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Commercial Division Decision Suggests Insurers May Struggle to Enforce Anti-Assignment Clauses in Prior-Incurred Loss Cases

In Certain Underwriters at Lloyd’s v. AT&T Corp.,[1] Justice Cohen of the New York County Commercial Division Court granted a motion for partial summary judgment and determined that Nokia, through its predecessor Lucent, had the right by assignment to seek coverage under certain insurance policies issued to AT&T that contained anti-assignment clauses.  Although the general rule in New York is that such anti-assignment clauses are enforceable, this decision highlights how it can be more challenging to bar assignment in the special context of an insurance policy.

Background

This case arises out of AT&T’s 1996 spin-off into three independent businesses, including AT&T Corp., NCR Corporation, and NS-MPG Inc.[2]  Those three companies entered into a Separation and Distribution Agreement (“SDA”), which was amended on March 29, 1996.[3]  After a series of name changes, NS-MPG is now known as Nokia of America Corporation.[4]  

As successor to certain of AT&T’s businesses, Nokia is defending thousands of asbestos-related bodily injury lawsuits related to those businesses.[5]  AT&T was insured by the plaintiff and several defendants (the “Insurers”), but the Insurers denied Nokia coverage.[6]  The Insurers brought a declaratory judgment action in the Commercial Division seeking declarations that Nokia was not entitled to coverage, and AT&T moved for summary judgment to establish whether it was entitled to assert rights under the Insurers’ policies for asbestos liabilities.

Decision on Assignment

The Court first looked to the text of the SDA to determine whether Nokia had met its prima facie burden to establish that the policies had been assigned under that agreement.  The Court noted that, under New York law, “[n]o special form or language is necessary to effect an assignment as long as the language shows the intention of the owner of a right to transfer it.”[7]  Thus, although the SDA did not mention the terms “assign” or “transfer” when discussing the insurance policies specifically, the Court found that the agreement reflected such an intention to assign to Nokia the rights to the relevant insurance policies in several places.[8]  For example, the SDA defined “Assets” to expressly include “all rights under insurance policies and all rights in the nature of insurance, indemnification or contribution” and then went on to transfer to Nokia “any and all Assets that are expressly contemplated by the [SDA].”[9]  Further, the SDA stated that “[t]he parties intend by this agreement that [Nokia] be successors-in-interest to all rights that any member of [AT&T] may have as of the Closing Date . . . under any policy of insurance issued to AT&T by any insurance carrier unaffiliated with AT&T, including any rights [AT&T] may have as an insured or additional named insured . . . to avail itself of any such policy of insurance.”[10]  The Court ultimately concluded that in light of the intention of the SDA to establish Nokia as an independent, standalone business going forward, it was commercially reasonable to read the agreement as conferring to Nokia insurance rights along with liabilities.[11] 

Having found that Nokia had met its burden to establish a prima facie case with respect to assignment, the Court then went on to analyze whether the Insurers had met their burden to demonstrate that triable issues of fact remained with respect to that claim.  The Insurers pointed to the anti-assignment clauses in the underlying insurance policies and raised two primary arguments why questions of fact remained as to whether those clauses should be enforced to bar the assignment to Nokia:  (1) Nokia failed to demonstrate that the losses for which it sought coverage occurred prior to the assignment, and (2) enforcing the assignment would unduly increase the risk borne by the Insurers.  The Court rejected both arguments.

The Court began its analysis by explaining that “under New York law, the enforceability of a no-transfer clause in an insurance contract is limited.”[12]  Specifically, as set forth in the leading First Department case of Arrowood Indemnity Co. v. Atlantic Mutual Insurance Co., “New York generally follows the majority rule that a no-transfer provision in an insurance contract is valid with respect to transfers that were made prior to, but not after, the insured-against loss.”[13]  As the First Department explained in Arrowood,this principle is based on a judgment that while insurers have a legitimate interest in protecting themselves against additional liabilities that they did not contract to cover, once the insured-against loss has occurred, there is no issue of an insurer having to insure against additional risk.”[14]

