In a unanimous decision handed down by the California Supreme Court yesterday afternoon in Fluor Corporation v. Superior Court, the court removed a significant obstacle facing companies that want to assign their interests in a third party insurance policy to a successor company as part of a corporate restructuring or sale. It held that an anti-assignment clause in liability policies prohibiting an insured from assigning its interests under the policy without the insurer’s consent is not enforceable after a covered loss, that is, after a third party has suffered personal injury or property damage for which the insured may be liable. The decision overturns the court’s earlier decision in Henkel Corp. v. Hartford Accident & Indemnity Co. (2003) 29 Cal. 4th 934, in which the state high court held that an anti-assignment clause remains enforceable much longer, until the third party’s claim against the insured has been reduced to a sum of money due, or to become due, under the policy, such as an adverse judgment against the insured in the underlying action. In doing so, the court relied on a California statute first enacted in 1872 that received almost no attention before Fluor and was never considered in Henkel.
The decision is an important win for policyholders, and the correct one, in our opinion, liberating firms which previously may have been hamstrung by Henkel. As the California Supreme Court observed in its opinion, commercial insurance is supposed “to facilitate economic activity and growth by providing risk management protection for economic actors.” In today’s environment of mergers, acquisitions, and sales, the rule announced by the court yesterday provides just such protection and facilitates economic growth. It protects the ability of a company to transfer its assets and liabilities and to assign its rights to claim coverage under prior and existing insurance policies, and affirms the assignee’s “understandable expectations” that it can look to those policies for coverage.
The Coverage Dispute
In the mid-1980s, Fluor Corporation, which provided engineering, procurement and construction services, became the target of personal injury lawsuits alleging exposure to asbestos at Fluor’s sites. Fluor tendered the early claims to its CGL insurers, including Hartford Accident & Indemnity Company which took the lead over the next two decades defending against and settling the lawsuits.
In 2000, Fluor created a new subsidiary (referred to in the coverage litigation as “Fluor-2”) which ultimately would retain the Fluor name and hold all of the assets and liabilities of the engineering, procurement and construction business. The “original” Fluor changed its name to Massey Energy Company, and focused its business solely on mining operations. Fluor advised Hartford of the corporate restructuring, and over the next several years Hartford defended and indemnified Fluor-2 against third party claims brought against it and collected almost $5 million in retrospective premiums from Fluor-2.
When Fluor-2 later sued Hartford over various coverage issues under the CGL policies, Hartford filed a cross-complaint in which it asserted, for the first time, that it was not obligated to defend or indemnify Fluor-2 under the policies’ so-called anti-assignment clause. According to Hartford, Fluor had violated the clause in purportedly assigning its coverage claims to Fluor-2 under the corporate restructuring. The trial court sided with Hartford, relying on the California Supreme Court’s decision in Henkel Corp. v. Hartford Accident & Indemnity Co. (2003) 29 Cal. 4th 934, in which the court considered an identical anti-assignment clause and held that the clause was enforceable until the policyholder’s loss is reduced to a sum of money due or to become due under the policies.
On appeal, Fluor challenged the precedential weight of Henkel, arguing that the state’s high court had not considered Insurance Code section 520, providing 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 . . . .” The “loss” in the instant case, Fluor-2 argued, occurred years before the corporate restructuring, when plaintiffs in the underlying asbestos actions allegedly suffered their injuries, and thus the anti-assignment clause in the Hartford CGL policy was void.
California’s Fourth District Court of Appeal was unpersuaded, concluding that section 520 applied to first-party policies, not third party liability policies like the Hartford CGL policies. The Fourth District reasoned that liability insurance did not exist, even as a concept, when an earlier version of section 520 was first enacted in 1872 as part of the state’s Civil Code. Nor did the state legislature intend to expand the reach of the provision beyond first party policies when it re-codified the statute in 1935 in enacting the Insurance Code or when it amended the provision in 1947 to reflect its current form. Accordingly, the Fourth District concluded it was duty-bound to follow Henkel.
Yesterday, the state high court reversed the Fourth District’s decision. It not only rejected the conclusion that section 520 does not apply to third party liability policies, it also overruled Henkel.
