In its decision, the three-judge appellate panel cited a previous Oregon state case which declared a substantive rule of law concerning the interpretation of a specific clause in insurance contracts. The clause at issue in that case – “Assignment of interest under this policy shall not bind the company until its consent is endorsed hereon” – was materially identical to the clause in the present case – “Assignment of interest under this Policy shall not bind Insurer unless their consent is endorsed hereon.”
The decision in the prior case was that the clause as worded only applied to pre-loss assignments. However, Circuit Judge Susan P. Graber, in writing for the court said that even if the prior case law was not binding, the anti-assignment clause in the current case is ambiguous. “There are two plausible interpretations of the term “interest”: one in which “interest” does not encompass post-loss assignments, and one in which “interest” does apply to post-loss as well as pre-loss assignments,” Graber wrote.
According to the opinion, “interest” plausibly could refer to a financial stake in the policy, as distinct from a financial stake in a post-loss cause of action. “In that sense, no “interest” in the policy may be assigned, for the sensible reason that the insurer accepts only the known risk of a particular insured. That purpose is irrelevant after a known loss already has occurred,” Graber said.
On the other hand, according to the court, one plausibly could interpret “interest” in the anti assignment clause to encompass all rights, including post-loss assignments. Graber noted that when both interpretations are reasonable in light of the other provisions of the policy, the court must resort to the rule of construction against the insurer.
Because the (Employee Stock Ownership Plan) ESOP’s interpretation of the anti-assignment clause is reasonable in context, because the insurer drafted it, and because it chose a clause with a known meaning under Oregon law, the court held that, as in the prior case, the anti-assignment clause excludes post-loss assignments.
Alexander Manufacturing, Inc. Employee Stock Ownership Plan and Trust, the sole shareholder of Alexander Manufacturing, Inc. (AMI), filed an action against three of its former fiduciaries alleging breach of fiduciary duty under the Employee Retirement Income Security Act (ERISA). The individuals were also former directors and officers of AMI.
The ESOP also brought a derivative action against them, alleging that they had breached certain duties owed as directors and officers of AMI.
AMI had previously purchased an insurance policy from Illinois Union Insurance Co., under which directors and officers and company were covered with a limit of $1 million. AMI also had fiduciary liability coverage with an additional limit of $1 million.
The former fiduciaries settled the action by paying $10,000 each and then assigning their rights under AMI's insurance policy to the ESOP. The ESOP agreed not to execute the remainder of the judgment against the individuals and to bring the claim against Illinois Union instead.
Illinois Union consented neither to the settlement agreement nor to the assignment of the policy to the ESOP. The ESOP filed the present action against the insurer for breach of the duty to indemnify and breach of the duty of good faith and fair dealing.
The opinion in Alexander Manufacturing Inc. Employee Stock Ownership Plan and Trust v. Illinois Union Insurance Co. is here .