assignment on insurance contract

Construction Accidents

Practice Areas

Retirement Planning

Assignment of Benefits: What You Need to Know

August 17, 2022
Steven Schwartzapfel

Insurance can be useful, but dealing with the back-and-forth between insurance companies and contractors, medical specialists, and others can be a time-consuming and ultimately unpleasant experience. You want your medical bills to be paid without having to act as a middleman between your healthcare provider and your insurer.

However, there’s a way you can streamline this process. With an assignment of benefits, you can designate your healthcare provider or any other insurance payout recipient as the go-to party for insurance claims. While this can be convenient, there are certain risks to keep in mind as well.

Below, we’ll explore what an assignment of insurance benefits is (as well as other forms of remediation), how it works, and when you should employ it. For more information, or to learn whether you may have a claim against an insurer, contact Schwartzapfel Lawyers now at 1-516-342-2200 .

What Is an Assignment of Benefits?

An assignment of benefits (AOB) is a legal process through which an insured individual or party signs paperwork that designates another party like a contractor, company, or healthcare provider as their insurance claimant .

Suppose you’re injured in a car accident and need to file a claim with your health insurance company for medical bills and related costs. However, you also need plenty of time to recover. The thought of constantly negotiating between your insurance company, your healthcare provider, and anyone else seems draining and unwelcome.

With an assignment of benefits, you can designate your healthcare provider as your insurance claimant. Then, your healthcare provider can request insurance payouts from your healthcare insurance provider directly.

Through this system, the health insurance provider directly pays your physician or hospital rather than paying you. This means you don’t have to pay your healthcare provider. It’s a streamlined, straightforward way to make sure insurance money gets where it needs to go. It also saves you time and prevents you from having to think about insurance payments unless absolutely necessary.

What Does an Assignment of Benefits Mean?

An AOB means that you designate another party as your insurance claimant. In the above example, that’s your healthcare provider, which could be a physician, hospital, or other organization.

With the assignment of insurance coverage, that healthcare provider can then make a claim for insurance payments directly to your insurance company. The insurance company then pays your healthcare provider directly, and you’re removed as the middleman.

As a bonus, this system sometimes cuts down on your overall costs by eliminating certain service fees. Since there’s only one transaction — the transaction between your healthcare provider and your health insurer — there’s only one set of service fees to contend with. You don’t have to deal with two sets of service fees from first receiving money from your insurance provider, then sending that money to your healthcare provider.

Ultimately, the point of an assignment of benefits is to make things easier for you, your insurer, and anyone else involved in the process.

What Types of Insurance Qualify for an Assignment of Benefits?

Most types of commonly held insurance can work with an assignment of benefits. These insurance types include car insurance, healthcare insurance, homeowners insurance, property insurance, and more.

Note that not all insurance companies allow you to use an assignment of benefits. For an assignment of benefits to work, the potential insurance claimant and the insurance company in question must each sign the paperwork and agree to the arrangement. This prevents fraud (to some extent) and ensures that every party goes into the arrangement with clear expectations.

If your insurance company does not accept assignments of benefits, you’ll have to take care of insurance payments the traditional way. There are many reasons why an insurance company may not accept an assignment of benefits.

To speak with a Schwartzapfel Lawyers expert about this directly, call 1-516-342-2200 for a free consultation today. It will be our privilege to assist you with all your legal questions, needs, and recovery efforts.

Who Uses Assignments of Benefits?

Many providers, services, and contractors use assignments of benefits. It’s often in their interests to accept an assignment of benefits since they can get paid for their work more quickly and make critical decisions without having to consult the insurance policyholder first.

Imagine a circumstance in which a homeowner wants a contractor to add a new room to their property. The contractor knows that the scale of the project could increase or shrink depending on the specifics of the job, the weather, and other factors.

If the homeowner uses an assignment of benefits to give the contractor rights to make insurance claims for the project, that contractor can then:

Bill the insurer directly for their work. This is beneficial since it ensures that the contractor’s employees get paid promptly and they can purchase the supplies they need.
Make important decisions to ensure that the project completes on time. For example, a contract can authorize another insurance claim for extra supplies without consulting with the homeowner beforehand, saving time and potentially money in the process.

Practically any company or organization that receives payments from insurance companies may choose to take advantage of an assignment of benefits with you. Example companies and providers include:

Ambulance services
Drug and biological companies
Lab diagnostic services
Hospitals and medical centers like clinics
Certified medical professionals such as nurse anesthetists, nurse midwives, clinical psychologists, and others
Ambulatory surgical center services
Permanent repair and improvement contractors like carpenters, plumbers, roofers, restoration companies, and others
Auto repair shops and mechanic organizations

Advantages of Using an Assignment of Benefits

An assignment of benefits can be an advantageous contract to employ, especially if you believe that you’ll need to pay a contractor, healthcare provider, and/or other organization via insurance payouts regularly for the near future.

These benefits include but are not limited to:

Save time for yourself. Again, imagine a circumstance in which you are hospitalized and have to pay your healthcare provider through your health insurance payouts. If you use an assignment of benefits, you don’t have to make the payments personally or oversee the insurance payouts. Instead, you can focus on resting and recovering.
Possibly save yourself money in the long run. As noted above, an assignment of benefits can help you circumvent some service fees by limiting the number of transactions or money transfers required to ensure everyone is paid on time.
Increased peace of mind. Many people don’t like having to constantly think about insurance payouts, contacting their insurance company, or negotiating between insurers and contractors/providers. With an assignment of benefits, you can let your insurance company and a contractor or provider work things out between them, though this can lead to applications later down the road.

Because of these benefits, many recovering individuals, car accident victims, homeowners, and others utilize AOB agreements from time to time.

Risks of Using an Assignment of Benefits

Worth mentioning, too, is that an assignment of benefits does carry certain risks you should be aware of before presenting this contract to your insurance company or a contractor or provider. Remember, an assignment of benefits is a legally binding contract unless it is otherwise dissolved (which is technically possible).

The risks of using an assignment of benefits include:

You give billing control to your healthcare provider, contractor, or another party. This allows them to bill your insurance company for charges that you might not find necessary. For example, a home improvement contractor might bill a homeowner’s insurance company for an unnecessary material or improvement. The homeowner only finds out after the fact and after all the money has been paid, resulting in a higher premium for their insurance policy or more fees than they expected.
You allow a contractor or service provider to sue your insurance company if the insurer does not want to pay for a certain service or bill. This can happen if the insurance company and contractor or service provider disagree on one or another billable item. Then, you may be dragged into litigation or arbitration you did not agree to in the first place.
You may lose track of what your insurance company pays for various services . As such, you could be surprised if your health insurance or other insurance premiums and deductibles increase suddenly.

Given these disadvantages, it’s still wise to keep track of insurance payments even if you choose to use an assignment of benefits. For example, you might request that your insurance company keep you up to date on all billable items a contractor or service provider charges for the duration of your treatment or project.

For more on this and related topic, call Schwartzapfel Lawyers now at 1-516-342-2200 .

How To Make Sure an Assignment of Benefits Is Safe

Even though AOBs do carry potential disadvantages, there are ways to make sure that your chosen contract is safe and legally airtight. First, it’s generally a wise idea to contact knowledgeable legal representatives so they can look over your paperwork and ensure that any given assignment of benefits doesn’t contain any loopholes that could be exploited by a service provider or contractor.

The right lawyer can also make sure that an assignment of benefits is legally binding for your insurance provider. To make sure an assignment of benefits is safe, you should perform the following steps:

Always check for reviews and references before hiring a contractor or service provider, especially if you plan to use an AOB ahead of time. For example, you should stay away if a contractor has a reputation for abusing insurance claims.
Always get several estimates for work, repairs, or bills. Then, you can compare the estimated bills and see whether one contractor or service provider is likely to be honest about their charges.
Get all estimates, payment schedules, and project schedules in writing so you can refer back to them later on.
Don’t let a service provider or contractor pressure you into hiring them for any reason . If they seem overly excited about getting started, they could be trying to rush things along or get you to sign an AOB so that they can start issuing charges to your insurance company.
Read your assignment of benefits contract fully. Make sure that there aren’t any legal loopholes that a contractor or service provider can take advantage of. An experienced lawyer can help you draft and sign a beneficial AOB contract.

Can You Sue a Party for Abusing an Assignment of Benefits?

Sometimes. If you believe your assignment of benefits is being abused by a contractor or service provider, you may be able to sue them for breaching your contract or even AOB fraud. However, successfully suing for insurance fraud of any kind is often difficult.

Also, you should remember that a contractor or service provider can sue your insurance company if the insurance carrier decides not to pay them. For example, if your insurer decides that a service provider is engaging in billing scams and no longer wishes to make payouts, this could put you in legal hot water.

If you’re not sure whether you have grounds for a lawsuit, contact Schwartzapfel Lawyers today at 1-516-342-2200 . At no charge, we’ll examine the details of your case and provide you with a consultation. Don’t wait. Call now!

Assignment of Benefits FAQs

Which states allow assignments of benefits.

Every state allows you to offer an assignment of benefits to a contractor and/or insurance company. That means, whether you live in New York, Florida, Arizona, California, or some other state, you can rest assured that AOBs are viable tools to streamline the insurance payout process.

Can You Revoke an Assignment of Benefits?

Yes. There may come a time when you need to revoke an assignment of benefits. This may be because you no longer want the provider or contractor to have control over your insurance claims, or because you want to switch providers/contractors.

To revoke an assignment of benefits agreement, you must notify the assignee (i.e., the new insurance claimant). A legally solid assignment of benefits contract should also include terms and rules for this decision. Once more, it’s usually a wise idea to have an experienced lawyer look over an assignment of benefits contract to make sure you don’t miss these by accident.

Contact Schwartzapfel Lawyers Today

An assignment of benefits is an invaluable tool when you need to streamline the insurance claims process. For example, you can designate your healthcare provider as your primary claimant with an assignment of benefits, allowing them to charge your insurance company directly for healthcare costs.

However, there are also risks associated with an assignment of benefits. If you believe a contractor or healthcare provider is charging your insurance company unfairly, you may need legal representatives. Schwartzapfel Lawyers can help.

As knowledgeable New York attorneys who are well-versed in New York insurance law, we’re ready to assist with any and all litigation needs. For a free case evaluation and consultation, contact Schwartzapfel Lawyers today at 1-516-342-2200 !

Schwartzapfel Lawyers, P.C. | Fighting For You™™

What Is an Insurance Claim? | Experian

What is assignment of benefits, and how does it impact insurers? | Insurance Business Mag

Florida Insurance Ruling Sets Precedent for Assignment of Benefits | Law.com

When Is It Too Late To Get A Lawyer For A Car Accident?

Car accidents are not only frightening but can also result in substantial financial costs. Between mounting medical bills, the potential

Motion Of Discovery: What Does It Actually Mean?

Court processes often require motions. Motions are filed by legal teams to initiate different phases of a case or to

The Future Of Construction Law And Workers’ Compensation In NYC

If you or a loved one works in construction in New York City, you need to know about some recent

We'll Fight For You

Schwartzapfel® lawyers has a 99% client satisfaction rate.

Assignment of Benefits: What It Is, and How It Can Affect your Property Insurance Claim

Table of Contents

What is an Assignment of Benefits?

In the context of insured property claims, an assignment of benefits (AOB) is an agreement between you and a contractor in which you give the contractor your right to insurance payments for a specific scope of work . In exchange, the contractor agrees that it will not seek payment from you for that scope of work, except for the amount of any applicable deductible. In other words, you give part of your insurance claim to your contractor, and your contractor agrees not to collect from you for part of its work.

The most important thing to know about an assignment of benefits is that it puts your contractor in control your claim , at least for their scope of work. Losing that control can significantly affect the direction and outcome of your claim, so you should fully understand the implications of an AOB (sometimes called an assignment of claims or AOC) before signing one.

How Does an Assignment of Benefits Work in Practice?

Let’s say you’re an insured homeowner, and Hurricane Ian significantly damaged your roof. Let’s also assume your homeowner’s policy covers that damage. A roofer, after inspecting your roof and reviewing your insurance policy, might conclude that your insurer is probably going to pay for a roof replacement under your insurance policy. The only problem is that it’s early in the recovery process, and your insurer hasn’t yet stated whether it will pay for the roof replacement proposed by your contractor. So if you want your roof replaced now, you would ordinarily agree to pay your roofer for the replacement, and wait in hopes that your insurer reimburses you for the work. This means that if your insurance company refuses to pay or drags out payment, you’re on the hook to your roofer for the cost of the replacement.

As an alternative to agreeing to pay your roofer for the full cost of the work, you could sign an assignment of benefits for the roof replacement. In this scenario, your roofer owns the part of your insurance claim that pertains to the roof replacement. You might have to pay your roofer for the amount of your deductible, but you probably don’t have to pay them for the rest of the cost of the work. And if your insurance company refuses to pay or drags out payment for the roof replacement, it’s your roofer, and not you, who would be on the hook for that shortfall.

So should you sign an AOB? Not necessarily. Read below to understand the pros and cons of an assignment of benefits.

Are There any Downsides to Signing an Assignment of Benefits?

Yes.

You lose control of your claim . This is the most important factor to understand when considering whether to sign an AOB. An AOB is a formal assignment of your legal rights to payment under your insurance contract. Unless you’re able to cancel the AOB, your contractor will have full control over your claim as it relates to their work.

To explain why that control could matter, let’s go back to the roof replacement example. When you signed the AOB, the scope of work you agreed on was to replace the roof. But you’re not a roofing expert, so you don’t know whether the costs charged or the materials used by the roofer in its statement of work are industry appropriate or not. In most cases, they probably are appropriate, and there’s no problem. But if they’re not – if, for instance, the roofer’s prices are unreasonably high – then the insurer may not approve coverage for the replacement. At that point, the roofer could lower its prices so the insurer approves the work, but it doesn’t have to, because it controls the claim . Instead it could hold up work and threaten to sue your insurer unless it approves the work at the originally proposed price. Now the entire project is insnared in litigation, leaving you in a tough spot with your insurer for your other claims and, most importantly, with an old leaky roof.

Misunderstanding the Scope of Work. Another issue that can arise is that you don’t understand the scope of the assignment of benefits. Contractor estimates and scopes of work are often highly technical documents that can be long on detail but short on clarity. Contractors are experts at reading and writing them. You are not. That difference matters because the extent of your assignment of benefits is based on that technical, difficult-to-understand scope of work. This can lead to situations where your understanding of what you’re authorizing the contractor to do is very different from what you’ve actually authorized in the AOB agreement.

In many cases, it’s not necessary . Many contractors will work with you and your insurer to provide a detailed estimate of their work, and will not begin that work until your insurer has approved coverage for it. This arrangement significantly reduces the risk of you being on the hook for uninsured repairs, without creating any of the potential problems that can occur when you give away your rights to your claim.

Do I have to sign an Assignment of Benefits?

No. You are absolutely not required to sign an AOB if you do not want to.

Are There any Benefits to Signing an Assignment of Benefits?

Potentially, but only if you’ve fully vetted your contractor and your claim involves complicated and technical construction issues that you don’t want to deal with.

First, you must do your homework to fully vet your contractor! Do not just take their word for it or be duped by slick ads. Read reviews, understand their certificate of insurance, know where they’re located, and, if possible, ask for and talk to references. If you’ve determined that the contractor is highly competent at the work they do, is fully insured, and has a good reputation with customers, then that reduces the risk that they’ll abuse their rights to your claim.

Second, if your claim involves complicated reconstruction issues, a reputable contractor may be well equipped to handle the claim and move it forward. If you don’t want to deal with the hassle of handling a complicated claim like this, and you know you have a good contractor, one way to get rid of that hassle is an AOB.

Another way to get rid of the hassle is to try Claimly, the all-in-one claims handling tool that get you results but keeps you in control of your claim.

Can my insurance policy restrict the use of AOBs?

Yes, it’s possible that your Florida insurance policy restricts the use of AOBs, but only if all of the following criteria are met:

When you selected your coverage, your insurer offered you a different policy with the same coverage, only it did not restrict the right to sign an AOB.
Your insurer made the restricted policy available at a lower cost than the unrestricted policy.
If the policy completely prohibits AOBs, then it was made available at a lower cost than any policy partially prohibiting AOBs.
The policy includes on its face the following notice in 18-point uppercase and boldfaced type:

THIS POLICY DOES NOT ALLOW THE UNRESTRICTED ASSIGNMENT OF POST-LOSS INSURANCE BENEFITS. BY SELECTING THIS POLICY, YOU WAIVE YOUR RIGHT TO FREELY ASSIGN OR TRANSFER THE POST-LOSS PROPERTY INSURANCE BENEFITS AVAILABLE UNDER THIS POLICY TO A THIRD PARTY OR TO OTHERWISE FREELY ENTER INTO AN ASSIGNMENT AGREEMENT AS THE TERM IS DEFINED IN SECTION 627.7153 OF THE FLORIDA STATUTES.

627.7153.

Pro Tip : If you have an electronic copy of your complete insurance policy (not just the declaration page), then search for “policy does not allow the unrestricted assignment” or another phrase from the required language above to see if your policy restricts an AOB. If your policy doesn’t contain this required language, it probably doesn’t restrict AOBs.

Do I have any rights or protections concerning Assignments of Benefits?

Yes, you do. Florida recently enacted laws that protect consumers when dealing with an AOB.

Protections in the AOB Contract

To be enforceable, a Assignments of Benefits must meet all of the following requirements:

Be in writing and executed by and between you and the contractor.
Contain a provision that allows you to cancel the assignment agreement without a penalty or fee by submitting a written notice of cancellation signed by the you to the assignee:
at least 30 days after the date work on the property is scheduled to commence if the assignee has not substantially performed, or
at least 30 days after the execution of the agreement if the agreement does not contain a commencement date and the assignee has not begun substantial work on the property.
Contain a provision requiring the assignee to provide a copy of the executed assignment agreement to the insurer within 3 business days after the date on which the assignment agreement is executed or the date on which work begins, whichever is earlier.
Contain a written, itemized, per-unit cost estimate of the services to be performed by the assignee .
Relate only to work to be performed by the assignee for services to protect, repair, restore, or replace a dwelling or structure or to mitigate against further damage to such property.
Contain the following notice in 18-point uppercase and boldfaced type:

YOU ARE AGREEING TO GIVE UP CERTAIN RIGHTS YOU HAVE UNDER YOUR INSURANCE POLICY TO A THIRD PARTY, WHICH MAY RESULT IN LITIGATION AGAINST YOUR INSURER. PLEASE READ AND UNDERSTAND THIS DOCUMENT BEFORE SIGNING IT. YOU HAVE THE RIGHT TO CANCEL THIS AGREEMENT WITHOUT PENALTY WITHIN 14 DAYS AFTER THE DATE THIS AGREEMENT IS EXECUTED, AT LEAST 30 DAYS AFTER THE DATE WORK ON THE PROPERTY IS SCHEDULED TO COMMENCE IF THE ASSIGNEE HAS NOT SUBSTANTIALLY PERFORMED, OR AT LEAST 30 DAYS AFTER THE EXECUTION OF THE AGREEMENT IF THE AGREEMENT DOES NOT CONTAIN A COMMENCEMENT DATE AND THE ASSIGNEE HAS NOT BEGUN SUBSTANTIAL WORK ON THE PROPERTY. HOWEVER, YOU ARE OBLIGATED FOR PAYMENT OF ANY CONTRACTED WORK PERFORMED BEFORE THE AGREEMENT IS RESCINDED. THIS AGREEMENT DOES NOT CHANGE YOUR OBLIGATION TO PERFORM THE DUTIES REQUIRED UNDER YOUR PROPERTY INSURANCE POLICY.

Contain a provision requiring the assignee to indemnify and hold harmless the assignor from all liabilities, damages, losses, and costs, including, but not limited to, attorney fees.

Contractor Duties

Under Florida law, a contractor (or anyone else) receiving rights to a claim under an AOB:

Must provide you with accurate and up-to-date revised estimates of the scope of work to be performed as supplemental or additional repairs are required.
Must perform the work in accordance with accepted industry standards.
May not seek payment from you exceeding the applicable deductible under the policy unless asked the contractor to perform additional work at the your own expense.
Must, as a condition precedent to filing suit under the policy, and, if required by the insurer, submit to examinations under oath and recorded statements conducted by the insurer or the insurer’s representative that are reasonably necessary, based on the scope of the work and the complexity of the claim, which examinations and recorded statements must be limited to matters related to the services provided, the cost of the services, and the assignment agreement.
Must, as a condition precedent to filing suit under the policy, and, if required by the insurer, participate in appraisal or other alternative dispute resolution methods in accordance with the terms of the policy.
If the contractor is making emergency repairs, the assignment of benefits cannot exceed the greater of $3,000 or 1% of your Coverage A limit.

How Is Collateral Assignment Used In A Life Insurance Contract?

Modified: February 21, 2024

Discover how collateral assignment is utilized in life insurance contracts to provide financial security and peace of mind. Explore the benefits and implications of this finance strategy today!

(Many of the links in this article redirect to a specific reviewed product. Your purchase of these products through affiliate links helps to generate commission for LiveWell, at no extra cost. Learn more )

What is collateral assignment, benefits of collateral assignment in a life insurance contract, how does collateral assignment work, steps involved in collateral assignment, risks and considerations of collateral assignment, examples of collateral assignment in life insurance contracts, comparison with other methods of securing loans, legal and financial implications of collateral assignment.

Collateral assignment is a legal and financial concept that involves using a life insurance policy as collateral for a loan. In simple terms, it is an arrangement where the policyholder pledges their life insurance policy to a lender as security for borrowing money. Essentially, the policyholder assigns their rights to the policy’s death benefit to the lender in case the loan is not repaid.

