Consent to Assignment Clauses

Last month in Part One of this article, available at http://bit.ly/1m8nbYs, we discussed the fact that most insurance policies contain anti-assignment provisions, purporting to prohibit the assignment of interests in the policy without the insurer's consent. Insurers rarely offer their consent to assignments. Thus, whether a policy's anti-assignment clause will void a transfer of insurance proceeds or coverage rights, by contract or operation of law, usually requires an analysis of whether the predecessor corporation is an insured under the policy; whether the predecessor corporation still exists; whether the successor corporation succeeded to the predecessor's liabilities and insurance assets by operation of law; whether the coverage rights or policies were transferred by agreement; and, whether the claim for which the successor seeks coverage constitutes a “chose in action” at the time of the transfer. Most jurisdictions that have considered these matters agree that after a loss, an insurance policy's consent-to-assignment clause is unenforceable. In fact, California, which had until recently been in the minority on this issue, now has corrected course.

We went on to discuss case law in California and in other states; other jurisdictions do not always have the same rulings.

Del Monte Fresh Produce

By way of example, in Del Monte Fresh Produce (Hawaii), Inc. v. Fireman's Fund Inc. Co., 117 Hawaii 357, 183 P.3d 734 (Haw. 2007), the corporate successor to a pineapple plantation owner brought an action against the predecessor's liability insurers seeking a declaration that they had a duty to indemnify and defend it in an EPA investigation. The trial court found that the policies' rights were transferred to the successor by operation of law, but this ruling was reversed on appeal. The U.S. Court of Appeals for the Fifth Circuit opined that assignment of insurance rights by operation of law is inconsistent with Hawaii's general rules governing construction of contracts, including insurance policies. It held that the policies' anti-assignment clauses should be given their plain meaning. The court also noted that common law tort rules relating to successor liability do not entitle a successor corporation to the insurance coverage of its predecessor corporation. As the policies' coverage rights did not pass by operation of law, the court concluded that the policies' anti-assignment clauses were valid and enforceable. The assignment therefore failed because the insurers' consent to the assignment was required, but had not been obtained.

Rationale for Enforcing the Clause

The often expressed rationale for enforcing a consent-to-assignment clause is to protect an insurer from bearing a risk or burden relating to a loss that is greater than what it agreed to undertake when issuing a policy. Thus, most courts agree that, as a general rule, an insured may not transfer the policy itself to another without the insurer's consent. The post-loss exception to the general rule restricting assignability distinguishes, however, between risk and the right to press for insurance coverage for a loss that an insurer is already obligated to pay. Many courts, therefore, acknow- ledge that an anti-assignment provision does not preclude transferring policy benefits, such as the right to money due under an insurance contract or damages for breach of the insurance contract. See, e.g., Maneikis v. St. Paul Ins. Co., 655 F.2d 818, 826 (7th Cir. 1981).

In Egger v. Gulf Insurance Co., 588 Pa. 287, 903 A.2d 1219 (2006), for instance, the Pennsylvania Supreme Court interpreted the scope of an anti-assignment clause in the context of a fatal workplace accident. The insurer there denied coverage, and the policyholder assigned its coverage rights to the plaintiff shortly before the jury returned a verdict for the plaintiff. The plaintiff then sued the insurer for its share of the award. The insurer argued that the assignment was invalid because its policy contained an anti-assignment clause. The court disagreed, finding the anti-assignment clause unenforceable against post-loss assignments. The court explained that a “loss” occurs, for purposes of determining if an assignment is valid, at the time the underlying occurrence gives rise to the liability, not at the time a verdict is rendered or a policyholder is ordered to pay it. It therefore concluded that permitting post-loss assignments without an insurer's consent does not run afoul of the intent of an anti-assignment clause, which is designed only to prevent increased risk caused by a change in policy ownership. The court also rejected the insurer's claim that permitting such assignments would permit policyholders to “throw” their defense of covered claims. It observed that the insurer had the right to participate in the defense, but elected not to do so.

