Excess insurer can enforce anti-assignment clause 

Excess insurers may enforce insurance policy provisions prohibiting or restricting post-loss assignments with the clauses construed based on the actual language in the insurance policy, a North Carolina Business Court judge has ruled, resulting in a split decision for the eight excess insurers disputing payment for damage to a chicken processing facility. 

On Dec. 14, 2017, a fire caused substantial damage to a chicken processing facility located in Mocksville. At the time of the fire, the facility was owned by House of Raeford Farms, Inc., but Brakebush Brothers, Inc. was in the process of purchasing it. 

Raeford had a primary insurance policy with a $20 million limit, as well as eight excess policies that provided a total of another $30 million. 

Brakebush and Raeford executed a purchase agreement on July 3, 2018. As part of the transaction, Brakebush secured the assignment of Raeford’s right to all insurance benefits, “including all rights and proceeds  under its property insurance policies relating to the loss” resulting from the fire. The primary insurer provided written consent to this assignment. 

Neither Brakebush nor Raeford obtained consent from any of the excess insurers prior to the assignment of Raeford’s right to collect insurance proceeds under the policies. Brakebush then began to seek payment for damage done to the facility. After exhausting the $20 million in primary coverage, Brakebush demanded payment of an additional $27.7 million. The excess insurers agreed to pay only a combined $4.2 million.  

Brakebush filed a complaint asserting a claim for a declaratory judgment regarding the obligations of the excess insurers, along with claims for breach of contract, bad faith, and unfair and deceptive trade practices (UDTP). 

The case was designated a mandatory complex business case. Once in Business Court, the excess insurers filed a motion to dismiss or strike, arguing that Brakebush lacked standing to seek coverage because Raeford failed to obtain consent before assigning its right to collect proceeds under the policies. 

While Judge Mark Davis agreed with the excess insurers that they had the right to enforce anti-assignment clauses in their insurance policies, his examination of the eight policies at issue found only three excess insurers used language that required insurer consent before the assignment could become legally effective. 

“Based on a careful review of applicable case law, the court concludes that insurance policy provisions prohibiting or restricting post-loss assignments are enforceable under North Carolina law,” Davis wrote. “Any such anti-assignment clauses are therefore to be construed based on the actual language contained in the insurance policy.” 

Anti-assignment provisions enforceable 

Did Brakebush have standing to seek coverage under the excess policies? 

The excess insurers argued to the negative, telling the court that each policy contained a provision requiring the consent of the insurer before a policyholder may validly assign its rights to collect proceeds under the policy and that no such consent was ever obtained by Raeford. 

Brakebush countered that North Carolina law doesn’t allow for the enforcement of anti-assignment clauses in an insurance policy regarding the post-loss assignment of proceeds, and that even if such clauses were enforceable as a general proposition, none of the excess policies actually contained the necessary language to prohibit the assignment at issue. 

Finding no support for the broad proposition that insurance policy provisions prohibiting or restricting post-loss assignments are per se unenforceable under state law, Davis rejected Brakebush’s position. Case law relied upon by Brakebush was misplaced, as it was based on an interpretation of the specific language used in the policy at issue in that case, he said. 

Nor did the excess insurers waive any anti-assignment provisions by paying the $4.2 million prior to litigation, as the payment was issued pursuant to an express reservation of rights. 

Davis also rejected the excess insurers’ argument that because the excess policies “follow form” to the primary policy, each of the excess policies required written consent by the excess insurers regarding any assignments. 

“The most basic flaw in this argument is that based on the court’s review of the primary policy, it does not appear to actually contain any anti-assignment language (or any policy language that would otherwise require the consent of the primary insurers to any assignment of rights under the policy),” he wrote. 

Excess policy language considered 

Davis then analyzed the pertinent language in each of the excess policies. Three of them required the insurer’s written consent to effect any transfer of rights, including an assignment of the right to seek post-loss proceeds. Each of those excess insurers was therefore dismissed from the suit, as Brakebush lacked standing regarding their policies.  

The remaining five policies lacked such explicit language, however. For example, one policy stated that a policyholder was “only authorized to make changes in the terms of this policy with the companies [sic] consent. The policies [sic] terms can be amended or waived only by endorsement issued by us and made part of this policy.” 

Davis found this provision to be ambiguous about whether it requires the consent of the insurer to an assignment of the right to recover post-loss proceeds, and since ambiguities in an insurance policy must be construed against the insurer, “the court concludes that this provision did not require Brakebush to obtain [the insurer’s] consent in the present case.” 

He made similar determinations regarding the other four policies, denying the excess insurers’ motion to dismiss the declaratory judgment and breach of contract claims against them. Brakebush can move forward with its bad faith and UDTP claims against those five excess insurers, Davis said. 

“By virtue of the assignment from Raeford, Brakebush stepped into Raeford’s shoes with respect to the right to collect post-loss proceeds under the excess policies,” he wrote. “The excess insurers have not cited any case from North Carolina’s appellate courts holding that a bad faith or UDTP claim was barred under the circumstances presented here.” 

Additionally, public policy concerns about third-party suits against insurers were unwarranted, he said, because as Raeford’s assignee, Brakebush was the only party who possessed a valid legal interest in collecting post-loss proceeds from the fire and the excess insurers were not faced with the prospect of receiving demands from both the named insured and an adverse claimant. 

“Moreover, a contrary ruling would mean that even though a party in Brakebush’s position possessed a legal right as an assignee to seek proceeds under an insurance policy, it would lack any remedy in tort for bad faith conduct by the insurer,” Davis wrote. “Such a result would run counter to the goal of preventing unlawful conduct by insurers with regard to the adjusting and payment of insurance claims.” 

Susan H. Boyles of Kilpatrick Townsend & Stockton in Winston-Salem, who represented Brakebush, did not respond to a request for comment.  

Citing the ongoing litigation, Winston-Salem attorneys G. Gray Wilson of Nelson Mullins Riley & Scarborough, who represented most of the insurers, and Bryan G. Scott of Akerman, who represented one other, declined to comment. 

The 38-page decision is Brakebush Bros., Inc. v. Certain Underwriters of Lloyd’s of London (Lawyers Weekly No. 020-070-21). The full text of the opinion is available online at nclawyersweekly.com.