Henkel (Almost) 10 Years Later

When companies merge, the surviving company succeeds to the rights of the non-survivor, including insurance rights, by law. But when a company purchases assets and liabilities from another company ' taking over a product line, for example, and assuming unknown claims arising out of the product ' in many jurisdictions the associated insurance does not pass by operation of law, but rather is passed, if at all, only by contract.

In an asset-and-liability purchase, the buyer often wants to ensure that the insurance covering unresolved or unknown claims will follow along with the liability for those claims. “Long-tail” liabilities, which are liabilities such as asbestos bodily injury or environmental property damage that can emerge years after the activity giving rise to the claim, are often covered under “occurrence” policies. Because buyers of a business that might have long-tail liabilities usually want to preserve the insurance for those claims, it is common in the corporate transaction for the parties to convey the vested insurance rights, either expressly or by means of an assignment of rights that is broad enough to encompass the insurance rights.

Although the conveyance of insurance rights is common in corporate transactions, in 2003 the California Supreme Court held in Henkel Corp. v. Hartford Accident & Indemnity Co. that an asset sale and assignment was not effective to pass the insurance coverage to the new owner. The court agreed with the long-standing rule that an anti-assignment clause does not preclude the transfer of a “chose in action” ' essentially, a right to make a claim ' but held that, under California law, no chose in action existed at the time of the attempted assignment because the right against the insurer “had not been reduced to a sum of money due or to become due under the policy.” 62 P.3d 69, 75 (Cal. 2003). By interposing a substantial barrier to corporations' ability to convey insurance rights under occurrence policies, the decision effected what appeared to be a substantial change in the law and raised the concern that if Henkel were adopted by other states, many corporate policyholders could be without the historical coverage of their corporate predecessors-in-interest.

The facts of Henkel are complicated, but the most relevant facts are the following. In 1977, Union Carbide acquired Amchem Products, Inc., referred to by the court as “Amchem No. 1.” Amchem No. 1 had two distinct product lines: agricultural chemicals and metallic chemicals. In 1979, Amchem No. 1 (then a Union Carbide subsidiary) transferred all of the metallic chemical business's assets and liabilities to a new Amchem company, called by the court “Amchem No. 2.” In 1980, Union Carbide sold all the stock of Amchem No. 2 to Henkel, and it was undisputed that Henkel succeeded to all the rights and obligations of Amchem No. 2. In 1989, current and former Lockheed employees sued Henkel as successor to Amchem's metallic chemicals business, alleging injuries arising from exposure to the metallic chemicals used from 1959 to 1976. Henkel, in turn, tendered its defense to the original Amchem insurers, which denied coverage.

The California Supreme Court held that the 1979 sale of assets and liabilities to Amchem No. 2 did not transfer the insurance rights. Although the court acknowledged that California case law permitted assignment of insurance rights, the court held that there was no “assignable chose in action” at the time of the 1979 sale because “the duty of defendant insurers to defend and indemnify Amchem No. 1 from the claims of the Lockheed plaintiffs had not become an assignable chose in action. Those claims had not been reduced to a sum of money due or to become due under the policy. Defendants had not breached any duty to defend or indemnify ' Consequently, Amchem No. 1 could not assign the right to defense and indemnity against such claims without the insurers' consent.” Id. at 75 (citation omitted).

According to the court, assignment created the potential for an increased burden on the insurer, which now might face competing claims under the policies from two entities. In the court's view, assignment in the face of an anti-assignment clause was possible only where at the time of the assignment either: a) the claim had been reduced to a monetary sum; or b) the insurer was in breach of the contract, and the assignment transferred the cause of action to recover damages for such a breach. Because the Amchem assignment occurred before either of these conditions was met, the anti-assignment clause was held to bar the transfer of coverage rights. Id. at 75-76 (citation omitted).

