Navigating the complexities of policy recovery can be daunting for property and/or business owners who are facing environmental liabilities from historical operations and activities. Assignment of claims (AOC) is a tool that can make historical insurance policies available to a future property owner or business owner and, when deployed properly, can streamline any buy/sell process.
By collateralizing these hidden assets to a future owner, the Seller can secure the value of their real estate and/or business, and the Buyer can obtain historical insurance funding for a known or suspected environmental liability.
This guide will break down an AOC’s purpose, process, advantages, considerations, and the role of insurance archaeology. Property and business owners can make informed decisions about using AOC to collateralize and monetize their long-lost insurance coverage by understanding how it works. Without these historical policies, environmental liabilities, property damage, and other long-tail claims can potentially adversely impact the value of real estate and business transactions.
What Is Assignment of Claims?
Assignment of claims (AOC) is a legal agreement that allows the rights under an insurance policy, such as the right to file a claim or recover benefits, to be transferred from one party to another. AOC may be used in a real estate and business transaction to address environmental liability when a seller assigns their rights under historical insurance policies to a buyer. This allows the buyer to pursue coverage for contamination or other long-tail liabilities that may have been discovered during due diligence or even after closing.
While AOC is common in industries like healthcare or property restoration, where contractors may have clients assign claims and/or benefits directly to them, it serves a unique role in real estate transactions where contamination can be cleaned up with 40+ year old policies. Insurance archaeology firms like Restorical Research help identify applicable historical insurance policies and help legal counsel facilitate the assignment process, so buyers can recover funds from insurance policies that existed long before they acquired the property or business.
An AOC can be inserted into a Purchase and Sale Agreement (PSA) for real estate and Merger Agreements, Share Purchase Agreements, or an Asset Purchase Agreement for businesses (M&A).
Advantages and Considerations of Using Assignment of Claims in PSA’s and M&A Agreements.
An AOC is a legal tool that allows one party—in this example, a property Seller—to transfer their claims under historical insurance policies to another party, a Buyer. This strategy is especially useful when PSA transactions involve contaminated properties, where the buyer will be responsible for an environmental cleanup and is liable for the contamination.
When a business is sold, the Buyer wants to obtain the rights under the historical insurance policies to protect themselves from long-tail liabilities post-closing. This strategy is especially useful when M&A transactions involve industries (and properties) with a history of environmental liability. The Acquirer will be responsible for known and unknown environmental liabilities.
For example, Private Equity Firms are saddled with tremendous financial impacts from PFAS (Forever Chemicals) Cleanups, and in many instances these Buyers can protect themselves by strategically using AOCs and gaining access to the prior business/owner’s historical insurance policies.
Restorical Research helps facilitate this process by locating these historical insurance policies. We will then advise clients and their legal counsel on structuring AOCs effectively, helping assign claims so that an entity other than the policyholder (such as a Buyer) may obtain insurance coverage after the sale. While AOC can be a powerful tool in the proper context, it also involves legal and logistical considerations.
| Advantages | Considerations |
| AOC allows buyers to unlock insurance rights they wouldn’t otherwise have access to. It’s a practical solution when contamination threatens a real estate transaction. | How much control does each party want to have over the claim and policies? The AOC should be tailored with this in mind. Hands off or working in partnership? |
| It helps preserve a property’s value. A contaminated site may not sell unless the buyer has a path to funding the cleanup with historical insurance policies. AOC makes that possible. | Insurer pushback is to be expected. Working with a good attorney is crucial. |
| It provides flexibility during property transfers. Buyers can pursue coverage from policies issued long before they took ownership. | State laws may limit or regulate AOC use. While carriers may challenge an AOC, these agreements are valid in all 50 states. Please consult legal counsel so that the AOC can be tailored to the nuances in your individual state. |
| It can streamline cleanup timelines. With rights secured, buyers can act quickly to get the funding needed to resolve contamination and proceed with redevelopment. | Using an AOC requires cooperation and timing. The earlier this process can be started, the more likely it will be successful. |
An AOC is not a catch-all solution—but when used strategically, especially in transactions involving environmental liabilities, it can make the difference between a failed sale and a viable redevelopment.
4 Considerations Before Signing an Assignment of Claims Agreement
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While AOC agreements can simplify recovering funds from historical insurance policies, they also require transferring certain claims, rights, and/or benefits to a third party [someone other than the policyholder]. Here are the most important factors to consider:
1. Understanding the Terms and Scope of the Agreement
Policyholders must fully understand what exactly they are transferring and how it may impact their ability to use these policies in the future. A poorly defined AOC agreement can leave both parties uncertain regarding the control over the claims process, financial recovery, and future legal options. A well-drafted AOC agreement clearly defines these terms, ensuring transparency and preserving the policyholder’s financial interests.
- Scope of authority: Does the agreement give the assignee complete control, or are there limitations on what they can do for the business? Is the policyholder receiving an indemnity in exchange for the AOC providing complete control?
- Claim settlement rights: Can the assignee settle a claim without consulting the business owner, or is prior approval required?
- Agreement duration: Does the agreement expire once a claim is settled, or does it grant long-term control over future claims under the same policy?
