Foran Glennon Palandech Ponzi & Rudloff

August 2015

California Supreme Court holds anti-assignment clause ineffective to prevent post-loss assignment of interest in insurance policy.

John Eggum

Overruling its 2003 Henkel decision, the California Supreme Court determined that Section 520 of the California Insurance Code – a statute tracing back to 1872 – required the Court to hold that an assignment of interest in an insurance policy was permissible after a loss happened, notwithstanding the policy’s anti-assignment clause.  Also contrary to Henkel, the Court found that a judgment or settlement was not a prerequisite to assignment – the insured could validly assign its interest in the policy once the injury occurred, which, in this case, meant that an assignment that was made after certain claimants were exposed to asbestos was permissible, and did not permit a disclaimer of coverage.

Factual Background.  The insurance coverage dispute in Fluor involved asbestos claims arising out of the operations of Fluor Corporation (“Original Fluor”), an engineering, procurement, and construction business.  Hartford Accident & Indemnity Company (“Hartford”) issued CGL policies to Original Fluor for the years 1971 through 1986.  These occurrence policies included the following anti-assignment provision: “Assignment of interest under this policy shall not bind the Company until its consent is endorsed hereon.”

During November of 2000, Original Fluor decided to reorganize its business operations, so as to place certain mining assets it had previously acquired into a separate subsidiary.  Rather than transfer the mining assets to a new subsidiary company, however, Original Fluor created a new parent company entity, which the Court refers to as “Fluor-2.”  Original Fluor then transferred its engineering, procurement, and construction business “up” to the new parent (a “reverse spinoff”).  In connection with this transfer, and at issue in this litigation, Original Fluor transferred and assigned its interest in the Hartford policies.

Both before and after the reverse spinoff in 2000, Fluor (Original Fluor, and subsequently Fluor-2) was a defendant in numerous suits alleging injuries incurred by asbestos exposure (it remains a defendant in approximately 2,500 asbestos lawsuits at the present time).  Although Fluor-2 notified its insurers, including Hartford, of the reverse spinoff shortly after it occurred in 2000, it was not until 2008 that Hartford asserted the transfer of interest in the Hartford policies violated the anti-assignment clause in each policy.  In response to this assertion, Fluor-2 commenced this declaratory judgment action.

The Henkel Decision.  In 2003, before the insurance coverage dispute arose between Fluor-2 and Hartford, the California Supreme Court decided Henkel, a decision in which it upheld anti-assignment clauses like the one in the Fluor policies, permitting the insurer, which happened to be Hartford, to disclaim coverage.  See Henkel Corp. v. Hartford Accident & Indemnity Co., 29 Cal.4th 934, 62 P.3d 69 (2003).  Under Henkel, the Court held that a consent-to-assignment clause permitted the insurer to disclaim coverage so long as there was no judgment or settlement existing prior to the assignment.  The Court interpreted California law to permit assignment after a claim or cause of action had been reduced to a fixed amount by means of a judgment or settlement, because the judgment/settlement transformed the unliquidated claim into an assignable “chose in action.”

Discussion.  The assignment provisions in the insurance policies that Hartford issued to Henkel and Original Fluor are identical, and the courts below therefore decided in Hartford’s favor, finding that the Henkel rule governed – there was no coverage due to the assignment.  Fluor-2 faced a significant uphill battle, as it was asking the Supreme Court to overrule a prior decision under circumstances involving essentially identical facts as Henkel, without there being any intervening change in the law.  The Court sided with Fluor-2, however, relying on a statute from the 1800s.  Perhaps due to this unusual approach, the Court took great pains to review the statutory history of the century-old Insurance Code section 520, as well as early case law evaluating anti-assignment clauses, in its lengthy opinion.

In its current form, the relevant language of section 520 provides 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.”  When the original statute was enacted in 1872, liability insurance did not exist as we know it today (property damage/fire insurance was the primary focus of the insurance marketplace).  Insurance laws and regulations at the time were therefore directed primarily to first-party property insurance.  Nonetheless, the Court rejected Hartford’s argument that section 520 did not apply to third-party liability insurance.  It concluded that by moving, renumbering, and slightly amending the statute in 1935 and 1947 statutory revisions, the California Legislature intended the statute to apply in situations involving third-party liability insurance.