Almost 10 Years Later ' Henkel's Mixed Reception

Henkel's reception across the country has been decidedly mixed. Of those cases that have explicitly considered Henkel, many have rejected its conclusion. For example, the U.S. District Court for the Northern District of Ohio in Elliot Co. v. Liberty Mutual Insurance Co. refused to follow Henkel and explained that Henkel was in “conflict with th[e] precedent” of Ohio, Pennsylvania, Connecticut, New York and Delaware. 434 F. Supp. 2d 483, 491 (N.D. Ohio 2006). The Delaware Chancery Court, applying New York law, likewise found Henkel to be contrary to long-standing law, noting that “the distinction that the California Supreme Court drew in Henkel simply does not exist in New York case law. ' New York law on this matter is in accord with the dissent in Henkel, which stressed that anti-assignment clauses should not apply in this context because '[t]he risk insured against does not increase because the insurer's duty to defend and indemnify relates to injury or damage which was suffered by the claimant prior to the assignment of benefits to a successor corporation.'” Viking Pump, Inc. v. Century Indem. Co., 2 A.3d 76, 105 (Del. Ch. 2009) (quoting Henkel, 62 P.3d at 79 (Moreno, J., dissenting) (alteration and emphasis in original)).

Similarly, other courts have reasoned, unlike Henkel, that the risk assumed by the insurer is effectively fixed at the moment of the original loss, property damage or bodily injury; once that has happened, an assignment of the chose in action is permissible. See, e.g., Century Indem. Co. v. Aero-Motive Co., No. 1:02-CV-108, 2004 U.S. Dist. LEXIS 31180, at *9-14 (W.D. Mich. Mar. 12, 2004) (rejecting Henkel and holding that when the event giving rise to the insurer's coverage liability occurs within the policy period and prior to assignment, the assignment is permissible no matter when a claim is finally filed), aff'd, 155 F. App'x 833 (6th Cir. 2005); Mass. Elec. Co. v. Commercial Union Ins. Co., No. 99-00467B, 2005 Mass. Super. LEXIS 550, at *4-6 (Oct. 18, 2005); N.H. Mfg. Self Ins. Group Trust v. Cont'l Cas. Co., No. 07-E-0043, 2008 N.H. Super. LEXIS 42, at *6-9 (Apr. 24, 2008) (citing Henkel as contrary to the majority rule).

Henkel received a mixed reaction even within a single case in the Ohio Supreme Court. The court in Pilkington North America, Inc. v. Travelers Casualty & Surety Co., 861 N.E.2d 121 (Ohio 2006), held that it saw “no reason to deviate from the standard rule” that anti-assignment language is ineffective after a loss has occurred; on this basis, the court held that the right to indemnification for settlements or judgments was transferable to the corporation that had received assets and liabilities from the original insured. Id. at ' 43. However, the court could not decide whether the right to a defense was similarly transferable. Several justices expressed concern that if an insurer might be forced to defend multiple insureds, the risk that the insurer had assumed might be increased. Id. at ” 62-70 (separate views of Moyer, C.J.); Id. at ” 71-84 (Pfeifer, J., concurring in part and dissenting in part). There was no majority statement rejecting the assignment of defense rights in the circumstance in which the original policyholder remained in existence and could still be sued, but several justices would have found the anti-assignment clause to have precluded the transfer of defense and several others were concerned by the issue.

In contrast, without discussing or citing Henkel, various state and federal trial and appellate courts from around the country, including at least four state high courts, have continued to apply the rule that was widespread before Henkel; that is, that once the injury or damage insured against has taken place, a policyholder could freely assign its rights to defense and indemnity for claims arising out of that damage or injury. See, e.g., Olah v. Baird (In re Baird), 567 F.3d 1207, 1213-14 (10th Cir. 2009); Gables Ins. Recovery, Inc. v. Seminole Cas. Ins. Co., 10 So.3d 1106, 1108 (Fla. Dist. Ct. App. 2009); Ill. Tool Works, Inc. v. Commerce & Indus. Ins. Co., 962 N.E.2d 1042 (Ill. App. Ct. 1st Dist. 2011); In Re: Wehr Constructors, Inc. v. Assur. Co. of Am., 2012-SC-000221-CL (Ky. Oct. 25, 2012); Star Windshield Repair, Inc. v. W. Nat'l Ins. Co., 768 N.W.2d 346, 349-50 & n.7 (Minn. 2009) (finding assignment permissible on a narrow ground but noting that the result was consistent with the majority rule allowing assignment after the loss has occurred); Arrowood Indem. Co. v. Atl. Mut. Ins. Co., 948 N.Y.S.2d 581, 582-83 (App. Div. 2012); Kittner v. E. Mut. Ins. Co., 915 N.Y.S.2d 666, 669 n.3 (App. Div. 2011); Egger v. Gulf Ins. Co., 909 A.2d 1219, 1224-29 (Pa. 2006) (rejecting the insurer's argument because it “confuses loss with the subsequent fixing of a precise amount of damages for that loss”); In re Ambassador Ins. Co., 965 A.2d 486, 490-91 (Vt. 2008); see also In re Fed.-Mogul Global Inc., 684 F.3d 355, 379-80 (3d Cir. 2012) (holding that anti-assignment clauses are pre-empted under the Bankruptcy Code, doubting that assignment of insurance rights after the loss has occurred “materially alters Insurers' risk,” and noting that the insurers' argument had also been rejected by the bankruptcy and district courts).

