Louisiana Attempts to Shift Its Losses Under the 'Road Home Program' to the Insurance Industry

Insurers around the country are keeping a close watch on the Katrina Canal Breaches Litigation currently pending in the U.S. Court of Appeals for the Fifth Circuit. In 2007, the state of Louisiana filed this putative class action against more than 200 insurers (the “Insurers”), claiming that they failed to adequately pay or adjust homeowners' claims following Hurricanes Katrina and Rita, thereby causing the state to administer more funds under the “Road Home Program” than initially contemplated. The state of Louisiana now seeks to recover these funds by taking over the rights to approximately 150,000 claims for property damage caused by those storms.

The state claims this right by virtue of so-called “assignment agreements” executed by recipients of funds under the Road Home Program. These assignments were an express condition attached to the dispersal of funds under the Program and purported to assign to the state all of the recipient's claims and future rights to payment under any policy of casualty, property damage or flood insurance covering the damaged property. On the basis of these “assignment agreements,” the state seeks to pursue additional recoveries from the Insurers to remedy an estimated $1 billion shortfall in funding for the Program. The state will pursue these additional recoveries even where the insured is satisfied with the amount paid, has already filed a separate lawsuit, or has settled with its insurer. If successful, the state will be in a position to re-open thousands of claims that had been long since resolved, potentially exposing the Insurers to additional sums in future liabilities on top of the approximately $40 billion that has been paid out to date.

The Insurers have moved to dismiss the state's action on the grounds that the homeowners' policies at issue all contain clear and explicit anti-assignment clauses that invalidate the purported transfer of rights to the state as a matter of law. The Insurers' motion is currently pending before the Fifth Circuit. Because the enforcement of the anti-assignment provisions is controlled by Louisiana law, the Fifth Circuit has asked the Louisiana Supreme Court, via certified question, for guidance in applying the anti-assignment provisions to the state's claims. This article examines the arguments both sides have advanced in support of their positions.

Background: The Road Home Takes a Detour

The Road Home Program was created as a way for the state of Louisiana to administer federal grant funds to uninsured or underinsured victims of Hurricanes Katrina and Rita. Eligible homeowners could receive up to $150,000 to repair uninsured damage to their dwellings, so long as they agreed to certain conditions the state imposed on its dispersal of the funds. For example, the state required that homes be rebuilt in compliance with state and local construction and zoning requirements, that recipients agree to remain in the new home for at least three years after repairs were completed or a new home was purchased, and that recipients agree to subrogate or assign to the Program claims for unpaid and outstanding insurance claims.

It is this last provision, the alleged assignment to the state of recipients' unpaid and outstanding insurance claims, that lies at the core of the state's lawsuit. The so-called “assignments” were made through the following agreement:

The Road Home Limited Subrogation/Assignment Agreement: I/we hereby assign to the State of Louisiana ' to the extent of the grant proceeds awarded or to be awarded to me under the Program, all of my/our claims and future rights to reimbursement and all payments hereafter received or to be received by me/us: (a) under any policy of casualty or property damage insurance or flood insurance on the residence, excluding contents (“Residence”) described in my/our application for Homeowner's Assistance under the Program (“Policies”); (b) from FEMA, Small Business Administration, and any other federal agency, arising out of physical damage to the Residence caused by Hurricane Katrina and/or Hurricane Rita.

The state, which claims that it overpaid Road Home recipients as a result of the Insurers' failure to properly adjust and pay hurricane claims, bases its right to recover from the Insurers on the assignment of claims and rights to future payments purportedly made under these “assignment agreements.”

The Insurers have moved to dismiss the state's action on the basis of anti-assignment provisions contained in the casualty, property and flood policies the state alleges were assigned to it. A typical anti-assignment provision reads as follows:

Assignment of this policy will not be valid unless we give our written consent. No interest in this policy can be transferred without our written consent.