Having decided that the statute applies, and acknowledging that the Court overlooked the law when deciding Henkel, the Court turned to the policy reasons that the majority of courts in the country have relied upon in permitting post-loss assignments.  Courts in many jurisdictions have rejected the view that assignment should be restricted until litigation occurs which establishes liability by means of a judgment or settlement.  While specific rationales vary, these courts have found that restraining an insured’s ability to assign its right to invoke policy coverage for a loss that has already occurred is “unjust” and “grossly oppressive,” and therefore void and unenforceable.  Although anti-assignment restrictions are enforceable pre-loss (before injury or property damage occurs), the primary justification for this is that an insurer evaluates and relies upon the risks imposed by insuring a particular insured, and pre-loss assignment undermines the insurer’s risk evaluation unfairly and improperly.  Once the loss has occurred, however, the liability, even though unliquidated, is no longer subject to change based upon factors unique to the particular insured.  As an early leading case noted, “after the event occurs giving rise to the liability the reason for the rule [against assignment] disappears and the cause of action arising under the policy is assignable.”

Ultimately, the Court found it agreed with the reasoning and holding of numerous courts which permitted post-loss assignment.  See Ocean Accident & Guarantee Corp. v. Southwestern Bell Telephone Co., 100 F.2d 441 (8th Cir. 1939); Gopher Oil Co. v. American Hardware Mutual Ins. Co., 588 N.W.2d 756, 763–764 (Minn. Ct. App. 1999); In re ACandS, Inc., 311 B.R. 36, 41 (Bankr. D. Del. 2004); Elliott v. Liberty Mutual Ins. Co., 434 F.Supp.2d 483, 491 (N.D. Ohio 2006); Egger v. Gulf Ins. Co., 588 Pa. 287, 903 A.2d 1219, 1223, 1226–1228 (Pa. 2006); Pilkington North America, Inc. v. Travelers Casualty & Surety Co., 112 Ohio St.3d 482, 861 N.E.2d 121, 126, 129 (Ohio 2006); In re Ambassador Ins. Co., 184 Vt. 408, 965 A.2d 486, 490–491 (Vt. 2008); Viking Pump, Inc. v. Century Indemnity Co., 2 A.3d 76, 107 (Del. Ch. 2009); Illinois Tool Works v. Commerce & Industry Ins. Co., 357 Ill.Dec. 141, 962 N.E.2d 1042, 1050, 1055 (Ill. App. Ct. 2011); Narruhn v. Alea London, Ltd., 404 S.C. 337, 745 S.E.2d 90, 94 (S.C. 2013).  It noted that Henkel was clearly in the minority of decisions addressing assignability, and had been subject to numerous criticisms by commentators.

The Court therefore concluded that only by interpreting section 520 to permit assignment after a loss occurred would the Court be honoring the clear intent, demonstrated by the history of section 520, to avoid “unjust” or “grossly oppressive” enforcement of a consent-to-assignment clause, and that this approach facilitated the efficient conduct of corporate sales and corporate reorganizations, consistent with the intent of early California court decisions, California Code Commissioners, and the California Legislature.

Conclusion.  The California Supreme Court’s Fluor opinion represents a major shift in California law, but it is a shift that brings California into line with the majority of courts that have considered issues of post-loss assignment and the application of anti-assignment clauses.  The decision brings additional certainty to both insurance coverage evaluations, as well as to transactional planning for corporate reorganizations and asset sales.  Although the Court’s approach – reliance on an overlooked, century-old statute – is unusual, the public policy it articulates is one that both courts and commentators have regularly found to be sound.

The case is Fluor Corp. v. Superior Court, __ P.3d __, No. S205889, 2015 WL 4938295 (Cal., Aug. 20, 2015).