The California Supreme Court’s Decision
Section 520 Applies to Third Party Liability Policies
The court began its analysis by acknowledging that the California Legislature likely did not contemplate liability insurance in 1872 when it enacted an earlier version of section 520. By 1935, however, when the legislature enacted the Insurance Code, liability insurance was well developed and a “commonplace form of coverage.” Moreover, the legislature did not, as the Fourth District had concluded, simply transplant insurance-related provisions from the Civil Code to the Insurance Code; it changed the law, revising some of the existing insurance-related provisions, eliminating some and adding others, to reflect the changing legal landscape, which by 1935 included general rules of liability insurance within the state of California and elsewhere. This history, viewed as a whole, the court concluded, indicated that the California Legislature intended section 520 to apply to all classes of insurance, including liability insurance.
The court found further support for its conclusion in the 1947 amendment to section 520, which provided that the provision did not apply to life or disability insurance. The fact that the legislature went to the trouble to exempt these two types of insurance, which were uncommon in 1872, confirmed that section 520 was supposed to apply to all classes of insurance, even those not specifically identified by the 1872 state legislature.
Section 520 Prohibits Post-Loss Enforcement of Anti-Assignment Clause
The court next analyzed the applicability of section 520. That provision essentially voids an anti-assignment clause “after a loss has happened,” so the court focused on the meaning of that phrase. Fluor-2 argued it meant after injury to the third party has happened. Hartford contended it meant after the insured incurs a direct loss via a judgment or settlement. The California Supreme Court concluded that Fluor-2’s interpretation was the correct one.
First, several pre-1872 decisions from California and New York, including two cases expressly cited in the annotation of the newly enacted provision, held that, in the first party insurance context, an insurer may prohibit assignment of the policy prior to the occurrence of a loss, but not after a loss. A pre-loss assignment amounted to a substitution of one insured for another, one that the insurer had not evaluated or agreed to insure before issuing the policy, forcing the insurer to bear a risk relating to a loss that was greater than what it had agreed to accept. The rationale for prohibiting pre-loss assignment, however, did not apply after a covered loss, as it should make no difference to the insurer to whom the insurance was paid after the loss occurred. The Fluor court concluded, therefore, that the 1872 legislature intended to codify a rule, in the first party insurance context, precluding an insurer from prohibiting assignment “immediately after the injury or damage covered by the insurance policy has occurred.”
Second, the early set of decisions addressing when a liability insurer’s indemnity obligation arises, held that the obligation arises when the third party suffered personal injury or property damage that was covered under the policy, not later when the insured was held liable or suffered a judgment against it.
Third, by the time the California legislature enacted the Insurance Code in 1935, numerous courts outside of California had upheld the ability of insureds to assign their interests in their liability policies after judgment had been entered against them. The rationale for prohibiting pre-loss assignment (namely, to protect the insurer from bearing a risk relating to a loss that was greater than what it had agreed to accept), these courts reasoned, did not apply post judgment.
Fourth, decisions issued by courts outside of California prior to the 1947 amendment of section 520 had extended the trend of refusing to enforce anti-assignment clauses in third party insurance policies. Assignments that were made before a judgment had been entered against the insured, and before the insured’s liability had been determined, were increasingly upheld. A post-loss assignment, according to these courts, was not an assignment of the policy itself, but of the claim, debt, or chose of action, which was assignable upon the happening of the event that gave rise to the insured’s liability.
Lastly, when faced with the question of when a liability insurer’s duties to defend and indemnify are triggered where personal injury or property damage is continuous or progressively deteriorating and may occur over multiple policy periods, California courts had held that an insured loss happens at the time of the injury and property damage to the third party.
Accordingly, the California Supreme Court held that the phrase “after a loss has happened” in Insurance Code section 520 means after a covered loss sustained by a third party for which the insured may be liable. There need not be a money judgment against the insured before a claim concerning the loss may be assigned without the insurer’s consent.
Henkel Is Overruled
The state’s high court observed that in Henkel it had not considered the language of section 520, its legislative history, or its purpose. It had overlooked the statute, had not examined the extensive judicial authorities bearing on its interpretation, nor considered the common law decisions of other courts—nearly all of which are at odds with Henkel. The court concluded, therefore, that Henkel conflicted with the rule prescribed by section 520 and should be overruled.