The Insurers argue that these anti-assignment clauses unequivocally prevent the insured from assigning its rights and obligations under these policies to anyone, including the state in connection with the Road Home Program.

The outcome of the Insurers' motion will turn on the enforceability of these anti-assignment provisions. While the Insurers argue that such clauses are expressly permitted and enforceable under Louisiana's Civil Code, the state argues that public policy prevents enforcing the anti-assignment clauses where the purported assignment takes place after the loss has occurred. The U.S. District Court for the Eastern District of Louisiana sided with the state, denying the Insurers' motion but certifying that denial for immediate appeal to the Fifth Circuit. The Fifth Circuit, in turn, has asked the Louisiana Supreme Court to decide whether the anti-assignment clauses bar the purported assignments to the state under Louisiana law. The Louisiana Supreme Court's answer will likely determine the viability of the state's lawsuit against the Insurers, and thus has the potential to cause a substantial swing in potential liability in favor of the state or the Insurers.

Analysis: Why the Insurers Should Prevail

As the Insurers point out, anti-assignment clauses are expressly made enforceable by Louisiana Civil Code article 2653, which provides that “[a] right cannot be assigned when the contract from which it arises prohibits assignment of that right.” Therefore, the viability of the state's action depends on its ability to convince the Louisiana Supreme Court to create a judicial “post-loss” exception to the plain wording of article 2653. That said, the state's argument in favor of creating such an exception suffers from significant legal and practical defects. First and foremost, any such exception would run contrary to established civilian maxims, which require that legislation such as article 2653 be applied as written. Second, the assignment agreements at issue here purport to transfer certain “reciprocal obligations” of the insured that are not transferable as a matter of law. Third, as a practical matter, the state is simply unable to comply with these reciprocal obligations, leaving the Insurers in the position of having to adjust a claim without the benefit of necessary information to which they are contractually entitled. Finally, there are strong policy considerations that weigh in favor of enforcing the prohibition on assignments.

Civil Code Article 2653 Should Be Enforced As Written Under Louisiana Law

Because Louisiana is a civil law jurisdiction, legislation, such as article 2653, is considered “the solemn expression of legislative will” and treated as “the superior source of law.” Willis-Knighton Med. Ctr. v. Caddo-Shreveport Sales & Use Tax Comm'n, 903 So. 2d 1071, 1078 (La. 2005). Therefore, “[w]hen a law is clear and unambiguous and its application does not lead to absurd consequences, the law shall be applied as written and no further interpretation may be made in search of statutory intent.” Frey Plumbing Co. v. Foster, 996 So. 2d 969, 972 (La. 2008). If article 2653 is indeed applied as written, the anti-assignment clauses will be enforced, invalidating the purported assignments to the state pursuant to the Road Home Program and likely resulting in dismissal of the state's lawsuit. Accordingly, the state seeks to have the court create an exception for “post-loss” assignments, arguing that a contractual prohibition on the assignment of rights and obligations under an insurance contract violates public policy where the assignment takes place after the loss has occurred.

The state's argument suffers from a fatal flaw. In Louisiana, the court is constrained to follow the unambiguous words of a Code article. Willis-Knighton, 903 So. 2d at 1085-86. Only the legislature may change the clear meaning of a statute; “[i]t is not the courts' role to consider the wisdom of the legislature in adopting statutes.” Marcus v. Hanover Ins. Co., 740 So. 2d 603, 609 (La. 1999). This is exactly what the state argues should occur, however, and the state's position is squarely at odds with these principles. Although the state argues that “exclusionary provisions are strictly construed against the insurer” and points to another Civil Code article permitting the assignment of contractual rights, these arguments are illusory in that they provide no legal justification for the court to depart from the clear wording of article 2653. Two Louisiana appellate courts have observed recently that the plain language of article 2653 requires enforcement of anti-assignment clauses whether the attempted assignment was made pre- or post-loss, and the Louisiana Supreme Court should reach the same result here. See R.L. Lucien Tile Co. v. Am. Sec. Ins. Co., 8 So. 3d 753, 756-57 (La. App. 4th Cir. 2009); TCC Contractors, Inc. v. Thibodeaux Regional Med. Ctr., 2010 La. App. LEXIS 1661, *23 n.9 (La. App. 1st Cir. 12/8/10) (observing that Lucien Tile enforced an anti-assignment clause to bar a post-loss assignment, in accordance with the “plain language” of article 2653).