When a life insurance policy is collateral-assigned, it means that the policyholder retains the ownership of the policy, but the lender has the right to receive the policy’s death benefit up to the outstanding loan amount. In the event of the policyholder’s death, the insurance company pays the death benefit directly to the lender to cover the remaining loan balance, and any remaining funds are then distributed to the policy’s beneficiaries.

Collateral assignment is commonly used by individuals and businesses as a means to secure loans or lines of credit when traditional forms of collateral, such as real estate or other assets, are not available or desirable. It provides lenders with additional security and reduces their risk, as they have a guaranteed source of repayment in case of default.

It is important to note that while collateral assignment can be used for various types of life insurance policies, it is most commonly associated with permanent life insurance policies, such as whole life or universal life, rather than term life insurance. This is because permanent policies have a cash value component that can be used as collateral, whereas term policies do not have cash value and are typically designed to provide a death benefit only for a specific term.

Collateral assignment offers several benefits for both policyholders and lenders involved in a life insurance contract:

Access to Funds: Collateral assignment allows policyholders to leverage the value of their life insurance policy to obtain much-needed funds. This can be especially useful for individuals or businesses facing financial challenges or requiring capital for investment or business growth.
Favorable Loan Terms: By assigning a life insurance policy as collateral, borrowers may enjoy more favorable loan terms, such as lower interest rates or longer repayment periods, compared to unsecured loans. Lenders are often more willing to offer competitive rates due to the reduced risk associated with having a guaranteed repayment source.
Retained Ownership: With collateral assignment, the policyholder retains ownership of the life insurance policy and continues to enjoy its benefits, including the potential for cash value accumulation and the ability to designate beneficiaries. This allows individuals to protect their loved ones financially while also meeting their immediate borrowing needs.
Flexibility: Collateral assignment provides flexibility in borrowing against the policy. Unlike traditional loans that may require reapplication and approval for future withdrawals or advances, policyholders can access additional funds from their life insurance policy without going through a lengthy and cumbersome approval process.
Tax Advantages: Collateral assignment generally does not trigger a taxable event for the policyholder, as long as the loan is repaid. This can provide tax benefits and preserve the tax-advantaged status of the life insurance policy’s cash value growth and death benefit proceeds.

It is important to consult with financial advisors or insurance professionals to fully understand the benefits and limitations of collateral assignment and how it aligns with individual financial goals and circumstances. While it offers advantages, policyholders must also consider the potential risks and implications of assigning their life insurance policy as collateral.

Collateral assignment involves a series of steps to ensure a smooth and legally binding agreement between the policyholder, the lender, and the insurance company. Here’s an overview of how collateral assignment works:

Loan Application: The borrower applies for a loan and agrees to use their life insurance policy as collateral. The lender assesses the borrower’s creditworthiness and determines the loan amount and terms.
Collateral Assignment Agreement: Once the loan is approved, the borrower and the lender enter into a collateral assignment agreement. This agreement outlines the terms of the collateral assignment, including the loan amount, interest rate, repayment schedule, and the rights and obligations of each party.
Notification to the Insurance Company: The borrower notifies the insurance company that they are assigning their policy as collateral for a loan. They provide the necessary documentation, including the collateral assignment agreement and any additional forms required by the insurance company.
Policy Endorsement: The insurance company reviews the collateral assignment documents and determines whether to endorse the assignment. Once endorsed, it becomes part of the policy’s terms and conditions.
Loan Disbursement: The lender disburses the loan funds to the borrower, according to the agreed-upon terms. The borrower can use the funds for their intended purpose, such as paying off debts, investing, or covering business expenses.
Repayment and Policy Premiums: The borrower is responsible for repaying the loan according to the agreed-upon schedule. This includes making regular loan payments, as well as continuing to pay the premiums on the life insurance policy to keep it in force.
Loan Repayment and Death Benefit: In the event of the policyholder’s death before the loan is fully repaid, the insurance company pays the death benefit to the lender up to the outstanding loan amount. If there is any remaining death benefit, it is distributed to the designated beneficiaries of the policy.

It is crucial for both the borrower and lender to understand and adhere to the terms of the collateral assignment agreement, as any violation or default of the agreement can have significant consequences. Consulting with legal and financial professionals can help ensure a thorough understanding of the process and the rights and obligations of all parties involved.

Collateral assignment involves several key steps to establish a legally binding agreement between the policyholder, lender, and insurance company. Here are the steps typically involved in the collateral assignment process:

Loan Application: The borrower applies for a loan and indicates their intention to use their life insurance policy as collateral.
Loan Agreement: The borrower and lender negotiate and finalize the terms of the loan, including the loan amount, interest rate, repayment period, and any other relevant conditions.
Collateral assignment documents: The lender provides collateral assignment documents, including the assignment agreement, to the borrower.
Review and Approval: The borrower reviews the collateral assignment agreement and seeks legal advice if necessary. If satisfied, the borrower signs the agreement.
Notification to the Insurance Company: The borrower notifies the insurance company of their intention to assign their policy as collateral. This typically involves submitting the collateral assignment agreement, along with any required forms and documentation, to the insurer.
Insurance Company Review: The insurance company reviews the collateral assignment documents to ensure they comply with their policies and guidelines.
Endorsement: If the insurance company approves the collateral assignment, they endorse the policy to indicate the assignment status. This endorsement becomes part of the policy’s terms and conditions.
Loan Disbursement: Once the collateral assignment is in effect, the lender disburses the loan funds to the borrower as agreed upon in the loan agreement.
Loan Repayment: The borrower is responsible for making the scheduled loan payments, including both the principal and interest, according to the terms of the loan agreement.
Policy Premium Payments: The policyholder must continue paying the premiums on the life insurance policy to keep it in force. Failure to do so may result in the policy lapsing, which could have implications for the collateral assignment.
Death Benefit Payout: In the event of the policyholder’s death before the loan is fully repaid, the insurance company pays the death benefit directly to the lender to cover the outstanding loan amount. Any remaining death benefit is then distributed to the designated beneficiaries of the policy.

It is crucial for both the borrower and lender to understand and adhere to the terms and conditions set forth in the collateral assignment agreement. Consulting with legal and financial professionals can help ensure a smooth collateral assignment process and minimize any potential risks or complications.

While collateral assignment offers benefits, it is important to consider the potential risks and implications associated with this arrangement:

Reduced Death Benefit: Collateral assignment reduces the policy’s death benefit by the outstanding loan amount. This means that the intended beneficiaries may receive less than expected in the event of the policyholder’s death, potentially impacting their financial security.
Loss of Flexibility: Once a life insurance policy is collateral-assigned, there may be limitations on the policyholder’s ability to make changes or access the policy’s cash value. Any modifications to the policy, such as increasing coverage or taking withdrawals, may require the lender’s consent.
Default and Policy Lapse: Failing to repay the loan or meet the policy’s premium payments can result in default. Defaulting on the loan could lead to the lender exercising their rights to the policy’s cash value or death benefit, potentially causing the policy to lapse and leaving the policyholder without coverage.
Unfavorable Loan Terms: While collateral assignment can provide access to funds and favorable loan terms, borrowers must ensure they thoroughly understand the terms and conditions. High interest rates or unfavorable repayment terms could potentially lead to financial strain or difficulties in meeting loan obligations.
Possible Negative Impact on Credit: Should the borrower default on the loan, it can have a negative impact on their credit history and credit score. This can make it more challenging to secure future loans or obtain favorable interest rates on credit products.
Risk of Loan Acceleration: In certain cases, the lender may have the right to accelerate the loan repayment if specific events occur, such as a significant change in the policy’s cash value or the policyholder’s financial circumstances. This could create unexpected financial burdens on the borrower.

Before entering into a collateral assignment agreement, borrowers should carefully assess their ability to repay the loan and consider alternative options. It is advisable to consult with financial advisors or insurance professionals to fully understand the risks involved, evaluate the impact on the policy’s benefits, and determine if collateral assignment aligns with their financial goals and circumstances.

Collateral assignment can be utilized in various scenarios where individuals or businesses require access to funds and have a life insurance policy with sufficient value. Here are a few examples of how collateral assignment can be used:

Business Loans: A small business owner may have a whole life insurance policy with a substantial cash value. They can collateral assign the policy to secure a business loan to finance expansion or cover operational expenses. The lender would have the assurance that in the event of default, they can recoup their loan amount from the policy’s death benefit.
Personal Debt Consolidation: An individual with multiple high-interest debts, such as credit card balances or personal loans, may choose to collateral assign their life insurance policy and obtain a loan at a lower interest rate to consolidate their debt. This can help simplify their finances and potentially reduce their overall interest payments.
Estate Planning: High-net-worth individuals may use collateral assignment as part of their estate planning strategy. By assigning their life insurance policy to a trust, they can access funds during their lifetime for various purposes while ensuring a guaranteed source of repayment for any loans taken against the policy.
Medical Expenses: In some cases, individuals may have significant medical expenses not covered by insurance. Collateral assignment can be used to secure a loan to cover these expenses, with the policy serving as collateral, offering more favorable loan terms than unsecured medical loans.
Education Funding: Parents or students may choose to collateral assign a life insurance policy to secure a loan for education expenses. This can be a viable option when other forms of financial aid are insufficient or unavailable, allowing the borrower to access funds and invest in their education.

These examples illustrate different situations where collateral assignment can provide individuals and businesses with financial flexibility and access to funds using the cash value of their life insurance policies. It is important to note that each scenario should be carefully evaluated, taking into consideration the specific terms and conditions of the policy, loan agreement, and individual financial circumstances.

When it comes to securing loans, collateral assignment offers unique advantages and considerations compared to other methods of loan security. Here is a comparison:

Collateral Assignment vs. Traditional Collateral: Collateral assignment provides an alternative to traditional forms of collateral, such as real estate or vehicles. It allows individuals who may not have tangible assets to secure loans using the value of their life insurance policies. This can be advantageous for those who have substantial life insurance coverage but limited assets.
Collateral Assignment vs. Personal Guarantees: In some cases, lenders may require personal guarantees when securing loans. Personal guarantees involve the borrower or a third party assuming responsibility for loan repayment if the borrower defaults. Collateral assignment offers a more concrete and direct form of security, as the lender can rely on the life insurance policy’s death benefit as repayment.
Collateral Assignment vs. Unsecured Loans: Unsecured loans, such as credit cards or personal lines of credit, do not require any form of collateral. While unsecured loans generally have higher interest rates, collateral assignment can provide borrowers with more favorable terms due to the reduced risk to lenders. Collateral assignment also allows individuals to borrow larger amounts than they might be eligible for with unsecured loans.
Collateral Assignment vs. Cash Value Loans: Permanent life insurance policies, such as whole life or universal life, often accumulate cash value over time. Some policyholders may choose to take out loans directly from the policy’s cash value instead of collateral assignment. While cash value loans offer flexibility and do not affect the death benefit, they may incur interest charges and reduce the policy’s cash value growth potential.
Collateral Assignment vs. Co-Signers: Co-signers are individuals who agree to take responsibility for loan repayment if the borrower defaults. While co-signers can increase the chances of loan approval for individuals with limited credit history or income, collateral assignment eliminates the need for co-signers by using the life insurance policy as direct security.

It is essential for borrowers to carefully evaluate their options and consider the specific terms, interest rates, and risks associated with each method of loan security. Collateral assignment provides a viable alternative for individuals with substantial life insurance coverage and serves as a valuable strategy for accessing funds while leveraging the value of their policies.

Collateral assignment in a life insurance contract carries both legal and financial implications that need to be understood by policyholders considering this arrangement:

Legal Obligations: Collateral assignment involves a legally binding agreement between the policyholder, lender, and insurance company. The terms and conditions must be reviewed and understood by all parties involved to ensure compliance and avoid any potential legal disputes.
Policy Modification Restrictions: Once a life insurance policy is collateral-assigned, certain modifications, such as reducing coverage or surrendering the policy, may require the lender’s approval. These restrictions can limit the policyholder’s flexibility in managing their insurance needs and may impact their ability to make changes as circumstances change.
Potential Policy Lapse: Failure to continue paying policy premiums can result in the policy lapsing, which can have significant implications. If the policy lapses, the collateral assignment may become void, and the lender may lose their right to the policy’s death benefit as repayment.
Impacts on Beneficiaries: Collateral assignment reduces the policy’s death benefit by the outstanding loan amount. This means that beneficiaries may receive less than expected. It is essential for policyholders to communicate the collateral assignment to their beneficiaries to avoid confusion or potential disputes in the future.
Potential Tax Consequences: While collateral assignment generally does not trigger a taxable event, policyholders should consult with tax professionals to understand the potential tax implications based on their individual circumstances. Changes in policy ownership or assignment may have tax consequences that need to be considered.
Loan Repayment Obligations: Collateral assignment involves the responsibility to make regular loan payments according to the agreed-upon terms. Failure to meet these obligations can result in default and may lead to the acceleration of the loan or loss of the policy.
Credit History: The collateral assignment and associated loan will be reflected in the borrower’s credit history. Defaulting on the loan or missing payments can negatively impact their credit score and make it more challenging to secure future credit or loans.

Given the potential legal and financial implications, it is crucial for policyholders to thoroughly understand the terms of the collateral assignment agreement, seek expert advice when necessary, and carefully assess their ability to meet loan obligations and policy premium payments.

Consulting with legal and financial professionals can help policyholders navigate the legal and financial complexities and ensure the collateral assignment aligns with their individual goals and circumstances.

Collateral assignment in a life insurance contract can be a valuable tool for individuals and businesses seeking access to funds. By utilizing the value of their life insurance policy as collateral, borrowers can secure loans and enjoy various benefits, including favorable loan terms and retained policy ownership.

However, it is crucial to carefully consider the risks and implications associated with collateral assignment. Policyholders should assess their ability to repay the loan and understand the potential impact on the policy’s death benefit and flexibility.

Before entering into a collateral assignment agreement, it is recommended to work with financial advisors or insurance professionals who can provide guidance and ensure all legal and financial aspects are thoroughly understood. They can help navigate the complex terms and conditions, evaluate other loan security options, and align the collateral assignment with individual financial goals.

Overall, collateral assignment can be a powerful tool that provides financial flexibility and potentially better loan terms. By understanding the process and implications, borrowers can make informed decisions that suit their specific circumstances and help them achieve their financial objectives.

How Is A Collateral Assignment Used In A Life Insurance Contract?

Our Review on The Credit One Credit Card

20 Quick Tips To Saving Your Way To A Million Dollars

What Is AOCI In Accounting

How To Refer A Friend Southwest Credit Card

The Importance of Emergency Funds and How to Build Yours

Written By:

A Beginner’s Guide to Effective WhatsApp Marketing in 2024

Navigating Crypto Frontiers: Understanding Market Capitalization as the North Star

Financial Literacy Matters: Here’s How to Boost Yours

Unlocking Potential: How In-Person Tutoring Can Help Your Child Thrive

Please accept our Privacy Policy.

We uses cookies to improve your experience and to show you personalized ads. Please review our privacy policy by clicking here .

https://livewell.com/finance/how-is-collateral-assignment-used-in-a-life-insurance-contract/

Search Search Please fill out this field.
Building Your Business
Business Insurance

Can You Assign Your Insurance Benefits to Someone Else?

Monashee Frantz / Getty Images

Most business insurance policies contain a so-called anti-assignment clause. This clause prohibits policyholders from transferring any of their rights under the policy to someone else. This means that the insured business cannot cede its right to collect claim payments to another party. However, laws in most states permit policyholders to transfer their rights to another party under certain circumstances.

Anti-Assignment Clause

In the standard ISO policies , the anti-assignment clause is located in a separate form called the Common Policy Conditions. These conditions apply to all coverages that are included in the policy. For instance, if a policy includes business auto , general liability , and commercial property coverages, the anti-assignment clause applies to all three coverages.

The clause is entitled Transfer of Your Rights and Duties Under This Policy. It includes the following provision:

Your rights and duties under this policy may not be transferred without our written consent except in the case of death of an individual named insured.

The anti-assignment clause prohibits the named insured from transferring any of its rights or obligations under the policy to someone else without the insurer's permission. The only exception is if the named insured is an individual (sole proprietor) and he or she dies. An assignment is permitted in this case because a sole proprietorship and the individual owner are one and the same. If the individual dies, the business cannot survive unless it is sold to someone else.

An anti-assignment clause is intended to prevent the insurer from unwittingly assuming risks it never intended to take on. Commercial insurers review business insurance applicants carefully. Before they issue policies, underwriters consider the knowledge and experience of a company's owners and managerial staff. If a business is sold to someone else, the new owners may not be as skilled or attentive as the previous ones. From the insurer's perspective, the new owners are an unknown risk.

Post-Loss Assignments Permitted

The anti-assignment clause doesn't distinguish between assignments made before a loss and those made afterward. Even so, courts in most states have allowed policyholders to assign their rights to another party after a loss has occurred. Pre-loss assignments are still prohibited. Here is an example of a post-loss assignment of insurance benefits.

Victor operates a restaurant called Vital Vittles out of a building he owns. Late one January night two water pipes in the building freeze. The pipes subsequently burst, causing considerable water damage to Victor's building. Victor is forced to close his restaurant until the repairs are completed.

Victor hires a water damage contractor called Rapid Restoration to repair the damage to his building. He tells the contractor that he needs the repairs done quickly as he is anxious to reopen his restaurant. The contractor says that the repairs can be expedited if Victor signs over his rights under the policy to Rapid Restoration. The contractor will then proceed with the repairs and negotiate a claim settlement with Vital Vittles' commercial property insurer. Victor agrees to the assignment and the contractor begins the repair work.

While Vital Vittles' commercial property policy contains an anti-assignment clause, Victor has assigned his rights to Rapid Restoration after a loss has occurred. Thus, in most states, Victor's insurer cannot reject the assignment (assuming post-loss assignments are permitted in Victor's state).

Problems With Assignments of Benefits

In recent years, assignment of benefits (AOB) agreements have been problematic in some states, particularly Florida. Unscrupulous contractors have preyed on unsuspecting homeowners and business owners who have suffered water damage . Some contractors work alone while others operate in cahoots with crooked lawyers. In either event, the contractor convinces the policyholder to assign his or her rights under the policy over to the contractor. The contractor then exaggerates the cost of the repairs and collects the inflated amount from the insurer. The policyholder is left with a large claim on his or her loss history. When the policy expires, the insurer may refuse to renew it.

In the previous example, Victor has assigned his rights under the policy to Rapid Restoration. Suppose that Rapid Restoration completes only half of the repair work on Victor's building. The actual cost is $15,000 but the contractor submits a bill to the insurer for $30,000. Alternatively, the contractor never submits a bill but sues the insurer for $30,000. In either case, the insurer may refuse to pay on the basis that the contractor has committed insurance fraud. Victor cannot intervene because he has signed his rights over to the contractor. If the contractor is unsuccessful in its lawsuit against the insurer, it may demand payment from Victor's company.

Avoiding Problems With AOBs

As a business owner, you can avoid problems associated with AOBs and unscrupulous contractors by taking the following steps:

Report any loss or accident directly to your insurer (or your agent or broker ). Notify your insurer immediately. Don't allow a contractor to do the notification on your behalf.
Take photos of the damage.
Don't allow any contractor to begin work until an insurance adjuster has documented the damage
Vet contractors thoroughly before hiring them. Make sure they are properly licensed. If your area has suffered a natural disaster, watch out for construction scams.
Don't sign an AOB unless you have reviewed it carefully. If you don't understand it, ask your agent, insurer, or attorney for assistance.
If your contractor won't do any work until you've signed an AOB, find another contractor.

AOBs in Health Insurance

Assignment of benefit agreements are common in health insurance. Patients are often asked to agree to such clauses before they receive treatment from a physician, hospital, or another healthcare provider. The assignment of benefits clause transfers a patient's right to collect benefits under his or her health policy to the provider. By signing the document, the patent agrees that payments will be made directly to the provider for the services rendered. The clause states that the patient is ultimately responsible for the charges if the insurer fails to pay.

Once the treatment has been performed, the provider submits the AOB along with a claim to the patient's health insurer. The insurer pays the provider for services rendered to the patient.

Received a document?

Assignment of Benefits for Contractors: Pros & Cons of Accepting an AOB

22 articles

Insurance , Restoration , Slow Payment

An illustrated assignment of benefits form in front of a damaged house

When a property owner files an insurance claim to cover a restoration or roofing project, the owner typically deals directly with the insurance company. They may not have the funds available to pay the contractor out of pocket, so they’re counting on that insurance check to cover the construction costs.

But insurance companies often drag their feet, and payments can take even longer than normal. Contractors often wish they could simply deal with the insurance company directly through an assignment of benefits. In some circumstances, an AOB can be an effective tool that helps contractors collect payment faster — but is it worth it?

In this article, we’ll explain what an assignment of benefits is, and how the process works. More importantly, we’ll look at the pros and cons for restoration and roofing contractors to help you decide if an AOB is worth it .

What is an assignment of benefits?

An assignment of benefits , or AOB, is an agreement to transfer insurance claim rights to a third party. It gives the assignee authority to file and negotiate a claim directly with the insurance company, without involvement from the property owner.

An AOB also allows the insurer to pay the contractor directly instead of funneling funds through the customer. AOBs take the homeowner out of the claims equation.

Here’s an example: A property owner’s roof is damaged in a hurricane. The owner contacts a restoration company to repair the damage, and signs an AOB to transfer their insurance rights to the contractor. The contractor, now the assignee, negotiates the claim directly with the insurance company. The insurer will pay the claim by issuing a check for the repairs directly to the restoration contractor.

