Too Much <i>Fluor?</i> California Supreme Court Overturns <i>Henkel</i>

Consent-to-assignment clauses are integral features of most commercial general liability (“CGL”) policies because they eliminate the potential burden of unknown parties seeking insurance coverage for liability that an insurer did not foresee or intend to cover. Pursuant to these clauses, an insured cannot assign its interest in insurance benefits to another party without the insurer's consent. Given their salutary purposes, California courts have historically upheld the validity of these consent-to-assignment clauses in CGL policies, even in situations where the event giving rise to liability occurred prior to the putative assignment. However, the California Supreme Court recently reversed course and overturned one of its earlier decisions, rejecting consent-to-assignment clauses as a bar to coverage where the loss at issue pre-dates the assignment.

This article: 1) provides an overview of consent-to-assignment clauses in CGL policies; 2) discusses the California Supreme Court's decision in Henkel; and 3) examines the California Supreme Court decision in Fluor Corp. v. Superior Court and its impact on the enforceability of consent-to-assignment clauses.

Background

CGL policies are commonplace in the corporate realm to protect businesses against myriad types of legal actions. Generally speaking, a CGL policy will provide coverage for liability that a business faces as part of its normal operations, such that the insurer agrees to defend and indemnify the insured against legal claims brought by a third party. Unlike property insurance, where an insurer's obligations are clearly defined (i.e.' the insurer only insures a finite set of property or resources), CGL policies contain much more uncertainty for an insurer given the potential ambiguities that exist surrounding the time period of events being covered (especially for continuous or long-tail claims), the types of accidents or operations encompassed within the CGL policy, and, ultimately, the amount of risk the insurer may face.

These issues inherent in a CGL policy are magnified when insured businesses reorganize and merge with other entities. In this context, attempts to assign CGL policies can significantly burden an insurer, as an assignment may create a situation where an insurer might have to defend multiple parties or cover unforeseen risks. For instance, if a corporation sells one of its divisions, the selling corporation's insurer may potentially be called upon to defend or indemnify the purchasing entity that may be using the acquired assets in a different, unanticipated manner. The selling corporation also could be sued for claims involving the sold-off assets, which could require the insurer to defend multiple suits arising out of the same underlying conduct or activity.

Consent-to-assignment clauses (al- so known as anti-assignment clauses) are a common mechanism in CGL policies by which insurers seek to ensure predictability as to the scope of coverage by limiting potential occasions for increased risk of duplicative defense or indemnity costs. Without an opportunity to reject the assignment, insurance companies would lack the ability to avoid bearing increased risk after an assignment of a CGL policy.

Currently, insureds are raising temporal challenges to the enforceability of consent-to-assignment clauses arising out of voluntary corporate reorganizations. The timing of assignability typically involves one of three scenarios. The first is when an insured purports to assign its CGL policy benefits before the alleged liability-creating incident. In these circumstances, consent-to-assignment provisions are enforceable because the insurer did not intend to provide coverage for the assignee (the non-insured) in the original insurance policy, and the insurer would be significantly burdened if required to defend or indemnify the assignee. The second situation occurs when the insured purports to assign its CGL policy after a monetary judgment has been rendered for an injury. In these instances, consent-to-assignment provisions are considered unenforceable because the insurer faces no potential for greater risk than what was intended to be covered by the initial insurance policy.

A closer issue, however, is the third scenario, which was the subject of the Fluor litigation before the California Supreme Court. In these cases, the insured seeks to assign the benefits of its insurance policy (both defense and indemnity coverage) to another party after the occurrence of a liability-producing event, but before the rendering of a monetary judgment. The assignee typically then seeks coverage for the defense and indemnity costs as the litigation develops but before it is resolved by a judgment or settlement.

The Henkel Decision

Voluntary corporate restructurings invariably implicate the timing of insurance assignments and the applicability of anti-assignment clauses. While businesses may wish to freely transfer insurance benefits during corporate transactions, in Henkel Corp. v. Hartford Accident & Indemnity Co. , 29 Cal.4th 934 (2003), the California Supreme Court upheld the enforceability of anti-assignment clauses for attempted assignments that occur after the liability-producing event but before a monetary judgment has been rendered.

Facts and Lower-Court Dispositions

Henkel involved the issue of whether a CGL policy's anti-assignment provision invalidated a purported assignment of insurance benefits where the underlying claimant's alleged injury had already occurred. Amchem Products, Inc., a Pennsylvania corporation (“Amchem-1″), ran metallic and agricultural chemicals product lines. In 1979, Amchem-1 reincorporated in Delaware and transferred all of its “assets, liabilities and goodwill” of its metallic chemicals line to the new Delaware entity (“Amchem-2″). The transfer did not specify what assets or liabilities Amchem-2 assumed, nor did it explicitly refer to the insurance policies furnished by Hartford Accident & Indemnity Co (“Hartford”). Amchem-1's insurance policy contained a consent-to-assignment clause, but Hartford had not affirmatively consented to the assignment to Amchem-2.