An Insured's 'Reciprocal Obligations' Under an Insurance Policy Are Non-transferable

Second, notwithstanding the impropriety of its attempt to craft a judicial exception to article 2653, the state's argument as to why the anti-assignment provisions should not be enforced lacks a basis in law. The state argues that “virtually every American jurisdiction” recognizes that anti-assignment clauses do not apply to bar post-loss assignments. The state has located a single Louisiana case, from 1936, which it claims supports its position. See Geddes & Moss Undertaking & Embalming v. Metropolitan, 167 So. 209 (La. Ct. App. 1936). However, the state's reliance on Geddes & Moss is misplaced. Geddes & Moss was decided approximately 60 years before article 2653 took effect. The comments to article 2653 state that it is intended as a “new” provision that “clarifies” the law, and it is well-settled in Louisiana that those who enact statutory provisions are presumed to act deliberately and with full knowledge of existing laws and awareness of court cases. Thus, the legislature is presumed to have been aware of the holding in Geddes & Moss, and the comments demonstrate the legislature's intent to “clarify” that holding through the enactment of the “new” law articulated in article 2653. Accordingly, because article 2653 expressly authorizes the enforcement of anti-assignment provisions, Geddes & Moss can no longer be treated as persuasive jurisprudence to the extent it holds otherwise.

Nonetheless, the state maintains that the “prevailing American rule” is that a post-loss assignment does not transfer a “contractual relationship,” but instead transfers only “the right to a money claim,” and therefore such post-loss assignments may not be prohibited as a matter of public policy. The state cites several cases it alleges support its position that anti-assignment clauses do not prevent post-loss assignment. Most of these cases involve “liquidated” or “fixed” amounts of money owed, meaning that the insurer's liability and the amount owed have already been determined. In contrast, the claims the state seeks to have assigned to it are unliquidated. Because the amounts owed in these claims, if any, are still subject to determination, there are vast legal and policy differences that render the cases cited by the state inapposite.

The distinction between liquidated (or “fixed”) claims and unliquidated claims is critical here. When a claim is not liquidated, the insured has certain duties, or “reciprocal obligations,” that are part of the agreement between the insurer and the insured and must be performed before a claim can be fixed and paid. The insurer evaluates its ultimate exposure, and bases its premium costs, on the assumption that the insured will comply with these reciprocal obligations in the event that a loss occurs. These obligations comprise the insured's general agreement to cooperate fully in the adjustment of his or her claim, and include obligations such as allowing the insurer, inspectors, and other interested parties to access and evaluate the damaged property, and to provide any documents or information requested by the insurer pertaining to the property. Courts around the nation have recognized that these reciprocal obligations are not transferable to third parties. See, e.g., Calif. Fair Plan Ass'n v. Superior Court, 8 Cal. Rptr. 3d 746, 752-53 (Cal. Ct. App. 2004); Ausch v. St. Paul Fire & Marine Ins. Co., 511 N.Y.S. 2d 919, 923 (N.Y. App. Div. 1987); Engleman v. Royal Ins. Co., 51 P. 2d 417, 417-19 (Nev. 1935). As the Engleman court noted, “the person insured may be fairly presumed to be in possession of the largest number of facts and the most reliable information in regard to the circumstances of the [loss] and to the extent of the loss,” and “to compel the insurer to accept proofs and adjust the loss with one who may know nothing ' would be a gross perversion of justice and the setting aside of their plain contract obligations.” Engleman, 51 P.2d at 418-419.

