Opinion ID: 172224
Heading Depth: 1
Heading Rank: 4

Heading: the contract can be assigned by the trustee

Text: Dr. Baird's insurance policy contains two clauses that arguably might limit the ability of the trustee to assign the policy or to exercise Dr. Baird's right under the policy to veto a settlement: (1) a clause that specifically restricts the Debtor's ability to assign the policy to a third party without the consent of the UMIA (the non-assignability clause), and (2) a clause that states UMIA was obligated not to settle any claim against the Debtor without his consent (the settlement consent clause). Bkrptcy Op. 2. Appellees argue that even if we find that the insurance contract is not executory we should still affirm the Bankruptcy Court's dismissal... because the Liability Policy cannot be assigned to the Olahs (or anyone else for that matter). Appellees' Br. 19. We hold that the non-assignability clause has no applicability under Utah law after the event triggering the loss has occurred, and that once the settlement consent right is assigned in bankruptcy to the trustee, there is no limitation on the trustee's further assignment of the right to another party. The appellees do not appear to contend that the non-assignability clause of the policy prevents the liability policy from being assigned to the bankruptcy estate itself. Section 541(c)(1) of the Bankruptcy Code clearly speaks to this point: an interest of the debtor in property becomes property of the estate ... notwithstanding any provision in an agreement, transfer instrument, or applicable nonbankruptcy law that restricts or conditions transfer of such interest by the debtor. 11 U.S.C. 541(c)(1)(A). So it is not the case that the policy cannot be assigned to anyone without UMIA's consent. The policy can be assigned to the trustee, notwithstanding the restriction in the policy. The question then becomes whether the trustee may further assign the contract to the Olahs (or anyone else) without UMIA's consent, or whether either the trustee or an assignee may exercise Dr. Baird's right under the contract to approve or veto a settlement. The question of the assignability of the liability policy is a question of state law. The parties agree that under Utah law, the assignability question depends on whether a loss has occurred in this case, because if a loss has occurred, then restrictions on assignability no longer have force. Time Fin. Corp. v. Johnson Trucking Co., 23 Utah 2d 115, 458 P.2d 873, 875 (1969); 44 Am.Jur.2d Insurance § 786 (After a loss has been incurred, the claim to recover insurance proceeds may be effectively assigned by the insured.). The logic is that an insurance company is entitled to tailor its liability policy  to decide whether to issue the policy, what the premiums should be, and what terms to impose  to the risk it perceives to be taking with regard to the insured. It would be inconsistent with that calculus to allow the insured to transfer his policy to someone else, whose risk profile might be different. See Northern Ins. Co. of New York v. Allied Mut. Ins. Co., 955 F.2d 1353, 1358 (9th Cir.1992) (Risk characteristics of the insured determine whether the insurer will provide coverage, and at what rate. An assignment could dramatically alter the insurer's exposure depending on the nature of the new insured.). Once a loss has occurred and the insurance company is on the hook to defend against a tort action and to pay any judgment, this concern about assignment is obviated: the insured-against event has already happened, and what is being transferred is not the insurance company's ongoing responsibility for future risks, but the insurance company's liability for the consequences of a past event. See Time Fin., 458 P.2d at 875 (distinguishing between a before-loss transfer of a contractual relationship and the after-loss transfer of a money claim). Thus, under the law of Utah and most other states, non-assignability provisions of liability insurance contracts may not be enforced after the event of a covered loss. But what is a loss? The Olahs want to fix the loss at the time the accident occurred and the claim was subsequently filed: this, they say, is when the insurance company's duty to defend under the contract begins. The UMIA and Dr. Baird, by contrast, argue that no loss occurs under the contract until there has been a tort judgment or settlement; until that time, Dr. Baird has not been found liable for malpractice and may never be found liable. The parties cite no relevant decisions from Utah or states with comparable policies regarding assignability during the period after the events giving rise to a liability