California Supreme Court Overrules Henkel and Holds Obscure Statute Allows Insured To Assign Policy With Anti-Assignment Clause After Loss Occurs
Matthew C. Lovell and Seth J. Manfredi
August 27, 2015
In 2003, the California Supreme Court held an insurer could enforce a “consent to assignment” (or “anti-assignment”) clause and decline to recognize an insured’s assignment of rights under the policy after the loss occurred. Henkel Corp. v. Hartford Accident & Indem. Co., 29 Cal. 4th 934 (2003). The court has now held that its prior ruling was wrong. In Fluor Corp. v. Superior Ct., Case No. S205889 (Cal. Aug. 20, 2015), the court reversed the lower courts, overruled Henkel, and held that California Insurance Code Section 520, a rarely-cited statute that escaped the parties’ and court’s attention in Henkel, “dictates a different result from that reached in Henkel.” The Fluor court held Section 520 precludes an insurer from invoking a consent to assignment clause to avoid coverage following assignment of the policy after the coverage-triggering event has happened, even though the insured did not obtain the insurer’s consent. The Fluor court overruled Henkel because that decision failed to consider “the controlling statutory provisions of Section 520,” and was inconsistent with “the overwhelming majority of cases decided before and since Henkel.”
The analysis of a successor’s rights to a predecessor company’s insurance has long been a troublesome area for insurers, especially in the contexts of product liability claims (including asbestos) and environmental liabilities. Claimants sue every iteration of a company, through acquisition and merger, and successor companies may have liability for a predecessor company’s products or operation under tort law or statute (like CERCLA). Sometimes a company has assigned its assets -- including insurance policies -- to successor companies. Insurance policies often have “consent to assignment” or “anti-assignment” provisions to preclude the insured from assigning its policy, as the insurer did not assess risks associated with the successor company and did not receive a premium to insure the new entity. Further, the insurance company did not plan to defend multiple companies years later, when it only insured one of them.
When it was issued in 2003, Henkel was touted as an important decision that clarified this issue for insurers faced with a number of companies seeking insurance coverage for the same claim.
Meanwhile, Section 520 of the Insurance Code, enacted in 1872 (long before the advent of liability insurance) and last updated in 1947, provides in relevant part 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 ….”
Fluor Corporation (“Fluor 1”) performed engineering and construction operations. Since the mid-1980s, Fluor had been sued in asbestos bodily injury lawsuits. Fluor 1 tendered these lawsuits to Hartford and its other liability insurers, all of which agreed to defend (with the exception of specific claims).
In 2000, Fluor 1 transferred several of its divisions to a separate corporation (“Fluor 2”). Fluor 1 and Fluor 2 were independent companies with no overlapping ownership interest. After this restructuring, asbestos lawsuits were brought against Fluor 2 based on the prior operations of Fluor 1, and Fluor 2 paid retrospective premiums to Hartford for the claims against Fluor 2.
Hartford filed a declaratory relief action, asserting there was no coverage for the lawsuits against Fluor 2 because Fluor 1 had failed to comply with the policies’ consent-to-assignment clauses. Those clauses required Hartford’s consent as a condition to Fluor 1’s assignment of its rights under the policies.
Fluor 2 moved for summary adjudication, arguing that Section 520 permitted assignments of losses that predate the assignment, regardless of whether the insurer consented to the assignment. Hartford argued Henkel applied, instead of Section 520. Hartford prevailed before the trial court and the Court of Appeal, which both held the consent-to-assignment clause was enforceable, notwithstanding Section 520. The Court of Appeal held Section 520 did not apply to third party liability insurance and, even if it did, the statute’s reference to “after a loss has happened” meant once the underlying matter is reduced to a judgment or settlement, which had not yet happened.
Supreme Court’s Opinion
The California Supreme Court reversed. It held Section 520 applies to liability insurance policies and first-party policies, and prevents insurers from enforcing consent-to-assignment clauses after a loss has already occurred.
The court conceded that, when Section 520’s predecessor statute was enacted in 1872, it was unlikely the Legislature contemplated liability insurance, which was first issued in the United States in 1886. However, by 1935, when the statute was re-codified, liability insurance had become prevalent and well-developed. More importantly, the 1947 amendment exempted life and disability insurance policies from Section 520’s coverage, and provided distinct rules for assignment of those types of policies. According to the court, the fact that liability insurance was not exempted by the 1947 amendment confirmed that the Legislature viewed Section 520 as a “general rule” covering all classes of insurance, even those not in existence in 1872.
The court analyzed the meaning of the statute’s phrase “after a loss has happened” and found the phrase ambiguous in the context of liability policies. The phrase could refer to the time after the injury to a third party has happened (e.g., the claimant’s exposure to asbestos), or to the period after the insured incurred a direct loss from entry of a judgment or from a settlement. To decide the most reasonable interpretation, the court examined legislative history and the history of assignments of third party liability insurance.
Citing to earlier case law interpreting a New York Civil Code statute that was identical to Section 520’s predecessor, the court held that in the first-party insurance context, the reference to “after the loss has happened” meant the time after the injury or damage covered by the policy had occurred. Subsequent third-party liability cases in California and elsewhere held a loss occurs at the time of the injury, well before any judgment or settlement. Thus, the court concluded the phrase “after a loss has happened” refers to the time the personal injury or property damage occurred within the time limits of the policy.
The Fluor court also was persuaded by the fact that its interpretation of Section 520 is consistent with the majority of cases in other jurisdictions. Those decisions hold an insurer must honor an insured’s assignment of the policy to another to pursue coverage for a loss that occurred before the assignment. The court noted that purpose of a consent-to-assignment clause is to protect an insurer from bearing a risk or burden relating to a loss beyond what the insurer agreed to undertake when issuing the policy. However, the assignment of a loss that has already taken place does not increase the insurer’s risk and the insured has already paid premiums for coverage for that loss.
The court concluded by stating the principle of stare decisis does not save the holding in Henkel, because there is precedent under California law for overruling common law decisions that overlook and conflict with an existing, controlling statute.
If you would like to discuss the potential ramifications or practical effects of the opinion in Fluor, please contact the lawyers at Nicolaides Fink Thorpe Michaelides Sullivan LLP.