- Liability protections: Does the AOC protect the business owner from legal disputes between the assignee and the insurer?
- Fee structure: Are fees tied to considering the policies that could impact the final payout?
- Revocation terms: While AOC agreements are typically binding, the ability to revoke them depends on what’s negotiated in the contract. Some agreements may include cancellation clauses or allow termination by mutual consent, so reviewing these terms carefully is essential.
2. Understand the Legal Risks of Assignment of Claims
While an AOC can be an effective tool for obtaining coverage from historical insurance policies, it comes with legal risks that vary based on contract terms, state laws, and the practices of the assigned firm.
- Disputes with insurers: Some insurers may challenge the validity of AOC agreements, especially in states where such agreements are not clearly defined in case law. However, AOCs are widely accepted in almost every state, and this highlights another reason to engage with knowledgeable legal counsel..
- Loss of legal standing: Depending on the terms negotiated in the AOC, the business owner may lose the ability to intervene in the claim process once rights are assigned. If the assignee does not act in the policyholder’s best interest, recourse may be limited.
- State-specific regulations: Some states have laws restricting or regulating AOC agreements. Engaging with an attorney who understands these nuances in your state is paramount.
3. Evaluate the Financial Terms of the Agreement
Depending on what is negotiated, some AOC agreements may involve financial terms.. In most cases, no payment is exchanged as the AOC is utilized to prevent a price reduction during a liability transfer, and the process benefits each party equally. However, as is the case in most things, the final agreement will reflect what has been negotiated, so it’s still important to understand what, if any, financial elements might be included.
- Fee structure: Some agreements may outline administrative fees or legal costs.
- Advance payments or retainers: In rare instances, a policyholder could request a retainer or payment upfront in exchange for the AOC. Verify whether the retainer is refundable and how additional expenses are handled.
- Potential liens or financial obligations: Will the policyholder want an accounting of future payouts? If yes, the agreement should have language outlining the right to audit or review these future distributions.
- Escrow Monies and Releases: Ensure the AOC agreement is written in a manner that complements any separate escrow instructions established in the PSA or M&A Agreements. Escrow documents should outline what happens when insurance funds are received and the mechanism for releasing escrow funds in coordination with the terms of the PSA and M&A.
4. Ensure the Agreement Allows for Transparency and Communication
A well-structured agreement should provide the policyholder with a structure they can accept and the assignee access to the policies they require. The best way to ensure transparency and communication among the parties is to start these discussions early in the buy/sell process and have competent representation on both sides.
The Role of Insurance Archaeology in an Assignment of Claims Process
Utilizing an AOC begins with finding and understanding the historical insurance coverage of the property and/or the business. Parties seeking to protect themselves from long tail claims with the help of historical insurance policies can follow this structured approach:.
- Hire an Insurance Archaeology Firm: Locating the policies is the first step. An insurance archaeology firm searches business records, legal documents, and past insurers to identify policies that may provide coverage. An insurance coverage attorney confirms whether the insurer is legally obligated to honor the policy.
- Determine if AOC is the right approach: Assigning claims can be helpful in any situation where property or businesses are changing hands, and these historical policies want to survive the transaction.
- Draft and sign the AOC agreement: The policyholder and assignee negotiate the terms of the agreement. .
- File and negotiate the claim: The assignee can then proceed with tendering claims to the policyholder’s historical insurance carriers per their needs.
- Obtain coverage and/or settle the claim and distribute funds: Once the carrier agrees to defend and indemnify the assignee, they will fund the investigation and remediation of the contaminated site.
Alternative Approaches to Assignment of Claims
AOC are an efficient way to recover historical insurance funds if you are not the policyholder, but it may not be the best option for every situation. Sometimes the preferred course if for the policyholder to retain control over the claims process or explore alternative methods to secure financial recovery. Below are other approaches you can consider.
- Direct negotiation with insurers: The policyholder can pursue coverage themselves and remain in control of the process. However, this may increase timelines for property and business transactions, depending upon the terms negotiated.
- State and federal cleanup funds: Businesses may qualify for brownfield redevelopment grants, state cleanup funds, natural disaster relief, or other public-private initiatives to cover remediation costs. These programs provide financial relief but often have strict eligibility requirements and funding limitations.
Unlocking Insurance Funds for Your Business’s Future
AOC is a powerful tool to ensure historical insurance policies survive a real estate and/or business transaction and can be relied upon to fund environmental (and other long-tail) liabilities in the future.
Restorical Research specializes in identifying lost insurance policies and securing historical coverage to help policyholders, property owners, and businesses manage environmental liabilities. Our team conducts in-depth policy searches, underwriting, advisory, claims management, and accounting services to assist our clients and their legal counsel (referred to as our “ Cost Recovery Assistance”) and in negotiating successful outcomes with insurers.
Our Clients rely on the versatility of AOC agreements as a tool to strategically maximize insurance cost recovery for future owners of real estate and businesses while maintaining transparency with policyholders. If your real estate or business is facing high cleanup costs or insurance challenges, contact us today to learn how we can help you recover historical insurance funds.