Not all courts have agreed, however. In Travelers Casualty & Surety Co. v. U.S. Filter Corp., the Indiana Supreme Court essentially adopted the Henkel approach, reasoning that “[a]t a minimum, for an insured loss to generate an assignable coverage benefit, the loss must be identifiable with some precision. It must be fixed, not speculative. ' A right not currently held is not a chose in action assignable at law. It follows that a chose in action only transfers in these circumstances if it is assigned at the moment when the policyholder could have brought its own action against the insurer for coverage.” 895 N.E.2d 1172, 1180 (Ind. 2008). See also Del Monte Fresh Produce (Haw.), Inc. v. Fireman's Fund Ins. Co., 183 P.3d 734 (Haw. 2007) (disallowing the transfer of rights by asset sale essentially on “plain meaning” grounds); Atlanta Gas Light Co. v. UGI Utils., Inc., No. 3:03-cv-614-J-20MMH, 2005 U.S. Dist. LEXIS 43592 (M.D. Fla. Mar. 22, 2005) (rejecting assignment by contract).

Whither Henkel?

Henkel itself recently survived a challenge within California based on an 1872 statute that 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.” Cal. Ins. Code. ' 520. In late summer, the California Court of Appeal held that the statute did not legislatively pre-empt the decision in Henkel because liability insurance did not exist at the time of the statute's drafting and therefore the statute could not have been intended to preclude the rule of Henkel. See Fluor Corp. v. Super. Ct., No. G045579, 2012 Cal. App. LEXIS 937 (Aug. 30, 2012). Unless the California Supreme Court reverses this ruling, it appears that Henkel will remain good law in California at least for the time being.

Despite its adoption in a few jurisdictions outside California, Henkel does not appear to be leading a trend toward restricting a policyholder's ability to transfer insurance rights after the occurrence of injury or damage. Indeed, Henkel did not directly reject the traditional rule that choses in action may be freely transferred notwithstanding contractual provisions that purport to limit the transferability of interest under an insurance policy. Instead, it held that the right attempted to be transferred in that case was too speculative and incomplete to constitute a chose in action. Henkel is subject to criticism in that it cites no authority for this rule, and its ruling seems to run counter to older authority in California holding that a chose in action exists at the moment of the loss. See Bibend v. Liverpool & London Fire & Life Ins. Co., 30 Cal. 78, 87-88 (1866); Greco v. Or. Mut. Fire. Ins. Co., 12 Cal. Rptr. 802, 806 (Ct. App. 1961).

Furthermore, Henkel remains subject to criticism on the ground that its departure from the venerable rule allowing post-loss assignments does not make practical sense. As courts around the country have long held, whether the insurer defends and indemnifies Company A or Company B is irrelevant, so long as the insurer's burden has not materially increased.

It is also not clear that a rule against assignment is consistent with California law ' and the law of many other states ' holding that latent injury triggers all policies on the risk during any period of physical injury or property damage, not just the policies in effect at the time of initial exposure or of manifestation. See Henkel, 62 P.3d at 78 (Moreno, J., dissenting) (citing Montrose Chem. Corp. v. Admiral Ins. Co., 913 P.3d 878 (Cal. 1995)). If an insurer's obligation to defend and indemnify its policyholder is effectively vested at the time property damage or physical injury occurs, even though the insurer is not called upon to fulfill its duty until years later, that policyholder's right is a vested right. Under ordinary principles of law, it ought to be transferable, so long as the transfer does not materially increase or change the insurer's obligation.