In short, most courts agree that an insurer's anti-assignment provision is not relevant or enforceable after a loss. Although insurers have urged that this result runs afoul of their contract's provisions, the courts' rulings, at least implicitly recognize that insurance policies are contracts of adhesion, which must be fair and reasonable and yield to public policy. As the Fluor court (Fluor Corporation v. Superior Court, 191 Cal.Rptr.3d 498 (Cal. 2015), see Part One of this article) recognized, the ability to assign insurance rights after a loss is a significant one. It benefits the American economy where mergers, acquisitions, and sales are part of everyday corporate life. There is substantial value to be gained by allowing insurance protections for past but possibly unknown losses to be freely assigned as part of corporate recombinations. Doing so lowers transaction costs and facilitates economic activity and wealth enhancement. It also prevents insurers from overreach and unfairly seeking concessions, or seeking to avoid responsibility, on claims for which they already are liable, under policies on which they already received premiums.

Conclusion

Those corporate policyholders seeking to use others' insurance following mergers, asset purchases or assignments, nonetheless, should familiarize themselves with the law applicable to their own circumstances. Before a transaction involving multiple or complicated asset transfers, the acquiring company should determine whether the selling corporation actually possesses transferable insurance rights, and their value, before offering consideration for them. Businesses acquiring other companies through asset purchase agreements (rather than mergers), should consider requiring sellers to obtain assignments from their insurers for liabilities arising from sellers' prior acts. In mergers, the surviving company should seek to have its agreements provide expressly for the transfer of insurance assets for all liability existing and/or fixed at the time of the transfer. It also should confirm, where appropriate, that the predecessor will be dissolved. It likewise should consider obtaining assignments from insurers, or confirmation from them that their risks have not been increased by the transaction. If the seller will remain a viable entity, the acquiring company should obtain an indemnification agreement from it sufficient to insure against any liabilities arising from the seller's acts.

Sherilyn Pastor, a member of this newsletter's Board of Editors, leads McCarter & English's Insurance Coverage Group. She is on the Board of the American College of Coverage and Extracontractual Counsel, and is the immediate past Co-Chair of the ABA's Insurance Coverage Litigation Committee and current Chair of the ABA's Roundtable Committee. This article is for educational purposes. It does not provide legal advice and it does not necessarily reflect the positions of its author, her current or future clients, or her law firm.

Last month in Part One of this article, available at http://bit.ly/1m8nbYs, we discussed the fact that most insurance policies contain anti-assignment provisions, purporting to prohibit the assignment of interests in the policy without the insurer's consent. Insurers rarely offer their consent to assignments. Thus, whether a policy's anti-assignment clause will void a transfer of insurance proceeds or coverage rights, by contract or operation of law, usually requires an analysis of whether the predecessor corporation is an insured under the policy; whether the predecessor corporation still exists; whether the successor corporation succeeded to the predecessor's liabilities and insurance assets by operation of law; whether the coverage rights or policies were transferred by agreement; and, whether the claim for which the successor seeks coverage constitutes a “chose in action” at the time of the transfer. Most jurisdictions that have considered these matters agree that after a loss, an insurance policy's consent-to-assignment clause is unenforceable. In fact, California, which had until recently been in the minority on this issue, now has corrected course.

We went on to discuss case law in California and in other states; other jurisdictions do not always have the same rulings.

Del Monte Fresh Produce

By way of example, in Del Monte Fresh Produce (Hawaii), Inc. v. Fireman's Fund Inc. Co. , 117 Hawaii 357, 183 P.3d 734 (Haw. 2007), the corporate successor to a pineapple plantation owner brought an action against the predecessor's liability insurers seeking a declaration that they had a duty to indemnify and defend it in an EPA investigation. The trial court found that the policies' rights were transferred to the successor by operation of law, but this ruling was reversed on appeal. The U.S. Court of Appeals for the Fifth Circuit opined that assignment of insurance rights by operation of law is inconsistent with Hawaii's general rules governing construction of contracts, including insurance policies. It held that the policies' anti-assignment clauses should be given their plain meaning. The court also noted that common law tort rules relating to successor liability do not entitle a successor corporation to the insurance coverage of its predecessor corporation. As the policies' coverage rights did not pass by operation of law, the court concluded that the policies' anti-assignment clauses were valid and enforceable. The assignment therefore failed because the insurers' consent to the assignment was required, but had not been obtained.