Setting up an AOB

A property owner and contractor can set up an assignment of benefits in two steps:

The owner and the contractor sign an AOB agreement
The contractor sends the AOB to the insurance company

Keep in mind that many states have their own laws about what the agreement can or should include .

For example, Florida’s assignment of benefits law contains relatively strict requirements when it comes to an assignment of benefits:

The AOB agreements need to be in writing. The agreement must contain a bolded disclosure notifying the customer that they are relinquishing certain rights under the homeowners policy. You can’t charge administrative fees or penalties if a homeowner decides to cancel the AOB.
The AOB must include an itemized, per-unit breakdown of the work you plan to do. The services can only involve how you plan to make repairs or restore the home’s damage or protect the property from any further harm. A copy must be provided to the insurance company.
A homeowner can rescind an AOB agreement within 14 days of signing, or within 30 days if no work has begun and no start date was listed for the work. If a start date is listed, the 30-day rule still applies if substantial progress has not been made on the job.

Before signing an AOB agreement, make sure you understand the property owner’s insurance policy, and whether the project is likely to be covered.

Learn more – Assignment of Benefits: Ultimate Guide for Contractors & Policyholders

Pros & cons for contractors

It’s smart to do a cost-benefit analysis on the practice of accepting AOBs. Listing pros and cons can help you make a logical assessment before deciding either way.

Pro: Hiring a public adjuster

An insurance carrier’s claims adjuster will inspect property damage and arrive at a dollar figure calculated to cover the cost of repairs. Often, you might feel this adjuster may have overlooked some details that should factor into the estimate.

If you encounter pushback from the insurer under these circumstances, a licensed, public adjuster may be warranted. These appraisers work for the homeowner, whose best interests you now represent as a result of the AOB. A public adjuster could help win the battle to complete the repairs properly.

Pro: More control over payment

You may sink a considerable amount of time into preparing an estimate for a customer. You may even get green-lighted to order materials and get started. Once the ball starts rolling, you wouldn’t want a customer to back out on the deal.

Klark Brown , Co-founder of The Alliance of Independent Restorers, concedes this might be one of the very situations in which an AOB construction agreement might help a contractor. “An AOB helps make sure the homeowner doesn’t take the insurance money and run,” says Brown.

Pro: Build a better relationship with the homeowner

A homeowner suffers a substantial loss and it’s easy to understand why push and pull with an insurance company might be the last thing they want to undertake. They may desire to have another party act on their behalf.

As an AOB recipient, the claims ball is now in your court. By taking some of the weight off a customer’s shoulders during a difficult period, it could help build good faith and further the relationship you strive to build with that client.

Learn more : 8 Ways for Contractors to Build Trust With a Homeowner

Con: It confuses payment responsibilities

Even if you accept an AOB, the property owner still generally bears responsibility for making payment. If the insurance company is dragging their feet, a restoration contractor can still likely file a mechanics lien on the property .

A homeowner may think that by signing away their right to an insurance claim, they are also signing away their responsibility to pay for the restoration work. This typically isn’t true, and this expectation could set you up for a more contentious dispute down the line if there is a problem with the insurance claim.

Con: Tighter margins

Insurance companies will want repairs made at the lowest cost possible. Just like you, carriers run a business and need to cut costs while boosting revenue.

While some restoration contractors work directly with insurers and could get a steady stream of work from them, Brown emphasizes that you may be sacrificing your own margins. “Expect to accept work for less money than you’d charge independently,” he adds.

The takeaway here suggests that any contractor accepting an AOB could subject themselves to the same bare-boned profit margins.

Con: More administrative work

Among others, creating additional administrative busywork is another reason Brown recommends that you steer clear of accepting AOBs. You’re committing additional resources while agreeing to work for less money.

“Administrative costs are a burden,” Brown states. Insurers may reduce and/or delay payments to help their own bottom lines. “Insurers will play the float with reserves and claims funds,” he added. So, AOBs can be detrimental to your business if you’re spending more while chasing payments.

Con: Increase in average collection period

Every contractor should use some financial metrics to help gauge the health of the business . The average collection period for receivables measures the average time it takes you to get paid on your open accounts.

Insurance companies aren’t known for paying claims quickly. If you do restoration work without accepting an AOB, you can often take action with the homeowner to get paid faster. When you’re depending on an insurance company to make your payment, rather than the owner, collection times will likely increase.

The literal and figurative bottom line is: If accepting assignment of benefits agreements increases the time it takes to get paid and costs you more in operational expense, these are both situations you want to avoid.

Learn more: How to calculate your collection effectiveness

AOBs and mechanics liens

A mechanics lien is hands down a contractor’s most effective tool to ensure they get paid for their work. Many types of restoration services are protected under lien laws in most states. But what happens to lien rights when a contractor accepts an assignment of benefits?

An AOB generally won’t affect a contractor’s ability to file a mechanics lien on the property if they don’t receive payment. The homeowner is typically still responsible to pay for the improvements. This is especially true if the contract involves work that wasn’t covered by the insurance policy.

However, make sure you know the laws in the state where your project is located. For example, Florida’s assignment of benefits law, perhaps the most restrictive in the country, appears to prohibit an AOB assignee from filing a lien.

Florida AOB agreements are required to include language that waives the contractor’s rights to collect payment from the owner. The required statement takes it even further, stating that neither the contractor or any of their subs can file a mechanics lien on the owner’s property.

On his website , Florida’s CFO says: “The third-party assignee and its subcontractors may not collect, or attempt to collect money from you, maintain any action of law against you, file a lien against your property or report you to a credit reporting agency.”

That sounds like a contractor assignee can’t file a lien if they aren’t paid . But, according to construction lawyer Alex Benarroche , it’s not so cut-and-dry.

“Florida’s AOB law has yet to be tested in court, and it’s possible that the no-lien provision would be invalid,” says Benarroche. “This is because Florida also prohibits no-lien clauses in a contract. It is not legal for a contractor to waive their right to file a lien via an agreement prior to performance.”

Learn more about no-lien clauses and their enforceability state-by-state

Remember that every state treats AOBs differently, and conflicting laws can create additional risk. It’s important to consult with a construction lawyer in the project’s state before accepting an assignment of benefits.

Best practices for contractors

At the end of the day, there are advantages and disadvantages to accepting an assignment of benefits. While it’s possible in some circumstances that an AOB could help a contractor get paid faster, there are lots of other payment tools that are more effective and require less administrative costs. An AOB should never be the first option on the table .

If you do decide to become an assignee to the property owner’s claim benefits, make sure you do your homework beforehand and adopt some best practices to effectively manage the assignment of benefits process. You’ll need to keep on top of the administrative details involved in drafting AOBs and schedule work in a timely manner to stay in compliance with the conditions of the agreement.

Make sure you understand all the nuances of how insurance works when there’s a claim . You need to understand the owner’s policy and what it covers. Home insurance policy forms are basically standardized for easy comparisons in each state, so what you see with one company is what you get with all carriers.

Since you’re now the point of contact for the insurance company, expect more phone calls and emails from both clients and the insurer . You’ll need to have a strategy to efficiently handle ramped-up communications since the frequency will increase. Keep homeowners and claims reps in the loop so you can build customer relationships and hopefully get paid faster by the insurer for your work.

I am doing some part-time administrative work for a friend who has an owner/operator pressure washing business located in NC in its first year of business. Recently, my friend has expressed interest in expanding his operations to FL so that he can eventually live and work between both...

I am a homeowner, 4 days prior to Ida, we had solar panels installed. Half were damaged and blown off of course, so after we allowed the solar panel co to do our roof and redo our panel system. After a year, they finally replaced our roof and...

I believe a person was impersonating as a licensed general contractor. When I verified the license in GA, the license belonged to a completely different individual. When I called the provided insurance carrier of the general contractor, the insurance company said the company did not have an active...

Thomas Tracy

View Profile

About the author

Recommended for you

Construction punch lists explained.

Punch list work might seem minor, but it has an improportionate impact on payment. Without getting punch work out of...

Conditional vs. Unconditional Lien Waivers: The Difference & Why It Matters

Unconditional vs. conditional lien waivers: which type of lien waiver should you use on your construction projects and jobs? We...

Guide to Alternative Dispute Resolution (ADR) in Construction

With a proper dispute resolution clause in place, contractors, subs, and suppliers can avoid taking their disputes into litigation.

How to Protect Your Payments When Dealing with a Construction Bankruptcy

Bankruptcies in the construction industry are unfortunately very common. Learn how a mechanics lien can help make sure your company...

Construction Contracts: Pros and Cons of a Cost-Plus Contract

What is a cost-plus contract and how is it used in the construction industry? This type of contract is also...

What Is a Notice of Completion?

What is a Notice of Completion? As anyone reading this surely knows, the construction industry loves its documents! There's a...

Lien Waiver vs. Lien Release: What’s the Difference?

Lien waivers and lien releases are completely different documents (even though they are often confused by the construction industry). Read...

What Is a Construction Schedule of Values? [Free Template Download]

A Schedule of Values is an essential tool used in construction project accounting that represents a start-to-finish list of work...

What Is A Collateral Assignment Of Life Insurance?

A couple signing up for Collateral Assignment

Our content follows strict guidelines for editorial accuracy and integrity. Learn about our editorial standards and how we make money.

A collateral assignment is sometimes a necessity if you’re applying for larger financing amounts such as a mortgage or business loan.

But what is a collateral assignment and how do you go about getting it on your life insurance policy?

In this article, we’ll cover what collateral assignment is, how you can add it to your life insurance, and what alternatives there are out there.

What Is Collateral Assignment?

A collateral assignment is a process by which a person uses their life insurance policy as collateral for a secured loan.

In simple terms, collateral assignment is reassigning priorities for who gets paid the death benefit of your life insurance policy.

What Is a death benefit?

A death benefit or face value of a life insurance contract is the amount of money that your beneficiaries will receive from your policy when you die.

Once you apply for collateral assignment and it’s approved, your specified debtor (the loan provider) will be paid first and then your beneficiaries will receive what is left over in your life insurance policy.

This is different from using your cash value to loan money as you are taking out a loan from another financial institution and using your policy as a guarantee that you’ll cover any debt when you die.

For example, let’s say you want to take out a secured loan from your local bank and want to use your life insurance policy as a collateral assignment.

In this situation, you’d still have to pay back any debt you have with interest during the loan period.

However, the life insurance policy would be used if the borrower dies and there was an outstanding loan balance remaining.

Secured Loans vs. Unsecured Loans

Secured loans are debts that are backed by assets that a lender can claim if the debt isn’t repaid. These types of loans often offer better interest rates and more generous payment terms.

Unsecured loans are debts that don’t have collateral. These types of loans are more expensive to repay and considered riskier than secured loans.

A woman signing up for Collateral Assignment.

Source: Pexels

How Does Applying for Collateral Assignment Work?

The process for getting collateral assignments for life insurance is the same as when you apply for new life insurance coverage.

All you’ll be doing is indicating to your life insurance provider that your lender will be given priority for the amount of money you have borrowed through them.

There is an:

Application process.

Underwriting process.

Offer that you’ll receive.

You’ll be required to name beneficiaries as well as indicate ownership of the life insurance policy in the collateral assignment form which will be provided by your life insurance company.

This is because you’re changing the terms of your payout and your life insurance provider will need to follow these instructions once you die.

NB Some insurance companies don’t offer collateral assignment on new loans and generally only provide this feature to an existing life insurance policy.

You should check beforehand to see what will be required to apply for a collateral assignment. If you need help finding plans that offer this, send an email to a licensed insurance agent today.

Once you’ve assigned a new collateral assignee to your life insurance policy, they will be entitled to lay a claim on your death benefit for any debt you have with them.

For example, let’s say you take out a collateral assignment life insurance policy worth $200,000 for a loan of $75,000 over 7 years at an interest rate of 18%.

If you die after five years, based on these figures, you’ll still have $41,231.02 owed on your loan.

Your $200,000 life insurance plan will be used to cover this and your beneficiaries will receive the remaining $158 768.98 from your life insurance policy.

Your lender is only allowed to take the amount outstanding on the debt owed and cannot take more.

What about Missed Payments and Cash Value Life Insurance?

If you have a permanent life policy with a cash value account, sometimes called cash value life insurance, your lender will have access to it to cover missed payments on your loan.

For example, let’s say you miss a payment on your loan and have a collateral assignment. Your lender will be able to access your cash value account and withdraw that month’s payment to cover your debt.

Who Can You Add as a Collateral Assignee?

You can add any person or institution as a collateral assignee to your life insurance policy if you owe them money.

This can include banks, lenders, private individuals, businesses, or credit card companies.

The most common collateral assignments are for business loans and mortgages. This is because they are loans for high amounts that are paid off over several years.

In fact, some banks and financial lenders may require that you add them as collateral assignees when you apply for any of the financing options mentioned below.

Common Collateral Assignees Include:

💵 Bank loans

💳 Credit cards

🏡 Mortgages

💼 Business loans

What Do I Do If I’ve Paid Off My Debt?

If you’ve managed to pay off your debt - firstly, congratulations! Secondly, you’ll want to notify your life insurance company that you’ll be changing your collateral assignments on your life policy.

While there is no legal claim that a company can make to debts that aren’t owed anymore, there may be a hold up in paying out the death benefit to your beneficiaries and other collateral assignees.

Life insurance companies will have to figure out who must be paid first, according to the order stated in your collateral assignment terms.

In general, life insurance policies will settle claims within 24 hours of being notified of a policyholder’s death.

The process can be delayed if you do not release your collateral assignees from your life insurance contract.

Tips to Make Sure Your Life Policy Is Paid Out Quickly

Here are some tips if you want your beneficiary claims to be handled as fast as possible:

1) Keep a copy of your life insurance policy and policy number in a safe place or with your lawyer, financial advisor, or estate planner.

2) Speak to your beneficiaries about your policies and give them the contact details of the relevant life insurance company.

3) Make sure your life insurance contract is updated to reflect your latest list of beneficiaries.

4) Make sure you have your beneficiaries' details listed in the contract or with your lawyer.

The Benefits of Using Collateral Assignment of Life Insurance

While adding a collateral assignment to your current life insurance policy may require an application, paperwork, and time, there are benefits:

Many lenders like it: Banks and financial institutions sometimes prefer it when applicants use their life insurance policy as collateral for a loan. This is because they know that their debt will be serviced long-term by your insurance company which makes their loan to you a lower risk.

Your private property won’t be jeopardized: The last thing you want when you go into debt is to put your personal items, such as your car, investments, or home on the line as collateral. Using collateral assignment is an alternative to this and can protect you in the event that you can’t service your debt.

It can be affordable for some people: If you’re in good health and young, you may be paying affordable rates for permanent life cover. In situations like this, it can make sense to use your life cover as collateral for debts you’ve incurred.

What Are Some Alternatives to Collateral Assignment?

Term Life Insurance: Getting a term life insurance contract to cover specific debts is one way of ensuring your estate and family are protected when you die.

There are multiple types of term life insurance plans and they are more affordable than permanent life insurance. This makes options like level term life insurance and decreasing term life insurance ideal for different types of debts you may have over your lifetime.

What Is Term Life?

Term life is a temporary life coverage option that lasts for a specific period of time. It is different from permanent life insurance which lasts until you die or you stop paying premiums.

Term life contracts are typically between 5 to 20 years, however, you can get renewable term life plans and even a forty-year term life plan .

Borrow from your life insurance: If you have a permanent life insurance policy, such as universal, whole, or indexed life cover, you can borrow money from your cash value account.

However, keep in mind that you’ll be required to pay interest on any amount that you borrow and any amount of debt incurred will be deducted from your policy’s death benefit when you die.

What Is Cash Value?

Cash value is a feature of permanent life insurance plans that policyholders can contribute additional money toward while they have a policy in force.

This money is set aside in a cash value account which is tax-deferred and can be used in a number of ways.

In some cases, if your policy allows it, you can end your contract and get the cash surrender value of it. This amount is usually much less than the value of your total life insurance contract.

Our Verdict on Collateral Assignment

Many banks, lenders, and financial institutions want long-term guarantees that you’ll be able to service your debt if anything happens to you.

In some situations, getting collateral assignments on your life insurance to cover these debts is a good option for people who are trying to access finance from these institutions.

However, there is a risk that your death benefit payout may be delayed for your beneficiaries if you don’t keep your different collateral assignees up to date.

If you already have a life insurance policy, you should contact your provider to find out what the process is and what you’ll need to do to change the collateral assignees on your policy.

If you don’t have a policy yet, our advice is to look at all of your options before you decide to take a permanent life insurance contract with a collateral assignment.

There are alternatives out there that are more affordable if you’re looking to protect your family and estate from debt.

Term life is one such option that is adaptable to your life and easy to get.

For example, a decreasing term life insurance policy might be the right choice for someone who has recently bought a home and wants to cover their mortgage while they pay it back.

Another option is final expense insurance, which is a permanent life policy for smaller amounts, usually under $50,000.

With final expense insurance, your beneficiaries can pay for anything they want, including any debts you may have had in your life.

The process for applying is simple and you won't have to go through a medical exam or intensive underwriting as you would with traditional permanent life insurance.

If you need any assistance with finding, comparing, or learning about the different life insurance options to cover your debts, speak to one of our expert advisors today at 1-888-912-2132 or [email protected] .

Where Can I Learn More about Life Insurance?

If you’re looking to learn more about life insurance, different kinds of coverage, or costs, visit our life insurance hub to find our latest articles.

We do the research so that you don’t have to and our articles cover complicated topics like what is a cash value account, what is key person insurance, or how long life insurance takes to pay out a death benefit.

If you need help with quotes, try out a life insurance quote finder or reach out to us via email at [email protected] to get in touch with a licensed life insurance agent for your state.

Search NAIC

Recommended.

Back to Newsroom

Consumer Insight

Sept. 13, 2023

Assignment of Benefits: Consumer Beware

You've just survived a severe storm, or a tornado and you've experienced some extensive damage to your home that requires repairs, including the roof. Your contractor is now asking for your permission to speak with your insurance company using an Assignment of Benefits. Before you sign, read the fine print. Otherwise, you may inadvertently sign over your benefits and any extra money you’re owed as part of your claim settlement.

The National Association of Insurance Commissioners (NAIC) offers information to help you better understand insurance, your risk and what to do in the event you need repairs after significant storm damage.

Be cautious about signing an Assignment of Benefits. An Assignment of Benefits, or an AOB, is an agreement signed by a policyholder that allows a third party—such as a water extraction company, a roofer or a plumber—to act on behalf of the insured and seek direct payment from the insurance company. An AOB can be a useful tool for getting repairs done, as it allows the repair company to deal directly with your insurance company when negotiating repairs and issuing payment directly to the repair company. However, an AOB is a legal contract, so you need to understand what rights you are signing away and you need to be sure the repair company is trustworthy.

With an Assignment of Benefits, the third party, like a roofing company or plumber, files your claim, makes the repair decision and collects insurance payments without your involvement.
Once you have signed an AOB, the insurer only communicates with the third party and the other party can sue your insurer and you can lose your right to mediation.
It's possible the third party may demand a higher claim payment than the insurer offers and then sue the insurer when it denies your claim.
You are not required to sign an AOB to have repairs completed. You can file a claim directly with your insurance company, which allows you to maintain control of the rights and benefits provided by your policy in resolving the claim.

Be on alert for fraud. Home repair fraud is common after a natural disaster. Contractors often come into disaster-struck regions looking to make quick money by taking advantage of victims.

It is a good idea to do business with local or trusted companies. Ask friends and family for references.
Your insurer may also have recommendations or a list of preferred contractors.
Always get more than one bid on work projects. Your adjuster may want to review estimates before you make repairs.

Immediately after the disaster, have an accurate account of the damage for your insurance company when you file a claim.

Before removing any debris or belongings, document all losses.
Take photos or video and make a list of the damages and lost items.
Save damaged items if possible so your insurer can inspect them, some insurance companies may have this as a requirement in their policy.

Most insurance companies have a time requirement for reporting a claim, so contact your agent or company as soon as possible. Your state insurance department can help you find contact information for your insurance company, if you cannot find it.

Insurance company officials can help you determine what damages are covered, start your claim and even issue a check to start the recovery process.
When reporting losses, you will need insurance information, current contact information and a home inventory or list of damaged and lost property . If you do not have a list, the adjuster will give you some time to make one. Ask the adjuster how much time you have to submit this inventory list. The NAIC Post Disaster Claims Guide has details on what you can do if you do not have a home inventory list.

After you report damage to your insurance company, they will send a claims adjuster to assess the damage at no cost to you . An adjuster from your insurance company will walk through and around your home to inspect damaged items and temporary repairs you may have made.

A public adjuster is different from an adjuster from your insurance company and has no ties to the insurance company.
They estimate the damage to your home and property, review your insurance coverage, and negotiate a settlement of the insurance claim for you.
Many states require public adjusters to be licensed. Some states prohibit public adjusters from negotiating insurance claims for you. In those states, only a licensed attorney can represent you.
You have to pay a public adjuster.
The NAIC Post Disaster Claims Guide has information on the different types of adjusters.

Once the adjuster has completed an assessment, they will provide documentation of the loss to your insurer to determine your claims settlement. When it comes to getting paid, you may receive more than one check. If the damage is severe or you are displaced from your home, the first check may be an emergency advance. Other payments may be for the contents of your home, other personal property, and structural damages. Please note that if there is a mortgage on your home, the payment for structural damage may be payable to you and your mortgage lender. Lenders may put that money into an escrow account and pay for repairs as the work is completed.

More information. States have rules governing how insurance companies handle claims. If you think that your insurer is not responding in a timely manner or completing a reasonable investigation of your claim, contact your state insurance department .

