An Assignment of a cause of action is useful where the cause of action is more valuable in the assignee’s hands. For example, a defendant who just lost a jury trial may lack the appetite or resources for a fight with the insurance company who wrongfully denied coverage to that defendant for the plaintiff’s claims. In this instance, the recovery from the insurance company may simply pass through to the plaintiff and the plaintiff’s only source of compensation may be the insurance company. Under this circumstance, an assignment of the defendant’s cause of action against the insurance company to the plaintiff in exchange for the plaintiff’s covenant not to execute the judgment against the defendant may increase both parties’ net economic position.
Assignments typically involve a contractual conveyance by the owner to another of 100% of a cause of action, including all associated rights such as the right to control litigation. Assignments are governed by contract and property law, as well as public policy. An assignment of a cause of action is a conveyance of personal property. Since a cause of action is property, a sale can be structured in the same manner as similar real property or business transactions. The general rule is that all of a cause of action is assignable. However, parties may agree the only parts of the cause of action will be assigned. Components of a cause of action include the right to the proceeds, the right to control the litigation, and the right to accept or reject settlement among others. Once a successful assignment is made, the assignor loses control of the rights assigned.
However, there are limits on assignments of causes of action. In State Farm Fire and Casualty Co. v. Gandy, 925 S.W.2d 696, 706 (Tex. 1996), the Texas Supreme Court voided an assignment in a settlement agreement by an insured defendant to a plaintiff against the insurance company on public policy grounds. The Court held that a defendant’s assignment of his claims against his insurer to a plaintiff is invalid if (1) it is made prior to an adjudication of plaintiff’s claim against the defendant in a fully adversarial trial, (2) the defendant’s insurer has tendered a defense, and (3) either (i) defendant’s insurer has accepted coverage, or (ii) defendant’s insurer has made a good faith effort to adjudicate coverage issues prior to the adjudication of plaintiff’s claim. But the Court made clear that, in no event, is a judgment for plaintiff against defendant, rendered without a fully adversarial trial binding on defendant’s insurer or admissible as evidence of damages in an action against defendant’s insurer by the defendant or the plaintiff as defendant’s assignee.