This suggests that the correct approach is not to impose an outright ban on assignments of post-loss “inchoate” choses in action, as the California Supreme Court did in Henkel. Instead, the insurer ought to be given the opportunity to prove that it has suffered material prejudice as a result of the corporate transaction ' for example, that it is now forced to pay significantly more to defend and/or indemnify the insured or insureds for the same risk or to provide a materially broader defense than it otherwise would have. If the insurer cannot establish such prejudice, the court may, under traditional contract rules, decline to enforce the anti-assignment provision. See, e.g., Restatement (Second) Contracts ' 229 (1981) (courts may excuse non-performance of a condition to avoid a “disproportionate forfeiture”). If, on the other hand, such prejudice could be established, the court could simply reduce the insurer's indemnity or defense obligation by an appropriate factor to account for the increased burden that the insurer now faces. Holding the insurer to the quantum of its original bargain would prevent the forfeiture of valuable insurance rights.

Conclusion

Almost 10 years after Henkel, the decision continues to trickle through the courts. Although still an outlier, the decision has influenced some courts. Insurance and transactional practitioners need to be sensitive to Henkel and other decisions concerning the anti-assignment clause as they address coverage for long-tail liabilities following corporate transactions or as they guide companies through such transactions.

Seth A. Tucker and Charles Fischette are, respectively, a partner and an associate in the Washington, DC, office of Covington & Burling LLP. They represent policyholders in complex insurance coverage matters. Tucker, a member of this newsletter's Board of Editors, argued the Pilkington North America case before the Ohio Supreme Court. The views expressed herein are those of the authors and not necessarily of Covington & Burling or its clients.

Commercial General Liability policies frequently contain an “anti-assignment” clause that prohibits policyholders from assigning any interest under the policy to another person without the insurer's consent. The meaning of this short clause has been hotly disputed since 2003, when the California Supreme Court interpreted the clause in a manner that restricted the transfer of coverage rights in certain corporate transactions. This article examines how other courts have resolved the anti-assignment issue in the last decade.

Background

The ability to assign rights to insurance recovery is especially important in corporate transactions. This is so because the acquiring company may take on historic liabilities of the acquired company, and the associated insurance rights may be a very valuable asset that can help offset those liabilities.

When companies merge, the surviving company succeeds to the rights of the non-survivor, including insurance rights, by law. But when a company purchases assets and liabilities from another company ' taking over a product line, for example, and assuming unknown claims arising out of the product ' in many jurisdictions the associated insurance does not pass by operation of law, but rather is passed, if at all, only by contract.

In an asset-and-liability purchase, the buyer often wants to ensure that the insurance covering unresolved or unknown claims will follow along with the liability for those claims. “Long-tail” liabilities, which are liabilities such as asbestos bodily injury or environmental property damage that can emerge years after the activity giving rise to the claim, are often covered under “occurrence” policies. Because buyers of a business that might have long-tail liabilities usually want to preserve the insurance for those claims, it is common in the corporate transaction for the parties to convey the vested insurance rights, either expressly or by means of an assignment of rights that is broad enough to encompass the insurance rights.

Although the conveyance of insurance rights is common in corporate transactions, in 2003 the California Supreme Court held in Henkel Corp. v. Hartford Accident & Indemnity Co. that an asset sale and assignment was not effective to pass the insurance coverage to the new owner. The court agreed with the long-standing rule that an anti-assignment clause does not preclude the transfer of a “chose in action” ' essentially, a right to make a claim ' but held that, under California law, no chose in action existed at the time of the attempted assignment because the right against the insurer “had not been reduced to a sum of money due or to become due under the policy.” 62 P.3d 69, 75 (Cal. 2003). By interposing a substantial barrier to corporations' ability to convey insurance rights under occurrence policies, the decision effected what appeared to be a substantial change in the law and raised the concern that if Henkel were adopted by other states, many corporate policyholders could be without the historical coverage of their corporate predecessors-in-interest.