In 1980, Henkel Corp. (“Henkel”) purchased Amchem-2 and acquired its assets and liabilities. Nine years later, plaintiffs named Henkel as a defendant for alleged injuries caused by exposure to metallic chemicals in the original Amchem-1 product line. Henkel sought the benefits of the Hartford insurance policy covering Amchem-1's metallic chemicals line, claiming that the assignment of Amchem-1's assets and liabilities to Amchem-2 in 1979 (and therefore Henkel's subsequent purchase of Amchem-2 in 1980) included the insurance benefits.

The trial court rejected Henkel's argument and held that Hartford was not obligated to provide coverage for Henkel. The trial court found that: 1) Amchem-2 assumed voluntarily by contract (not by operation of law) the liabilities for the metallic chemicals line; 2) the transaction did not include a transfer of Amchem-1's insurance policy; and 3) even if it had included an assignment of the policy, Hartford never consented to the assignment. The court of appeal reversed and took a different approach, stating that the right to indemnity follows the liability ' not the policy. Since Amchem-2 assumed liability over Amchem-1's metallic chemicals line, the court of appeal held that Amchem-1's policy benefits transferred automatically to Amchem-2 (and, subsequently, to Henkel).

The CA Supreme Court's Holding

On appeal, the California Supreme Court reversed the appellate court. Like the trial court, the California Supreme Court found that because Henkel assumed the liability voluntarily by contract, the insurance policy did not transfer by operation of law. It thus distinguished a voluntary transfer of assets from situations where liability transfers by operation of law, such as when a party acquires or merges with another company. The California Supreme Court declined to answer whether in those situations the insurance policy also transfers automatically because it found that Amchem-2 voluntarily assumed Amchem-1's liabilities. The California Supreme Court concluded that for voluntary transfers, the insurance contract itself determined what rights (if any) Henkel would have to Amchem-1's insurance policy benefits.

Turning to the insurance contract, the California Supreme Court then held that the policy's anti-assignment clause was valid and enforceable, and therefore Hartford's consent was required for the insurance benefits to transfer. Henkel had argued that the insurance coverage should transfer irrespective of Hartford's consent because the events giving rise to liability ' namely the alleged personal injury from exposure to metallic chemicals ' occurred before the assignment. Thus, Henkel contended that it should not matter which entity receives the benefits of the policy if the insurer knows it has to provide coverage over the injury that occurred within the policy period. The California Supreme Court rejected this argument, finding that a unilateral assignment could only occur if the claims for personal injury were “an assignable chose in action” ( i.e. , a right to sue) that became “reduced to a sum of money due or to become due under the policy.” It reasoned that such a restriction was necessary to avoid placing additional risk on the insurers than originally bargained for, such as the possibility of having to defend multiple parties for the same occurrence.

Approaches of Other States

Certain states adopted Henkel' s holding where the liability producing event occurs pre-assignment. For instance, the Indiana Supreme Court, ruling in favor of insurers in a similar factual scenario, stated that “[t]he California Supreme Court's logic in Henkel seems about right.” Travelers Cas. & Surety Co. v. U.S. Filter Corp., 895 N.E.2d 1172, 1180 (Ind. 2008). The Indiana Supreme Court reasoned that “for an insured loss to generate an assignable coverage benefit, the loss must be identifiable with some precision. It must be fixed, not speculative.” Hawaii also adopted Henkel's approach to consent-to-assignment clauses, heavily deferring to the terms of the original policy. See Del Monte Fresh Produce (Haw.), Inc. v. Fireman's Fund Ins. Co., 117 Haw. 357, 370 (2007). Ohio has taken a mixed approach, allowing pre-judgment assignment of indemnity coverage over the potential judgment itself, but not necessarily over the costs of defending the lawsuit (which can be substantial). See Pilkington N. Am., Inc. v. Travelers Cas. & Sur. Co., 861 N.E.2d 121, 129 (Ohio 2006).

Other states, however, did not follow Henkel. See, e.g., Viking Pump, Inc. v. Century Indem. Co., 2 A.3d 76, 105 (Del. Ch. 2009) (“[T]he distinction that the California Supreme Court drew in Henkel simply does not exist in New York case law ' courts applying New York law have treated the 'loss' as occurring when liability arose.”); Mass. Elec. Co. v. Commercial Union Ins., 2005 WL 3489658, at *2 (Mass. Super. Oct. 18, 2005) (“[W]here the policies at issue were triggered by property damage occurring during the policy periods, the transfer of the right to recover for contamination occurring prior to the [] asset sale would not contravene the purpose of the no-assignment clause or increase the risk to the insurers.”); Century Indem. Co. v. Aero-Motive Co., 2004 WL 5642427, at *3 (W.D. Mich. Mar. 12, 2004) (holding that when the occurrence happens pre-assignment “there is no valid reason for not enforcing the assignment”).

Fluor's Challenge of Henkel

Twelve years since its decision, Henkel's holding was back before the California Supreme Court. In a recent lawsuit directly implicating Henkel, the California Supreme Court in Fluor Corp. v. Superior Court of Orange County, No. S205889, 2015 WL 4938295 (Cal. Aug. 20, 2015), overturned Henkel based upon a previously obscure Insurance Code provision as well as historical and current case law dealing with the assignability of insurance rights following a loss.