The State Is Unable to Comply With the Insured's Reciprocal Obligations

It makes sense that the reciprocal obligations described above are non-transferable because, as a practical matter, any transferee of these duties and obligations is almost always going to be unable to perform them. Here, for example, the state cannot make a homeowner's property available for inspection, will not possess relevant documentation concerning property value or repair costs, and will not have first-hand knowledge of any of the other information necessary to adjust a claim. As the Insurers argue to the Louisiana Supreme Court, these difficulties will be “magnified many times over in this case, where the State seeks to pursue over 150,000 claims ' over five years after the storm[s] occurred.” Further complicating the issue is the fact that much of the damage has already been repaired, and in some cases, the damaged homes have been torn down.

In its briefing to the Fifth Circuit, the state attempted to downplay these implications, referring to the assignments as “merely transfer[ring] an accrued right to benefits and do[ing] nothing to alter the risk initially assumed by the insurance company.” This argument is incorrect insofar as it ignores completely the reciprocal obligations that arise post-loss on a property damage claim, see “An Insured's 'Reciprocal Obligations' Under an Insurance Policy Are Non-transferable,” supra, and does not account for the fact that the insurer's “risk” is calculated on the assumption that its contractual counterpart will fully cooperate in, and have all information relevant to, the adjustment of its claim. The insured's premium is calculated on the basis of these assumptions, and the “risk” initially assumed by the insurance company therefore does not include the variables that a lawsuit against the state, or any third party, would necessarily present.

In that same vein, to the extent any of the cases cited by the state support the notion that anti-assignment provisions should not apply to bar post-loss claims, these cases fail to account for the realities extant in the adjustment of homeowners' losses. Unlike a life-insurance payout, where the fact of a loss and the amount owed are generally cut-and-dried, or an auto loss where the damaged vehicle is easily transferable, the damage in a homeowners' case is not as easily quantifiable. There may be multiple types of damage requiring multiple inspections and multiple estimates. Even establishing the fact of the loss itself requires the cooperation of the insured, as there may be distinctions between wind damage and flood damage, for example, that affect the insurer's coverage obligation. Assigning responsibility for these items to a third party who is unable to comply would prejudice both the insurer and the insured. The “one size fits all” rule urged by the State, which would invalidate anti-assignment provisions whenever the assignment occurred “post loss,” does not account for these complexities.

The Anti-Assignment Provisions Should Be Enforced As a Matter Of Policy

Finally, there are strong policy reasons that weigh in favor of enforcing the anti-assignment provisions against the state. In the event the state is successful and allowed to pursue approximately 150,000 insurance claims, the Insurers potentially face substantial sums in future liabilities for claims that have already been adjusted, closed and “taken off the books.” Such exposure would very likely cause the Insurers to re-evaluate their future exposures to account for both these liabilities and the possibility of other en masse transfers of claims to the state or another third party. Any such re-evaluation would most likely inure to the detriment of insurers and insureds. Indeed, concerns about enterprising plaintiffs' counsel purchasing thousands of small claims from otherwise satisfied insureds and aggregating them in an attempt to extract additional payments (and attorneys' fees) have already been expressed.

Conclusion

The Insurers have made persuasive arguments demonstrating that the claims the state of Louisiana seeks to assert are barred by explicit anti-assignment provisions contained in the very policies the state alleges it was assigned. Although the state argues for a “public policy” exception exempting “post-loss” assignments from the ambit of article 2653, it likely has not advanced sufficient legal grounds that would permit the Louisiana Supreme Court to fashion such an exception, nor has it identified any policy interests supporting the same. In the absence of such justification, article 2653 should be applied as written, invalidating the Road Home assignments and resulting in dismissal of the state's claims against the Insurers.

Daniel Centner is an associate in the New Orleans office of Lugenbuhl, Wheaton, Peck, Rankin & Hubbard. The views expressed in this article are his own and do not necessarily represent the views of the firm or any of its clients.

