What are the Conditions Precedent (if any) to Perfecting a Claim to an Assignment of a Life Insurance Policy as Security Collateral for a Loan?

When lenders take life insurance policies as collateral for loans, they need to be aware of what needs to occur to place a claim in the event their borrower dies. Furthermore, in the event the collateral was pledged to multiple lenders, lenders will need to know how to discern whether their assignment of life insurance takes precedent over the collateral interest of a competing secured creditor. This blog posts addresses those issues as they are regularly found in practice in the State of Florida.

In sum, to determine priority between multiple assignees, the common law of contract assignments will be dispositive of the issue of priority rights to the life insurance collateral.  Florida courts have adopted the so-called “English” rule, which gives priority to the assignee who first notifies the obligor of the assignment.  The first-to-notify assignee must take the assignment without notice of a previous one.  Therefore, it is critical for lenders to confirm that no prior assignment exists on life insurance collateral prior to taking the collateral on as security for a loan.

Before assessing the priority of claims on the assignment, it is necessary to look to the underlying life insurance policy to determine the validity of any assignment to a third party.  Insurance policies often dictate the conditions precedent for a valid assignment.  In a dispute over claims to the collateral as between successive creditor-assignees, every purported assignment must first meet the conditions of validity in the policy.

Most life insurance policies authorize the insured to change the beneficiaries and assign it to third parties if the insured provides written notice to the insurer.  Written notice should be sufficient to create a valid assignment to a secured lender. Any successive assignee alleging claim to the policy must also meet this notice requirement under the policy.  If there is more than one valid assignment pursuant to the policy at issue, the court must next determine which assignee has superior rights to the collateral.

In Florida, it is impossible for a lender to “perfect” a claim to an interest in a life insurance policy in the sense that “perfection” is a legally operative word in the Florida Secured Transactions Act.  Both Section 679.1091(4)(h), Florida Statutes, and UCC 9-109(d)(8), specifically exclude an assignment of a claim under an insurance policy from the scope of those chapters. Section 679.1091(4)(h) (tracking the language of UCC 9-109(d)(8)) provides in pertinent part:

This chapter does not apply to . . . A transfer of an interest in or an assignment of a claim under a policy of insurance, other than an assignment by or to a health-care provider of a health-care-insurance receivable and any subsequent assignment of the right to payment but Section 679.3151 and 679.322 apply with respect to proceeds and priorities in proceeds.

Fla. Stat. § 679.1091(4)(h).

In other words, the exclusion applies only to situations where the parties to a security agreement attempt to create a direct security interest in an insurance policy by making the policy itself the immediate collateral securing the loan. See Kahn v. Capital Bank, 384 So. 2d 976 (Fla. 3d DCA 1980).  In absence of statutory authority to establish priority between successive assignees, the common law of assignments will be dispositive of the issue.  Florida has adopted the so-called “English” rule, which gives preference to the assignee who first gives notice to the obligor, unless that assignee takes the assignment with notice of a previous assignment, or takes the assignment without valuable consideration.  Town of River Junction v. Maryland Cas. Co., 110 F.2d 278 (5th Cir. 1940) (applying Florida law); Boulevard Nat’l Bank of Miami v. Air Metal Industries, Inc., 176 So.2d 94 (Fla. 1965).

In Boulevard, the Florida Supreme Court granted certiorari to determine whether the English of American rule (first-in-time has priority) comported with Florida jurisprudence, when resolving a dispute between two assignees of an account receivable.  Id. at 97.  The court began its analysis by stating that “both rules presuppose the absence of any estoppel or other special equities in favor of or against either assignee.”  Id.  After a finding that no special equities or rights existed, the Court affirmed the English rule, recognizing the principle that notice to the debtor of an assignment is necessary to impose upon the debtor the duty to pay the assignee; and the assignee must acquire some “delivery” or “possession” of the debt establishing that right to collect.  Id. at 98.  However, the court did not take a position that notice is the only method of effecting a delivery or possession of an account, so as to put subsequent interests on notice of the prior assignment. Thus, in any priority dispute, the court should first determine that no special equities or rights exist between successive assignees.  If none exist, that the assignee who was first to notify the life insurer will have superior rights to the collateral, unless that assignee had notice of a previous assignment or took the assignment without valuable consideration.