Chicken One Day and Feathers the Next: Section 75-1.1 Claims of Insurance Assignees
Rights to insurance proceeds can be—and frequently are—assigned. For example, one business might acquire an insured’s right to insurance proceeds as part of a larger asset acquisition. Or an unpaid contractor who repaired damage to a home after a hurricane might take an assignment of the insured’s rights to collect any homeowner’s insurance proceeds.
This raises an interesting question: Can someone who has been assigned rights in insurance proceeds bring a claim for unfair or deceptive trade practices against the insurer? If the claim is based on the insurer’s dealings with the original insured, the answer is “no.” If, however, the claim is based on the insurer’s dealings with the assignee, the answer is more nuanced. So, what claims proceed? The answer may depend on the type of insurance involved—and perhaps on the court hearing the dispute.
Two recent cases—the North Carolina Business Court’s Brakebush Brothers decision and the Fourth Circuit’s Skyline Restoration decision—addressed this question and reached different results. After analyzing each decision, we will try to reconcile the holdings.
Brakebush Brothers (The Chickens)
A fire at a chicken-processing plant in Mocksville caused tens of millions of dollars in damage. At the time, the plant’s owner (House of Raeford Farms) was in the process of selling the plant to Brakebush Brothers. Because the necessary repairs to the plant had not yet been determined, Raeford and Brakebush Brothers asked Raeford’s insurers to consent to the assignment of related insurance proceeds to Brakebush Brothers. Some consented. Some did not.
When some of the non-consenting insurers refused to pay, Brakebush Brothers sued them, bringing claims for breach of contract, bad faith refusal to settle, and unfair or deceptive trade practices. The insurers moved to dismiss, claiming that Brakebush Brothers, as a purported assignee, lacked standing to recover for the fire damage and that Brakebush Brothers had failed to state a claim.
As a threshold matter, the Brakebush Brothers court looked closely at the insurance policies involved to determine whether each policy prohibited assignment without consent. For the policies that prohibited assignment without consent, the court agreed with the insurers and dismissed them from the case. Where the policies did not contain such a prohibition, the court allowed Brakebush Brothers’ claims to proceed.
The insurers who remained in the case argued that Brakebush Brothers’ bad faith and section 75-1.1 claims could not survive because they were unassignable as a matter of law. They noted that North Carolina public policy prohibits the assignment of personal tort claims because it promotes champerty. North Carolina courts have extended this policy to prohibit the assignment of section 75-1.1 claims.
The court disagreed with the insurers, distinguishing those cases on the ground that Brakebush Brothers’ claims were “based on the assignee’s own interactions” with the insurers and, therefore, “never belonged to Raeford.” On this basis, the court allowed Brakebush Brothers’ bad-faith and section 75-1.1 claims to proceed.
Skyline Restoration (The Church)
After a windstorm left a church severely damaged, the church hired Skyline Restoration to handle repairs. Skyline Restoration completed its work, but unfortunately, the church couldn’t pay. Eventually, the church went into bankruptcy, and Skyline Restoration brought an adversary proceeding to recover payment. The church and Skyline Restoration settled, with Skyline Restoration taking an assignment of the church’s right to recover proceeds of the casualty loss from its insurance company.
When the insurance company failed to pay, Skyline Restoration sued, bringing contract claims and a section 75-1.1 claim. Just as Brakebush Brothers’ section 75-1.1 claim was based on its own interactions with the insurance companies that it sued rather than interactions with the original insured, Skyline Restoration’s section 75-1.1 claim was based on its own interactions with the insurer; namely, the insurer’s failure to respond to invoices that Skyline Restoration sent for its repair work.