Facts and Lower-Court Dispositions

Fluor Corp. (“Fluor-1″) was incorporated in 1924 and performed various energy development and construction operations. In fall 2000, Fluor-1 underwent a “reverse spinoff” and created a new entity (“Fluor-2″). Fluor-1 transferred its engineering, procurement, construction and project management services to Fluor-2 while retaining its coal mining and energy operations. Fluor-1 was then renamed but continued to operate as a separate and independent public company from Fluor-2. Hartford, coincidentally the same insurer that issued the policies in Henkel, had furnished 11 CGL policies to Fluor-1 between 1971 and 1986. These policies contained standard consent-to-assignment provisions.

Over a number of years, various Fluor entities were sued for asbestos claims arising out of the entities' business operations. For seven years after the 2000 corporate restructuring, Hartford defended both Fluor-1 and Fluor-2 in their asbestos litigations. In 2006, Fluor-2 initiated a coverage action against Hartford following policy disputes with respect to Fluor-1's insurance policy. Hartford sought a declaration that it had no obligation to defend or indemnify Fluor-2 because of the consent-to-assignment provision in Fluor-1's policy, and sought reimbursement for previous payments to Fluor-2. The latter responded that an 1872 statute (now codified at Cal. Ins. Code ' 520), cited only twice previously in cases, permitted assignment of insurance benefits without the insurer's consent after the liability-producing incident already occurred. The text of the statute reads: “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 except as otherwise provided in [other sections] of this code.”

The trial court rejected Fluor-2's arguments and denied its request for relief. The trial court applied Henkel directly and enforced the consent-to-assignment clauses since the assignment occurred prior to the loss becoming a liquidated sum. On appeal to the California Court of Appeal, Fluor-2 again argued that the 1872 insurance statute providing for assignments even after a loss superseded Henkel. Fluor-2 further argued that the recodification of the statute into Insurance Code ' 520 in 1934, as well as a later amendment in 1947, indicated a legislative intent to apply the Section 520 to liability policies, which by that time were commonly used in the corporate realm.

The court of appeal, however, rejected Fluor-2's position. The court construed the term “loss” in the statute narrowly as applying only to first-party property damage coverage, such that consent-to-assignment clauses are unenforceable in that particular circumstance because coverage is limited to a pre-established amount. While liability insurance involves a more nuanced question of whether the “loss” occurs at the point of injury or following a judgment for monetary damages, the court of appeal declined to analyze that issue since third party liability insurance did not exist in 1872.

The court of appeal similarly concluded that the recodification of the 1872 statute into Insurance Code ' 520 did not amount to a legislative intent for the statute to apply to liability policies. The court found language in Insurance Code ' 2 that expressly stated that the recodification was not meant to alter the original application of the law. It also noted that liability policies began merely as indemnity contracts, such that an insurer's duty began only when a judgment was rendered. Thus, according to the court, even in the early 20th century the definition of “loss” in ' 520 could not have meant the event giving rise to the claimant's alleged injury, but rather meant legal liability after a judgment. Further, the court cited to the Insurance Code ' 108 as additional support for its interpretation of a “loss,” because that provision defined liability insurance as insurance against loss resulting from legal “liability” for personal injury or property damage.

Ultimately, the court of appeal concluded that it should not “recast the 1872 statute to account for the evolution of modern liability insurance policies on an 'occurrence' basis” and denied Fluor-2's request for relief.

The CA Supreme Court Decision

Insurance Code Section 520 Covers Liability Insurance

As a threshold matter, the California Supreme Court disagreed with the court of appeal and held that Insurance Code Section 520 applies to liability insurance and supersedes Henkel. Although the California Supreme Court acknowledged that in 1872 the California Legislature likely did not contemplate liability insurance, by 1935, when the Legislature enacted the Insurance Code, liability insurance had become so commonplace that Section 520 would have applied generally to all types of insurance ' not just first-party coverage.

The 1947 amendment to Section 520 further supported this conclusion. In 1947, the Legislature made the first and only amendment to Section 520, exempting life and disability insurance from its scope. This exempting of two specific types of insurance ' but not liability coverage ' confirmed to the California Supreme Court that the Legislature intended Section 520 to cover all classes of insurance, including those not identified or known in 1872.

A 'Loss' Occurs After an Injury to a Third Party

Satisfied that Section 520 applies to liability insurance, the California Supreme Court then analyzed the meaning of the phrase “after a loss has happened” as used in Section 520. Fluor-2 took the position that a “loss” refers to the time period after the injury to a third party has happened, and for which the insured may be potentially liable. Conversely, Hartford advocated for the approach taken in Henkel, where a “loss” refers to the period after the insured incurs a quantifiable loss as a result of a final monetary judgment or settlement. Although neither argument was “unreasonable,” the California Supreme Court ultimately sided with Fluor-2 and departed from Henkel's previous understanding of when a “loss” occurs.

