CA Supreme Court Finds “Consent-to-Assignment” Clauses Unenforceable After Loss Occurs During the Policy Period

In Fluor Corporation v. Superior Court (No. S205889; filed 8/20/15), the California Supreme Court overruled its earlier decision in Henkel Corp. v. Hartford Accident & Indemnity Co. (2003) 29 Cal.4th 934, holding that notwithstanding the presence of a consent-to-assignment clause in a liability policy, Insurance Code section 520 bars an insurer from refusing to honor the insured’s assignment of coverage after a loss has taken place during the policy period.

In Henkel, the Supreme Court limited the ability of corporate successors to obtain coverage under predecessors’ policies on a contract theory. The Henkel Court held that where a successor corporation contractually assumed liabilities of the predecessor corporation, the insurance benefits would not automatically follow. The Henkel Court ruled that if the predecessor company’s policy contains a consent-to-assignment clause, any assignment of insurance policy benefits to a successor corporation required the insurer’s consent. The Court said that policy benefits are not transferable choses in action unless at the time of corporate transfer they could be reduced to a monetary sum certain. The Court reasoned that historic product or environmental liabilities might not even be known to the predecessor at that time, much less reduced to a sum certain, so coverage for such risks could not be considered a transferable chose in action. Thus, where the liability was inchoate at the time of the corporate transaction, the Henkel Court said that coverage would not necessarily follow because the insurer’s duties had not yet attached.

The Henkel Court feared that transferring insurance policy benefits could increase an insurer’s risk because the insurer might have to defend both the predecessor and the successor if both were named in an underlying lawsuit. Moreover, dissolution of the predecessor corporation did not negate that risk, since it might still be possible to revive and sue the former corporation. Thus, the Henkel Court saw an automatic transfer of coverage despite the violation of a contractual consent-to-assignment clause as a potential and unwarranted judicial expansion of coverage, that exposed the insurer to the risk of defending and indemnifying two different corporations.

But the Court overruled that result in Fluor, noting that the Henkel decision failed to account for Insurance Code section 520. In Fluor, Hartford agreed to defend and indemnify Fluor Corporation for asbestos claims and lawsuits dating back decades that arose out of Fluor’s engineering and construction business. At some point Fluor acquired a mining company and subsequently underwent a corporate restructuring known as a “reverse spinoff,” under which the original Fluor corporation retained the mining operations but was renamed, while an entirely new company was formed to take over the engineering and construction operations, and given the name Fluor that had been abandoned by the original company. Hartford was given notice of the spinoff but continued to defend and indemnify the new corporation. However, a coverage dispute subsequently arose between the two, leading Fluor to seek declaratory relief and Hartford to cross-complain. Hartford was granted summary judgment on the ground that Henkel was dispositive and Fluor had failed to comply with the Hartford policy’s consent-to-assignment provision.

The Supreme Court reversed. Insurance Code section 520 provides that: “An agreement not to transfer the claim of the insured against the insurer after a loss has happened, is void if made before the loss except as otherwise provided in Article 2 of Chapter 1 of Part 2 of Division 2 of this code.” The Fluor Court stated that the exception referred to in the concluding clause concerns only life insurance and disability insurance, and consequently, the relevant language provides that an agreement not to transfer a claim of an insured against an insurer “after a loss has happened, is void if made before the loss.”

After exhaustively reviewing the Legislative history of the statute and case law throughout the United States, the Fluor court rejected an argument that the phrase “after a loss has happened” necessarily means the period after the insured has incurred a direct loss by virtue of the entry of a judgment, or finalization of a settlement, fixing a sum of money due on a claim, or that there needed to be a “perfected” and discrete claim.

The Court noted that California law analyzing the trigger of a duty to defend repeatedly equates the term “loss,” not with a judgment or settlement for a sum of money, but as synonymous with occurrence of bodily injury and property damage. The Fluor Court also cited as a major rationale of commercial insurance the facilitation of economic activity and growth, and that in the modern American economy, mergers, acquisitions, and sales are part of corporate life. And to the extent that insurance protection (for past but possibly unknown losses) may be more freely assigned as part of corporate recombinations, it lowers transaction costs and facilitates economic activity and wealth enhancement.

Thus, the Fluor Court concluded that “the phrase ‘after a loss has happened’ in section 520 should be interpreted as referring to a loss sustained by a third party that is covered by the insured’s policy, and for which the insured may be liable. We conclude that the statutory phrase does not contemplate that there need have been a money judgment or approved settlement before such a claim concerning that loss may be assigned without the insurer’s consent.”

Consequently, “as applied to this case and similar circumstances, only such an interpretation protects the ability of an insured, in the course of transferring assets and liabilities to another business entity in connection with a corporate sale or reorganization, to assign rights to claim defense and indemnification coverage provided by prior and existing insurance policies concerning the business’s previous conduct. Because any such new business entity typically will assume both the assets and the liabilities of the prior business entity, the new business entity will understandably expect to obtain the rights to claim defense and indemnification coverage for such liabilities triggered during the policy period. If the insurer were able to prevent its insured from assigning rights to assert such claims unless first reduced to a money judgment or approved settlement, it would effectively exert precisely the type of unjust and oppressive pressure on the insured that the early decisions, California Code Commissioners, and Legislature sought to foreclose.”

And the Fluor Court concluded by stating that: “Insurance Code section 520 applies to third party liability insurance. Under that provision, after personal injury (or property damage) resulting in loss occurs within the time limits of the policy, an insurer is precluded from refusing to honor an insured’s assignment of the right to invoke defense or indemnification coverage regarding that loss. This result obtains even without consent by the insurer — and even though the dollar amount of the loss remains unknown or undetermined until established later by a judgment or approved settlement. Our contrary conclusion announced in Henkel Corp. v. Hartford Accident & Indemnity Co., supra, 29 Cal.4th 934, is overruled to the extent it conflicts with this controlling statute and this opinion’s analysis.”

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August 21, 2015