Insurers around the country are keeping a close watch on the Katrina Canal Breaches Litigation currently pending in the U.S. Court of Appeals for the Fifth Circuit. In 2007, the state of Louisiana filed this putative class action against more than 200 insurers (the “Insurers”), claiming that they failed to adequately pay or adjust homeowners' claims following Hurricanes Katrina and Rita, thereby causing the state to administer more funds under the “Road Home Program” than initially contemplated. The state of Louisiana now seeks to recover these funds by taking over the rights to approximately 150,000 claims for property damage caused by those storms.

The state claims this right by virtue of so-called “assignment agreements” executed by recipients of funds under the Road Home Program. These assignments were an express condition attached to the dispersal of funds under the Program and purported to assign to the state all of the recipient's claims and future rights to payment under any policy of casualty, property damage or flood insurance covering the damaged property. On the basis of these “assignment agreements,” the state seeks to pursue additional recoveries from the Insurers to remedy an estimated $1 billion shortfall in funding for the Program. The state will pursue these additional recoveries even where the insured is satisfied with the amount paid, has already filed a separate lawsuit, or has settled with its insurer. If successful, the state will be in a position to re-open thousands of claims that had been long since resolved, potentially exposing the Insurers to additional sums in future liabilities on top of the approximately $40 billion that has been paid out to date.

The Insurers have moved to dismiss the state's action on the grounds that the homeowners' policies at issue all contain clear and explicit anti-assignment clauses that invalidate the purported transfer of rights to the state as a matter of law. The Insurers' motion is currently pending before the Fifth Circuit. Because the enforcement of the anti-assignment provisions is controlled by Louisiana law, the Fifth Circuit has asked the Louisiana Supreme Court, via certified question, for guidance in applying the anti-assignment provisions to the state's claims. This article examines the arguments both sides have advanced in support of their positions.

Background: The Road Home Takes a Detour

The Road Home Program was created as a way for the state of Louisiana to administer federal grant funds to uninsured or underinsured victims of Hurricanes Katrina and Rita. Eligible homeowners could receive up to $150,000 to repair uninsured damage to their dwellings, so long as they agreed to certain conditions the state imposed on its dispersal of the funds. For example, the state required that homes be rebuilt in compliance with state and local construction and zoning requirements, that recipients agree to remain in the new home for at least three years after repairs were completed or a new home was purchased, and that recipients agree to subrogate or assign to the Program claims for unpaid and outstanding insurance claims.

It is this last provision, the alleged assignment to the state of recipients' unpaid and outstanding insurance claims, that lies at the core of the state's lawsuit. The so-called “assignments” were made through the following agreement:

The Road Home Limited Subrogation/Assignment Agreement: I/we hereby assign to the State of Louisiana ' to the extent of the grant proceeds awarded or to be awarded to me under the Program, all of my/our claims and future rights to reimbursement and all payments hereafter received or to be received by me/us: (a) under any policy of casualty or property damage insurance or flood insurance on the residence, excluding contents (“Residence”) described in my/our application for Homeowner's Assistance under the Program (“Policies”); (b) from FEMA, Small Business Administration, and any other federal agency, arising out of physical damage to the Residence caused by Hurricane Katrina and/or Hurricane Rita.

The state, which claims that it overpaid Road Home recipients as a result of the Insurers' failure to properly adjust and pay hurricane claims, bases its right to recover from the Insurers on the assignment of claims and rights to future payments purportedly made under these “assignment agreements.”

The Insurers have moved to dismiss the state's action on the basis of anti-assignment provisions contained in the casualty, property and flood policies the state alleges were assigned to it. A typical anti-assignment provision reads as follows:

Assignment of this policy will not be valid unless we give our written consent. No interest in this policy can be transferred without our written consent.

The Insurers argue that these anti-assignment clauses unequivocally prevent the insured from assigning its rights and obligations under these policies to anyone, including the state in connection with the Road Home Program.