About the National Association of Insurance Commissioners

As part of our state-based system of insurance regulation in the United States, the National Association of Insurance Commissioners (NAIC) provides expertise, data, and analysis for insurance commissioners to effectively regulate the industry and protect consumers. The U.S. standard-setting organization is governed by the chief insurance regulators from the 50 states, the District of Columbia and five U.S. territories. Through the NAIC, state insurance regulators establish standards and best practices, conduct peer reviews, and coordinate regulatory oversight. NAIC staff supports these efforts and represents the collective views of state regulators domestically and internationally.

How Does Your Insurance Policy’s “Assignment of Benefits” Clause Affect You?

When homeowners suffer a property loss, one of the first things they do – even before they know the amount of coverage they will receive from their insurer – is call a contractor. The contractor looks at the damage, and estimates the likely cost of repairing the property. Maybe that estimate is greater than the coverage amount the homeowner expects the insurance company to pay out.

In this instance, the contractor will sometimes suggest that the homeowner enter into an “assignment of benefits” (AOB) arrangement. Under this side contract, the contractor agrees to accept as payment whatever the insurance company pays for the insured’s property loss claim.

Such AOB deals can be a major problem.

For one thing, most contractors know very little about insurance coverages and the art of negotiating optimal coverage payouts. The insurance company may initially offer $60K, for example, in a situation where an experienced public adjuster could have secured almost twice that amount. The contractor might take the $60K, and then discover that amount isn’t enough to get the repair job done properly. The contractor then must skimp and cut corners, resulting in a shoddy repair job for the unsuspecting homeowner.

At common law, insureds were prohibited from assigning their insurance policy benefits and other underlying rights. State legislatures, however, have allowed AOB, and many state courts will permit the assignment of insurance policies.

The problems stemming from AOB have led to a mountain of litigation and debates about whether it should be allowed at all. Insurance carriers are happy to allow AOB, because contractors present an easy mark and often accept low-ball claim offers. The contractors, meanwhile, are serving two masters – handling the insured’s claim, as well as taking money to do repairs. That’s exactly why the National Association of Public Insurance Adjusters (NAPIA) doesn’t allow contractors to be PAs and do this type of work.

We recently spoke with Brian Goodman, General Counsel of NAPIA, who calls the practice of AOB “ripe with the possibility of harming consumers and making it so the insured never gets properly indemnified.” We agree.

NAPIA is working with the National Association of Insurance Commissioners (NAIC) to eradicate the practice of AOB. There is some resistance because of an unwillingness to infringe on an individual’s right to contract with somebody. But, in our view, any use of AOB really harms consumers.

Diane Swerling

What Is the Assignment of Insurance Benefits?

An assignment of insurance benefits shares the ownership interest of an insurance policy with another party.

Hemera Technologies/AbleStock.com/Getty Images

1. What Is a Life Insurance Assignment?
2. Absolute Assignment of Life Insurance Policies
3. What Is the Collateral Assignment of a Life Insurance Policy?

Assigning insurance benefits is a legal procedure that gives another party permission to receive payments or benefits directly from your insurance company rather than you receiving the benefits yourself. Depending on the arrangement, you may be able to terminate the assignment at will, or be required to keep the arrangement in place until you meet certain conditions.

Health Insurance

When you require medical care, it's important to have health insurance in place to protect your financial well-being. If your health care provider does not have a direct contract with your insurance company, it may require you to fill out an assignment of benefits form allowing it to bill the insurance company directly for your medical treatments. You remain responsible for any deductibles and co-pays, however, and are ultimately responsible for any medical bills.

Income Loan

Whole life insurance policies with accumulating cash values can act as supplementary retirement income planning investments. When you wish to access the cash value in your policy, you can assign your policy to a bank in exchange for a loan. Typically the bank lends you up to a specified percentage of the policy's cash value, and it becomes the primary beneficiary of the death benefit up to and including the outstanding balance of the loan at your death. The advantage of such an arrangement is that the bank loan is not treated as taxable income, unlike a policy withdrawal, and you repay the bank loan with the tax-free death benefit.

Collateral Loan

If you are self-employed and wish to secure a loan for your business, you may be required by your lenders to purchase life insurance as an additional guarantee. Once the insurance is purchased you complete a assignment of benefits, sharing ownership control with the bank. You must pay the insurance premiums and cannot make any decisions affecting the policy without the written consent of the lender. If and when you pay off your business loan, the assignment is terminated and you regain full control of the policy.

Charitable Contribution

Life insurance can be purchased as a means to finance a charitable gift at death. There are several ways to set this up, one of which involves assigning the benefits to the charity immediately after purchase. The assignment is typically irrevocable, as this requires the charity's consent to make any changes to the policy. The advantage of such an assignment is that your premiums are tax-deductible as a charitable contribution. Upon your death, the charity receives the death benefit directly, without the money passing through your estate.

Massachusetts Avenue Surgery Center: Assignment of Insurance Benefits
Feeley and Driscoll, P.C.: Life insurance leads way to charitable contribution

Philippe Lanctot started writing for business trade publications in 1990. He has contributed copy for the "Canadian Insurance Journal" and has been the co-author of text for life insurance company marketing guides. He holds a Bachelor of Science in mathematics from the University of Montreal with a minor in English.

What is a life insurance assignment, absolute assignment of life insurance policies, what is the collateral assignment of a life insurance policy, how do i set up a trust fund with a life insurance policy, how much can i borrow against cash value, is whole-term life insurance with a retirement plan a good idea, how to finance a funeral, can you write off life insurance payments, can life insurance proceeds paid to a beneficiary be forced to pay the deceased's debts, taxation of death benefits paid on a life insurance policy, is life insurance taxed at payout, does life insurance count towards the two million for federal estate tax.

Zacks Research is Reported On:

Zacks Investment Research

is an A+ Rated BBB

Accredited Business.

At the center of everything we do is a strong commitment to independent research and sharing its profitable discoveries with investors. This dedication to giving investors a trading advantage led to the creation of our proven Zacks Rank stock-rating system. Since 1986 it has nearly tripled the S&P 500 with an average gain of +26% per year. These returns cover a period from 1986-2011 and were examined and attested by Baker Tilly, an independent accounting firm.

Visit performance for information about the performance numbers displayed above.

NYSE and AMEX data is at least 20 minutes delayed. NASDAQ data is at least 15 minutes delayed.

Credit Cards

Financial planning.

Cheapest Car Insurance
Cheapest Full Coverage Car Insurance
Car Insurance Cost Calculator
Best Car Insurance
Compare Car Insurance Costs
Average Cost of Car Insurance
Best Term Life Insurance
Best Whole Life Insurance
Best Life Insurance Companies
Best Universal Life Insurance
Best Life Insurance for Seniors
Compare Quotes
Best Auto and Home Insurance Bundle
Homeowners Insurance
Renters Insurance
Health Insurance
Pet Insurance
Small Business Insurance

Insurance Guidance

How Much Car Insurance Do You Really Need?

Conventional Mortgages
Jumbo Loans
Best HELOC Loans and Rates
Get a HELOC With Bad Credit
Pay Off Your Mortgage With a HELOC
Pros and Cons of HELOCs
The HELOC Approval Process
Mortgage Payment Calculator
Reverse Mortgage Calculator
FHA vs. Conventional Loan Calculator
Private Mortgage Insurance Calculator
Debt-to-Income Ratio Calculator

Mortgage Guidance

What Is a Mortgage? A Guide for Beginners

Best Balance Transfer Credit Cards
Best Cash Back Credit Cards
Best Travel Rewards Credit Cards
Best Airline Credit Cards
Best Credit Cards for Excellent Credit
Best Business Credit Cards
Best American Express Cards
Best Capital One Credit Cards
Best Chase Credit Cards
Best Citi Credit Cards
Best Bank of America Credit Cards
Cash Back Calculator
Pros and Cons of Balance Transfers
Practical Guide for Improving Credit Fast
Average Credit Score by Age
Credit Cards For Bad Debt
Credit Card Glossary

Recent Credit Card Reviews & Comparisons

Blue Cash Everyday® Card vs. Blue Cash Preferred® Card From American Express

Best Personal Loans of 2024
Best Personal Loans for Excellent Credit
Best Personal Loans for Good Credit
Best Personal Loans for Bad Credit
Best Same-Day Approval Loans
Best Personal Loans for Debt Consolidation
Best Private Student Loans
Best Student Loans for Bad Credit
Best Student Loans for International Students
Best Low-Interest Student Loans
Best Student Loans Without a Co-Signer
Personal Loan Calculator
Auto Loan Calculator
Student Loan Calculator
How to Calculate Loan Payments
Can You Get a Personal Loan With Bad Credit?

Loans Guidance

Compound Interest Calculator
Cost of Living Calculator
Financial Literacy Handbook
Guide to Retirement Planning
Ultimate Guide to Budgeting
Understanding Types of Debt
How to Pay Down Student Loan Debt
How to Start Saving & Investing
Should You Rent or Buy a House
How to Pay for College
Guide to Buying a Car
Guide to Negotiating Salary
Safest Cities in America
Top Cities for Job Seekers
Most & Least Tax-Friendly States
Most Dangerous Days for DUIs

What Is Collateral Assignment of Life Insurance?

Collateral assignment of life insurance designates a lender as the assignee of a policy, granting them the right to part or all of the death benefit until the loan is repaid.

Nathan Paulus

Director of Content Marketing, MoneyGeek

Nathan Paulus is the Head of Content Marketing at MoneyGeek, with nearly 10 years of experience researching and creating content related to personal finance and financial literacy. Paulus has a bachelor's degree in English from the University of St. Thomas, Houston. He enjoys helping people from all walks of life build stronger financial foundations.

Casie McCoskey

Content Editor

Casie McCoskey is a professional editor passionate about providing people with accessible information on personal finance. Before MoneyGeek, she worked in the legal field, drafting and editing briefs and motions.

Quality Verified

MoneyGeek is dedicated to providing trustworthy information to help you make informed financial decisions. Each article is edited, fact-checked and reviewed by industry professionals to ensure quality and accuracy.

Updated: June 5, 2024

How It Works
Overview of Application Process

Pros and Cons

Impact on Beneficiaries
Alternatives

How Collateral Assignment of Life Insurance Works

The collateral assignment allows you to use your life insurance policy as security for a loan. The process involves legally designating your policy as collateral, which means if you pass away before fully repaying the loan, the lender can claim the death benefit to cover the remaining balance. You start by choosing either a term policy or whole life insurance and then complete a collateral assignment agreement. This agreement is legally binding and sets the terms for the lender to access the death benefit .

For your beneficiaries, the assignment of your life insurance policy as collateral could reduce the death benefit they receive. If you die with an outstanding loan balance, the lender is paid first from the policy's proceeds. Any remaining amount goes to your beneficiaries only after the loan is settled.

For example, a policyholder with a $500,000 policy uses their life insurance as collateral for a $200,000 loan. If the policyholder dies before settling the loan, the lender will receive $200,000 from the policy's death benefit. Meanwhile, the remaining $300,000 gets disbursed to the policy's beneficiaries.

Roles of the Policyholder, Lender and Insurance Provider

Role of the Policyholder

Ensure consistent premium payments to keep the policy active and in force.
Inform the lender of any policy changes, such as lapses or surrenders.
Understand that active management upholds the collateral agreement's integrity.

Role of the Lender

Accept the life insurance policy as collateral.
Right to recover owed amounts from the policy's death benefit if the policyholder dies before loan repayment.
Priority claim on the death benefit, with remaining funds disbursed to beneficiaries.
Responsible for releasing the assignment after full loan repayment.

Role of the Insurance Provider

Approve or reject the collateral assignment of the policy.
Evaluate and ensure compliance with policy terms.
Officially record the assignment as part of the policy.

Applying for Collateral Assignment

Applying for collateral assignment is a process moderated by your life insurance company designed to secure loans using your life insurance policy as collateral. It involves a series of steps:

Obtain a Collateral Assignment Form

Request a collateral assignment form from your life insurance provider. This form is vital for designating the lender as a collateral beneficiary for the loan amount. Ensure you obtain the correct form, as forms vary based on policy type and insurer.

Fill Out the Form Correctly

Complete the form with accurate details, including policy number, loan amount and lender information. Pay close attention to all sections to avoid errors that could delay or invalidate the assignment. Incomplete or incorrect information can lead to processing delays or rejection.

Sign the Paperwork

Ensure both the policyholder and lender sign the form, confirming the agreement. This dual signature legally binds both parties to the terms of the collateral assignment. Any discrepancy in signatures may question the form's validity.

Submit the Completed Form

Submit the signed form back to the insurance company for processing. Consider using a traceable delivery method for submission to confirm receipt. Delays in submission can impact the timeline of the loan approval process.

Await Approval or Rejection From the Insurance Company

Wait for the insurer to review and approve or reject the collateral assignment. The insurer may request additional information or clarification, which can extend the approval timeline.

Receive a Letter of Acknowledgment

You and your lender will receive a letter of acknowledgment from the insurer if your collateral assignment application is approved.

Obtaining Required Documentation

The required documentation for collateral assignment of life insurance is straightforward. Typically, you'll need to provide two main types of documents for the assignment of a life insurance policy as collateral:

Collateral Assignment Form: This form is critical because it officially transfers a portion of your life insurance policy benefits to the lender as collateral. It demonstrates to the lender that you have taken the steps to secure your loan against your life insurance policy.
Original Life Insurance Policy and Proof of Loan: Lenders may require your original life insurance policy to ensure it is valid and enforceable. Proof of the loan agreement or obligation, such as a mortgage note or other loan document, is also commonly required. This establishes the legitimacy of your loan and substantiates the life insurance collateral assignment.

If you need more clarification about documentation requirements, contact your lender to confirm the necessary details to avoid process delays.

Pros and Cons of Collateral Assignment

Using life insurance as collateral can offer a range of benefits and potential drawbacks. Collateral assignment of a policy allows you to secure loans and is often safer than using physical assets as collateral. However, you should also note the inherent risks, primarily that the lender retains the first right to your policy’s death benefit upon your death.

Lower interest rates on loans.
Allows you to use the policy and not physical assets as collateral.
The cash value of your insurance policy continues to grow.
The lender has the first right to the death benefit.
Failure to repay the loan can reduce or even eliminate the death benefit.
Any lapse or cancellation of the policy may lead to violating the loan terms.

Impact of Collateral Assignment on Beneficiaries

While the collateral assignment of life insurance has its benefits, it’s important to remember that it can impact the amount your beneficiaries receive. If you pass away with an outstanding balance on your loan:

Your Lender Will Be Paid First

In the collateral assignment arrangement, the lender is designated as the collateral beneficiary holding the primary claim to the death benefit for the outstanding loan amount. This means if you pass away before fully repaying the loan, the lender is entitled to receive payment from the death benefit first. The amount collected by the lender is limited to the remaining loan balance.

Any Remaining Death Benefit Will Be Disbursed to Your Beneficiaries

After the lender's claim is satisfied, the remaining death benefit is disbursed to your policy’s designated beneficiaries. The amount they receive depends on the loan balance at the time of your death. If the loan balance is substantial, your beneficiaries will receive significantly less than the policy's total death benefit.

This structure underscores the importance of carefully considering life insurance collateral loans and their impact on future financial planning. Policyholders using life insurance as collateral need to understand the terms set forth by loan companies that accept it.

Alternatives to Collateral Assignment

Alternatives to collateral assignment include personal loans , home equity loans or surrendering the life insurance policy for its cash value. None of these options require using life insurance as collateral, and each offers different benefits and risks compared to using life insurance as collateral.



	.

FAQ About Collateral Assignment

These questions cover various topics related to collateral assignments, including their requirements, implications for beneficiaries and what happens in different scenarios.

A collateral assignment is a contractual arrangement in which a borrower uses their life insurance policy as collateral for a loan. This agreement grants the lender rights to the policy’s death benefit. The lender is prioritized over other beneficiaries until the loan is repaid in full.

In the context of a life insurance collateral assignment, the collateral is the policy's death benefit. This setup allows lenders to be listed as collateral beneficiaries, guaranteeing that they can recover the outstanding loan balance from the death benefit in the event of the borrower’s death before the debt is fully paid.

In a life insurance contract, a collateral assignment allocates the policy's death benefit as security for a loan. This means that if the borrower dies before repaying the loan, the lender, as the collateral assignee of the life insurance, can claim the owed amount from the death benefit. The remaining balance, if any, goes to the designated beneficiaries, ensuring the loan is covered without affecting other assets.

Collateral assignment allows a lender to claim the life insurance death benefit for an outstanding loan amount while naming a life insurance beneficiary designated who receives the death benefit. The lender's claim is prioritized over the beneficiaries' in collateral assignment.

Most types of life insurance policies , including term, whole and universal life, can be used for collateral assignment, provided the insurance company allows it and the policy has sufficient value.

Yes, the policyholder can change beneficiaries after a collateral assignment, but the lender's right to the death benefit amount remains until the loan is repaid. This ensures the lender's position as a collateral beneficiary.

Canceling your life insurance policy before repaying the debt can lead to a breach of the collateral assignment loan agreement. This action may prompt the lender to increase your interest rate or demand immediate repayment of the outstanding loan balance.

These related sections offer additional insights into concepts and alternatives connected to collateral assignments and life insurance:

Using Collateral for a Personal Loan — This link explains how to use various types of collateral for securing a personal loan, providing a broader context to the specific use of life insurance as collateral.

Term vs. Permanent Life Insurance — This resource compares term and permanent life insurance, helping to understand which policies can be used for collateral assignments.

Permanent Life Insurance — This page details permanent life insurance, a type commonly used in collateral assignments due to its cash value component.

Life Insurance Calculator — This page helps you calculate the appropriate amount of life insurance coverage needed, which is crucial when considering using a policy for collateral.

About Nathan Paulus

Nathan Paulus is the Head of Content Marketing at MoneyGeek, with nearly 10 years of experience researching and creating content related to personal finance and financial literacy.

Paulus has a bachelor's degree in English from the University of St. Thomas, Houston. He enjoys helping people from all walks of life build stronger financial foundations.

Car Insurance
Home Insurance
Rental Insurance
Life Insurance
Refinancing
Conventional Loan
Business Credit Cards
Student Credit Cards
Balance Transfer Cards
Credit Cards with Rewards
Travel Credit Cards
Cash Back Credit Cards

Search Search Please fill out this field.

Insurance Contract Essentials

Contract values, insurable interest, principle of subrogation, the doctrine of good faith, other policy aspects, the bottom line.

Personal Finance

How to Easily Understand Your Insurance Contract

Drazen Zigic / Getty Images

There are certain types of insurance most people need to have. For example, if you own a home then homeowner's insurance may be standard. Auto insurance covers your vehicle while life insurance protects you and your loved ones in a worst-case scenario.

When your insurer gives you the policy document, it's important to read through it carefully to make sure you understand it. Your insurance advisor is always there for you to help you with the tricky terms in the insurance forms, but you should also know for yourself what your contract says. In this article, we'll make reading your insurance contract easy, so you understand their basic principles and how they are put to use in daily life.

Key Takeaways

Life insurance contracts spell out the terms of your policy, including what's covered and what's not as well as what you'll pay.
A life insurance contract can contain terminology and jargon that you may not be immediately familiar with.
It's important to read through an insurance contract carefully before signing so you understand what you're agreeing to.
You should also review the contract to check for any errors that may affect your coverage or costs.

When reviewing an insurance contract, there are certain things included that are typically universal.

Offer and Acceptance. When applying for insurance, the first thing you do is get the proposal form of a particular insurance company. After filling in the requested details, you send the form to the company (sometimes with a premium check). This is your offer. If the insurance company agrees to insure you, this is called acceptance . In some cases, your insurer may agree to accept your offer after making some changes to your proposed terms.
Consideration. This is the premium or the future premiums that you have to pay to your insurance company. For insurers, consideration also refers to the money paid out to you should you file an insurance claim . This means that each party to the contract must provide some value to the relationship.
Legal Capacity. You need to be legally competent to enter into an agreement with your insurer. If you are a minor or are mentally ill, for example, then you may not be qualified to make contracts. Similarly, insurers are considered to be competent if they are licensed under the prevailing regulations that govern them.
Legal Purpose. If the purpose of your contract is to encourage illegal activities, it is invalid.

You may not want to sign an insurance contract if you don't fully understand the terms without first consulting an insurance expert.

This section of an insurance contract specifies what the insurance company may pay out to you for an eligible claim, as well as what you may pay to the insurer for a deductible. How these sections of an insurance contract are structured often depends on whether you have an indemnity or non-indemnity policy.

Indemnity Contracts

Most insurance contracts are indemnity contracts . Indemnity contracts apply to insurances where the loss suffered can be measured in terms of money.

Principle of Indemnity. This states that insurers pay no more than the actual loss suffered. The purpose of an insurance contract is to leave you in the same financial position you were in immediately prior to the incident leading to an insurance claim. When your old Chevy Cavalier is stolen, you can't expect your insurer to replace it with a brand new Mercedes-Benz. In other words, you will be remunerated according to the total sum you have assured for the car.

(To read more on indemnity contracts, see " Shopping for Car Insurance " and " How Does the 80% Rule for Home Insurance Work? ")

There are some additional factors of your insurance contract that create situations in which the full value of an insured asset is not remunerated.

