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.