First, the California Supreme Court found relevant the fact that the 1872 Legislature intended to codify the rationale contained in several pre-1872 decisions from California and New York involving first party insurance to ascertain when a loss occurs. To the California Supreme Court, these cases demonstrated that in the first-party insurance context, the phrase “after a loss has happened” applies to the time period immediately subsequent to the injury or accident covered under the policy. It followed, according to the California Supreme Court, that prior to an accident occurring, an insurer may prohibit assignments because a pre-loss assignment is tantamount to a substitution of one insured for another. An insurer rightfully can prevent this type of assignment because the insurer has not evaluated the risks imposed by the assignee and its possessions, such that the insurer cannot be made to bear risk relating to a loss it did not originally agree to accept. However, the California Supreme Court stated, once the loss has happened, the traditional justification for enforcing consent-to-assignment clauses disappears, as it should make no difference to the insurer who it provides insurance to after the incident occurred.

Second, the California Supreme Court found additional support for its decision that a loss occurs after an accident or injury ' but before the rendering of a monetary judgment ' from early third-party liability insurance cases involving an insurer's duty to indemnify its insured for a loss. In these cases, the California Supreme Court found that the insurer's duty to indemnify arose when the personal injury or property damage to a third party occurred during the policy term. The fact that the insured had not yet been found liable or that the amount of damage or liability had not been ascertained was of no moment to the California Supreme Court in these early indemnity cases.

Third, the California Supreme Court explained that at the time the California Legislature enacted the Insurance Code, several non-California decisions embraced the proposition that consent-to-assignment clauses could not prevent post-loss assignments of rights to insurance coverage in both first and third party insurance policies. Although these cases did not address the exact issue in Fluor, the California Supreme Court nonetheless found persuasive the fact that the recognized reasons for enforcing consent-to-assignment clauses were inapplicable after the rendering of a judgment against the insured, as the insurer would not be bearing a greater risk than what it originally agreed to undertake.

Fourth, the California Supreme Court pointed to the fact that additional cases outside of California that preceded that 1947 amendment of the Insurance Code began to adhere to the rule that an insured can assign its insurance rights after a third party had been injured but prior to the rendering of a monetary judgment. These early cases viewed the assignment of rights post-accident but pre-judgment as the assignment of a cause of action, debt, or claim that was assignable at the time the accident occurred. As the California Supreme Court noted, this rule, first announced in a 1939 federal court decision, quickly gained traction nationwide and became the “accepted part of the legal landscape” by the time the Legislature amended Section 520 in 1947.

Finally, California decisions involving the point in time at which an injury or damage occurred in long-tail insurance coverage cases further supported the California Supreme Court's holding that a loss occurs at the time of injury during the policy period ' irrespective of whether a final judgment or settlement has been entered. In those cases where bodily injury or property damage is continuous throughout multiple policy periods, California courts have found that the continuous injury or damage is covered under all policies in effect, even though the injuries at issue may still be unknown or not yet manifested.

In light of the foregoing legislative history and developing case law both inside and outside of California, the California Supreme Court held that the “after a loss has happened” phrase as used in Section 520 simply refers to a loss sustained by a third party that is covered under the insured's policy and for which the insured may be liable. Further, the California Supreme Court ruled that Section 520 does not contain any requirement that there must be a monetary judgment or approved settlement before an insured can assign its rights under the claim without the insurer's consent. According to the California Supreme Court, so long as the accident or injury occurs within the applicable policy period, an insurer cannot refuse to honor an insured's assignment of insurance rights regarding that loss. Because Henkel reached a contrary conclusion, the California Supreme Court overruled its prior precedent and deferred to the controlling statute embodied in Section 520.

Fluor Alters the Insurance Assignability Landscape

Fluor's holding eliminated a significant obstacle that companies seeking to assign insurance rights previously faced. Where California law applies, insureds may now assign their rights to insurance to other entities without an insurer's consent once a liability-producing event occurs, notwithstanding the existence of a consent-to-assignment clause. Despite being the law of California for the past 12 years, insurance companies can no longer rely on Henkel's holding to deny insurance coverage to assignees prior to the claim at issue being reduced to a fixed monetary sum.

Nevertheless, even after Fluor, insurance companies will still be protected against unfettered assignments. Importantly, Fluor's holding has no bearing on the validity of consent-to-assignment clauses in the typical situation where the insured wants to assign insurance benefits before the occurrence of a liability-producing event. These pre-occurrence assignments will still require an insurer's consent. In addition, insurers still will be able to draft policies that minimize the risk of having to defend multiple parties for the same occurrence in the event of an assignment after the liability-producing event. This could be accomplished by adding a condition precedent into the consent-to-assignment provisions, such that the original policyholder will disclaim any right to coverage from the insurer following an assignment to another party. Insurers can similarly include provisions that disincentivize assignments by the original policyholder, for example by providing for a mandatory increase in premiums or a higher deductible following an assignment. However insurance companies choose to proceed, it is crucial that they are cognizant of this new and important decision.

Conclusion

Henkel had been controlling law in California for over a decade. However, given the California Supreme Court's recent overruling of Henkel, insurance companies and policyholders alike must be aware of the new legal landscape affecting insurance assignments and should not continue to operate under outdated rules that previously applied.

Chet A. Kronenberg, a member of this newsletter's Board of Editors, is a litigation partner in the Los Angeles office of Simpson Thacher & Bartlett LLP. Tyler Z. Bernstein is a litigation associate and Benjamin Harris was a summer associate in the same office.