Skyline Restoration affirmed dismissal of the contract claims based on the governing three-year statute of limitations. But section 75-1.1 claims have a four-year statute of limitations,which Skyline Restoration met. The Skyline Restoration court relied on other grounds to affirm dismissal of that claim. It recited the general rule that section 75-1.1 claims are not assignable. It also noted that North Carolina “does not recognize a [separate] cause of action for third-party claimants against the insurance company of an adverse party based on . . . § 75-1.1.” For this last proposition, the Skyline Restoration court cited two North Carolina decisions: Craven v. Demidovich and Wilson v. Wilson.
Reconciling the Cases (Why the Claim in the Case About Chickens Crossed the Road, but the Other Claim Flew the Coop)
How did these two cases with similar facts reach completely different results? The Brakebush Brothers court’s explanation of the North Carolina caselaw that Skyline Restoration cited may provide an answer.
Craven and Wilson held that an “adverse third-party claimant” cannot bring a section 75-1.1 claim against an insurer. The Brakebush Brothers court explained what that term means by discussing the different types of insurance that are sold.
Broadly speaking, insurance can be categorized as either first-party coverage or third-party coverage.
First-party coverage insures against a risk by providing for payment directly to the insured on the insured’s claim. Examples of first-party coverage include health insurance, disability insurance, and casualty insurance. If the insured becomes disabled or loses her home to a fire, the insured makes a claim for the insurer to pay her directly.
Third-party coverage, by contrast, insures against a risk by providing the insured with a defense and indemnity against the claim of another. A general commercial liability policy or an automobile liability policy would typify third-party coverage. The insurer’s duties are triggered by an accident and an injured party’s claim. That injured party is a stranger to the insurance policy.
The Brakebush Brothers court reasoned that the rule from Craven and Wilson is limited to the third-party coverage context. For example, a party injured in a car accident cannot bring a section 75-1.1 claim against the other driver’s liability carrier. But parties with aligned interests in first-party coverage—like how Raeford and Brakebush Brothers were aligned in seeking coverage for fire damage—can bring such a claim. This understanding is consistent with the rationale of Craven and Wilson, which explained that the rule was necessary to prevent “a conflict of interest for the insurance company.”
But Skyline Restoration Involved First-Party Coverage, Too?!? (Something to Brood Over)
If you’ve followed along this far, you are probably wondering why the Skyline Restoration court did not let the section 75-1.1 claim proceed. After all, the church and the contractor had aligned interests in receiving payment for a casualty loss under a first-party coverage policy.
Even without the benefit of the Brakebush Brothers decision (which was decided later), Skyline Restoration made similar arguments. It pointed out that “the insured and assignee’s interests are aligned and have always been in opposition to the insurer”—including, crucially, at the time that Skyline Restoration demanded settlement from the insurer. And it noted that the cases applying the Craven and Wilson rule were limited to liability, rather than property, insurance.
The federal court rejected these arguments and did not distinguish Craven and Wilson on the same grounds as Brakebush Brothers. Instead, in a footnote, the Skyline Restoration opinion explained that the church and the contractor were “adverse parties” by virtue of the adversary proceeding. Implicitly, the court held that this made Skyline Restoration an “adverse third-party claimant” for purposes of Craven and Wilson.
What to Make of This Post (The Chicken Salad)
The federal court in Skyline Restoration did not follow Brakebush Brothers’ reasoning. In fairness, though, Brakebush Brothers had not been decided when Skyline Restoration was argued. Will future federal court decisions look to the type of insurance—first-party coverage versus third-party coverage—in this context? That remains to be seen. For now, these two cases give future litigants—both insurers and assignees—something to argue about.
Bonus Points: As this post illustrates, we are thrilled to find two contemporaneously decided cases that involve the same subject matter. In fact, the end of 2021 brought a third decision about an assignee’s ability to bring a section 75-1.1 claim against an insurer: Storm Team Construction. We have not addressed Storm Team here because it turned on a matter of procedure; namely, the intersection of Rules 15 and 25 of the Federal Rules of Civil Procedure. If you litigate in this area or get as excited as we do about questions of procedure, make sure to check it out.
Author: Tom Segars