Under-Insurance. Often, in order to save on premiums, you may insure your house at $80,000 when the total value of the house actually comes to $100,000. At the time of partial loss, your insurer will pay only a proportion of $80,000 while you have to dig into your savings to cover the remaining portion of the loss. This is called under-insurance , and you should try to avoid it as much as possible.
Excess. To avoid trivial claims, the insurers have introduced provisions like excess. For example, you have auto insurance with the applicable excess of $5,000. Unfortunately, your car had an accident with the loss amounting to $7,000. Your insurer will pay you the $7,000 because the loss has exceeded the specified limit of $5,000. But, if the loss comes to $3,000 then the insurance company will not pay a single penny and you have to bear the loss expenses yourself. In short, the insurers will not entertain claims unless and until your losses exceed a minimum amount set by the insurer.
Deductible . This is the amount you pay in out-of-pocket expenses before your insurer covers the remaining expense. Therefore, if the deductible is $5,000 and the total insured loss comes to $15,000, your insurance company will only pay $10,000. The higher the deductible, the lower the premium and vice versa.

Non-Indemnity Contracts

Life insurance contracts and most personal accident insurance contracts are non-indemnity contracts. You may purchase a life insurance policy of $1 million, but that does not imply that your life's value is equal to this dollar amount. Because you can't calculate your life's net worth and fix a price on it, an indemnity contract does not apply.

A life insurance contract typically includes the following:

Declarations page : This is often the first page of a life insurance policy and it includes the policy owner's name, the policy type and number, issue date, effective date, premium class or rate class and any riders you've chosen to add on. If you purchased a term life policy, the declarations page should also specify the length of the coverage term.
Policy terms and definitions: You may see a separate section in your life insurance contract that breaks down terms and definitions, including death benefit, premium, beneficiary and insurance age. Your insurance age may be your actual age or the nearest age assigned to you by the life insurance company.
Coverage details: The coverage details section of a life insurance contract provides in-depth information about your policy, including how much you'll pay for premiums, when those payments are due, penalties for missing payments and who your policy's death benefits should be paid out to. For example, you may have just one primary beneficiary or a primary beneficiary with several contingent beneficiaries .
Additional policy details: There may be a separate section in your life insurance contract that covers riders if you've chosen to add any on. Riders expand your policy's coverage. Common life insurance riders include accelerated death benefit riders, long-term care riders and critical illness riders. These add-ons allow you to tap into your death benefit while still living if you need money to cover expenses related to a terminal illness.

When you've determined that life insurance is something you need, it's important to compare the options carefully. For example, you may lean toward term life insurance versus permanent life insurance if you don't need lifetime coverage. Or you may prefer permanent coverage if you're treating life insurance like an investment.

In either scenario, it's important to shop around to find the best life insurance companies .

(For more information on non-indemnity contracts, read " Buying Life Insurance: Term Versus Permanent " and " Shifting Life Insurance Ownership .")

Using a life insurance calculator can help you determine what type and what amount of coverage you need.

It is your legal right to insure any type of property or any event that may cause financial loss or create legal liability for you. This is called insurable interest .

Suppose you are living in your uncle's house, and you apply for homeowners insurance because you believe that you may inherit the house later. Insurers will decline your offer because you are not the owner of the house and, therefore, you do not stand to suffer financially in the event of a loss. When it comes to insurance, it is not the house, car or machinery that is insured. Rather, it is the monetary interest in that house, car or machinery to which your policy applies.

It is also the principle of insurable interest that allows married couples to take out insurance policies on each other's lives, on the principle that one may suffer financially if the spouse dies. Insurable interest also exists in some business arrangements, as seen between a creditor and debtor , between business partners or between employers and employees.

In life insurance contracts, someone with an insurable interest can include your spouse, your children or grandchildren, a special needs adult who is also a dependent or aging parents.

Subrogation allows an insurer to sue a third party that has caused a loss to the insured and pursues all methods of getting back some of the money that it has paid to the insured as a result of the loss.

For example, if you are injured in a road accident that is caused by the reckless driving of another party, you will be compensated by your insurer. However, your insurance company may also sue the reckless driver in an attempt to recover that money.

All insurance contracts are based on the concept of uberrima fides, or the doctrine of utmost good faith . This doctrine emphasizes the presence of mutual faith between the insured and the insurer. In simple terms, while applying for insurance, it becomes your duty to disclose your relevant facts and information truthfully to the insurer. Likewise, the insurer cannot hide information about the insurance coverage that is being sold.

Duty of Disclosure . You are legally obliged to reveal all information that would influence the insurer's decision to enter into the insurance contract. Factors that increase the risks — previous losses and claims under other policies, insurance coverage that has been declined to you in the past, the existence of other insurance contracts, full facts and descriptions regarding the property or the event to be insured — must be disclosed. These facts are called material facts. Depending on these material facts, your insurer will decide whether to insure you as well as what premium to charge. For instance, in life insurance, your smoking habit is an important material fact for the insurer. As a result, your insurance company may decide to charge a significantly higher premium as a result of your smoking habits.
Representations and Warranty. In most kinds of insurances, you have to sign a declaration at the end of the application form, which states that the given answers to the questions in the application form and other personal statements and questionnaires are true and complete. Therefore, when applying for fire insurance, for example, you should make sure that the information that you provide regarding the type of construction of your building or the nature of its use is technically correct.

Depending on their nature, these statements may either be representations or warranties.

A) Representations: These are the written statements made by you on your application form, which represent the proposed risk to the insurance company. For instance, on a life insurance application form, information about your age, details of family history, occupation, etc. are the representations that should be true in every respect. Breach of representations occurs only when you give false information (for example, your age) in important statements. However, the contract may or may not be void depending on the type of the misrepresentation that occurs

B) Warranties: Warranties in insurance contracts are different from those of ordinary commercial contracts. They are imposed by the insurer to ensure that the risk remains the same throughout the policy and does not increase. For example, in auto insurance, if you lend your car to a friend who doesn't have a license and that friend is involved in an accident, your insurer may consider it a breach of warranty because it wasn't informed about this alteration. As a result, your claim could be rejected.

As we've already mentioned, insurance works on the principle of mutual trust. It is your responsibility to disclose all the relevant facts to your insurer. Normally, a breach of the principle of utmost good faith arises when you, whether deliberately or accidentally, fail to divulge these important facts. There are two kinds of non-disclosure:

Innocent non-disclosure relates to failing to supply the information you didn't know about
Deliberate non-disclosure means providing incorrect material information intentionally

For example, suppose that you are unaware that your grandfather died from cancer and, therefore, you did not disclose this material fact in the family history questionnaire when applying for life insurance; this is innocent non-disclosure. However, if you knew about this material fact and purposely held it back from the insurer, you are guilty of fraudulent non-disclosure.

When you supply inaccurate information with the intention to deceive, your insurance contract becomes void.

If this deliberate breach was discovered at the time of the claim, your insurance company will not pay the claim.
If the insurer considers the breach as innocent but significant to the risk, it may choose to punish you by collecting additional premiums.
In case of an innocent breach that is irrelevant to the risk, the insurer may decide to ignore the breach as if it had never occurred.

The Doctrine of Adhesion. The doctrine of adhesion states that you must accept the entire insurance contract and all of its terms and conditions without bargaining. Because the insured has no opportunity to change the terms, any ambiguities in the contract will be interpreted in their favor.

Principle of Waiver and Estoppel . A waiver is a voluntary surrender of a known right. Estoppel prevents a person from asserting those rights because they have acted in such a way as to deny interest in preserving those rights. Presume that you fail to disclose some information in the insurance proposal form. Your insurer doesn't request that information and issues the insurance policy. This is a waiver. In the future, when a claim arises, your insurer cannot question the contract on the basis of non-disclosure. This is estoppel. For this reason, your insurer will have to pay the claim.

Endorsements are normally used when the terms of insurance contracts are to be altered. They could also be issued to add specific conditions to the policy.

Co-insurance refers to the sharing of insurance by two or more insurance companies in an agreed proportion. For the insurance of a large shopping mall, for example, the risk is very high. Therefore, the insurance company may choose to involve two or more insurers to share the risk. Coinsurance can also exist between you and your insurance company. This provision is quite popular in medical insurance, in which you and the insurance company decide to share the covered costs in the ratio of 20:80. Therefore, during the claim, your insurer will pay 80% of the covered loss while you shell out the remaining 20%.

Reinsurance occurs when your insurer "sells" some of your coverage to another insurance company. Suppose you are a famous rock star and you want your voice to be insured for $50 million. Your offer is accepted by the Insurance Company A. However, Insurance Company A is unable to retain the entire risk, so it passes part of this risk — let's say $40 million — to Insurance Company B. Should you lose your singing voice, you will receive $50 million from insurer A ($10 million + $40 million) with insurer B contributing the reinsured amount ($40 million) to insurer A. This practice is known as reinsurance. Generally, reinsurance is practiced to a much greater extent by general insurers than life insurers.

When applying for insurance, you will find a huge range of insurance products available in the market. If you have an insurance advisor or broker, they can shop around and make sure that you are getting adequate insurance coverage for your money. Even so, a little understanding of insurance contracts can go a long way in making sure that your advisor's recommendations are on track.

Furthermore, there may be times when your claim is canceled because you didn't pay attention to certain information requested by your insurance company. In this case, a lack of knowledge and carelessness can cost you a lot. Go through your insurer's policy features instead of signing them without delving into the fine print. If you understand what you're reading, you'll be able to ensure that the insurance product that you are signing up for will cover you when you need it most.

Terms of Service
Editorial Policy
Privacy Policy

MyNewMarkets.com
Claims Journal
Insurance Journal TV
Academy of Insurance
Carrier Management

Current Magazine

Read Online

Post-Loss Assignments of Claims Under Insurance Policies

In the settlement of lawsuits involving insured claims, it is not uncommon that one condition of the settlement is that the defendant assign his or her claims under all applicable insurance policies to the party that filed suit.

Indeed, it is frequently the case that the defendant, particularly when the defendant is an individual, has a limited ability to pay a judgment and insurance coverage offers the best opportunity for a recovery by the suing party. Usually, such settlements are made without any serious thought being given to whether the defendant’s claim against its insurer is assignable; the assumption being that it is assignable.

However, insurance policies generally have anti-assignment clauses which prohibit the assignment of the policy, or an interest in the policy, without the insurer’s consent. These clauses come into play in determining the validity or enforceability of the assignment of a claim under an insurance policy and should be considered when such an assignment is part of a settlement.

When considering the enforceability of anti-assignment clauses in insurance policies, the courts generally draw a distinction between an assignment made prior to the occurrence of a covered loss (a “pre-loss” assignment) and an assignment made after the occurrence of a covered loss (a “post-loss” assignment).

In analyzing pre-loss assignments, the courts recognize that requiring an insurer to provide coverage to an assignee of its policy prior to the occurrence of a covered loss would place the insurer in the position of covering a party with whom it had not contracted nor been allowed to properly underwrite to assess the risks posed by that potential insured, and, accordingly, determine the appropriate premium to charge for the risks being undertaken or choose to decline coverage.

Post-loss assignments, on the other hand, take place after the insurer’s obligations under its policy have become fixed by the occurrence of a covered loss, thus the risk factors applicable to the assignee are irrelevant with regard to the covered loss in question. For these reasons, the majority of the courts enforce anti-assignment clauses to prohibit or restrict pre-loss assignments, but refuse to enforce anti-assignment clauses to prohibit or restrict post-loss assignments.

Katrina Cases

The Louisiana Supreme Court, which had not previously addressed the enforceability of anti-assignment clauses for post-loss assignments, was recently confronted with this issue in the In re: Katrina Canal Breaches Litigation, litigation involving consolidated cases arising out of Hurricane Katrina. The issue arose as a result of a lawsuit brought by the State of Louisiana as the assignee of claims under numerous insurance policies as part of the “Road Home” Program. The Road Home Program was set up following Hurricanes Katrina and Rita to distribute federal funds to homeowners suffering damage from the hurricanes. In return for receiving a grant of up to $150,000, homeowners were required to execute a Limited Subrogation/Assignment agreement, which provided in pertinent part:

Pursuant to these Limited Subrogation/Assignments, the State of Louisiana brought suit against more than 200 insurance companies to recover funds dispensed under the Road Home Program. The suit was removed to Federal Court under the Class Action Fairness Act and the insurers filed motions to dismiss, arguing that the assignments to the State of Louisiana were invalid under the anti-assignment clauses in the homeowner policies at issue.

On appeal, the United States Fifth Circuit Court of Appeals certified the following question to the Louisiana Supreme Court: “Does an anti-assignment clause in a homeowner’s insurance policy, which by its plain terms purports to bar any assignment of the policy or an interest therein without the insurer’s consent, bar an insured’s post-loss assignment of the insured’s claims under the policy when such an assignment transfers contractual obligations, not just the right to money due?”

In answering this question, the Louisiana Supreme Court began by noting that, as a general matter, contractual rights are assignable unless the law, the contract terms or the nature of the contract preclude assignment. Specific to the certified question, Louisiana Civil Code article 2653 provides that a right “cannot be assigned when the contract from which it arises prohibits the assignment of that right.” The Louisiana Supreme Court observed that the language of article 2653 is broad and, on its face, applies to all assignments, including post-loss assignments of insurance claims. The Court, therefore, construed the issue confronting it as whether Louisiana public policy would enforce an anti-assignment clause to preclude post-loss assignments of claims under insurance policies.

In addressing the public policy question, the Louisiana Supreme Court recognized the distinction between pre-loss assignments and post-loss assignments discussed by courts from other states and noted that the prevailing view was that anti-assignment clauses were invalid and/or unenforceable when applied to post-loss assignments. Notwithstanding this weight of authority, the Louisiana Supreme Court stated:

“[W]hile the Louisiana legislature has clearly indicated an intent to allow parties freedom to assign contractual rights, by enacting La. C.C. art. 2653, it has also clearly indicated an intent to allow parties freedom to contractually prohibit assignment of rights. We recognize the vast amount of national jurisprudence distinguishing between pre-loss and post-loss assignments and rejecting restrictions on post-loss assignments, however we find no public policy in Louisiana favoring assignability of claims over freedom of contract.”

Thus, Court refused to invalidate the enforceability of the anti-assignment clauses to the post-loss assignments before it based on public policy, adding that public policy determinations are better suited to the legislature.

Nonetheless, after having recognized the general enforceability of anti-assignment clauses to post-loss assignments, the Court immediately placed limits on when those clauses would be applicable, stating that to be applicable, they “must clearly and unambiguously express that the non-assignment clause applies to post-loss assignments.” The Court refused “to formulate a test consisting of specific terms or words,” which would satisfy this condition and remanded the case to the federal courts to determine whether the individual anti-assignment clauses in the various policies were sufficiently clear and explicit to be enforced with respect to post-loss assignments at issue.

A Broad Application

It should be noted that the Court’s opinion appears to apply broadly to all post-loss assignments irrespective of what specific rights are being assigned, despite the fact that the certified question was narrower and asked only about the applicability of a post-loss assignment where the assignment “transfers contractual obligations, not just the right to money due.”

In a footnote at the beginning of its opinion, the Louisiana Supreme Court observed that in certifying the question to it, the Fifth Circuit “disclaimed any intent” that the Court “confine its reply to the precise form or scope of the legal questions certified.” The footnote indicates that the Court’s opinion was not intended to be limited to only those post-loss assignments involving the assignment of contractual obligations.

Louisiana has departed from the majority view in holding that as a matter of general law, anti-assignment clauses are not inherently void with regard to post-loss assignments. However, it may be that in practical application, the results of individual cases may well be consistent with the majority rule of not enforcing anti-assignment clauses with regard to post-loss assignments because Louisiana courts may be reluctant to find that the anti-assignment clauses are sufficiently “clear and explicit” unless they specifically state that they apply to post-loss assignments, notwithstanding the Louisiana Supreme Court’s unwillingness to “formulate a test consisting of specific terms or words.”

Topics Lawsuits Carriers Profit Loss Claims Louisiana Hurricane Homeowners

Was this article valuable?

Thank you! Please tell us what we can do to improve this article.

Thank you! % of people found this article valuable. Please tell us what you liked about it.

Here are more articles you may enjoy.

Written By Robert Redfearn, Jr.

From this issue.

Insurance Journal Magazine July 18, 2011

Excess, Surplus & Specialty Markets Directory Vol. II – The Industry’s Leading Coverage Placement Directory

Interested in carriers .

Get automatic alerts for this topic.

Categories: Legal Beat
Have a hot lead? Email us at [email protected]

Insurance Jobs

Senior Consultant – P&C Commercial Lines Operational Strategy & Technology - Chicago, IL
Health and Benefits – Senior Associate - New York, NY
Claim Rep Trainee, Worker’s Comp - Alpharetta, GA
Personal Lines Account Manager – Insurance – REMOTE - Remote
Client Manager - Hartford, CT

Umbrella Liability: The Triple Upsell Possibility for Personal Lines Clients
Where the AI Risks Are: Swiss Re's Top 10 Ranking by Industry
How to Succeed in the Entertainment Insurance Business: Get creative producing with a small cast of underwriters and limited capacity.
How Do Insurers Define Systemic Cyber Risk?
The Gaming Boom: Potential Risks and Insurance Implications

Client Mix-up Leads to Lawsuits, Bar Complaint Against Mississippi Comp Lawyer
Ford to Recall About 85,000 Vehicles Due to Risk of Engine Fire
GSK to Seek Dismissal of Florida Case Against Heartburn Drug Zantac
Chevron to Pay $550 Million Settlement to Richmond, California
Ice Cream Museum Sued by Man Who Says He Broke Ankle Jumping into Sprinkle Pool

August 22 HO-14: More Than a Mature HO-4

Practical Law

Assignment of insurance policies and claims

Practical law uk practice note w-031-6021 (approx. 19 pages), get full access to this document with a free trial.

Try free and see for yourself how Practical Law resources can improve productivity, efficiency and response times.

About Practical Law

This document is from Thomson Reuters Practical Law, the legal know-how that goes beyond primary law and traditional legal research to give lawyers a better starting point. We provide standard documents, checklists, legal updates, how-to guides, and more.

650+ full-time experienced lawyer editors globally create and maintain timely, reliable and accurate resources across all major practice areas.

83% of customers are highly satisfied with Practical Law and would recommend to a colleague.

81% of customers agree that Practical Law saves them time.

Construction and engineering
Construction insurance
Credit, terrorism and political risks
Cyber insurance
Directors and officers
Disputes, investigations and enforcement
Insurance in commercial transactions
Insurance intermediaries
Legal expenses
Making and dealing with claims
Reinsurance
Security, risk management and business continuity

Assignment under Insurance Policies

By J Mandakini, NUALS

Editor’s Note: This paper attempts to explore the concept of assignment under Indian law especially Contract Act, Insurance Act and Transfer of Property Act. It seeks to appreciate why the assignment is made use of for securities of a facility sanctioned by ICICI Bank. Also, it explains how ICICI Bank faces certain problems in executing the same.

INTRODUCTION

For any facility sanctioned by a lender, collateral is always deposited to secure the same. Such mere deposition will not suffice, the borrower has to explicitly permit the lender to recover from the borrower, such securities in case of his default.

This is done by the concept of assignment, dealt with adequately in Indian law. Assignment of obligations is always a tricky matter and needs to be dealt with carefully. The Bank should not fall short of any legally permitted lengths to ensure the same. This is why ambiguity in its security documents have to be rectified.

This paper attempts to explore the concept of assignment in contract law. It seeks to appreciate why the assignment is made use of for securities of a facility sanctioned by ICICI Bank. The next section will deal with how ICICI Bank faces certain problems in executing the same. The following sections will talk about possible risks involved, as well as defenses and solutions to the same.

WHAT IS ASSIGNMENT?

Assignment refers to the transfer of certain or all (depending on the agreement) rights to another party. The party which transfers its rights is called an assignor, and the party to whom such rights are transferred is called an assignee. Assignment only takes place after the original contract has been made. As a general rule, assignment of rights and benefits under a contract may be done freely, but the assignment of liabilities and obligations may not be done without the consent of the original contracting party.

The liability on a contract cannot be transferred so as to discharge the person or estate of the original contractor unless the creditor agrees to accept the liability of another person instead of the first. [i]

Illustration

P agrees to sell his car to Q for Rs. 100. P assigns the right to receive the Rs. 100 to S. This may be done without the consent of Q. This is because Q is receiving his car, and it does not particularly matter to him, to whom the Rs. 100 is being handed as long as he is being absolved of his liability under the contract. However, notice may still be required to be given. Without such notice, Q would pay P, in spite of the fact that such right has been assigned to S. S would be a sufferer in such case.

In this case, that condition is being fulfilled since P has assigned his right to S. However, P may not assign S to be the seller. P cannot just transfer his duties under the contract to another. This is because Q has no guarantee as to the condition of S’s car. P entered into the contract with Q on the basis of the merits of P’s car, or any other personal qualifications of P. Such assignment may be done with the consent of all three parties – P, Q, S, and by doing this, P is absolved of his liabilities under the contract.

1.1. Effect of Assignment

Immediately on the execution of an assignment of an insurance policy, the assignor forgoes all his rights, title and interest in the policy to the assignee. The premium or loan interest notices etc. in such cases will be sent to the assignee. [ii] However, the existence of obligations must not be assumed, when it comes to the assignment. It must be accompanied by evidence of the same. The party asserting such a personal obligation must prove the existence of an express assumption by clear and unequivocal proof. [iii]

Assignment of a contract to a third party destroys the privity of contract between the initial contracting parties. New privity is created between the assignee and the original contracting party. In the illustration mentioned above, the original contracting parties were P and Q. After the assignment, the new contracting parties are Q and S.

1.2. Revocation of Assignment

Assignment, once validly executed, can neither be revoked nor canceled at the option of the assignor. To do so, the insurance policy will have to be reassigned to the original assignor (the insured).