The facts of Henkel are complicated, but the most relevant facts are the following. In 1977, Union Carbide acquired Amchem Products, Inc., referred to by the court as “Amchem No. 1.” Amchem No. 1 had two distinct product lines: agricultural chemicals and metallic chemicals. In 1979, Amchem No. 1 (then a Union Carbide subsidiary) transferred all of the metallic chemical business's assets and liabilities to a new Amchem company, called by the court “Amchem No. 2.” In 1980, Union Carbide sold all the stock of Amchem No. 2 to Henkel, and it was undisputed that Henkel succeeded to all the rights and obligations of Amchem No. 2. In 1989, current and former Lockheed employees sued Henkel as successor to Amchem's metallic chemicals business, alleging injuries arising from exposure to the metallic chemicals used from 1959 to 1976. Henkel, in turn, tendered its defense to the original Amchem insurers, which denied coverage.

The California Supreme Court held that the 1979 sale of assets and liabilities to Amchem No. 2 did not transfer the insurance rights. Although the court acknowledged that California case law permitted assignment of insurance rights, the court held that there was no “assignable chose in action” at the time of the 1979 sale because “the duty of defendant insurers to defend and indemnify Amchem No. 1 from the claims of the Lockheed plaintiffs had not become an assignable chose in action. Those claims had not been reduced to a sum of money due or to become due under the policy. Defendants had not breached any duty to defend or indemnify ' Consequently, Amchem No. 1 could not assign the right to defense and indemnity against such claims without the insurers' consent.” Id. at 75 (citation omitted).

According to the court, assignment created the potential for an increased burden on the insurer, which now might face competing claims under the policies from two entities. In the court's view, assignment in the face of an anti-assignment clause was possible only where at the time of the assignment either: a) the claim had been reduced to a monetary sum; or b) the insurer was in breach of the contract, and the assignment transferred the cause of action to recover damages for such a breach. Because the Amchem assignment occurred before either of these conditions was met, the anti-assignment clause was held to bar the transfer of coverage rights. Id. at 75-76 (citation omitted).

Almost 10 Years Later ' Henkel's Mixed Reception

Henkel's reception across the country has been decidedly mixed. Of those cases that have explicitly considered Henkel, many have rejected its conclusion. For example, the U.S. District Court for the Northern District of Ohio in Elliot Co. v. Liberty Mutual Insurance Co. refused to follow Henkel and explained that Henkel was in “conflict with th[e] precedent” of Ohio, Pennsylvania, Connecticut, New York and Delaware. 434 F. Supp. 2d 483, 491 (N.D. Ohio 2006). The Delaware Chancery Court, applying New York law, likewise found Henkel to be contrary to long-standing law, noting that “the distinction that the California Supreme Court drew in Henkel simply does not exist in New York case law. ' New York law on this matter is in accord with the dissent in Henkel , which stressed that anti-assignment clauses should not apply in this context because '[t]he risk insured against does not increase because the insurer's duty to defend and indemnify relates to injury or damage which was suffered by the claimant prior to the assignment of benefits to a successor corporation.'” Viking Pump, Inc. v. Century Indem. Co. , 2 A.3d 76, 105 (Del. Ch. 2009) (quoting Henkel , 62 P.3d at 79 (Moreno, J., dissenting) (alteration and emphasis in original)).

Similarly, other courts have reasoned, unlike Henkel, that the risk assumed by the insurer is effectively fixed at the moment of the original loss, property damage or bodily injury; once that has happened, an assignment of the chose in action is permissible. See, e.g., Century Indem. Co. v. Aero-Motive Co., No. 1:02-CV-108, 2004 U.S. Dist. LEXIS 31180, at *9-14 (W.D. Mich. Mar. 12, 2004) (rejecting Henkel and holding that when the event giving rise to the insurer's coverage liability occurs within the policy period and prior to assignment, the assignment is permissible no matter when a claim is finally filed), aff'd , 155 F. App'x 833 (6th Cir. 2005); Mass. Elec. Co. v. Commercial Union Ins. Co., No. 99-00467B, 2005 Mass. Super. LEXIS 550, at *4-6 (Oct. 18, 2005); N.H. Mfg. Self Ins. Group Trust v. Cont'l Cas. Co., No. 07-E-0043, 2008 N.H. Super. LEXIS 42, at *6-9 (Apr. 24, 2008) (citing Henkel as contrary to the majority rule).

