PRACTICAL POLICYHOLDER ADVICE

For policyholders considering corporate transactions under California  law,  the  Supreme  Court of California’s recent interpretation of an overlooked statute in Fluor Corporation v. Superior Court of Orange County, No. S205889,  2015 WL 4938295 (Cal. Aug. 20, 2015), provides comfort that pending claims for coverage of liabilities to third parties are assignable regardless of policy language  that requires the insurer’s consent to assignment. The court’s decision in Fluor brings California in step with the majority of other jurisdictions and overrules a 2003 decision that had held that anti-assignment provisions are enforceable unless the assigned  claim  was  reduced to a money judgment or approved settlement before the assignment.

Assignment of  insurance rights  and obligations is  often a  key consideration in  corporate transactions. In a minority of states, insurers have successfully blocked transfers  of  insurance  rights  to  third parties  in  asset sales or stock purchases based on the argument that such assignments are invalid without the insurer’s consent pursuant to  consent-to-assignment  provisions  in  the  insurance  policies. The  Supreme  Court  of California’s recent ruling in Fluor Corporation v. Superior Court of Orange County abandoned the minority approach, removing this barrier  to  the  assignment  of  insurance claims under California law and overturning the court’s decision in Henkel Corp. v. Hartford Accident & Indemnity Co., 62 P.3d 69 (Cal. 2003).

In Fluor, the court held that a rarely cited statute, California Insurance Code Section 520, bars an insurer from refusing  to  honor  an  insured’s  assignment  of  policy  coverage  under  a  third-party comprehensive  general liability  policy  (CGL)  with  respect  to  a  loss  that  predates  the  assignment. The  court  further  held  that consent-to-assignment  provisions  are  unenforceable  to  the  extent  that they preclude post-loss assignment. Additionally,  the  court  held  that  the  insured’s  claim  for coverage  of  a  loss  is  assignable  under  Section 520 even before the claim is reduced to a money judgment or approved settlement, and regardless of whether the dollar amount of the loss is unknown, overruling its 2003 decision in Henkel.

In Henkel,  the  insured  had spun  off  its metal working business  into a  separate,  newly  created corporation, which  subsequently  was  acquired  by  and  merged  into  Henkel  Corporation.         Following  these  transactions, various workers sued Henkel alleging that before the transactions occurred they had suffered personal injuries from exposure to metallic chemicals.   Henkel sought insurance coverage from the original company’s insurers, including Hartford Accident & Indemnity Co. (Hartford).   Hartford denied coverage, pointing to the consent-to- assignment clause.   The court ruled in favor of Hartford, holding that any purported contractual assignment to Henkel of the right to coverage was ineffective because the assignment was made without Hartford’s consent and the  underlying claims had not  matured into a “chose in action.”  The Henkel  court held that consent-to- assignment provisions were unenforceable only if at the time of the assignment the coverage claim has been reduced  to  a  fixed  sum  of  money  due  or  to  become  due,  i.e.  a  chose  in  action,  but  found  that the court Hartford’s duty relating to the injured workers’ claims did not meet that criteria.

The  facts  underlying  Fluor  are  analogous.  Fluor   Corporation’s   original   business   involved   engineering, procurement, and construction (EPC) operations.   During the 1980s, Fluor acquired a mining business, A.T. Massey Coal Company, as a subsidiary.   In 2000, Fluor engaged in a tax-free stock distribution known as a “reverse  spinoff.”    In connection with  the  transaction,  Fluor  changed its name  to Massey Energy Company, and, at the same time, Fluor transferred its EPC operations to a newly incorporated subsidiary, which retained the name Fluor Corporation (Fluor-2).  The Distribution Agreement transferred all rights and obligations from the original  Fluor  to  Fluor-2  with  respect  to  the  EPC  business,  with  some  unrelated  exceptions.    Following  the corporate restructuring, Fluor-2 continued the EPC business and asserted claims to insurance coverage under the original Fluor’s policies.