Consent-to-assignment clauses are integral features of most commercial general liability (“CGL”) policies because they eliminate the potential burden of unknown parties seeking insurance coverage for liability that an insurer did not foresee or intend to cover. Pursuant to these clauses, an insured cannot assign its interest in insurance benefits to another party without the insurer's consent. Given their salutary purposes, California courts have historically upheld the validity of these consent-to-assignment clauses in CGL policies, even in situations where the event giving rise to liability occurred prior to the putative assignment. However, the California Supreme Court recently reversed course and overturned one of its earlier decisions, rejecting consent-to-assignment clauses as a bar to coverage where the loss at issue pre-dates the assignment.

This article: 1) provides an overview of consent-to-assignment clauses in CGL policies; 2) discusses the California Supreme Court's decision in Henkel; and 3) examines the California Supreme Court decision in Fluor Corp. v. Superior Court and its impact on the enforceability of consent-to-assignment clauses.

Background

CGL policies are commonplace in the corporate realm to protect businesses against myriad types of legal actions. Generally speaking, a CGL policy will provide coverage for liability that a business faces as part of its normal operations, such that the insurer agrees to defend and indemnify the insured against legal claims brought by a third party. Unlike property insurance, where an insurer's obligations are clearly defined (i.e.' the insurer only insures a finite set of property or resources), CGL policies contain much more uncertainty for an insurer given the potential ambiguities that exist surrounding the time period of events being covered (especially for continuous or long-tail claims), the types of accidents or operations encompassed within the CGL policy, and, ultimately, the amount of risk the insurer may face.

These issues inherent in a CGL policy are magnified when insured businesses reorganize and merge with other entities. In this context, attempts to assign CGL policies can significantly burden an insurer, as an assignment may create a situation where an insurer might have to defend multiple parties or cover unforeseen risks. For instance, if a corporation sells one of its divisions, the selling corporation's insurer may potentially be called upon to defend or indemnify the purchasing entity that may be using the acquired assets in a different, unanticipated manner. The selling corporation also could be sued for claims involving the sold-off assets, which could require the insurer to defend multiple suits arising out of the same underlying conduct or activity.

Consent-to-assignment clauses (al- so known as anti-assignment clauses) are a common mechanism in CGL policies by which insurers seek to ensure predictability as to the scope of coverage by limiting potential occasions for increased risk of duplicative defense or indemnity costs. Without an opportunity to reject the assignment, insurance companies would lack the ability to avoid bearing increased risk after an assignment of a CGL policy.

Currently, insureds are raising temporal challenges to the enforceability of consent-to-assignment clauses arising out of voluntary corporate reorganizations. The timing of assignability typically involves one of three scenarios. The first is when an insured purports to assign its CGL policy benefits before the alleged liability-creating incident. In these circumstances, consent-to-assignment provisions are enforceable because the insurer did not intend to provide coverage for the assignee (the non-insured) in the original insurance policy, and the insurer would be significantly burdened if required to defend or indemnify the assignee. The second situation occurs when the insured purports to assign its CGL policy after a monetary judgment has been rendered for an injury. In these instances, consent-to-assignment provisions are considered unenforceable because the insurer faces no potential for greater risk than what was intended to be covered by the initial insurance policy.

A closer issue, however, is the third scenario, which was the subject of the Fluor litigation before the California Supreme Court. In these cases, the insured seeks to assign the benefits of its insurance policy (both defense and indemnity coverage) to another party after the occurrence of a liability-producing event, but before the rendering of a monetary judgment. The assignee typically then seeks coverage for the defense and indemnity costs as the litigation develops but before it is resolved by a judgment or settlement.

The Henkel Decision

Voluntary corporate restructurings invariably implicate the timing of insurance assignments and the applicability of anti-assignment clauses. While businesses may wish to freely transfer insurance benefits during corporate transactions, in Henkel Corp. v. Hartford Accident & Indemnity Co. , 29 Cal.4th 934 (2003), the California Supreme Court upheld the enforceability of anti-assignment clauses for attempted assignments that occur after the liability-producing event but before a monetary judgment has been rendered.

Facts and Lower-Court Dispositions

Henkel involved the issue of whether a CGL policy's anti-assignment provision invalidated a purported assignment of insurance benefits where the underlying claimant's alleged injury had already occurred. Amchem Products, Inc., a Pennsylvania corporation (“Amchem-1″), ran metallic and agricultural chemicals product lines. In 1979, Amchem-1 reincorporated in Delaware and transferred all of its “assets, liabilities and goodwill” of its metallic chemicals line to the new Delaware entity (“Amchem-2″). The transfer did not specify what assets or liabilities Amchem-2 assumed, nor did it explicitly refer to the insurance policies furnished by Hartford Accident & Indemnity Co (“Hartford”). Amchem-1's insurance policy contained a consent-to-assignment clause, but Hartford had not affirmatively consented to the assignment to Amchem-2.