1.3. Exceptions to Assignment

There are some instances where the contract cannot be assigned to another.

Express provisions in the contract as to its non-assignability – Some contracts may include a specific clause prohibiting assignment. If that is so, then such a contract cannot be assigned. Assignability is the rule and the contrary is an exception. [iv]

Pensions, PFs, military benefits etc. Illustration

1.4. enforcing a contract of assignment.

From the day on which notice is given to the insurer, the assignee becomes the beneficiary of the policy even though the assignment is not registered immediately. It does not wait until the giving of notice of the transfer to the insurer. [vi] However, no claims may lie against the insurer until and unless notice of such assignment is delivered to the insurer.

If notice of assignment is not provided to the obligor, he is discharged if he pays to the assignor. Assignee would have to recover from the assignor. However, if the obligor pays the assignor in spite of the notice provided to him, he would still be liable to the assignee.

The following two illustrations make the point amply clear:

Illustrations

1. Seller A assigns its right to payment from buyer X to bank B. Neither A nor B gives notice to X. When payment is due, X pays A. This payment is fully valid and X is discharged. It will be up to B to recover it from A

2. Seller A assigns to bank B its right to payment from buyer X. B immediately gives notice of the assignment to X. When payment is due, X still pays A. X is not discharged and B is entitled to oblige X to pay a second time.

An assignee doesn’t stand in better shoes than those of his assignor. Thus, if there is any breach of contract by the obligor to the assignee, the latter can recover from the former only the same amount as restricted by counter claims, set offs or liens of the assignor to the obligor.

The acknowledgment of notice of assignment is conclusive proof of, and evidence enough to entertain a suit against an assignor and the insurer respectively who haven’t honoured the contract of assignment.

1.5. Assignment under various laws in India

There is no separate law in India which deals with the concept of assignment. Instead, several laws have codified it under different laws. Some of them have been discussed as follows:

1.5.1. Under the Indian Contract Act

There is no express provision for the assignment of contracts under the Indian Contract Act. Section 37 of the Act provides for the duty of parties of a contract to honour such contract (unless the need for the same has been done away with). This is how the Act attempts to introduce the concept of assignment into Indian commercial law. It lays down a general responsibility on the “representatives” of any parties to a contract that may have expired before the completion of the contract. (Illustrations to Section 37 in the Act).

An exception to this may be found from the contract, e.g. contracts of a personal nature. Representatives of a deceased party to a contract cannot claim privity to that contract while refusing to honour such contract. Under this Section, “representatives” would also include within its ambit, transferees and assignees. [vii]

Section 41 of the Indian Contract Act applies to cases where a contract is performed by a third party and not the original parties to the contract. It applies to cases of assignment. [viii] A promisee accepting performance of the promise from a third person cannot afterwards enforce it against the promisor. [ix] He cannot attain double satisfaction of its claim, i.e., from the promisor as well as the third party which performed the contract. An essential condition for the invocation of this Section is that there must be actual performance of the contract and not of a substituted promise.

1.5.2. Under the Insurance Act

The creation of assignment of life insurance policies is provided for, under Section 38 of the Insurance Act, 1938.

When the insurer receives the endorsement or notice, the fact of assignment shall be recorded with all details (date of receipt of notice – also used to prioritise simultaneous claims, the name of assignee etc). Upon request, and for a fee of an amount not exceeding Re. 1, the insurer shall grant a written acknowledgment of the receipt of such assignment, thereby conclusively proving the fact of his receipt of the notice or endorsement. Now, the insurer shall recognize only the assignee as the legally valid party entitled to the insurance policy.

1.5.3. Under the Transfer of Property Act

Indian law as to assignment of life policies before the Insurance Act, 1938 was governed by Sections 130, 131, 132 and 135 of the Transfer of Property Act 1882 under Chapter VIII of the Act – Of Transfers of Actionable Claims. Section 130 of the Transfer of Property Act states that nothing contained in that Section is to affect Section 38 of the Insurance Act.

I) Section 130 of the Transfer of Property Act

An actionable claim may be transferred only by fulfilling the following steps:

Signed by a transferor (or his authorized agent)

The transfer will be complete and effectual as soon as such an instrument is executed. No particular form or language has been prescribed for the transfer. It does not depend on giving notice to the debtor.

The proviso in the section protects a debtor (or other person), who, without knowledge of the transfer pays his creditor instead of the assignee. As long as such payment was without knowledge of the transfer, such payment will be a valid discharge against the transferee. When the transfer of any actionable claim is validly complete, all rights and remedies of transferor would vest now in the transferee. Existence of an instrument in writing is a sine qua non of a valid transfer of an actionable claim. [x]

II) Section 131 of the Transfer Of Property Act

This Section requires the notice of transfer of actionable claim, as sent to the debtor, to be signed by the transferor (or by his authorized agent), and if he refuses to sign it, a signature by the transferee (or by his authorized agent). Such notice must state both the name and address of the transferee. This Section is intended to protect the transferee, to receive from the debtor. The transfer does not bind a debtor unless the transferor (or transferee, if transferor refuses) sends him an express notice, in accordance with the provisions of this Section.

III) Section 132 of the Transfer Of Property Act

This Section addresses the issue as to who should undertake the obligations under the transfer, i.e., who will discharge the liabilities of the transferor when the transfer has been made complete – would it be the transferor himself or the transferee, to whom the rest of the surviving contract, so to speak, has been transferred.

This Section stipulates, that the transferee himself would fulfill such obligations. However, where an actionable claim is transferred with the stipulation in the contract that transferor himself should discharge the liability, then such a provision in the contract will supersede Ss 130 and 132 of this Act. Where the insured hypothecates his life insurance policies and stipulates that he himself would pay the premiums, the transferee is not bound to pay the premiums. [xi]

FACILITIES SECURED BY INSURANCE POLICIES – HOW ASSIGNMENT COMES INTO THE PICTURE

Many banks require the borrower to take out or deposit an insurance policy as security when they request a personal loan or a business loan from that institution. The policy is used as a way of securing the loan, ensuring that the bank will have the facility repaid in the event of either the borrower’s death or his deviations from the terms of the facility agreement.

Along with the deposit of the insurance policy, the policyholder will also have to assign the benefits of the policy to the financial institution from which he proposes to avail a facility. The mere deposit, without writing, or passing of any document of title to such a claim, does not create any equitable charge. [xii]

ETHICS OF ASSIGNING LIFE INSURANCE POLICY TO LENDERS

The purpose of taking out a life insurance policy on oneself, is that in the event of an untimely death, near and dear ones of the deceased are not left high and dry, and that they would have something to fall back on during such traumatic times. Depositing and assigning the rights under such policy document to another, would mean that there is a high chance that benefits of life insurance would vest in such other, in the event of unfortunate death and the family members are prioritized only second. These are not desirable circumstances where the family would be forced to cope with the death of their loved one coupled with the financial crisis.

Thus, there is a need to examine the ethics of:

The bank accepting such assignment

The customer should be cautious before assigning his rights under life insurance policies. By “cautious”, it is only meant that he and his dependents and/or legal heirs should be aware of the repercussions of the act of assigning his life insurance policy. It is conceded that no law prohibits the assignment of life insurance policies.

In fact, Section 38 of the Insurance Act, 1938 , provides for such assignments. Judicial cases have held life insurance policies as property more than a social welfare measure. [xiii] Further, the bank has no personal relationship with any customer and thus has no moral obligation to not accept such assignments of life insurance.

However, the writer is of the opinion that, in dealing with the assignment of life insurance policies, utmost care and caution must be taken by the insured when assigning his life insurance policy to anyone else.

CURRENT STAND OF ICICI REGARDING FACILITIES SECURED BY INSURANCE POLICY, WITH SPECIFIC REFERENCE TO ASSIGNMENT OF OBLIGATIONS

This Section seeks to address and highlight the manner in which ICICI Bank drafts its security documents with regard to the assignment of obligations. The texts placed in quotes in the subsequent paragraphs are verbatim extracts from the security document as mentioned.

Composite Document for Corporate and Realty Funding

“ 8 . CHARGING CLAUSE

The Mortgagor doth hereby:

iii) Assign and transfer unto the Mortgagee all the Bank Accounts and all rights, title, interest, benefits, claims and demands whatsoever of the Mortgagor in, to, under and in respect of the Bank Accounts and all monies including all cash flows and receivables and all proceeds arising from Projects and Other Projects_______________, insurance proceeds, which have been deposited / credited / lying in the Bank Accounts, all records, investments, assets, instruments and securities which represent all amounts in the Bank Accounts, both present and future (the “Account Assets”, which expression shall, as the context may permit or require, mean any or each of such Account Assets) to have and hold the same unto and to the use of the Mortgagee absolutely and subject to the powers and provisions herein contained and subject also to the proviso for redemption hereinafter mentioned;

(v) Assign and transfer unto the Mortgagee all right, title, interest, benefit, claims and demands whatsoever of the Mortgagors, in, to, under and/or in respect of the Project Documents (including insurance policies) including, without limitation, the right to compel performance thereunder, and to substitute, or to be substituted for, the Mortgagor thereunder, and to commence and conduct either in the name of the Mortgagor or in their own names or otherwise any proceedings against any persons in respect of any breach of, the Project Documents and, including without limitation, rights and benefits to all amounts owing to, or received by, the Mortgagor and all claims thereunder and all other claims of the Mortgagor under or in any proceedings against all or any such persons and together with the right to further assign any of the Project Documents, both present and future, to have and to hold all and singular the aforesaid assets, rights, properties, etc. unto and to the use of the Mortgagee absolutely and subject to the powers and provisions contained herein and subject also to the proviso for redemption hereinafter mentioned.”

ICICI Bank’s Standard Terms and Conditions Governing Consumer Durable Loans

“ insurance.

The Borrower further agrees that upon any monies becoming due under the policy, the same shall be paid by the Insurance Company to ICICI Bank without any reference / notice to the Borrower, but not exceeding the principal amount outstanding under the Insurance Policy. The Borrower specifically acknowledges that in all cases of claim, the Insurance Company will be solely liable for settlement of the claim, and he/she will not hold ICICI Bank responsible in any manner whether for compensation, recovery of compensation, processing of claims or for any reason whatsoever.

Reference has been made only to assignment of assets, rights, benefits, interests, properties etc. No specific reference has been made to the assignment of obligations of the assignor under such insurance contract.

THE ISSUE FACED BY ICICI BANK

Where ICICI Bank accepts insurance policy documents of customers as security for a loan, in the light of the fact that the documents are silent about the question of assignment of obligations, are they assigned to ICICI Bank? Where there is hypothecation of a life insurance policy, with a stipulation that the mortgagor (assignor) should pay the premiums, and that the mortgagee (assignee) is not bound to pay the same, Sections 130 and 132 do not apply to such cases. [xiv] With rectification of this issue, ICICI Bank can concretize its hold over the securities with no reservations about its legality.

RISKS INVOLVED

This section of the paper attempts to explore the many risks that ICICI Bank is exposed to, or other factors which worsen the situation, due to the omission of a clause detailing the assignment of obligations by ICICI Bank.

Practices of Other Companies

The practices of other companies could be a risk factor for ICICI Bank in the light of the fact that some of them expressly exclude assignment of obligations in their security documents.

There are some companies whose notice of assignment forms contain an exclusive clause dealing with the assignment of obligations. It states that while rights and benefits accruing out of the insurance policy are to be assigned to the bank, obligations which arise out of such policy documents will not be liable to be performed by the bank. Thus, they explicitly provide for the only assignment of rights and benefits and never the assignment of obligations.

Possible Obligation to Insurance Companies

By not clearing up this issue, ICICI Bank could be held to be obligated to the insurance company from whom the assignor took the policy, for example, with respect to insurance premiums which were required to be paid by the assignor. This is not a desirable scenario for ICICI Bank. In case of default by the assignor in the terms of the contract, the right of ICICI Bank over the security deposited (insurance policy in question) could be fraught in the legal dispute.

Possible litigation

Numerous suits may be instituted against ICICI Bank alleging a violation of the Indian Contract Act. Some examples include allegations of concealment of fact, fraud etc. These could be enough to render the existing contract of assignment voidable or even void.

Contra Proferentem

This doctrine applies in a situation when a provision in the contract can be interpreted in more than one way, thereby creating ambiguities. It attempts to provide a solution to interpreting vague terms by laying down, that a party which drafts and imposes an ambiguous term should not benefit from that ambiguity. Where there is any doubt or ambiguity in the words of an exclusion clause, the words are construed more forcibly against the party putting forth the document, and in favour of the other party. [xv]

The doctrine of contra proferentem attempts to protect the layman from the legally knowledgeable companies which draft standard forms of contracts, in which the former stands on a much weaker footing with regard to bargaining power with the latter. This doctrine has been used in interpreting insurance contracts in India. [xvi]

If litigation ensues as a result of this uncertainty, there are high chances that the Courts will tend to favour the assignor and not the drafter of the documents.

POSSIBLE DEFENSES AGAINST DISPUTES FOR THE SECURITY DOCUMENTS AS THEY ARE NOW

This section of the paper attempts to give defences which the Bank may raise in case of any disputes arising out of silence on the matter of assignability of obligations.

Interpretation of the Security Documents

UNIDROIT principles expressly provide a method for interpretation of contracts. [xvii] The method consists of utilizing the following factors:

This defence relates to the concept of estoppel embodied in Section 115 of the Indian Evidence Act, 1872. According to the Section, when one person has, by his declaration, act or omission, intentionally caused or permitted another person to believe a thing to be true and to act upon such belief, neither he nor his representative shall be allowed, in any suit or proceeding between himself and such person or his representatives, to deny the truth of that thing.

If a man either by words or by conduct has intimated that he consents to an act which has been done and that he will not offer any opposition to it, and he thereby induces others to do that which they otherwise might have abstained from, he cannot question legality of the act he had sanctioned to the prejudice of those who have so given faith to his words or to the fair inference to be drawn from his conduct. [xviii] Subsequent conduct may be relevant to show that the contract exists, or to show variation in the terms of the contract, or waiver, or estoppel. [xix]

Where the meaning of the instrument is ambiguous, a statement subsequently interpreting such instrument is admissible. [xx] In the present case, where the borrower has never raised any claims with regard to non assignability of obligations on him, and has consented to the present conditions and relations with ICICI Bank, he cannot he cannot be allowed to raise any claims with respect to the same.

Internationally, the doctrine of post contractual conduct is invoked for such disputes. It refers to the acts of parties to a contract after the commencement of the contract. It stipulates that where a party has behaved in a particular manner, so as to induce the other party to discharge its obligations, even if there has been a variation from the terms of the contract, the first party cannot cite such variation as a reason for its breach of the contract.

Where the parties to a contract are both under a common mistake as to the meaning or effect of it, and therefore embark on a course of dealing on the footing of that mistake, thereby replacing the original terms of the contract by a conventional basis on which they both conduct their affairs, then the original contract is replaced by the conventional basis. The parties are bound by the conventional basis. Either party can sue or be sued upon it just as if it had been expressly agreed between them. [xxi]

The importance of consensus ad idem has been concretized by various case laws in India. Further, if the stipulations and terms are uncertain and the parties are not ad idem there can be no specific performance, for there was no contract at all. [xxii]

In the present case, the minds of the assignor and assignee can be said to have not met while entering into the assignment. The assignee never had any intention of undertaking any obligations of the assignor. In Hartog v Colin & Shields, [xxiii] the defendants made an offer to the plaintiffs to sell hare skins, offering to a pay a price per pound instead of per piece.

AVOIDING THESE RISKS

To concretize ICICI Bank’s stand on the assignment of obligations in the matter of loans secured by insurance policies, the relevant security documents could be amended to include such a clause.

For instances where loans are secured by life insurance policies, a standard set by the American Banker’s Association (ABA) has been followed by many Indian commercial institutions as well. [xxvi] The ABA is a trade association in the USA representing banks ranging from the smallest community bank to the largest bank holding companies. ABA’s principal activities include lobbying, professional development for member institutions, maintenance of best practices and industry standards, consumer education, and distribution of products and services. [xxvii]

There are several ICICI security documents which have included clauses denying any assignment of obligations to it. An extract of the deed of hypothecation for vehicle loan has been reproduced below:

“ 3. In further pursuance of the Loan Terms and for the consideration aforesaid, the Hypothecator hereby further agrees, confirms, declares and undertakes with the Bank as follows:

(i)(a) The Hypothecator shall at its expenses keep the Assets in good and marketable condition and, if stipulated by the Bank under the Loan Terms, insure such of the Assets which are of insurable nature, in the joint names of the Hypothecator and the Bank against any loss or damage by theft, fire, lightning, earthquake, explosion, riot, strike, civil commotion, storm, tempest, flood, erection risk, war risk and such other risks as may be determined by the Bank and including wherever applicable, all marine, transit and other hazards incidental to the acquisition, transportation and delivery of the relevant Assets to the place of use or installation. The Hypothecator shall deliver to the Bank the relevant policies of insurance and maintain such insurance throughout the continuance of the security of these presents and deliver to the Bank the renewal receipts / endorsements / renewed policies therefore and till such insurance policies / renewal policies / endorsements are delivered to the Bank, the same shall be held by the Hypothecator in trust for the Bank. The Hypothecator shall duly and punctually pay all premia and shall not do or suffer to be done or omit to do or be done any act, which may invalidate or avoid such insurance. In default, the Bank may (but shall not be bound to) keep in good condition and render marketable the relevant Assets and take out / renew such insurance. Any premium paid by the Bank and any costs, charges and expenses incurred by the Bank shall forthwith on receipt of a notice of demand from the Bank be reimbursed by the Hypothecator and/or Borrower to the Bank together with interest thereon at the rate for further interest as specified under the Loan Terms, from the date of payment till reimbursement thereof and until such reimbursement, the same shall be a charge on the Assets…”

The inclusion of such a clause in all security documents of the Bank can avoid the problem of assignability of obligations in insurance policies used as security for any facility sanctioned by it.

An assignment of securities is of utmost importance to any lender to secure the facility, without which the lender will not be entitled to any interest in the securities so deposited.

In this paper, one has seen the need for assignment of securities of a facility. Risks involved in not having a separate clause dealing with non assignability of obligations have been discussed. Certain defences which ICICI Bank may raise in case of the dispute have also been enumerated along with solutions to the same.

Formatted by March 2nd, 2019.

BIBLIOGRAPHY

[i] J.H. Tod v. Lakhmidas , 16 Bom 441, 449

[ii] http://www.licindia.in/policy_conditions.htm#12, last visited 30 th June, 2014

[iii] Headwaters Construction Co. Ltd. v National City Mortgage Co. Ltd., 720 F. Supp. 2d 1182 (D. Idaho 2010)

[iv] Indian Contract Act and Specific Relief Act, Mulla, Vol. I, 13 th Edn., Reprint 2010, p 968

[v] Khardah Co. Ltd. v. Raymond & Co ., AIR 1962 SC 1810: (1963) 3 SCR 183

[vi] Principles of Insurance Law, M.N. Srinivasan, 8 th Edn., 2006, p. 857

[vii] Ram Baran v Ram Mohit , AIR 1967 SC 744: (1967) 1 SCR 293

[viii] Sri Sarada Mills Ltd. v Union of India, AIR 1973 SC 281

[ix] Lala Kapurchand Godha v Mir Nawah Himayatali Khan, [1963] 2 SCR 168

[x] Velayudhan v Pillaiyar, 9 Mad LT 102 (Mad)

[xi] Hindustan Ideal Insurance Co. Ltd. v Satteya, AIR 1961 AP 183

[xii] Mulraj Khatau v Vishwanath, 40 IA 24 – Respondent based his claim on a mere deposit of the policy and not under a written transfer and claimed that a charge had thus been created on the policy.

[xiii] Insure Policy Plus Services (India) Pvt. Ltd. v The Life Insurance Corporation of India, 2007(109)BOMLR559

[xiv] Transfer of Property Act, Sanjiva Row, 7 th Edn., 2011, Vol II, Universal Law Publishing Company, New Delhi

[xv] Ghaziabad Development Authority v Union of India, AIR 2000 SC 2003

[xvi] United India Insurance Co. Ltd. v M/s. Pushpalaya Printers, [2004] 3 SCR 631, General Assurance Society Ltd. v Chandumull Jain & Anr., [1966 (3) SCR 500]

[xvii] UNIDROIT Principles, Art 4.3

[xviii] B.L.Sreedhar & Ors. v K.M. Munireddy & Ors., 2002 (9) SCALE 183

[xix] James Miller & Partners Ltd. v Whitworth Street Estates (Manchester) Ltd., [1970] 1 All ER 796 (HL)

[xx] Godhra Electricity Co. Ltd. v State of Gujarat, AIR 1975 SC 32

[xxi] Amalgamated Investment & Property Co. Ltd. v Texas Commerce International Bank Ltd., [1981] 1 All ER 923

[xxii] Smt. Mayawanti v Smt. Kaushalya Devi, 1990 SCR (2) 350

[xxiii] [1939] 3 All ER 566

[xxiv] Terrell v Alexandria Auto Co., 12 La.App. 625

[xxv] http://www.uncitral.org/pdf/english/CISG25/Pamboukis.pdf, last visited on 30 th June, 2014

[xxvi] https://www.phoenixwm.phl.com/shared/eforms/getdoc.jsp?DocId=525.pdf, last visited on 30 th June, 2014

[xxvii] http://www.aba.com/About/Pages/default.aspx, last visited on 30 th June, 2014

Accounting News: Recent Developments Affecting the Accounting for Split-Dollar Life Insurance Arrangements

Bank Examinations
Past Issues
Composite Ratings Definition List
Statement of FDIC Board of Directors on the Development and Communication of Supervisory Recommendations
Statement of the FDIC Board of Directors on the Development and Review of Supervisory Guidance
Formal And Informal Enforcement Actions Manual
Consumer Compliance Supervisory Highlights
Trust Examination Manual
Applications Procedures Manual
Deposit Insurance
Applications for Deposit Insurance
Examination Manuals
Laws, Regulations, and Supervisory Guidance
Pending New Applications
Resources for Organizers and Proposed Directors and Officers
Other Resources
Activities (Part 362)
Brokered Deposit Waiver
Change In Control
Change in Director or Senior Executive Officer
Consent To Exercise Trust Powers
Establishing, Relocating, or Closing an Office
Golden Parachute and Indemnification Payments
Management Official Interlocks
Mutual-To-Stock Conversion
Retire Capital and Debt
Savings Association Election or Conversion
Delegations of Authority
Privacy Rule Handbook

PDF version of this article

This regular feature focuses on topics of critical importance to bank accounting. Comments on this column and suggestions for future columns can be e-mailed to [email protected] .

