After a significant weather event like a hurricane, many property owners cannot make repairs without insurance proceeds, and they cannot afford to wait several months or years to resolve their insurance claims. Owners of damaged properties frequently elect to sell their properties in a damaged condition, and to transfer their insurance claims to the purchaser to allow the purchaser to make the repairs. Due to a unique feature of Texas law, buyers and sellers of damaged properties should pay careful attention to casualty provisions in purchase and sale agreements.
Following a casualty, many Texas purchase and sale agreement forms give the purchaser the option to (1) terminate the contract, (2) extend the closing a specified period of time to allow the seller to repair the property, or (3) accept at the closing the property in its damaged state, along with an assignment of any insurance proceeds seller is entitled to receive. See TAR 1801 Commercial Contract Improved Property, Sec. 16(A). If a purchaser selects option (3) the seller may be unable to perform absent consent from its insurer to assignment of the insurance claim. The reason the seller may be unable to perform is that most insurance policies include non-assignment provisions which preclude assignment by the insured of its rights under the policy without the insurer’s consent.
Most jurisdictions adhere to the rule that insurance policy provisions which prohibit assignment without insurer consent apply only to assignments before loss, and do not prevent an assignment after loss. Couch on Insurance § 35:7 (Westlaw 2010). The rationale for such a rule is clear: “[t]he purpose of a no assignment clause is to protect the insurer from increased liability, and after events giving rise to the insurer’s liability have occurred, the insurer’s risk cannot be increased by a change in the insured’s identity.” Id. Texas courts, however, diverge from the majority and enforce non-assignment clauses even for assignments made post-loss. Keller Founds., Inc. v. Wausau Underwriters Ins. Co., 626 F.3d 871, 874 (5th Cir. 2010). In Texas no transfer of an insurance claim can be valid without the consent of the insurer. Id.; see also Texas Farmers Insurance Co. v. Gerdes, 880 S.W.2d 215, 219 (Tex. App.—Fort Worth 1994, writ denied).
The Texas rule regarding post-loss assignment of insurance claims was discussed in the 2014 decision in Melinder v. Tex. Farmers Ins. Co., which involved assignment of an insurance claim arising from Hurricane Ike. Melinder v. Tex. Farmers Ins. Co., No. G-10-516, 2014 U.S. Dist. LEXIS 5103, at 4 (S.D. Tex., Jan. 15, 2014). In Melinder, the U.S. District Court for the Southern District of Texas concluded that the assignee of an insurance claim lacked standing to pursue an insurance claim for property damages because the insurance company did not consent to assignment of the claim.
The practical implications of the Texas rule on buyers and sellers of damaged real estate are significant. A purchaser of damaged property needs to be aware that assignment of an insurance claim without insurer consent may be invalid and unenforceable by the purchaser. A seller that agrees to assign an insurance claim at closing needs to realize that if the insurance company does not consent to assignment of the claim, the seller may not be able to validly assign the claim and perform at the closing. If a sale of real estate will include assignment of an insurance claim, the parties should make receipt of consent to assignment of the claim from the insurer a condition to close. The parties also should include language in their contract that contemplates the seller’s inability to execute a valid assignment of the insurance claim at the closing. If the insurance claim cannot be assigned to the buyer at closing because the insurance company does not give consent, it may be appropriate to provide a credit to the buyer equal to the estimated cost to repair the damages. Before offering a credit to the buyer; however, the seller would be advised to consult an insurance coverage expert to determine the value of the claim and whether it will be enforceable following the sale of the property. Unfortunately, the Texas rule regarding post-loss assignment of claims does not provide easy solutions for buyers and sellers of damaged real estate. Buyers and sellers need to plan for the possibility that an insurance claim for damages may not be assignable at the time of closing.
Alan M. Cohen is partner in the Austin, Texas, law firm of Stahl, Bernal, Davies, Sewell & Chavarria LLP, where his practice focuses on real estate, construction and renewable energy. Mr. Cohen can be contacted at email@example.com or (512) 652-2943.