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From Products Liability Law Daily, August 21, 2015

California high court reverses itself on consent-to-assignment clauses

By John W. Scanlan, J.D.

A commercial general liability insurer was precluded from refusing the assignment by its insured of the right to invoke defense or indemnification coverage after personal injury had occurred even though the dollar amount of the loss was unknown or undetermined, the California Supreme Court announced in overruling its own earlier decision. The case involved a company’s assignment of these rights to a subsidiary as part of a reverse spinoff, after which the insurer argued that it should not be obligated to defend and indemnify asbestos-related claims brought against it (Fluor Corp. v. The Superior Court of Orange County, August 20, 2015, Cantil-Sakauye, T.).

Background. Fluor Corp. performed engineering, procurement, and construction (EPC) operations for many years, and operated at sites at which asbestos allegedly was used. Hartford Accident & Indemnity Co. issued 11 comprehensive general liability (CGL) policies to Fluor from 1971 to 1986. Among other things, the policies covered "personal injury liability" for which Fluor became legally obligated to pay damages because of personal injury sustained by any person caused by an occurrence. Each policy contained a consent-to-assignment clause: "Assignment of interest under this policy shall not bind the Company until its consent is endorsed hereon." Beginning in the 1980s, Fluor entities were named as defendants in various asbestos-related personal injury suits, which Hartford defended and/or settled.

Fluor bought a mining business named A.T. Massey Coal Co. that was managed separately from Fluor’s EPC operations. In 2000, Fluor engaged in a reverse spinoff, in which it created a new subsidiary that retained the Fluor Corp. name to continue its EPC business, and the parent company changed its name to Massey Energy Co. and focused on the mining and related businesses. The distribution agreement provided that the former parent would transfer to the new Fluor Corp. any and all rights and obligations with respect to the old parent’s assets and liabilities (with certain exceptions); insurance rights were not excepted. After the spinoff, the new Fluor Corp. continued the original Fluor Corp.’s business, used the same stock symbol, was owned by the same shareholders, was managed by the same executives, was headquartered in the same location, and retained all of the books, licenses, permits, contracts, and agreements associated with the old Fluor’s EPC business. In May 2001, Fluor notified Hartford of the spinoff, and for the next several years it continued to pay premiums to Hartford and Hartford continued to defend the asbestos suits and provide indemnification.

The litigation. However, in 2006, due to various ancillary questions regarding the scope of Hartford’s coverage, Fluor filed suit against Hartford seeking declaratory relief. A cross-claim filed by Hartford in 2009 sought a declaration that it had no obligation to defend or indemnify Fluor because the original Fluor had attempted to assign its insurance coverage claims to new Fluor without Hartford’s consent, in violation of the consent-to-assignment provisions in the policies. As a result, it asked for reimbursement of the defense and indemnity payments it had made on behalf of new Fluor. Fluor moved for summary judgment on the ground that Section 520 of the California Insurance Code barred enforcement of the policies consent-to-assignment clauses "after a loss has happened." Fluor argued that the loss that triggered the duty to defend and to indemnify had already happened. Thus, the claims for injuries resulting from the occurrences were properly assignable without Hartford’s consent, and had been properly assigned from old Fluor to new Fluor during the spinoff.

The trial court denied summary judgment, agreeing with Hartford that Section 520 did not apply because the California Supreme Court’s decision in Henkel Corp. v. Hartford Accident & Indemnity Co., 29 Cal.4th 934 (2003), had definitively resolved the enforceability of consent-to-assignment clauses. The state Court of Appeal rejected Fluor’s argument that the Supreme Court failed to consider Section 520 when deciding Henkel, and that the court’s lack of awareness of this section undermined Henkel’s precedential value. The appellate court found that the history of the statute showed that the legislature intended it to apply only to first party insurance policies, not third party liability policies such as those in Henkel and the present case. Fluor petitioned the high court for review.

