw case assigned the insured's rights and benefits to the extent of the assignee's services. However, the "rights and benefits are contained in the insurance policy, and any money that may be due and owing derives from that policy." Id. at 340. The court noted that State Farm's ability to contest the validity of the bills submitted by the assignee should not be thwarted simply because the medical provider took an assignment from the insured. Finally, the assignment should not deprive State Farm of its right to investigate the assignee's claim to determine if it is valid and/or deprive State Farm of its right to utilize the EUO provision of the policy. "There is nothing due and owing regarding a contested claim until it is determined that the claim is reasonable and the services provided were necessary and related to the accident, and there is nothing due and owing under the policy unless the EUO condition precedent in the policy has been complied with…." Id. at 341.
The Assignee Does Not Get New Shoes:
While the black letter law regarding assignments may have provided the underlying basis for the Court's decision in Shaw, this black letter law should not apply in a property insurance claim. A review of nationwide case law has not revealed how an assignment will be dealt with in the context of a property insurance claim. Shaw and its progeny address whether an assignee must comply with the duties of an auto insurance policy. Based on the existence of the PIP statutes and the provisions within the PIP statutes that provide an insurer a mechanism to obtain records and investigate claims, it is somewhat understandable that an assignee of an auto policy does not have to comply with the duties of the policy.
In the context of a property insurance claim, however, there are no statutory provisions that provide any assistance to the insurer in its investigation of an assignee's claim. In the water mitigation example mentioned above, Florida insurers are facing lawsuits where the assignment is created at the inception of the claim, when the contractor performs the service at the insured's residence. In many instances, the assignee is presenting the claim directly to the insurer on behalf of the insured. In these cases, it would be futile to force an insurer to take the EUO of the insured, where the insured would likely have little or no information to be gleaned as to the assignee's claim. In particular, the insured would have no knowledge as to the amount of the assignee's invoice, pricing, method of repair, scope of repairs, etc. These issues strike right at the heart of the assignee's claim.
Further, extending the Shaw logic to the appraisal context makes little sense. By the Shaw logic, an insurer would be required to seek appraisal from its insured as opposed to the assignee. However, by virtue of the assignment, the insured no longer has any right to the claim. Id. at 343, citing, Cont'l Cas. Co. v. Ryan Inc. Eastern, 974 So. 2d 368 (Fla. 2008). So then, what right does an insurer have to seek appraisal from the insured for a claim to which the insured no longer has any right? Further, if an insurer were to demand the insured take part in appraisal, would the assignee have the right to sue the insurer to recover the difference between the appraisal award and the assignee's invoice because the assignee would not be bound the appraisal with the insured? The results would be absurd.
The majority holding in Shaw is improperly used in property insurance claims to deprive insurers of their right to properly investigate claims being asserted by an assignee. In an ordinary contractual assignment, the black letter law may be relevant and on point. However, when the entire claim revolves around the work performed by the assignee, the insurer cannot investigate the claim without utilizing the tools provided for it under the policy.
David H. Shaw, II
Catherine C. Ackerman
Butler Pappas Weihmuller Katz Craig LLP