Can an individual who is not named as an insured on a health insurance policy, under which benefits are presumably available, assign his/her rights in favor of a healthcare provider? This question was recently answered by the Tennessee Court of Appeals in Action Chiropractic Clinic, LLC v. Hyler, No. M2013-01468-COA-R3-CV, 2014 Tenn. App. LEXIS 73 (Tenn. Ct. App. Feb. 12, 2014).

In Hyler, Prentice Hyler (“Hyler”) and William Burnette, Jr. (“Burnette”) were involved in an automobile collision that was caused by Burnette. At the time of the accident, Burnette’s automobile was insured by Erie Insurance Exchange (“Erie”). Following the accident, Hyler received medical treatment at Action Chiropractic Clinic, LLC (“Action”). As consideration for the healthcare provided and in order to satisfy any payment owed, Hyler executed an Assignment of Rights (the “Assignment”) to Action for medical expense benefits allowable and otherwise payable to Hyler from his “Health Insurance, Auto Insurance, or any other party involved.” When Hyler’s treatment ended, Action sent Erie a copy of the Assignment.

When Erie did not remit payment, Action filed a civil warrant in Davidson County General Sessions Court. Erie removed the case to Circuit Court, where it filed a motion for summary judgment. The Circuit Court granted Erie’s motion, holding that: (1) Hyler had no vested rights against Erie when he executed the Assignment to Action; (2) the insurance policy required written consent to the assignment of any rights thereunder and there was no evidence of such consent; (3) there was no contractual privity between Action and Erie; (4) Action was not a third-party beneficiary of the policy; and (5) the suit was a direct action against an insurance company and, hence, prohibited by Tennessee law.

On appeal, Action argued: (1) that the Assignment was valid under Tenn. Code Ann. § 56-7-120(a)(1) and Tennessee common law; (2) that Hyler could assign his rights to Action despite the language regarding assignments in the automobile insurance policy; (3) that public policy favored the assignment of benefits to a health care provider by an injured party; (4) that the Assignment was valid despite a lack of contractual privity with Erie; and (5) that it could sue Erie directly even though Tennessee is not a direct action state.

The Tennessee Court of Appeals first addressed whether the Assignment of Action was valid under Tenn. Code Ann. § 56-7-120(a)(1), which states, in pertinent part, as follows:

Notwithstanding any law, rule, or regulation to the contrary, whenever any policy of insurance issued in this state provides for coverage of health care rendered by a provider covered under title 63, the insured or other persons entitled to benefits under the policy shall be entitled to assign these benefits to the healthcare provider and such rights must be stated clearly in the policy. Notice of the assignment must be in writing to the insurer in order to be effective; provided, however, such notice can be provided by other means if so stated in the policy.

Tenn. Code Ann. § 56-7-120(a)(1).

In determining whether the Assignment from Hyler to Action was valid under the foregoing statutory provision, the Tennessee Court of Appeals stated that the dispositive question was whether, Hyler, who was not a named insured under the policy, otherwise qualified as a “person entitled to benefits under the policy.” After evaluating the portion of the policy identifying the persons protected under the policy and determining that there was nothing to suggest that Hyler was such a person, the Court held that the Assignment was not valid under Tenn. Code Ann. § 56-7-120(a)(1).

Having determined that the Assignment was not valid under Tenn. Code Ann. § 56-7-120(a)(1), the Court addressed whether the Assignment was valid under Tennessee common law. In this regard, the Court ultimately concluded that, while Hyler had a common law right to assign the proceeds of his claim against Burnette to Action to pay for his treatment, Action’s rights were no greater than Hyler’s. Because Hyler was not a named insured or otherwise within the class of persons protected by the policy and because there was no evidence that Burnette, who was the named insured, had taken any action to assign his benefits under the policy to Hyler, it followed that Hyler had no rights against Erie that he could assign to Action. For that reason, while holding that Hyler had a common law right to assign his proceeds to Action, the Court ruled that Erie was not obligated to honor the Assignment.

The Court next addressed Action’s argument that the Assignment was valid and, hence, enforceable against Erie despite the lack of contractual privity between Action and Erie. Action argued that because there will never be privity between a healthcare provider and the insurance company, lack of privity should not serve as a basis for refusing to honor the Assignment. The Court of Appeals disagreed, stating that insurance contracts are, by their very nature, personal contracts between the insured and the insurer. The Court further reiterated that Hyler had no claim or right to performance against Erie and, therefore, nothing to assign relative to Erie.

The Court then turned to Action’s assertion that the trial court erred in holding that Action could not bring suit against Erie because Tennessee is not a “direct action” state. The Court of Appeals found Action’s contention unavailing, stating that, because Action’s lawsuit against Erie sought to enforce a duty arising from the policy, it indisputably amounted to a direct action.

Lastly, the Court addressed Action’s argument that the language in the policy requiring Erie’s consent to any assignment of benefits did not apply to Hyler because Hyler was not a party to the contract of insurance and, hence, not bound to the policy’s consent requirement. In response, the Court stated that, while it agreed that Hyler’s ability to assign the proceeds of his claim against Burnette were not constricted by the language of the policy, it disagreed with Action’s contention that, as a result, Erie was bound to honor the Assignment. In explaining the reason for its decision, the Court stated that because Hyler was not a named insured or otherwise protected or entitled to benefits under the policy, Erie was not obligated to honor Hyler’s Assignment to Action.

For the foregoing reasons, the Court of Appeals affirmed the judgment of the trial court.

There are two points that insurance companies should take away from this decision. First, it would be advisable for insurance companies to include language in their policies stating that assignments executed by individuals who are not either named insureds or otherwise protected or entitled to benefits under the policy will not be honored by the insurer. Second, even when no such language is included in the policy, there is now precedent clearly establishing that such an assignment will not be enforceable against the insurer.