In 1980, Henkel Corp. (“Henkel”) purchased Amchem-2 and acquired its assets and liabilities. Nine years later, plaintiffs named Henkel as a defendant for alleged injuries caused by exposure to metallic chemicals in the original Amchem-1 product line. Henkel sought the benefits of the Hartford insurance policy covering Amchem-1's metallic chemicals line, claiming that the assignment of Amchem-1's assets and liabilities to Amchem-2 in 1979 (and therefore Henkel's subsequent purchase of Amchem-2 in 1980) included the insurance benefits.

The trial court rejected Henkel's argument and held that Hartford was not obligated to provide coverage for Henkel. The trial court found that: 1) Amchem-2 assumed voluntarily by contract (not by operation of law) the liabilities for the metallic chemicals line; 2) the transaction did not include a transfer of Amchem-1's insurance policy; and 3) even if it had included an assignment of the policy, Hartford never consented to the assignment. The court of appeal reversed and took a different approach, stating that the right to indemnity follows the liability ' not the policy. Since Amchem-2 assumed liability over Amchem-1's metallic chemicals line, the court of appeal held that Amchem-1's policy benefits transferred automatically to Amchem-2 (and, subsequently, to Henkel).

The CA Supreme Court's Holding

On appeal, the California Supreme Court reversed the appellate court. Like the trial court, the California Supreme Court found that because Henkel assumed the liability voluntarily by contract, the insurance policy did not transfer by operation of law. It thus distinguished a voluntary transfer of assets from situations where liability transfers by operation of law, such as when a party acquires or merges with another company. The California Supreme Court declined to answer whether in those situations the insurance policy also transfers automatically because it found that Amchem-2 voluntarily assumed Amchem-1's liabilities. The California Supreme Court concluded that for voluntary transfers, the insurance contract itself determined what rights (if any) Henkel would have to Amchem-1's insurance policy benefits.

Turning to the insurance contract, the California Supreme Court then held that the policy's anti-assignment clause was valid and enforceable, and therefore Hartford's consent was required for the insurance benefits to transfer. Henkel had argued that the insurance coverage should transfer irrespective of Hartford's consent because the events giving rise to liability ' namely the alleged personal injury from exposure to metallic chemicals ' occurred before the assignment. Thus, Henkel contended that it should not matter which entity receives the benefits of the policy if the insurer knows it has to provide coverage over the injury that occurred within the policy period. The California Supreme Court rejected this argument, finding that a unilateral assignment could only occur if the claims for personal injury were “an assignable chose in action” ( i.e. , a right to sue) that became “reduced to a sum of money due or to become due under the policy.” It reasoned that such a restriction was necessary to avoid placing additional risk on the insurers than originally bargained for, such as the possibility of having to defend multiple parties for the same occurrence.

Approaches of Other States

Certain states adopted Henkel' s holding where the liability producing event occurs pre-assignment. For instance, the Indiana Supreme Court, ruling in favor of insurers in a similar factual scenario, stated that “[t]he California Supreme Court's logic in Henkel seems about right.” Travelers Cas. & Surety Co. v. U.S. Filter Corp. , 895 N.E.2d 1172, 1180 (Ind. 2008). The Indiana Supreme Court reasoned that “for an insured loss to generate an assignable coverage benefit, the loss must be identifiable with some precision. It must be fixed, not speculative.” Hawaii also adopted Henkel's approach to consent-to-assignment clauses, heavily deferring to the terms of the original policy. See Del Monte Fresh Produce (Haw.), Inc. v. Fireman's Fund Ins. Co. , 117 Haw. 357, 370 (2007). Ohio has taken a mixed approach, allowing pre-judgment assignment of indemnity coverage over the potential judgment itself, but not necessarily over the costs of defending the lawsuit (which can be substantial). See Pilkington N. Am., Inc. v. Travelers Cas. & Sur. Co. , 861 N.E.2d 121, 129 (Ohio 2006).

Other states, however, did not follow Henkel. See, e.g., Viking Pump, Inc. v. Century Indem. Co. , 2 A.3d 76, 105 (Del. Ch. 2009) (“[T]he distinction that the California Supreme Court drew in Henkel simply does not exist in New York case law ' courts applying New York law have treated the 'loss' as occurring when liability arose.”); Mass. Elec. Co. v. Commercial Union Ins., 2005 WL 3489658, at *2 (Mass. Super. Oct. 18, 2005) (“[W]here the policies at issue were triggered by property damage occurring during the policy periods, the transfer of the right to recover for contamination occurring prior to the [] asset sale would not contravene the purpose of the no-assignment clause or increase the risk to the insurers.”); Century Indem. Co. v. Aero-Motive Co., 2004 WL 5642427, at *3 (W.D. Mich. Mar. 12, 2004) (holding that when the occurrence happens pre-assignment “there is no valid reason for not enforcing the assignment”).

Fluor's Challenge of Henkel

Twelve years since its decision, Henkel's holding was back before the California Supreme Court. In a recent lawsuit directly implicating Henkel, the California Supreme Court in Fluor Corp. v. Superior Court of Orange County, No. S205889, 2015 WL 4938295 (Cal. Aug. 20, 2015), overturned Henkel based upon a previously obscure Insurance Code provision as well as historical and current case law dealing with the assignability of insurance rights following a loss.

