Colorado Supreme Court: Indefinite, Future Assignment of Insurance Proceeds Unenforceable Against Insurer

It is not uncommon for injured persons to assign their rights to insurance proceeds to a third party, and the enforceability of those assignments has been the subject of frequent litigation around the country.   In the most recent development on this topic, Allstate Ins. Co. v. Medical Lien Mgmt., 2015 CO 32, 2015 WL 3378141, 2015 Colo. LEXIS 447 (Colo., May 26, 2015), the Colorado Supreme Court held that an injured person’s assignment to a medical lien company was not enforceable against the insurance company.

In Allstate, an individual, Martinez, was injured in a car accident with Allstate’s insured.  Martinez entered into an agreement with Medical Lien Management (MLM) in which MLM agreed to pay for Martinez’s medical treatment in exchange for a lien by MLM on any and all proceeds derived from Martinez’s personal injury claim to the extent of the amount paid by MLM for the medical treatment.   MLM sent Allstate a notice of the lien.   Martinez settled his personal injury claim against Allstate’s insured, and Allstate issued payment to Martinez – not to MLM.   MLM then sued Allstate for breach of assignment (MLM also sued Martinez).

The Colorado Supreme Court ultimately concluded that the purported assignment was not enforceable against Allstate.   There were two main factors that influenced the Court’s conclusion.   First, the Court noted that “the concept of an assignment as a present transfer that extinguishes a contract right in the assignor and recreates that right in the assignee logically requires an existing right in the assignor.”  When the assignment involves future rights, however, “a purported assignment of a right expected to arise under a contract not yet in existence operates only as a promise to assign the right when it arises and as a power to enforce it….Depending upon various factors, including whether the promise was given for value, it may be enforceable in some manner against the promisor, but it does not constitute an assignment of future or after-acquired rights so as to be effective against the promisor’s obligor.”   Here, the purported assignment to MLM was an assignment of future rights.   Thus, Martinez could not legally assign those rights so as to be effective against Allstate.

The second factor that the Court found persuasive was the fact that the purported assignment did not identify a specific amount of money – it granted to MLM a lien on proceeds in an amount equal to the amount paid by MLM for Martinez’s medical treatment.  However, at the time of the assignment, and the notice provided to Allstate, Martinez’s medical treatment was not complete, and thus the amount of the lien was unknown.   If the assignment were to be enforced, it would put an additional burden on Allstate to determine the extent of the amount paid by MLM and resolving any disputes between MLM and Martinez.  Thus, in order for an assignment to be effective against an obligor, “it nevertheless remains essential that the assigned portion of a right or interest be identified by fraction, amount, or otherwise, with sufficient precision to put the obligor on notice of the extent of the assignment.”

This decision by no means suggests that assignments are never valid in  Colorado, but it does place limitations on enforceability in certain situations.  When an insurer is evaluating who is entitled to proceeds on a claim, it should be very careful, because now, at least in Colorado, it could find itself in an unenviable Catch 22 if it does not pay an enforceable assignment, or pays an unenforceable assignment – leaving one to wonder whether the Colorado Supreme Court has inadvertently opened the door to more interpleader lawsuits.