Why it matters: Reversing its holding in a 2003 case, the Supreme Court of California recently ruled that notwithstanding the presence of a consent-to-assignment clause in a liability policy, an insured may legally transfer its insurance after a loss has taken place. The court based its decision in large part on Insurance Code Section 520, which states: "[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." The court rejected the insurer's 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's decision brings California into line with the vast majority of decisions nationwide holding that an insurer may not block assignment of coverage under liability policies once a covered loss has occurred. This is good news for policyholders because it removes a significant and widely criticized legal impediment to mergers and acquisitions and facilitates the transfer of assets and liabilities to between business entities without fear of jeopardizing already-triggered insurance coverage.
Detailed discussion: The case involved a dispute between Fluor Corp. and Hartford Accident & Indemnity Company ("Hartford") arising from a 2000 corporate restructuring in which Fluor split itself into two companies.
Fluor purchased numerous comprehensive general liability policies from mid-1971 to mid-1986 from, among others, Hartford. The policies contained a consent-to-assignment clause that stated "[a]n assignment of interest under this policy shall not bind the Company until its consent is endorsed hereon."
Commencing in the mid-1980s, various Fluor entities were sued in numerous lawsuits alleging liability for personal injury caused by exposure to asbestos. Fluor tendered these lawsuits to Hartford. For many years Hartford defended and settled those actions.
In 2001, Fluor notified Hartford of a reverse spin-off in which Fluor was separated into two publicly traded companies. Hartford continued to provide coverage to Fluor under its predecessor's policies.
In 2009, in subsequent coverage litigation, Hartford sought to avoid its coverage obligations, asserting for the first time that the reverse spin-off reflected a purported assignment of insurance rights which was done without Hartford's consent, thereby rendering the assignment void.
Hartford argued that it had no obligation to defend or indemnify the entity which was the subject of the asbestos lawsuits, even though it was a continuation of the original Fluor Corporation whose operations were at issue in those suits.
The trial court agreed with Fluor, holding that the California Supreme Court had addressed the issue in its 2003 decision Henkel Corporation v. Hartford Accident and Indemnity Company. Fluor subsequently appealed and again lost, leading Fluor to appeal to the California Supreme Court.
In Henkel, the California Supreme Court issued a decision that limited the ability of corporate successors to obtain coverage under predecessors' policies on a contract theory. The 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 stated 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.
But the court overruled that result in Fluor, noting that the Henkel decision failed to account for Insurance Code 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."
After a lengthy review of the legislative history of the statute and case law throughout the United States, the Fluor court rejected the 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 reasoned that "the rule embodied in section 520 is consistent with the overwhelming majority of cases decided before and sinceHenkel." The principle reflected in those cases—precluding an insurer, after a loss has occurred, from refusing to honor an insured's assignment of the right to invoke policy coverage for such a loss—has been described as a venerable one, borne of experience and practice, facilitating the productive transformation of corporate entities, and thereby fostering economic activity."
While consent-to-assignment clauses are a recognized means of protecting an insurer from having to bear a greater risk than what it agreed to undertake when it issued the policy, the court further explained, Section 520's "post-loss exception" is an essential aspect of modern commerce, with its constant mergers, acquisitions, and asset sales.
The 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." The court further explained 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."
"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. is overruled to the extent it conflicts with this controlling statute and this opinion's analysis."
The case was sent back to the Court of Appeal for reconsideration.
To read the decision in Fluor Corp. v. Superior Court, click here.