In recent years, an increasing number of banks have acquired life insurance assets to finance the cost of employee benefits, protect against the loss of key persons, or provide retirement and death benefits as part of certain employees’ compensation. Data reported in the Consolidated Reports of Condition and Income (Call Report) reveal that more than 47 percent of all banks held life insurance assets as of December 31, 2006. For these banks, their total life insurance assets exceeded $96 billion, which represented more than 11 percent of their aggregate equity capital.

Banks often use split-dollar life insurance arrangements to provide retirement and death benefits to employees. These arrangements are commonly structured as either “endorsement” split-dollar arrangements or “collateral assignment” split-dollar arrangements. Although both types of split-dollar life insurance arrangements have existed for many years, within the past year the Financial Accounting Standards Board (FASB) has ratified separate consensuses reached by its Emerging Issues Task Force (EITF) on the accounting for these two types of arrangements. The consensuses in EITF Issues No. 06-4 and No. 06-10 cover endorsement and collateral assignment split-dollar life insurance arrangements, respectively. 1 The EITF addressed the accounting issues associated with these arrangements because of diversity in practice with respect to the deferred compensation and postretirement benefit aspects of typical split-dollar arrangements. As a consequence, institutions that have entered into split-dollar arrangements with employees now need to review how they account for them. For many banks, the application of the EITF consensuses will result in a change in accounting principles that will require them to recognize a liability at the beginning of 2008 for any benefits provided to these employees that extend to postretirement periods.

Split-Dollar Life Insurance Arrangements

The December 2004 Interagency Statement on the Purchase and Risk Management of Life Insurance, 2 which provides guidance regarding supervisory expectations for the acquisition and holding of life insurance by banks and savings associations, also addresses split-dollar life insurance arrangements. As noted in the Interagency Statement, under split-dollar arrangements, the employer and the employee share the rights to the insurance policy’s cash surrender value (CSV) and death benefits. In general, the difference between endorsement and collateral assignment split-dollar life insurance arrangements is in the ownership and control of the life insurance policy. In an endorsement arrangement, the employer (bank) owns the insurance policy and controls all rights of ownership; in a collateral assignment arrangement, the employee owns the policy and controls all rights of ownership.

According to the EITF’s description of a typical endorsement split-dollar arrangement,

An employer purchases a life insurance policy to insure the life of an employee and pays a single premium at inception of the policy. Based on the insurance carrier’s experience (for example, mortality) it can either charge or credit the policyholder for the negative or positive experience, respectively. The additional premium or credit is typically effectuated through an adjustment to the cash surrender value of the policy. The employer enters into a separate agreement that splits the policy benefits between the employer and the employee….To effect the split-dollar arrangement, the employer endorses a portion of the death benefits to the employee (the employee designates a beneficiary for this portion of the death benefits). Upon the death of the employee, the employee’s beneficiary typically receives the designated portion of the death benefits directly from the insurance company and the employer receives the remainder of the death benefits. 3

In contrast, as described in the EITF’s materials, a typical collateral assignment split-dollar arrangement has the following characteristics:

An employee purchases a life insurance policy through an arrangement with the employer to insure the employee’s life…[or] the employer purchases a life insurance policy and transfers ownership of the insurance policy to the employee…The employer usually pays all or a substantial part of the premium. The employee irrevocably assigns a portion or all of the death benefits to the employer as collateral for the employer’s interest in the insurance policy [i.e., the employer’s loan to the employee] (the collateral assignment arrangement). Amounts due to the employer vary but, typically, the employer is entitled to receive a portion of the death benefits equal to the premiums paid by the employer or premiums paid plus an additional fixed or variable return on those premiums . 4

The appendix to the 2004 Interagency Statement contains similar descriptions of these two split-dollar arrangements. The Interagency Statement further provides that an institution’s economic interest in the insurance policy underlying the split-dollar arrangement should at least be equal to the premium or premiums paid plus a rate of return comparable to returns on investments of similar maturity and credit risk.

Liability Recognition for Split-Dollar Arrangements under the EITF Consensuses

The EITF reached similar conclusions as to whether an employer should recognize a liability and related compensation costs for postretirement benefits associated with both endorsement and collateral assignment split-dollar life insurance arrangements. For both types of split-dollar arrangements, determining whether the employer should recognize a liability for postretirement benefits should be based on the substantive agreement with the employee. Thus, “if the employer has agreed to maintain a life insurance policy during the employee’s retirement or provide the employee with a death benefit,” 5 the employer should recognize a liability for its postretirement benefit obligation to the employee. The liability must be recognized in accordance with FASB Statement No. 106, Employers’ Accounting for Postretirement Benefits Other Than Pensions (FAS 106) , “if, in substance, a postretirement benefit plan exists,” or Accounting Principles Board Opinion No. 12, Omnibus Opinion —1967 (APB 12), “if the arrangement is, in substance, an individual deferred compensation contract.” To determine the substance of an arrangement, all available evidence should be considered, including the “explicit written terms of the arrangement, communications made by the employer to the employee, the employer’s past practices in administering the same or similar arrangements, and whether the employer is the primary obligor for the postretirement benefit.”

Furthermore, when evaluating a collateral assignment split-dollar arrangement, an employer would be deemed to have agreed to maintain a life insurance policy “if the employer has a stated or implied commitment to provide loans to an employee to fund premium payments on the underlying insurance policy during the postretirement period.” In the absence of evidence to the contrary, there is a presumption that an employer will “provide loans to an employee to fund premium payments on the underlying insurance policy in the postretirement period if the employer has provided loans in the past or if the employer is currently promising to provide loans in the future.” For example, if, under the terms of the collateral assignment arrangement, the employer has either a stated or implied obligation “to provide loans to an employee to cover the experience gains and losses of the insurance company, that may indicate that the employer has a postretirement benefit obligation” to be recognized.

Therefore, after considering all available evidence surrounding a split-dollar arrangement, if the substance of the arrangement is the employer’s agreement to maintain a life insurance policy on the employee during his or her retirement, “the estimated cost of maintaining the insurance policy during the postretirement period should be accrued.” Similarly, if the substance of the arrangement is the employer’s agreement “to provide the employee with a death benefit, the employer should accrue, over the service period, a liability for the actuarial present value of the future death benefit as of the employee’s expected retirement date.” These accruals should be made in accordance with FAS 106 or APB 12, as appropriate.

APB 12 requires that

an employer’s obligation under a deferred compensation agreement be accrued according to the terms of the individual contract over the required service period to the date the employee is fully eligible to receive the benefits, i.e., the “full eligibility date.”…[It] does not prescribe a specific accrual method for the benefits under deferred compensation contracts, stating only that the “cost of those benefits shall be accrued over that period of the employee’s service in a systematic and rational manner.” The amounts to be accrued each period should result in a deferred compensation liability at the full eligibility date that equals the then present value of the estimated benefit payments to be made under the individual contract. 6

FAS 106 also directs an employer to “recognize and measure the obligation for postretirement benefits based on the actuarial present value of all future benefits attributed to an employee’s service rendered to that date [i.e., to the full eligibility date]. FAS 106 requires an employer to attribute the costs of those postretirement benefits over the required service period.” 7

The EITF noted that the facts and circumstances relating to a collateral assignment split-dollar arrangement may change in periods after the inception of the arrangement, for example, as a result of an amendment to the arrangement or a change from the employer’s past practice in administering these arrangements. Therefore, an employer should periodically evaluate the substance of its collateral assignment arrangements to determine whether any change in an arrangement has altered its substance and, hence, whether a liability for a postretirement benefit obligation should be recognized or a previously recognized liability should be adjusted.

Asset Recognition for Split-Dollar Arrangements under the EITF Consensuses

An employer must also ensure that it properly recognizes the asset resulting from its split-dollar arrangements with employees. Because the owner of the insurance policy differs under the two types of split-dollar arrangements, the resulting asset held by the employer must reflect the nature of the employer’s interest in the life insurance.

In an endorsement split-dollar arrangement, the employer owns the insurance policy. Thus, the accounting guidance in the FASB’s Technical Bulletin 85-4, Accounting for Purchases of Life Insurance (TB 85-4), as interpreted by the EITF in Issue No. 06-5, Accounting for Purchases of Life Insurance—Determining the Amount That Could Be Realized in Accordance with FASB Technical Bulletin 85-4 (EITF 06-5), should be applied to the insurance policy. Under TB 85-4, “the amount that could be realized under the insurance contract as of the date of the statement of financial position should be reported as an asset.” Normally, this amount is the CSV of a policy, less any applicable surrender charges not reflected by the insurance carrier in the reported CSV. However, EITF 06-5 explains that the employer, as policyholder, should also consider any additional amounts included in the contractual terms of the policy in determining the amount that could be realized under the insurance contract.

In this regard, EITF 06-5 notes that an insurance policy’s contractual terms may include a “claims stabilization reserve” account and a provision that allows the policyholder to recover the upfront “deferred acquisition costs” (DAC) tax over a specified period of time. 8 When either of these amounts is present in an insurance policy used in an endorsement split-dollar arrangement and the amount is realizable based on the policy’s contractual terms, this realizable amount should be included as part of the amount reported as a life insurance asset on the balance sheet. Thus, as long as the split-dollar arrangement entitles the employer to the entire CSV reported by the insurance carrier (less any applicable surrender charges not reflected therein) plus any additional realizable amounts, the employer should report this total amount as an asset.

In contrast, because the employee owns the life insurance policy in a collateral assignment split-dollar arrangement, an employer’s process for recognizing and measuring the asset in such an arrangement is not as straightforward. According to EITF 06-10, this process should be “based on the nature and substance” of the arrangement, which requires the employer to “evaluate all available information.” To determine the nature and substance, “the employer should assess what future cash flows the employer is entitled to, if any, as well as the employee’s obligation and ability to repay the employer.” As an example, the EITF cited a collateral assignment split-dollar arrangement in which the employer is entitled to recover only the CSV of the employee’s insurance policy even if the employer’s loan to the employee is a larger amount. Under such an arrangement, the employer’s asset as of any balance sheet date would be limited to the CSV. As a second example, if the employee is required “to repay the [loan from the] employer irrespective of the collateral assigned and the employer (a) has determined that the employee loan is collectible and (b) intends to seek recovery beyond the cash surrender value of the life insurance policy, the employer should recognize the value of the loan (including accrued interest, if applicable) considering the guidance in” APB 21.

Under APB 21, if the employer’s loan to the employee requires repayment only of the premiums paid by the employer on the insurance policy, i.e., without the payment of interest or a rate of return on those premiums, the employer should “record a receivable from the employee at a discounted amount for the premiums paid.” 9 Thus, the employer would need to determine the expected repayment date of the loan to the employee based on the terms of the split-dollar life insurance arrangement as well as the appropriate interest rate at which to discount the loan. APB 21 states that “the rate used for valuation purposes will normally be at least equal to the rate at which the debtor [i.e., the employee] can obtain financing of a similar nature from other sources at the date of the transaction. The objective is to approximate the rate which would have resulted if an independent borrower and an independent lender had negotiated a similar transaction under comparable terms and conditions.” The employer would apply the interest method to amortize the resulting discount on the loan to the employee over the life of the loan at the rate used for valuation purposes.

Effective Date for the EITF Consensuses

The consensuses reached on EITF 06-4 and EITF 06-10 are expected to represent a significant change in accounting practice for many banks with split-dollar life insurance arrangements. As a result, the EITF delayed the effective date of these consensuses to allow adequate time for implementation. Thus, both consensuses take effect for fiscal years beginning after December 15, 2007, i.e., as of January 1, 2008, for banks with calendar year fiscal years. Calendar year banks with split-dollar life insurance arrangements must first report in accordance with these consensuses in their March 31, 2008, Call Reports and in any first quarter 2008 financial statements they issue. Earlier application of the consensuses is also permitted.

When the EITF initially reached a tentative consensus in EITF 06-4 in June 2006, it proposed that the consensus should take effect for fiscal years beginning after December 15, 2006. For calendar year banks, this meant that they would have had to apply this consensus at the beginning of 2007. In considering comments received on its tentative consensus on EITF 06-4 that requested a delay in the effective date, the EITF recognized that, absent any changes to banks’ existing endorsement split-dollar arrangements, many banks with such arrangements would see a reduction in their Tier 1 capital upon their initial application of the consensus. This regulatory capital reduction would be the consequence of having to recognize a liability for postretirement benefits that these banks had not previously accrued on their balance sheets. Accordingly, the EITF reconsidered the effective date and moved it one year into the future. When the EITF subsequently reached its consensus on EITF 06-10 for collateral assignment split-dollar arrangements, it decided in the interest of consistency to set the same delayed effective date as for EITF 06-4.

For a bank whose split-dollar life insurance accounting practices differ from the consensuses reached by the EITF, the effects of applying the relevant consensus for the type of split-dollar arrangement into which the bank has entered with its employees should be recognized “through either (a) a change in accounting principle through a cumulative-effect adjustment to retained earnings…as of the beginning of the year of adoption or (b) a change in accounting principle through retrospective application to all prior periods.” Because each Report of Income in a bank’s Call Report covers a single discrete calendar year-to-date period rather than presenting comparative statements, a bank is not permitted to implement a change in accounting principle through retrospective application to prior years’ Call Reports. Therefore, unless a calendar year bank elects earlier application of the relevant split-dollar EITF consensus, it will report the cumulative effect of applying the consensus as of January 1, 2008, as a direct adjustment to its equity capital in item 2 of Call Report Schedule RI-A—Changes in Equity Capital, and disclose this amount in item 4 of Schedule RI-E—Explanations.

Examination Considerations

Under the 2004 Interagency Statement on the Purchase and Risk Management of Life Insurance, institutions should have a comprehensive risk management process for purchasing and holding life insurance. A prudent risk management process includes effective senior management and board oversight as well as an effective ongoing system of risk assessment, management, monitoring, and internal control. As a key aspect of the ongoing monitoring process, management should provide a risk management review of the institution’s insurance assets to the board of directors at least annually. The Interagency Statement provides examples of situations when more frequent reviews are appropriate. Although changes in accounting requirements are not specifically included among the examples, the EITF’s two recent consensuses are of sufficient significance as to warrant a review outside of the annual cycle.

Among other elements, an institution’s risk management review should include a comprehensive assessment of the risks of its life insurance holdings. In particular, the Interagency Statement notes that transaction/operational risk arises due to the tax and accounting treatments of life insurance products and instructs an institution to thoroughly review and understand how the accounting rules will apply to the insurance products it is considering purchasing. Therefore, when accounting rules change, a thorough review and understanding of the effect of the changes should be an integral part of the institution’s risk management review. The Interagency Statement also notes that “[s]plit-dollar life insurance has complex tax and legal consequences” and that material modifications of these arrangements may unfavorably alter their tax treatment. As a consequence, the Interagency Statement cautions institutions to “consult qualified tax, insurance, and legal advisors” before entering into or modifying split-dollar life insurance arrangements.

Because the application of the consensuses in EITF 06-4 and EITF 06-10 may require banks with split-dollar life insurance arrangements to initially recognize a liability for postretirement benefits, which will reduce both equity capital and regulatory capital, and to subsequently recognize compensation costs over the remainder of the employees’ required service periods until their full eligibility dates, banks should use the transition period during 2007 for risk management reviews that assess the substance of their split-dollar arrangements. In these reviews, banks should also consider the nature of their interest in the life insurance policies associated with their split-dollar arrangements to ensure that they are properly reporting their insurance assets. The results of these reviews, including consultations with their external accountants and other qualified advisors, should enable management to understand and evaluate the accounting consequences of the EITF consensuses; ascertain the impact of the consensuses on equity capital on their effective date and on earnings thereafter; and determine the actions needed, if any, to remedy the effects of applying the consensuses beginning in 2008. These actions may include considering whether to eliminate or reduce the postretirement benefits provided under these arrangements after addressing any relevant tax consequences from such modifications.

Thus, when examining banks that have entered into split-dollar life insurance arrangements with employees, examiners should ensure that management is aware of the recent accounting guidance issued by the EITF and is assessing, or has completed an assessment of, the impact that the consensuses will have on their organization as part of a timely risk management review of these insurance arrangements. In cases where management has not yet taken appropriate action, examiners should seek management’s commitment to promptly address the EITF guidance relevant to its split-dollar arrangements.

Robert F. Storch FDIC’s Chief Accountant, Washington, DC

1 See EITF Issue No. 06-4, Accounting for Deferred Compensation and Postretirement Benefit Aspects of Endorsement Split-Dollar Life Insurance Arrangements (EITF 06-4), and EITF Issue No. 06-10, Accounting for Collateral Assignment Split-Dollar Life Insurance Arrangements (EITF 06-10). The FASB ratified the EITF’s consensuses on these issues on September 20, 2006, and March 28, 2007, respectively.

2 FIL 127-2004, Bank-Owned Life Insurance: Interagency Statement on the Purchase and Risk Management of Life Insurance, December 7, 2004, www.fdic.gov/news/news/financial/2004/fil12704.html .

3 EITF Abstracts , Issue No. 06-4, paragraph 2.

4 EITF 06-10, Issue Summary No. 1, paragraph 2.

5 Unless otherwise noted, this quotation and subsequent quotations are taken from the EITF Abstracts for Issue No. 06-4 or Issue No. 06–10.

6 Instructions for the Preparation of Consolidated Reports of Condition and Income , Glossary, “Deferred Compensation Agreements,” page A-15 (3-04). Further guidance on accounting for deferred compensation agreements, including examples, is provided in the Interagency Advisory on Accounting for Deferred Compensation Agreements and Bank-owned Life Insurance. See FIL-16-2004, Accounting and Reporting, February 11, 2004, www.fdic.gov/news/news/financial/2004/fil1604.html .

7 EITF 06-4, Issue Summary No. 1, Supplement No. 2, Revised, page 20.

8 Under EITF 06-5, when measuring the amount that could be realized under an insurance contract, “amounts that are recoverable by the policyholder in periods beyond one year from the surrender of the policy [such as the DAC tax] should be discounted in accordance with” Accounting Principles Board Opinion No. 21, Interest on Receivables and Payables (APB 21).

9 EITF 06-10, Issue Summary No. 1, paragraph A2.

Last Updated: June 28, 2023

Skip to Navigation
Skip to Main Content
Skip to Related Content
Today's news
Reviews and deals
Climate change
2024 election
Fall allergies
Health news
Mental health
Sexual health
Family health
So mini ways
Unapologetically
Buying guides

Entertainment

How to Watch
My watchlist
Stock market
Biden economy
Personal finance
Stocks: most active
Stocks: gainers
Stocks: losers
Trending tickers
World indices
US Treasury bonds
Top mutual funds
Highest open interest
Highest implied volatility
Currency converter
Basic materials
Communication services
Consumer cyclical
Consumer defensive
Financial services
Industrials
Real estate
Mutual funds
Credit cards
Balance transfer cards
Cash back cards
Rewards cards
Travel cards
Online checking
High-yield savings
Money market
Home equity loan
Personal loans
Student loans
Options pit
Fantasy football
Pro Pick 'Em
College Pick 'Em
Fantasy baseball
Fantasy hockey
Fantasy basketball
Download the app
Daily fantasy
Scores and schedules
GameChannel
World Baseball Classic
Premier League
CONCACAF League
Champions League
Motorsports
Horse racing
Newsletters

New on Yahoo

Privacy Dashboard

Fantasy Football
Yahoo Sports AM
College Sports
Horse Racing
Fantasy Sports
What & How To Watch
Scores/Schedules
Power Rankings
Fantasy Baseball
Fantasy Football Draft Kit
Clark scores 29 in Fever's win
Verdugo allergic to batting gloves
Judge blocks ESPN-Fox-WBD venture
USMNT legend newest NWSL coach

Detroit Tigers veteran Gio Urshela designated for assignment as infield prospects arrive

The Detroit Tigers have made some big changes.

Not only did the Tigers promote infield prospects Jace Jung and Trey Sweeney from Triple-A Toledo for their MLB debuts, but the Tigers also designated veteran third baseman Gio Urshela for assignment, thus removing him from the 40-man roster.

The flurry of roster moves became official before Friday's game against the New York Yankees at Comerica Park.

ON THE FARM: Tigers prospect acquired in Jack Flaherty trade already showing how he 'nukes balls'

Urshela, a nine-year MLB veteran, has been placed on waivers.

The Tigers informed Urshela of the decision to place him on waivers after Thursday's 2-1 win over the Seattle Mariners, according to a source with knowledge of the situation.

"That was tough," manager A.J. Hinch said before Friday's game. "I was told when we signed him, by a lot of people in the industry, that he would turn into one of my favorite players, and they were right. He's such a fun pro to be around, but these jobs, they often create situations that you have to make tough decisions."