The  original  Fluor  was  insured  by  Hartford  under  CGL  policies  that  contained  a  consent–to-assignment clause identical to the provision in Henkel.   The clause provided that “[a]ssignment of interest under this policy shall not bind the Company until its consent is endorsed hereon.”  From the mid-1980s and continuing through the present, Hartford defended and settled numerous lawsuits against various Fluor entities that alleged liability for personal injury caused by exposure to asbestos.  After Fluor’s corporate restructuring, Hartford provided the same coverage  to Fluor-2  until 2009,  when  Hartford responded  to an  unrelated  dispute by alleging that the original Fluor had failed to comply with the consent-to-assignment provision.  Hartford sought declaratory relief and reimbursement of the defense and indemnity payments it had made on behalf of Fluor-2, alleging that the original Fluor’s  assignment  of the  right  to invoke  coverage  to Fluor-2  was  ineffective  because  it  was done without Hartford’s consent.

The court in Fluor determined to reconsider its ruling in Henkel  primarily  because  Henkel  had  overlooked Section 520.  Section  520  provides  that  “[a]n  agreement  not  to  transfer  the  claim  of  the  insured  against the insurer after a loss has happened, is void if made before the loss,” with some enumerated exceptions. After reviewing the statute’s legislative history, the court first held that Section 520 applies to  claims  for insurance coverage of liability to third parties, rejecting Hartford’s argument that the provision was limited to claims for first-party loss (e.g., an insured’s coverage for damage to its own property).

The  court  then  considered  the  parties’  conflicting  interpretations  of  the  statutory language, focusing on the terms “after a loss has happened.”   Fluor-2 contended that loss happened when the underlying litigants were exposed  to asbestos  resulting  in  bodily injury,  and  therefore  the  claims were  assignable  without  Hartford’s consent at the time of the restructuring.   Hartford argued that there must be a judgment or final settlement against  the  insured,  fixing  a  sum  of  money  due  in  the  underlying  lawsuits,  before  Section  520  permits  the insured to assign a claim without the insurer’s consent.

The  court  conducted  an  extensive  review   of   the   legislative   history   of   Section   520,   including predecessor statutes, and the development of relevant case law, including early case law addressing anti- assignment provisions in the context of first-party insurance and subsequent case law in the third-party liability insurance context. As the court found based on the  early  case  law,  Section  520  should  be  interpreted  as barring the insurer from unjustly withholding coverage after a loss because, at that point, the insurer-insured relationship becomes that of debtor-creditor, and the justification for prohibiting  assignment  (i.e.,  that  the insurer had only evaluated the risks  imposed  by  the  particular  insured)  no  longer  applied.  In  more  recent case law,  the  court  identified  two  key  principles  supporting  its  reasoning.  First,  a  liability  insurer’s obligation to  indemnify  the insured  arises  when  personal  injury  or  property  damage  results  during  the  term of the policy, regardless of whether the dollar amount is uncertain. Second, an  insured  may  assign  its post-loss  insurance  coverage rights.

The court relied heavily on Ocean Accident & Guarantee Corp. v. Southwestern Bell Telephone Co., 100 F.2d 441 (8th Cir. 1939), noting that it was decided before the amendment of Section 520 in 1947 and that it has been adopted in the vast majority of courts that have addressed similar issues.  In Ocean Accident, the Eighth Circuit distinguished between  assignment  of a  claim, or  debt, under the policy, and assignment of the policy itself.The  court held  that a  post-loss  claim  became  assignable notwithstanding a policy prohibition against assignment when the cause of action arose, simultaneous with the underlying injury, and before the claim was liquidated and reduced to judgment. As the Fluor court found, the fundamental premise in Ocean Accident – that an insured loss occurs at the time of injury – is consistent with California cases addressing trigger of coverage in long-tail insurance disputes.

Following its extensive review of the legislative history and case law, the court adopted the majority approach, concluding that the terms “after a loss has happened” in Section 520 refer to a loss that is covered by the insured’s  policy  and  for  which  the  insured  may  be  liable.         Rejecting  Hartford’s  argument  and  overruling  its 2003 decision in Henkel, the  court held that the  loss  may be  assigned  without  the  insurer’s  consent even before  it  is  reduced  to  a  money  judgment  or  approved  settlement. As  the  court  further  reasoned, its interpretation would contribute to the efficiency of business by minimizing transaction costs and the barriers to wealth-maximizing  activity.