Facts and Lower-Court Dispositions

Fluor Corp. (“Fluor-1″) was incorporated in 1924 and performed various energy development and construction operations. In fall 2000, Fluor-1 underwent a “reverse spinoff” and created a new entity (“Fluor-2″). Fluor-1 transferred its engineering, procurement, construction and project management services to Fluor-2 while retaining its coal mining and energy operations. Fluor-1 was then renamed but continued to operate as a separate and independent public company from Fluor-2. Hartford, coincidentally the same insurer that issued the policies in Henkel, had furnished 11 CGL policies to Fluor-1 between 1971 and 1986. These policies contained standard consent-to-assignment provisions.

Over a number of years, various Fluor entities were sued for asbestos claims arising out of the entities' business operations. For seven years after the 2000 corporate restructuring, Hartford defended both Fluor-1 and Fluor-2 in their asbestos litigations. In 2006, Fluor-2 initiated a coverage action against Hartford following policy disputes with respect to Fluor-1's insurance policy. Hartford sought a declaration that it had no obligation to defend or indemnify Fluor-2 because of the consent-to-assignment provision in Fluor-1's policy, and sought reimbursement for previous payments to Fluor-2. The latter responded that an 1872 statute (now codified at Cal. Ins. Code ' 520), cited only twice previously in cases, permitted assignment of insurance benefits without the insurer's consent after the liability-producing incident already occurred. The text of the statute reads: “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 except as otherwise provided in [other sections] of this code.”

The trial court rejected Fluor-2's arguments and denied its request for relief. The trial court applied Henkel directly and enforced the consent-to-assignment clauses since the assignment occurred prior to the loss becoming a liquidated sum. On appeal to the California Court of Appeal, Fluor-2 again argued that the 1872 insurance statute providing for assignments even after a loss superseded Henkel. Fluor-2 further argued that the recodification of the statute into Insurance Code ' 520 in 1934, as well as a later amendment in 1947, indicated a legislative intent to apply the Section 520 to liability policies, which by that time were commonly used in the corporate realm.

The court of appeal, however, rejected Fluor-2's position. The court construed the term “loss” in the statute narrowly as applying only to first-party property damage coverage, such that consent-to-assignment clauses are unenforceable in that particular circumstance because coverage is limited to a pre-established amount. While liability insurance involves a more nuanced question of whether the “loss” occurs at the point of injury or following a judgment for monetary damages, the court of appeal declined to analyze that issue since third party liability insurance did not exist in 1872.

The court of appeal similarly concluded that the recodification of the 1872 statute into Insurance Code ' 520 did not amount to a legislative intent for the statute to apply to liability policies. The court found language in Insurance Code ' 2 that expressly stated that the recodification was not meant to alter the original application of the law. It also noted that liability policies began merely as indemnity contracts, such that an insurer's duty began only when a judgment was rendered. Thus, according to the court, even in the early 20th century the definition of “loss” in ' 520 could not have meant the event giving rise to the claimant's alleged injury, but rather meant legal liability after a judgment. Further, the court cited to the Insurance Code ' 108 as additional support for its interpretation of a “loss,” because that provision defined liability insurance as insurance against loss resulting from legal “liability” for personal injury or property damage.

Ultimately, the court of appeal concluded that it should not “recast the 1872 statute to account for the evolution of modern liability insurance policies on an 'occurrence' basis” and denied Fluor-2's request for relief.

The CA Supreme Court Decision

Insurance Code Section 520 Covers Liability Insurance

As a threshold matter, the California Supreme Court disagreed with the court of appeal and held that Insurance Code Section 520 applies to liability insurance and supersedes Henkel. Although the California Supreme Court acknowledged that in 1872 the California Legislature likely did not contemplate liability insurance, by 1935, when the Legislature enacted the Insurance Code, liability insurance had become so commonplace that Section 520 would have applied generally to all types of insurance ' not just first-party coverage.

The 1947 amendment to Section 520 further supported this conclusion. In 1947, the Legislature made the first and only amendment to Section 520, exempting life and disability insurance from its scope. This exempting of two specific types of insurance ' but not liability coverage ' confirmed to the California Supreme Court that the Legislature intended Section 520 to cover all classes of insurance, including those not identified or known in 1872.

A 'Loss' Occurs After an Injury to a Third Party

Satisfied that Section 520 applies to liability insurance, the California Supreme Court then analyzed the meaning of the phrase “after a loss has happened” as used in Section 520. Fluor-2 took the position that a “loss” refers to the time period after the injury to a third party has happened, and for which the insured may be potentially liable. Conversely, Hartford advocated for the approach taken in Henkel, where a “loss” refers to the period after the insured incurs a quantifiable loss as a result of a final monetary judgment or settlement. Although neither argument was “unreasonable,” the California Supreme Court ultimately sided with Fluor-2 and departed from Henkel's previous understanding of when a “loss” occurs.