claim have occurred (and the tort lawsuit filed) but before there has been a judgment or settlement. We believe that the logic of the Utah legal principle against post-loss non-assignment supports the Olahs' view. The rationale for Utah's legal principle is that prior to a loss, when no one knows whether a covered loss will occur, the risks of the policy depend heavily on the identity of the policyholder, but once the loss occurs, the degree of risk is essentially fixed; the only question is to whom any payments will be owed. The insurance company's need to bar assignment therefore ceases to be significant. This rationale points toward treating the event triggering coverage as being the loss, because that is the point when the degree of risk is fixed. Subsequent events may affect to whom payment must be made, but they cannot increase or decrease the risk to the company. Moreover, after suit has been filed, the insurance company has a duty to defend, which is an important feature of the insurance contract. Even if no liability is ultimately imposed, the costs of the legal defense are, in every realistic sense, a loss. Finally, in a formal sense, it makes sense to distinguish between when the loss occurs and when liability is determined. Even though we do not know in this case if ultimate liability will ever be imposed, because we do not know whether Dr. Baird actually committed malpractice, we do know that if liability is imposed, the moment it fixed was the moment the accident occurred. Ocean Accident & Guar. Corp. v. Sw. Bell Tel. Co., 100 F.2d 441, 444 (8th Cir.1939). The judgment against Dr. Baird (if there is one) would merely confirm that liability was fixed at that point. See id. at 447 (explaining that final judgment is simply confirmation of the moment at which liability attaches). Against this interpretation, UMIA argues that allowing assignment to the Olahs would  drastically impact the risk and burden on UMIA. Appellee's Br. 27. Reluctant as we are to second-guess a party regarding its own interest, we are highly skeptical of this claim. Under the policy, UMIA has control over the conduct of the malpractice litigation against Dr. Baird. The company has the right to defend, and the right (subject to any veto rights Dr. Baird may have) to settle. No one can force the company to settle if the company does not think that is in its interest. If UMIA negotiates a mutually agreeable settlement of the malpractice case with the Olahs, it is in the interest of UMIA for the Olahs, not Dr. Baird, to exercise the right to accept or refuse the settlement. It is hard to see why an assignment of the settlement acceptance right to the Olahs would increase UMIA's risk or burden. Indeed, now that Dr. Baird has received his discharge in bankruptcy and will not be personally liable for any malpractice judgment, he has an inefficient and one-sided incentive to frustrate settlement and to insist that UMIA take the case to trial. Only his reputational interest is now on the line. He has nothing to lose and everything to gain from blocking settlement and forcing UMIA to go to trial. Thus, we do not accept UMIA's argument that it would impose unacceptable risk on the insurance company to allow assignment at this stage. Quite the contrary. That leaves Dr. Baird's argument that the settlement consent clause is personal to him and thus cannot be assigned. Dr. Baird and UMIA mention this argument only briefly, Appellees' Br. 29, citing two personal service contract cases, neither of which dealt with insurance policies. In re Tonry, 724 F.2d 467, 469 (5th Cir. 1984) (attorney's contingent fee contract); In re Carrere, 64 B.R. 156, 159 (Bankr. C.D.Cal.1986) (contract to perform in the television series General Hospital). But in any event, it appears undisputed that this right under the contract, like all others, may be transferred to the bankruptcy trustee. 11 U.S.C. 541(c)(1). Once the right to approve or disapprove settlement leaves the hands of the insured, we see no reason why the trustee may not dispose of that right in whatever manner he regards as in the best interest of the estate. Presumably, the trustee could make an agreement with the Olahs to exercise this right in a particular way, and we see no reason why he should be barred from making an agreement with the Olahs to sell the right in exchange for value to the estate. Or he could exercise the settlement approval right himself. Even assuming the right is personal and non-transferrable in the first instance, once it has been transferred to the bankruptcy trustee it has ceased to be personal and there is no reason in law or logic to forbid a further transfer.