Applicability to third party liability insurance. Examining the history of Section 520, the California Supreme Court found that it also regulated third party liability policies. When the state insurance code was first enacted in 1935, third party liability policies were well-known and the legislature appeared to intend that Section 520 applied generally to all classes of insurance. A 1947 amendment that changed this section to specifically exempt life and disability insurance and to provide distinct assignment rules for them provided additional support for the view that the legislature did see Section 520 as applicable to all other types of insurance.

Meaning of a "loss." The relevant part of Section 520 provides that an agreement not to transfer a claim of an insured against an insurer "after a loss has happened, is void if made before the loss." The parties in the present case disputed the meaning of the phrase "after a loss has happened." Fluor argued that the loss happened when third parties’ exposure to asbestos resulted in bodily injury between 1971 and 1985, but Hartford argued that a loss happens when an insured incurred a direct loss due to entry of a judgment or finalization of a settlement fixing a sum of money due on a claim against the insured, and not before then.

The court observed that the overwhelming majority of courts to have considered the issue have followed the Eighth Circuit’s rule in Ocean Accident & Guarantee Corp. v. Southwestern Bell Telephone Co., 100 F.2d 441 (8th Cir. 1939), which voided consent clauses as applied to post-loss assignment of rights to invoke liability insurance coverage, with no requirement that the matter be first reduced to a sum of money due. This view was consistent with the language and history of Section 520. The California Supreme Court noted that the premise underlying Ocean Accident—that the insured loss occurs at the time of injury during the policy period—has been recognized in its own jurisprudence in cases that did not address assignability of a right to invoke liability coverage.

The rationale for a consent-to-assignment clause, according to the state high court, is that when an insurer issues a policy, it evaluates and relies upon the risks imposed by that particular insured and its possessions, and should be protected from bearing a risk or burden heavier than it agreed to undertake when it issued the policy. However, this consideration was no longer a factor after the loss had taken place. The post-loss exception to the general rule against assignments is not only widespread and long-standing, but also is a part of the modern economy: the assignment of insurance protection for past losses as part of corporate transformations and recombinations helps facilitate economic activity and prevents insurers from engaging in unfair or oppressive conduct. Only this interpretation permits insureds in the course of transferring assets and liabilities to another entity to assign rights to claim defense and indemnification coverage from prior and existing policies, as new entities would expect to obtain rights to defense and indemnification coverage to cover the liabilities that arose during the coverage period. There was no indication that those who were part of the insurance codification process understood the term "loss" as used in Section 520 to arise only upon issuance of liability by entry of a judgment or approved settlement for a sum of money, as Hartford argued.

Henkel. Saying that it was not persuaded that it should rely upon Henkel in interpreting Section 520, the state high court stated that it was overruling Henkel to the extent it was inconsistent with the present decision. The Henkel court did not address Section 520 or its language, history, or purpose, and the present court said that it was now aware that its decision in Henkel was at odds with the decisions of virtually all other courts decided both before and after it. It noted that Section 520 was not an obscure statute, and the reason that it had rarely been addressed in litigation was that the generally accepted policy in the industry was to permit post-loss assignment of rights to invoke liability coverage. Because the holding of Henkel, which was based on common law, conflicted with the statute, the court could not continue to follow Henkel based on stare decisis considerations.

The case is No. S205889.

Attorneys: G. Andrew Lundberg (Latham & Watkins) for Fluor Corp. Jason R. Litt (Horvitz & Levy), Alan Jay Weil (Gaims, Weil, West & Epstein), and James P. Ruggeri (Shipman & Goodwin) for Hartford Accident & Indemnity Co. Thomas H. Prouty (Troutman Sanders) for Stonewall Insurance Co. Dave C. Capell (Gordon & Rees) for Complex Insurance Claims Litigation Association, and America Insurance Association.

Companies: Fluor Corp.; Hartford Accident & Indemnity Co.; Stonewall Insurance Co.; Complex Insurance Claims Litigation Association; America Insurance Association

MainStory: TopStory AsbestosNews DamagesNews DefensesLiabilityNews CaliforniaNews

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