Thursday, May 7, 2015
Assignments and the Need for Conditional Assignments
An Assignment Deed is a legal instrument that transfers the ownership of an asset from the owner to another.
ASSIGNOR ---------------- ASSIGNEE
(Owner) (New owner)
A life insurance policy is recognized as an asset of an individual and thereby its ownership is generally allowed to be transferred to another by an assignment deed. Upon an assignment being effected, it is a complete transfer of ownership and cannot be withdrawn by the assignor. However, (just like any other asset), the assignee can transfer the ownership back to the assignor if he/she wishes to do so. This is effected by means of a “Reassignment” or “Revocation” of the assignment as practiced by insurance companies.
When an insurance policy is assigned, the benefits in the policy (unless specifically excluded in the policy contract) are payable to the assignee. These benefits would include cash bonuses, survival benefits, loans, surrender or maturity proceeds and of course death claim proceeds. Hence, such assignments have been labeled as “Absolute Assignments”.
It is believed that in the early 1960s, some life insurers created a “modified assignment” and called this instrument a “Conditional Assignment”. This instrument was probably created because the laws prevailing at that time did not allow a beneficiary to be legally entitled to the proceeds of an insurance policy and could only make a claim if the Grant of Probate or Letters of Administration of the deceased’s estate were produced. Section 44 of the Insurance Act 1963 was later introduced as an amendment (in 1983), to allow beneficiaries to receive all or part of the death claim proceeds under certain conditions. Thus, the object of the Conditional Assignment at that time was to allow the policy owner (the assignor) to give the entire death claim proceeds to the beneficiary (an assignee) without the need for Grant of Probate or Letters of Administration. The situation had changed because Section 165(1) of the Insurance Act 1996 and now Para 4 of Schedule 10 of the FSA 2013 makes it mandatory for the insurer to pay the entire death claim proceeds to the named nominee(s) in a insurance policy.
The FSA 2013, in directing insurers to pay death claim proceeds to the nominees directly, further stipulates that some of them are not entitled to these moneys beneficially. Para 2(4) Schedule 10 states “The licensed insurer shall prominently display in the nomination form that the policy owner has to assign the policy benefits to his nominee if his intention is for his nominee, other than his spouse, child or parent to receive the policy benefits beneficially and not as an executor;…….”
The words used in this statutory provision i.e. “assign the policy benefits” clearly directs the insurer to allow the policy owner to assign the policy benefits and not necessarily the ownership of the policy.
Thus, it is now onerous on the insurer to create an assignment that provides for nominees, who are other than spouse, children and sometimes parents (commonly called “non-trust nominees”), to receive death claims beneficially and not merely as executors as provided in Para 6(3) of the FSA 2013. This provision again uses the words “policy moneys “and not “policy” with regards to assignments.
Therefore, a “Conditional Assignment” is now necessary to give “non-trust nominees” beneficial interest in the death claim proceeds of both life and personal accident insurance policies. Such an assignment may be provided by the insurers as “standard forms” or drafted in any other manner acceptable to them. Although the primary purpose is to give the claim proceeds to the assignee, other conditions may be introduced to give effect to this objective.. For example, the condition that “if the assignee predeceases the assignor, then the assignment is revoked” will be a natural requirement for these purposes.
As an alternative to executing a conditional assignment, the policy owner may also give the beneficial interest of the policy moneys to “non- trust nominees” by means of specific directions in his/her will by virtue of Para6(2) of Schedule 10 of the FSA 2013.
The above discussion is to impress upon insurers dealing in life insurance and personal accident policies the need for allowing policy owners to assign policy moneys to specific persons if they desire to receive the death claim moneys beneficially. Such assignments may carry the label “Conditional Assignment” or any other suitable name. Academics and lawyers may find this concept unacceptable because it is alien to the principles of assignments as seen and applied with other assets and as taught in law school. It must be noted that the FSA 2013 and its predecessor for the insurance industry, the Insurance Act 1996 had created several peculiar legal “phenomena” applicable to insurance contracts. Among the most significant of this, apart from the concept of “conditional assignments” is the principle of “suspended trusts”. This of course, is a matter to be discussed in another paper.