Henkel received a mixed reaction even within a single case in the Ohio Supreme Court. The court in Pilkington North America, Inc. v. Travelers Casualty & Surety Co. , 861 N.E.2d 121 (Ohio 2006), held that it saw “no reason to deviate from the standard rule” that anti-assignment language is ineffective after a loss has occurred; on this basis, the court held that the right to indemnification for settlements or judgments was transferable to the corporation that had received assets and liabilities from the original insured. Id. at ' 43. However, the court could not decide whether the right to a defense was similarly transferable. Several justices expressed concern that if an insurer might be forced to defend multiple insureds, the risk that the insurer had assumed might be increased. Id. at ” 62-70 (separate views of Moyer, C.J.); Id. at ” 71-84 (Pfeifer, J., concurring in part and dissenting in part). There was no majority statement rejecting the assignment of defense rights in the circumstance in which the original policyholder remained in existence and could still be sued, but several justices would have found the anti-assignment clause to have precluded the transfer of defense and several others were concerned by the issue.

In contrast, without discussing or citing Henkel, various state and federal trial and appellate courts from around the country, including at least four state high courts, have continued to apply the rule that was widespread before Henkel; that is, that once the injury or damage insured against has taken place, a policyholder could freely assign its rights to defense and indemnity for claims arising out of that damage or injury. See, e.g., Olah v. Baird (In re Baird), 567 F.3d 1207, 1213-14 (10th Cir. 2009); Gables Ins. Recovery, Inc. v. Seminole Cas. Ins. Co. , 10 So.3d 1106, 1108 (Fla. Dist. Ct. App. 2009); Ill. Tool Works, Inc. v. Commerce & Indus. Ins. Co. , 962 N.E.2d 1042 (Ill. App. Ct. 1st Dist. 2011); In Re: Wehr Constructors, Inc. v. Assur. Co. of Am., 2012-SC-000221-CL (Ky. Oct. 25, 2012); Star Windshield Repair, Inc. v. W. Nat'l Ins. Co ., 768 N.W.2d 346, 349-50 & n.7 (Minn. 2009) (finding assignment permissible on a narrow ground but noting that the result was consistent with the majority rule allowing assignment after the loss has occurred); Arrowood Indem. Co. v. Atl. Mut. Ins. Co. , 948 N.Y.S.2d 581, 582-83 (App. Div. 2012); Kittner v. E. Mut. Ins. Co. , 915 N.Y.S.2d 666, 669 n.3 (App. Div. 2011); Egger v. Gulf Ins. Co. , 909 A.2d 1219, 1224-29 (Pa. 2006) (rejecting the insurer's argument because it “confuses loss with the subsequent fixing of a precise amount of damages for that loss”); In re Ambassador Ins. Co., 965 A.2d 486, 490-91 (Vt. 2008); see also In re Fed.-Mogul Global Inc., 684 F.3d 355, 379-80 (3d Cir. 2012) (holding that anti-assignment clauses are pre-empted under the Bankruptcy Code, doubting that assignment of insurance rights after the loss has occurred “materially alters Insurers' risk,” and noting that the insurers' argument had also been rejected by the bankruptcy and district courts).

Not all courts have agreed, however. In Travelers Casualty & Surety Co. v. U.S. Filter Corp., the Indiana Supreme Court essentially adopted the Henkel approach, reasoning that “[a]t a minimum, for an insured loss to generate an assignable coverage benefit, the loss must be identifiable with some precision. It must be fixed, not speculative. ' A right not currently held is not a chose in action assignable at law. It follows that a chose in action only transfers in these circumstances if it is assigned at the moment when the policyholder could have brought its own action against the insurer for coverage.” 895 N.E.2d 1172, 1180 (Ind. 2008). See also Del Monte Fresh Produce (Haw.), Inc. v. Fireman's Fund Ins. Co. , 183 P.3d 734 (Haw. 2007) (disallowing the transfer of rights by asset sale essentially on “plain meaning” grounds); Atlanta Gas Light Co. v. UGI Utils., Inc., No. 3:03-cv-614-J-20MMH, 2005 U.S. Dist. LEXIS 43592 (M.D. Fla. Mar. 22, 2005) (rejecting assignment by contract).