Turning to the facts of the case, the Court noted that any potential losses covered by the policies necessarily preceded the assignment because the underlying policies covered only “accidents” or “occurrences” during their respective policy periods, all of which had expired before the SDA was executed.[15]  The Court thus found that Nokia need not establish that the claimed losses preceded the assignment to be successful on its motion—because all covered losses were by definition pre-assignment losses, and any post-assignment losses were not insurable under the policies.[16]

Finally, the Court addressed the Insurers’ argument that permitting the assignment would unduly increase the risk they bore under the relevant insurance policies.  Specifically, the Insurers argued that granting Nokia coverage under the policies would multiply their defense costs because both Nokia and AT&T are regularly sued for the same liability, and often fail to cooperate as co-defendants, sometimes reaching separate settlements with plaintiffs for vastly different sums of money.[17]

The Court acknowledged that there is an exception to the rule that an anti-assignment clause in an insurance policy generally will not be enforced with respect to pre-assignment losses.  Where such pre-assignment losses are speculative—such as lost profits—they typically are not assignable “because the insurers’ risk can vary depending on the characteristics of the assignee.”[18]  The Court discussed Holt v. Fidelity Phoenix Fire Insurance Co. of New York,[19] as an example of this exception.  There, a fire had forced the closure of a movie theatre in Albany.  The theatre owner’s business interruption insurance would have covered any lost profits resulting from the closure, but because the business had been operating at a loss, no such profits could be claimed.[20]  The owner then sold the property and assigned the rights under the insurance policy.  The Third Department rejected this new owner’s attempt to seek lost profits under the assigned policy because any profits of this newly established business would be speculative.[21]

The Court distinguished the case at bar from Holt and its progeny, noting that there was no speculative claim for lost profits at issue in this case.  Unlike a claim for lost profits, the increased defense costs the insurers complained of could be limited by other contractual means—such as defense cooperation provisions—some of which were in place in the underlying policies at issue.[22]  Moreover, the Insurers could point to no other case extending the “undue risk” exception to increased defense costs, and the Court declined to create a new blanket rule that pre-assignment losses could not be transferred in any case where enforcing the assignment might increase such costs.[23]

Having rejected both of the Insurers’ primary arguments, the Court ultimately enforced the rule announced in Arrowood—that an anti-assignment clause in an insurance policy cannot be enforced with respect to pre-assignment losses—and granted summary judgment in Nokia’s favor.

Conclusion

Certain Underwriters at Lloyd’s represents a good reminder that anti-assignment clauses are more difficult to enforce in the insurance context.  Despite the rule in New York that anti-assignment clauses are generally enforceable, insurers may struggle to enforce anti-assignment clauses in insurance policies where the loss occurred prior to assignment, unless they can demonstrate that such losses are speculative.


[1] 2021 N.Y. Misc. LEXIS 2736 (N.Y. Sup. Ct. N.Y. Cty. May 19, 2021).

[2] Id. at *3. 

[3] Id. 

[4] Id.

[5] Id. at *4-5. 

[6] Id. at *5. 

[7] Id. at *5-6 (quoting Tawil v. Finkelstein Bruckman Wohl Most & Rothman, 223 A.D.2d 52, 55 (1st Dep’t 1996)).

[8] Id. at *6.

[9] Id.

[10] Id. at *6-7.

[11] Id. at *8.

[12] Id. at *11 (quoting Arrowood Indem. Co. v. Atl. Mut. Ins. Co., 96 A.D.3d 693, 694 (1st Dep’t 2012)).

[13] Arrowood, 96 A.D.3d at 694 (quotation marks omitted).

[14] Id. (quotation marks and alterations omitted).

[15] Certain Underwriters at Lloyd’s, 2021 N.Y. Misc. LEXIS 2736, at *13.

[16] Id.

[17] Id. at *14.

[18] Id. at *16.

[19] 273 A.D. 166 (3d Dep’t), aff’d, 297 N.Y. 987 (1948).

[20] Id.

[21] Id.

[22] Certain Underwriters at Lloyd’s, 2021 N.Y. Misc. LEXIS 2736, at *18.

[23] Id. at *17.