The outcome of the Insurers' motion will turn on the enforceability of these anti-assignment provisions. While the Insurers argue that such clauses are expressly permitted and enforceable under Louisiana's Civil Code, the state argues that public policy prevents enforcing the anti-assignment clauses where the purported assignment takes place after the loss has occurred. The U.S. District Court for the Eastern District of Louisiana sided with the state, denying the Insurers' motion but certifying that denial for immediate appeal to the Fifth Circuit. The Fifth Circuit, in turn, has asked the Louisiana Supreme Court to decide whether the anti-assignment clauses bar the purported assignments to the state under Louisiana law. The Louisiana Supreme Court's answer will likely determine the viability of the state's lawsuit against the Insurers, and thus has the potential to cause a substantial swing in potential liability in favor of the state or the Insurers.

Analysis: Why the Insurers Should Prevail

As the Insurers point out, anti-assignment clauses are expressly made enforceable by Louisiana Civil Code article 2653, which provides that “[a] right cannot be assigned when the contract from which it arises prohibits assignment of that right.” Therefore, the viability of the state's action depends on its ability to convince the Louisiana Supreme Court to create a judicial “post-loss” exception to the plain wording of article 2653. That said, the state's argument in favor of creating such an exception suffers from significant legal and practical defects. First and foremost, any such exception would run contrary to established civilian maxims, which require that legislation such as article 2653 be applied as written. Second, the assignment agreements at issue here purport to transfer certain “reciprocal obligations” of the insured that are not transferable as a matter of law. Third, as a practical matter, the state is simply unable to comply with these reciprocal obligations, leaving the Insurers in the position of having to adjust a claim without the benefit of necessary information to which they are contractually entitled. Finally, there are strong policy considerations that weigh in favor of enforcing the prohibition on assignments.

Civil Code Article 2653 Should Be Enforced As Written Under Louisiana Law

Because Louisiana is a civil law jurisdiction, legislation, such as article 2653, is considered “the solemn expression of legislative will” and treated as “the superior source of law.” Willis-Knighton Med. Ctr. v. Caddo-Shreveport Sales & Use Tax Comm'n , 903 So. 2d 1071, 1078 (La. 2005). Therefore, “[w]hen a law is clear and unambiguous and its application does not lead to absurd consequences, the law shall be applied as written and no further interpretation may be made in search of statutory intent.” Frey Plumbing Co. v. Foster , 996 So. 2d 969, 972 (La. 2008). If article 2653 is indeed applied as written, the anti-assignment clauses will be enforced, invalidating the purported assignments to the state pursuant to the Road Home Program and likely resulting in dismissal of the state's lawsuit. Accordingly, the state seeks to have the court create an exception for “post-loss” assignments, arguing that a contractual prohibition on the assignment of rights and obligations under an insurance contract violates public policy where the assignment takes place after the loss has occurred.

The state's argument suffers from a fatal flaw. In Louisiana, the court is constrained to follow the unambiguous words of a Code article. Willis-Knighton, 903 So. 2d at 1085-86. Only the legislature may change the clear meaning of a statute; “[i]t is not the courts' role to consider the wisdom of the legislature in adopting statutes.” Marcus v. Hanover Ins. Co. , 740 So. 2d 603, 609 (La. 1999). This is exactly what the state argues should occur, however, and the state's position is squarely at odds with these principles. Although the state argues that “exclusionary provisions are strictly construed against the insurer” and points to another Civil Code article permitting the assignment of contractual rights, these arguments are illusory in that they provide no legal justification for the court to depart from the clear wording of article 2653. Two Louisiana appellate courts have observed recently that the plain language of article 2653 requires enforcement of anti-assignment clauses whether the attempted assignment was made pre- or post-loss, and the Louisiana Supreme Court should reach the same result here. See R.L. Lucien Tile Co. v. Am. Sec. Ins. Co., 8 So. 3d 753, 756-57 (La. App. 4th Cir. 2009); TCC Contractors, Inc. v. Thibodeaux Regional Med. Ctr., 2010 La. App. LEXIS 1661, *23 n.9 (La. App. 1st Cir. 12/8/10) (observing that Lucien Tile enforced an anti-assignment clause to bar a post-loss assignment, in accordance with the “plain language” of article 2653).