Whither Henkel?

Henkel itself recently survived a challenge within California based on an 1872 statute that 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.” Cal. Ins. Code. ' 520. In late summer, the California Court of Appeal held that the statute did not legislatively pre-empt the decision in Henkel because liability insurance did not exist at the time of the statute's drafting and therefore the statute could not have been intended to preclude the rule of Henkel. See Fluor Corp. v. Super. Ct., No. G045579, 2012 Cal. App. LEXIS 937 (Aug. 30, 2012). Unless the California Supreme Court reverses this ruling, it appears that Henkel will remain good law in California at least for the time being.

Despite its adoption in a few jurisdictions outside California, Henkel does not appear to be leading a trend toward restricting a policyholder's ability to transfer insurance rights after the occurrence of injury or damage. Indeed, Henkel did not directly reject the traditional rule that choses in action may be freely transferred notwithstanding contractual provisions that purport to limit the transferability of interest under an insurance policy. Instead, it held that the right attempted to be transferred in that case was too speculative and incomplete to constitute a chose in action. Henkel is subject to criticism in that it cites no authority for this rule, and its ruling seems to run counter to older authority in California holding that a chose in action exists at the moment of the loss. See Bibend v. Liverpool & London Fire & Life Ins. Co. , 30 Cal. 78, 87-88 (1866); Greco v. Or. Mut. Fire. Ins. Co. , 12 Cal. Rptr. 802, 806 (Ct. App. 1961).

Furthermore, Henkel remains subject to criticism on the ground that its departure from the venerable rule allowing post-loss assignments does not make practical sense. As courts around the country have long held, whether the insurer defends and indemnifies Company A or Company B is irrelevant, so long as the insurer's burden has not materially increased.

It is also not clear that a rule against assignment is consistent with California law ' and the law of many other states ' holding that latent injury triggers all policies on the risk during any period of physical injury or property damage, not just the policies in effect at the time of initial exposure or of manifestation. See Henkel , 62 P.3d at 78 (Moreno, J., dissenting) (citing Montrose Chem. Corp. v. Admiral Ins. Co. , 913 P.3d 878 (Cal. 1995)). If an insurer's obligation to defend and indemnify its policyholder is effectively vested at the time property damage or physical injury occurs, even though the insurer is not called upon to fulfill its duty until years later, that policyholder's right is a vested right. Under ordinary principles of law, it ought to be transferable, so long as the transfer does not materially increase or change the insurer's obligation.

This suggests that the correct approach is not to impose an outright ban on assignments of post-loss “inchoate” choses in action, as the California Supreme Court did in Henkel. Instead, the insurer ought to be given the opportunity to prove that it has suffered material prejudice as a result of the corporate transaction ' for example, that it is now forced to pay significantly more to defend and/or indemnify the insured or insureds for the same risk or to provide a materially broader defense than it otherwise would have. If the insurer cannot establish such prejudice, the court may, under traditional contract rules, decline to enforce the anti-assignment provision. See, e.g., Restatement (Second) Contracts ' 229 (1981) (courts may excuse non-performance of a condition to avoid a “disproportionate forfeiture”). If, on the other hand, such prejudice could be established, the court could simply reduce the insurer's indemnity or defense obligation by an appropriate factor to account for the increased burden that the insurer now faces. Holding the insurer to the quantum of its original bargain would prevent the forfeiture of valuable insurance rights.

Conclusion

Almost 10 years after Henkel, the decision continues to trickle through the courts. Although still an outlier, the decision has influenced some courts. Insurance and transactional practitioners need to be sensitive to Henkel and other decisions concerning the anti-assignment clause as they address coverage for long-tail liabilities following corporate transactions or as they guide companies through such transactions.

Seth A. Tucker and Charles Fischette are, respectively, a partner and an associate in the Washington, DC, office of Covington & Burling LLP. They represent policyholders in complex insurance coverage matters. Tucker, a member of this newsletter's Board of Editors, argued the Pilkington North America case before the Ohio Supreme Court. The views expressed herein are those of the authors and not necessarily of Covington & Burling or its clients.