First, the California Supreme Court found relevant the fact that the 1872 Legislature intended to codify the rationale contained in several pre-1872 decisions from California and New York involving first party insurance to ascertain when a loss occurs. To the California Supreme Court, these cases demonstrated that in the first-party insurance context, the phrase “after a loss has happened” applies to the time period immediately subsequent to the injury or accident covered under the policy. It followed, according to the California Supreme Court, that prior to an accident occurring, an insurer may prohibit assignments because a pre-loss assignment is tantamount to a substitution of one insured for another. An insurer rightfully can prevent this type of assignment because the insurer has not evaluated the risks imposed by the assignee and its possessions, such that the insurer cannot be made to bear risk relating to a loss it did not originally agree to accept. However, the California Supreme Court stated, once the loss has happened, the traditional justification for enforcing consent-to-assignment clauses disappears, as it should make no difference to the insurer who it provides insurance to after the incident occurred.

Second, the California Supreme Court found additional support for its decision that a loss occurs after an accident or injury ' but before the rendering of a monetary judgment ' from early third-party liability insurance cases involving an insurer's duty to indemnify its insured for a loss. In these cases, the California Supreme Court found that the insurer's duty to indemnify arose when the personal injury or property damage to a third party occurred during the policy term. The fact that the insured had not yet been found liable or that the amount of damage or liability had not been ascertained was of no moment to the California Supreme Court in these early indemnity cases.

Third, the California Supreme Court explained that at the time the California Legislature enacted the Insurance Code, several non-California decisions embraced the proposition that consent-to-assignment clauses could not prevent post-loss assignments of rights to insurance coverage in both first and third party insurance policies. Although these cases did not address the exact issue in Fluor, the California Supreme Court nonetheless found persuasive the fact that the recognized reasons for enforcing consent-to-assignment clauses were inapplicable after the rendering of a judgment against the insured, as the insurer would not be bearing a greater risk than what it originally agreed to undertake.

Fourth, the California Supreme Court pointed to the fact that additional cases outside of California that preceded that 1947 amendment of the Insurance Code began to adhere to the rule that an insured can assign its insurance rights after a third party had been injured but prior to the rendering of a monetary judgment. These early cases viewed the assignment of rights post-accident but pre-judgment as the assignment of a cause of action, debt, or claim that was assignable at the time the accident occurred. As the California Supreme Court noted, this rule, first announced in a 1939 federal court decision, quickly gained traction nationwide and became the “accepted part of the legal landscape” by the time the Legislature amended Section 520 in 1947.

Finally, California decisions involving the point in time at which an injury or damage occurred in long-tail insurance coverage cases further supported the California Supreme Court's holding that a loss occurs at the time of injury during the policy period ' irrespective of whether a final judgment or settlement has been entered. In those cases where bodily injury or property damage is continuous throughout multiple policy periods, California courts have found that the continuous injury or damage is covered under all policies in effect, even though the injuries at issue may still be unknown or not yet manifested.

In light of the foregoing legislative history and developing case law both inside and outside of California, the California Supreme Court held that the “after a loss has happened” phrase as used in Section 520 simply refers to a loss sustained by a third party that is covered under the insured's policy and for which the insured may be liable. Further, the California Supreme Court ruled that Section 520 does not contain any requirement that there must be a monetary judgment or approved settlement before an insured can assign its rights under the claim without the insurer's consent. According to the California Supreme Court, so long as the accident or injury occurs within the applicable policy period, an insurer cannot refuse to honor an insured's assignment of insurance rights regarding that loss. Because Henkel reached a contrary conclusion, the California Supreme Court overruled its prior precedent and deferred to the controlling statute embodied in Section 520.

Fluor Alters the Insurance Assignability Landscape

Fluor's holding eliminated a significant obstacle that companies seeking to assign insurance rights previously faced. Where California law applies, insureds may now assign their rights to insurance to other entities without an insurer's consent once a liability-producing event occurs, notwithstanding the existence of a consent-to-assignment clause. Despite being the law of California for the past 12 years, insurance companies can no longer rely on Henkel's holding to deny insurance coverage to assignees prior to the claim at issue being reduced to a fixed monetary sum.

Nevertheless, even after Fluor, insurance companies will still be protected against unfettered assignments. Importantly, Fluor's holding has no bearing on the validity of consent-to-assignment clauses in the typical situation where the insured wants to assign insurance benefits before the occurrence of a liability-producing event. These pre-occurrence assignments will still require an insurer's consent. In addition, insurers still will be able to draft policies that minimize the risk of having to defend multiple parties for the same occurrence in the event of an assignment after the liability-producing event. This could be accomplished by adding a condition precedent into the consent-to-assignment provisions, such that the original policyholder will disclaim any right to coverage from the insurer following an assignment to another party. Insurers can similarly include provisions that disincentivize assignments by the original policyholder, for example by providing for a mandatory increase in premiums or a higher deductible following an assignment. However insurance companies choose to proceed, it is crucial that they are cognizant of this new and important decision.

Conclusion

Henkel had been controlling law in California for over a decade. However, given the California Supreme Court's recent overruling of Henkel, insurance companies and policyholders alike must be aware of the new legal landscape affecting insurance assignments and should not continue to operate under outdated rules that previously applied.

Chet A. Kronenberg, a member of this newsletter's Board of Editors, is a litigation partner in the Los Angeles office of Simpson Thacher & Bartlett LLP. Tyler Z. Bernstein is a litigation associate and Benjamin Harris was a summer associate in the same office.