An Insured's 'Reciprocal Obligations' Under an Insurance Policy Are Non-transferable

Second, notwithstanding the impropriety of its attempt to craft a judicial exception to article 2653, the state's argument as to why the anti-assignment provisions should not be enforced lacks a basis in law. The state argues that “virtually every American jurisdiction” recognizes that anti-assignment clauses do not apply to bar post-loss assignments. The state has located a single Louisiana case, from 1936, which it claims supports its position. See Geddes & Moss Undertaking & Embalming v. Metropolitan , 167 So. 209 (La. Ct. App. 1936). However, the state's reliance on Geddes & Moss is misplaced. Geddes & Moss was decided approximately 60 years before article 2653 took effect. The comments to article 2653 state that it is intended as a “new” provision that “clarifies” the law, and it is well-settled in Louisiana that those who enact statutory provisions are presumed to act deliberately and with full knowledge of existing laws and awareness of court cases. Thus, the legislature is presumed to have been aware of the holding in Geddes & Moss, and the comments demonstrate the legislature's intent to “clarify” that holding through the enactment of the “new” law articulated in article 2653. Accordingly, because article 2653 expressly authorizes the enforcement of anti-assignment provisions, Geddes & Moss can no longer be treated as persuasive jurisprudence to the extent it holds otherwise.

Nonetheless, the state maintains that the “prevailing American rule” is that a post-loss assignment does not transfer a “contractual relationship,” but instead transfers only “the right to a money claim,” and therefore such post-loss assignments may not be prohibited as a matter of public policy. The state cites several cases it alleges support its position that anti-assignment clauses do not prevent post-loss assignment. Most of these cases involve “liquidated” or “fixed” amounts of money owed, meaning that the insurer's liability and the amount owed have already been determined. In contrast, the claims the state seeks to have assigned to it are unliquidated. Because the amounts owed in these claims, if any, are still subject to determination, there are vast legal and policy differences that render the cases cited by the state inapposite.

The distinction between liquidated (or “fixed”) claims and unliquidated claims is critical here. When a claim is not liquidated, the insured has certain duties, or “reciprocal obligations,” that are part of the agreement between the insurer and the insured and must be performed before a claim can be fixed and paid. The insurer evaluates its ultimate exposure, and bases its premium costs, on the assumption that the insured will comply with these reciprocal obligations in the event that a loss occurs. These obligations comprise the insured's general agreement to cooperate fully in the adjustment of his or her claim, and include obligations such as allowing the insurer, inspectors, and other interested parties to access and evaluate the damaged property, and to provide any documents or information requested by the insurer pertaining to the property. Courts around the nation have recognized that these reciprocal obligations are not transferable to third parties. See, e.g., Calif. Fair Plan Ass'n v. Superior Court , 8 Cal. Rptr. 3d 746, 752-53 (Cal. Ct. App. 2004); Ausch v. St. Paul Fire & Marine Ins. Co. , 511 N.Y.S. 2d 919, 923 (N.Y. App. Div. 1987); Engleman v. Royal Ins. Co. , 51 P. 2d 417, 417-19 (Nev. 1935). As the Engleman court noted, “the person insured may be fairly presumed to be in possession of the largest number of facts and the most reliable information in regard to the circumstances of the [loss] and to the extent of the loss,” and “to compel the insurer to accept proofs and adjust the loss with one who may know nothing ' would be a gross perversion of justice and the setting aside of their plain contract obligations.” Engleman, 51 P.2d at 418-419.