Urshela, 32, is still owed about $353,000 of his $1.5 million 2024 salary, which he agreed to when he signed a one-year contract with the Tigers at the beginning of spring training. If he is claimed off waivers, the new team will take on his contract.

The Tigers will know by Sunday if Urshela clears waivers or gets claimed. He will not play for the Tigers while awaiting his fate because he has been removed from the 40-man roster, which helps create room for the incoming infield prospects.

SPRING TRAINING: Can newcomer Gio Urshela become everyday third baseman for Tigers in 2024 season?

His remaining salary is affordable, so Urshela is a candidate to be claimed, but he hit just .243 with five home runs, 19 walks and 49 strikeouts in 92 games with the Tigers, posting a .619 OPS. He has been worth minus-5 defensive runs saved at third base.

Urshela didn't generate trade interest from other teams ahead of the July 30 trade deadline , but even a couple of weeks later, he could generate more interest on the waiver wire because other teams don't have to surrender a prospect for him.

If he clears waivers, he would be eligible to sign with a new team for the prorated minimum salary (roughly $174,000) while the Tigers remain responsible for the rest of his contract.

"We have to take a step in a new direction to give opportunities to some young players who have earned it," Hinch said, "and it's going to come at the cost of his spot in our organization, but I will speak highly of Gio and what he's about as a person and as a player, and hopefully, somebody grabs him while they can now."

His most memorable moment as a Tiger occurred July 13, when he hit a walk-off two-run home run to left-center field for an 11-9 win over the Los Angeles Dodgers at Comerica Park, capping an epic comeback . He also had two homers in a three-game stretch in early June against the Boston Red Sox at Fenway Park.

GI-OMG 😱 pic.twitter.com/98a2yYfNCi — Detroit Tigers (@tigers) July 13, 2024

Before the Tigers, Urshela played for five other teams in his 756-game MLB career: the Cleveland Guardians (2015, 2017), Toronto Blue Jays (2018), New York Yankees (2019-21), Minnesota Twins (2022) and Los Angeles Angels (2023). He suffered a season-ending pelvic injury, which didn't require surgery, in mid-June 2023 with the Angels.

He spent three weeks on the injured list in 2024 with a right hamstring strain .

Urshela is a career .273 hitter in the majors.

Contact Evan Petzold at [email protected] or follow him @EvanPetzold .

Listen to our weekly Tigers show "Days of Roar" every Monday afternoon on demand at freep.com, Apple , Spotify or wherever you listen to podcasts. And catch all of our podcasts and daily voice briefing at freep.com/podcasts .

This article originally appeared on Detroit Free Press: Gio Urshela DFA'ed by Detroit Tigers as infield prospects arrive

Rockies Release Elias Diaz, Promote Drew Romo
Red Sox, Rich Hill Nearing Agreement On Minor League Deal
Tigers To Promote Jace Jung
Christian Yelich To Undergo Season-Ending Back Surgery
Marlins Do Not Intend To Trade Sandy Alcantara In Offseason
Dodgers’ River Ryan To Undergo Tommy John Surgery
Hoops Rumors
Pro Football Rumors
Pro Hockey Rumors

MLB Trade Rumors

Red Sox Designate Dominic Smith For Assignment

By Steve Adams | August 16, 2024 at 3:00pm CDT

3:00pm: The Sox have formally announced Smith’s DFA and the reinstatement of Casas from the 60-day IL. Boston also reinstated Cooper Criswell from the injured list and optioned righty Chase Shugart to Triple-A Worcester.

2:10pm: The Red Sox will designate first baseman Dominic Smith for assignment today, reports Robert Murray of FanSided. Smith’s DFA will presumably clear the way for Triston Casas to be reinstated from the 60-day IL — as has been previously reported — and reclaim the everyday first base job in Boston.

Smith opted out of a minor league deal with the Rays back on May 1 when a big league spot with the Red Sox became available in the wake of Casas’ injury. He’s hardly replaced the offensive contributions that Casas can offer, but Smith hasn’t been too far off a league-average bat in Boston, slashing .237/.317/.390 with six homers and 20 doubles in 278 plate appearances. By measure of wRC+, he’s only been about 5% worse than average at the dish.

Still, for an offensively inclined position like first base, that’s not much production — particularly since Smith also grades out as an average defender at best. Defensive Runs Saved had him as a positive last year but pegs him at -2 in 2024. Statcast’s Outs Above Average has had him slightly above-average in each of the past three seasons but below-average in his career overall. It’s fair to suggest Smith has improved his glovework over the years, but he’s still not a standout defensive player at his position.

Now that he’s been designated for assignment, Smith will be either outrighted or released. It’s unlikely he’ll be claimed by another club, but he could latch on elsewhere on a new deal once he clears waivers. The Red Sox would be responsible for the remainder of his contract, minus the prorated minimum for any time spent on his new club’s big league roster/injured list.

Smith hasn’t lived up to his former top prospect billing, but he did have an impressive 2019-20 run that saw him slash .299/.366/.571 with 21 homers in 396 plate appearances. His bat has cratered with a .242/.312/.361 output in the four seasons since that time — numbers that roughly align with his results during his 84-game stint with the Red Sox. Smith reached six years of big league service while with the Sox, so he’ll be a free agent again at season’s end regardless of who signs him for the season’s final few weeks.

82 Comments

22 hours ago

Feel real sorry for Smith but it was inevitable, it was a matter of time.

21 hours ago

Why feel sorry? This was his chance to shine and he really didn’t.

20 hours ago

He did better than expected and gave the team stability at first in a horrible infield.

19 hours ago

What were you expecting?

Better than expected? His stats have been pretty consistently average to below average the last three years. He’s done as expected and it’s not very great

Why compare the past three years? I’m referencing only his time in Boston and comparing him to Dalbec and Cooper. As a fill in, he was fine.

7 hours ago

Because you said “he was better than expected.” Dom Smith’s stats were completely expected and very aligned to what his career stats were, which were average.

I’m glad he came immediately to fill in, but he was nothing but average. If that’s what you want, good, but I’m not praising him just for being an average body. At least we had someone, that’s where his credit is due

5 hours ago

Dalber and Cooper are well below replacement level that’s a horrible bar to measure against might as well give Smith a participation trophy you know you want to

You gotta think of a really good rhyming insult name for Smith bro.

Smith did a good job, hopefully he returns.

Good job? He wasn’t even a 1 WAR player

Who cares about war? Look what the team had in Cooper and Dalbec? You don’t need stars at all positions.

Regardless of WAR or not, he was basically an auto out and has little OBP as well for a .250 hitter. He’s nothing short of average at best. We could have had better options, probably even in AAA. I’m sorry, not trying to be the pessimist in the room, but he’s just not that good.

He was worth the try but that’s all the credit I give him. Cooper would have been just as average if we kept him longer

Dalbec had to go long ago…

You don’t need all average players in every spot either. Ownership has to pony up somewhere if we want to win

Who was the other option? He was traded to LA and shockingly will get a shot shortly. His strikeout rate in AAA makes Dalbec look reasonable

4 hours ago

You got owned by pocketbook just take the L and move on

Just barely a 0 WAR player in fact

So he was average, or better than half of the players at his position. Not bad at all.

WAR is such an overrated, garbage stat, it’s ridiculous.

No one knows how it’s even calculated.

If you don’t like WAR, look at average and OBP… neither are anything better than average and Dom met basically the same expectations as before he came to the Sox.

18 hours ago

I don’t think it is calculated. It’s probably 6-8 statisticians making up garbage.

15 hours ago

Give us the formula to calculate it math genius. Oh that’s right it’s completely different depending on the group determining it.

13 hours ago

Jan6 = War is neither math or stats. It’s a formula that would be math if the estimates used were based on any REAL statistics but it isn’t. The formula has constants that are made up, variables that are made up and the assumptions behind it are faulty It’s a crap ESTIMATE it’s not a stat and the only form of math involved is fantasy math since the elements of the formula are pure conjecture. Just because it’s published doesn’t mean it’s accurate. You could assign your own WAR value and it would be just as valid. YES, it wouldn’t be valid at all.

11 hours ago

What is it good for??

@Jan6worsethan911 Well, not to be rude, but if you think January 6th was worse than 9/11, then you can’t do math either.

WAR is overrated, when it doesn’t fit your argument. I get it….

WAR isn’t great for pitchers, I use FIP then, but for batters, it’s a great Stat. And if you don’t like it, use Smith’s other average stats

Jan6 – That’s a really ignorant comment. RBIs do matter, so do runs, hits and all stats that are part of the real game of baseball. You think simulation estimates are stats. Now that’s ignorant. You aren’t even educated enough on the subject to debate it. You can’t do my homework for me because you apparently flunked the class that differentiated between stats and estimates. Come back when you get better educated because your comments show it’s a waste of time to have this discussion with you when you don’t understand the topic.

Your rhetoric is cheap copy cat crap from the nerds of summer. You believe simulating things is predictive and accurate and you aren’t smart enough to know that actual runs scored are REAL not an estimate. If you want to look into someone else’s crystal ball for an estimate rather than reviewing real stats, that’s your call. It’s not factual but the nerds of summer simply exist because they sold baseball fans the equivalent of crypto for baseball. It’s not real, it’s not accurate and it has only one place in baseball and that is if you want to simulate something with contrived projections.

6 hours ago

Thanks for proving how moronic your made up math is. What in Dante Bichetes math stats make him a bad player ever? Please explain what in math makes him even slightly bad even excluding your RBIs? Common genius. Was it his career .835 OPS.

Absolutely Nothing….say it again

It’s from baseball reference. I’d trust the stats there than a guy on a forum.

Dom did his job covering the position but he added no value to the team and didn’t make us any better.

If you don’t like WAR, Dom’s average and OBP and OPS all tell a similar story. He’s just not that good, plain and simple

When you go into a season with Dalbec as your primary corner infield backup, and your starting 1B goes down for the count, you end up with replacement level players. At least Smith delivered positive value rather than negative value. (Despite the name, “replacement level” isn’t easily achievable when sorting through replacement level players.)

.01 WAR is not much positive value. He had negative WAR throughout most of his stint until the end. He did not provide much, if at all, support that would drastically change this team.

Shame, he was pretty good in July but hasn’t kept it going in August so far

Well, he knew the gig was temporary. but maybe he built enough value for another job. Good luck to him.

Maybe he’ll stick around Worcester and see if he’s needed again. Electing free agency is only going to lead to another minor league deal anyway

Sucks for Smith, always played with a smile, but there isn’t a role for him on the team with Casas and Yoshida on the roster. The right move, even if he gave us a solid run in July.

Did about as well as you can hope for from a backup you claimed mid season. Some teams wouldn’t hate that production.

Shame about Yoshida’s contract

Why? Smith can’t DH

Yoshida can’t do anything

Yoshida can hit, he just doesn’t get big hits. What does this have to do with the topic?

Neither of them can do anything, BUT

Smith is a likeable guy

Yoshida makes $15 mil/year for no good reason, and despite his nickname being “Macho Man” (for whatever reason) the one thing he doesn’t do at the plate is hit home runs

Yoshida still hits a lot better than Smith does… Smith was a .1 WAR player. Class doesn’t matter when you can’t hit well.

In fact, Yoshida has more homeruns than Dom Smith has.

I agree Yoshida isn’t great, but he’s better than Smith

“Doesn’t get big hits”…Neither Dom Smith or Yoshida are very good, but at least Smith is league average cheap. I’m not sure how any GM ever saw Yoshida play defense and thought he’s worth $80M+. It may be a stretch to call Yoshida even league average.

“Better than Smith”…When you take into account the huge difference in salary, I’d MUCH rather have Dom Smith on my team over Yoshida. I agree neither is good, but Smith can at least play passable(if not excellent)defense at his primary position.

In your defense, I already proposed we trade Yoshida. I think Cora has actually ruined his production. We would have to eat the contract but he’s a waste of a roster spot…

I don’t want Dom Smith in his place though

Yoshida is a good hitter. He ain’t great, but he’s good. Lifetime OPS of .780, lifetime ba of .287. He’s more than fine as a hitter.

He’s just way overpaid, which last I checked was not his fault.

Trade Yoshida to who? I don’t think we have teams knocking down the door to take on that contract. Are you just going to eat the contract? Who is going to take his spot at DH, because if they eat his contract they are not going to go out and spend big bucks on someone else. Unfortunately it was not a good contract as he proved to be as bad defensively as many had predicted and his offense has not been as consistent as hoped.

14 hours ago

He had some big hits versus the Yankees? I think he did against the Dodgers?2 of the best teams right?

Instead of Smith we should have traded some prospects for Goldschmidt.He is a big name and proven veteran.He would have brought fans to the park.

Clay – When you break down how good a guy like Yoshida is you have categories that already exist. He could be elite, but he is not, he could be well above league average but he is NOT, he could be league average which comes with a very low price and is extremely replaceable by many players and that description fits him. I don’t believe he is below league average like Kiki Hernandez and a lot of Cora’s favorites but he is certainly easily replaceable for roughly $1MM per year. That means he’s a $17MM a year over pay which roughly matches Devers except his contract is four years shorter than Devers. That’s an over payment between the two players of over $30MM per year. Bloom really sucked at his job.

I agree, Yoshida is a decent hitter but he’s paid too much just to DH, and you can get similar production from Abreu, who mans the bench because Yoshida takes his spot.

@Uncle Pedro

Devers would probably DH the most if Yoshida were gone. Then we would find a player for third, which wouldn’t be too hard, or Sogard would keep his position if Grissom finally does come back

If Breslow can trade Story and Yoshida this coming off-season, I’ll call him a genius and take back the bad things I have said regarding Paxton.

If things go well and Mayer, Anthony, and Teel all progress well they could make the major league roster during ST or soon thereafter. So Yoshida kind of loses a roster spot, they don’t need a DH only LHB. Eat the contract and get something back.

17 hours ago

They should offer Story and Yoshida to San Diego for Xander.

Joemo – Well said. Don’t hold your breathe on Mayer but Teel should make Wong expendable or a career back-up and Anthony could make O’Neill an unnecessary investment.

Personally, I lose Yoshida, Story and Mayer so someone might consider a deal and move Rafaela to SS with Anthony, Duran and Abreu in the outfield and then figure a way to shame Devers into not fielding. Nobody is fooled by his 40 to 50 misplays per year that only count for 15 errors. They can’t win with Devers at 3B. They’ll make the playoffs but the number of innings pitched peaks due to misplays by Devers and the ERAs and WHIPs are destroyed when the errors are recorded as hits. It’s a travesty that Devers’ agent can bribe score keepers to cheat but it’s consistent with any team managed by Cora.

10 hours ago

They play the same amount of innings regardless of Devers “40 to 50 misplays”.so, yeah.

Diabetic Rockstar – You do realize Devers misplay adds pitches, base runners and often runs? Right? So pitchers are 10 t0 30 pitches deeper without advancing the inning so what could be a 7 inning start ends up under 5 more often than not? Do you also realize there are easy innings and stress innings and that usually depends on base runners. If you put an extra base runner on that adds stress. If the first mishap by Devers leads to more hits when the pitcher would have been out of the inning that adds even more stress. The bullpen now has to cover 2 or 3 innings more simply because Devers frequently misses balls MLB 3Bs would routinely catch. The bad defense in Boston stresses the pitching staff enormously. The starters throw just as many pitches but don’t go nearly as many innings so the bullpen must make up the difference which then wears on them. The more innings are pitched the more likely injuries will happen.

There is a HUGE trickle down impact of bad defense and whether the score keeper counts it as an error or not, the pitching staff always pays for misplayed balls. In 2023 Devers had 52 misplays and 14 were counted as errors. The 38 balls not counted as errors led to hundreds of additional pitches for the pitching staff. It led to a much higher ERA and WHIP and the wear and tear from stress innings were much higher.

So do you still think his 40 to 50 misplays have no impact? Or have you been sufficiently educated to hold off on flippant unintelligent comments?

I was wrong but this is stupid. Smith was valuable and now if Casas has a set back, we bring up Dalbec?

Either that or you suffer with Romy Gonzalez as your first baseman. Good luck with that,

Gonzalez has a much higher OPS than Smith so not sure if “suffer” is the correct term.

Very good point. Gonzalez has better stats than Dom Smith

Let’s see Gonzoloez pick at first like Smith. If you use your eyes, you should realize defensively he’s head and shoulders abovevalk others on the Sox roster.

Romy is fine as a fill-in, but I can’t picture him playing 1st 5-6 times a week.

That is a good point. Dom is better defensively but still, you don’t win many games with either guy. That’s the issue

It’s not like Smith doing nothing but sitting on the bench was gonna provide much value in that scenario. Casas would have to have an immediate setback, otherwise Smith would get far too rusty to be of any use at all. He’s not playing ahead of Casas or Yoshida.

KingKen – When the roster has 13 hitters and you want coverage in case of injury, Smith is perfect. He’s a solid hitter and defender and has some pop for late inning pinch hitting for guys like Wong and Abreu. 1 catcher, 1 middle infielder, 1 corner infielder and 1 outfielder. 9 starters make up the 13.

There was a perfect roster spot for Smith but Cora is the manager and Smith didn’t go UT when Cora was cheating down in Houston so he doesn’t have the same relationship with him. That’s why some guys get kept, some guys don’t and this team doesn’t win.

Hopefully Smith will be waiting in the minors to come back up if needed. He may not have been great, but better than many of the players we have gotten as short term solutions and seemed to be a solid clubhouse guy. Fingers crossed that Casas is going to be back to 100% soon and not have any setbacks.

We don’t need Smith back. He’s probably better than Dalbec but an AAAA hitter at best. He was here only to fill a position. Keep the utility guys instead for versatility.

42 mins ago

Gasper can also play first base.

Man, I miss Carmine Ragusa or whoever it was… did he get banned yet? Where is he? Waiting for him to come and attack me about this.

Who? I don’t recall him anywhere but with Shirley and Laverne…

He was also on “Blansky’s Beauties” under a different character name.

It was a member here but yours could be sarcasm. Hard to pick up

This was to be expected. He’s had spurts where he had looked great…. but not the last few years. QUAD A player at worst, bench bat at best but reality is he needs to head over seas.

As I write this the score is 11-9 Sox. Can we please designate John Henry for assignment? I mean really, this pitching is not even AA level.

Smith wasn’t the player he was billed to be and we all know that. Considering everything he was a good stop gap who was a veteran presence on a young team . Yes some will say WAR or some other stat wasn’t great. Sometimes you got to look through the numbers and what he meant to a team. I wish him the best in his future endeavors

12 hours ago

Smith is the result of poor planning by Bloom that forced Breslow into some very tough decisions. Breslow inherited the worst team in decades and was told not to spend money if you believe the rumors.

What was the vision of the team during DD’s era? c= Vazquez – inexpensive 1B – Moreland = inexpensive with Casas coming 2B – Pedroia then Holt and other temps SS – Bogey – all-star 3B – Devers – eventually DH all-star RF – Mookie – all-star CF – JBJ – inexpensive with Duran coming LF – Benny – all-star DH – JD Martinez – all- star

Bloom crushed the talent level and left Breslow with a AAA talent or worse C – Wong 80 OPS+ 1B – Casas – an extension of DD’s team 2B – Yorke – a non performing 1st round pick SS – Story – Injured since contracted 3B – Devers – overpaid DH killing team payroll LF – Yoshida – a DH playing LF CF – Duran – an extension of DD’s team RF – Rafaela/Abreu two inexperienced outfielders DH – Refsnyder

Where are we today? C – Teel – Good first round pick due to high draft choice 1B – Casas 2B – Uncertain – Maybe Grissom or Sogard SS – Rafaela or Hamilton or Story or Campbell/Mayer from the farm 3B – Devers still over paid and horrendous on defense LF – Duran – All-star CF – Rafaela – potential all-star RF – Abreu/Refsnyder platoon players DH – O’Neill to try to keep him healthy

So Smith became a necessary replacement since Breslow did not have the authority to build a future vision of the team, he inherited what was left of the DD era that wasn’t destroyed by Bloom.

1 – There was no strong choice for corner infield utility player 2 – There was no strong choice for middle infield utility player 3 – The only depth position was outfield and that was inherited by Breslow and then added to by Breslow when he contracted O’Neill.

That’s not good planning but to be fair, Bloom decimated the cupboard and if DD hadn’t left the farm loaded this team would be winning 50 games a year not 81. Smith is good enough to carry the title of Corner Infield utility player as one of the 26 rostered player but Cora is too stupid to know how to construct a balanced roster. That’s not going to change in the next 3 years so Boston’s future is going to be filled with poorly conceived combinations of players. Cora loves guys like Hamilton who should NEVER start at the MLB level he should be a AAA player or at best a Middle Infielder Utility player. Those bad choices end up forcing guys like Smith out of the organization. As usual, this is on Cora like all the other bad decisions. Next year Breslow needs to define for Cora the roster spots. 13 pitchers and 13 hitters. 9 starting hitters plus a back-up catcher, middle infielder, corner infielder and outfielder. If Cora is allowed to mix and match based on who he likes, the same issues will surface next year with each injury.

Smith did his job adequately and should have been the designated Corner Infielder Utility player who is used late in games as a pinch hitter and defensive substitute. Too bad Cora didn’t respect him as much as lesser players who are his favorites.

This team has more problems than keeping Dom Smith around. Ego Alex at the helm. The pitching came back down to earth . They have like 8 middle infielders with no clear choice of who it’s going to be . Basically 3 DH’s. No true 3rd baseman and nothing as backup at 3rd . No legit right handed power hitter. Unless you call ONeill that .