The State Is Unable to Comply With the Insured's Reciprocal Obligations

It makes sense that the reciprocal obligations described above are non-transferable because, as a practical matter, any transferee of these duties and obligations is almost always going to be unable to perform them. Here, for example, the state cannot make a homeowner's property available for inspection, will not possess relevant documentation concerning property value or repair costs, and will not have first-hand knowledge of any of the other information necessary to adjust a claim. As the Insurers argue to the Louisiana Supreme Court, these difficulties will be “magnified many times over in this case, where the State seeks to pursue over 150,000 claims ' over five years after the storm[s] occurred.” Further complicating the issue is the fact that much of the damage has already been repaired, and in some cases, the damaged homes have been torn down.

In its briefing to the Fifth Circuit, the state attempted to downplay these implications, referring to the assignments as “merely transfer[ring] an accrued right to benefits and do[ing] nothing to alter the risk initially assumed by the insurance company.” This argument is incorrect insofar as it ignores completely the reciprocal obligations that arise post-loss on a property damage claim, see “An Insured's 'Reciprocal Obligations' Under an Insurance Policy Are Non-transferable,” supra, and does not account for the fact that the insurer's “risk” is calculated on the assumption that its contractual counterpart will fully cooperate in, and have all information relevant to, the adjustment of its claim. The insured's premium is calculated on the basis of these assumptions, and the “risk” initially assumed by the insurance company therefore does not include the variables that a lawsuit against the state, or any third party, would necessarily present.

In that same vein, to the extent any of the cases cited by the state support the notion that anti-assignment provisions should not apply to bar post-loss claims, these cases fail to account for the realities extant in the adjustment of homeowners' losses. Unlike a life-insurance payout, where the fact of a loss and the amount owed are generally cut-and-dried, or an auto loss where the damaged vehicle is easily transferable, the damage in a homeowners' case is not as easily quantifiable. There may be multiple types of damage requiring multiple inspections and multiple estimates. Even establishing the fact of the loss itself requires the cooperation of the insured, as there may be distinctions between wind damage and flood damage, for example, that affect the insurer's coverage obligation. Assigning responsibility for these items to a third party who is unable to comply would prejudice both the insurer and the insured. The “one size fits all” rule urged by the State, which would invalidate anti-assignment provisions whenever the assignment occurred “post loss,” does not account for these complexities.

The Anti-Assignment Provisions Should Be Enforced As a Matter Of Policy

Finally, there are strong policy reasons that weigh in favor of enforcing the anti-assignment provisions against the state. In the event the state is successful and allowed to pursue approximately 150,000 insurance claims, the Insurers potentially face substantial sums in future liabilities for claims that have already been adjusted, closed and “taken off the books.” Such exposure would very likely cause the Insurers to re-evaluate their future exposures to account for both these liabilities and the possibility of other en masse transfers of claims to the state or another third party. Any such re-evaluation would most likely inure to the detriment of insurers and insureds. Indeed, concerns about enterprising plaintiffs' counsel purchasing thousands of small claims from otherwise satisfied insureds and aggregating them in an attempt to extract additional payments (and attorneys' fees) have already been expressed.

Conclusion

The Insurers have made persuasive arguments demonstrating that the claims the state of Louisiana seeks to assert are barred by explicit anti-assignment provisions contained in the very policies the state alleges it was assigned. Although the state argues for a “public policy” exception exempting “post-loss” assignments from the ambit of article 2653, it likely has not advanced sufficient legal grounds that would permit the Louisiana Supreme Court to fashion such an exception, nor has it identified any policy interests supporting the same. In the absence of such justification, article 2653 should be applied as written, invalidating the Road Home assignments and resulting in dismissal of the state's claims against the Insurers.

Daniel Centner is an associate in the New Orleans office of Lugenbuhl, Wheaton, Peck, Rankin & Hubbard. The views expressed in this article are his own and do not necessarily represent the views of the firm or any of its clients.