Rationale for Enforcing the Clause

The often expressed rationale for enforcing a consent-to-assignment clause is to protect an insurer from bearing a risk or burden relating to a loss that is greater than what it agreed to undertake when issuing a policy. Thus, most courts agree that, as a general rule, an insured may not transfer the policy itself to another without the insurer's consent. The post-loss exception to the general rule restricting assignability distinguishes, however, between risk and the right to press for insurance coverage for a loss that an insurer is already obligated to pay. Many courts, therefore, acknow- ledge that an anti-assignment provision does not preclude transferring policy benefits, such as the right to money due under an insurance contract or damages for breach of the insurance contract. See, e.g., Maneikis v. St. Paul Ins. Co. , 655 F.2d 818, 826 (7th Cir. 1981).

In Egger v. Gulf Insurance Co. , 588 Pa. 287, 903 A.2d 1219 (2006), for instance, the Pennsylvania Supreme Court interpreted the scope of an anti-assignment clause in the context of a fatal workplace accident. The insurer there denied coverage, and the policyholder assigned its coverage rights to the plaintiff shortly before the jury returned a verdict for the plaintiff. The plaintiff then sued the insurer for its share of the award. The insurer argued that the assignment was invalid because its policy contained an anti-assignment clause. The court disagreed, finding the anti-assignment clause unenforceable against post-loss assignments. The court explained that a “loss” occurs, for purposes of determining if an assignment is valid, at the time the underlying occurrence gives rise to the liability, not at the time a verdict is rendered or a policyholder is ordered to pay it. It therefore concluded that permitting post-loss assignments without an insurer's consent does not run afoul of the intent of an anti-assignment clause, which is designed only to prevent increased risk caused by a change in policy ownership. The court also rejected the insurer's claim that permitting such assignments would permit policyholders to “throw” their defense of covered claims. It observed that the insurer had the right to participate in the defense, but elected not to do so.

In short, most courts agree that an insurer's anti-assignment provision is not relevant or enforceable after a loss. Although insurers have urged that this result runs afoul of their contract's provisions, the courts' rulings, at least implicitly recognize that insurance policies are contracts of adhesion, which must be fair and reasonable and yield to public policy. As the Fluor court ( Fluor Corporation v. Superior Court , 191 Cal.Rptr.3d 498 (Cal. 2015), see Part One of this article) recognized, the ability to assign insurance rights after a loss is a significant one. It benefits the American economy where mergers, acquisitions, and sales are part of everyday corporate life. There is substantial value to be gained by allowing insurance protections for past but possibly unknown losses to be freely assigned as part of corporate recombinations. Doing so lowers transaction costs and facilitates economic activity and wealth enhancement. It also prevents insurers from overreach and unfairly seeking concessions, or seeking to avoid responsibility, on claims for which they already are liable, under policies on which they already received premiums.

Conclusion

Those corporate policyholders seeking to use others' insurance following mergers, asset purchases or assignments, nonetheless, should familiarize themselves with the law applicable to their own circumstances. Before a transaction involving multiple or complicated asset transfers, the acquiring company should determine whether the selling corporation actually possesses transferable insurance rights, and their value, before offering consideration for them. Businesses acquiring other companies through asset purchase agreements (rather than mergers), should consider requiring sellers to obtain assignments from their insurers for liabilities arising from sellers' prior acts. In mergers, the surviving company should seek to have its agreements provide expressly for the transfer of insurance assets for all liability existing and/or fixed at the time of the transfer. It also should confirm, where appropriate, that the predecessor will be dissolved. It likewise should consider obtaining assignments from insurers, or confirmation from them that their risks have not been increased by the transaction. If the seller will remain a viable entity, the acquiring company should obtain an indemnification agreement from it sufficient to insure against any liabilities arising from the seller's acts.

Sherilyn Pastor, a member of this newsletter's Board of Editors, leads McCarter & English's Insurance Coverage Group. She is on the Board of the American College of Coverage and Extracontractual Counsel, and is the immediate past Co-Chair of the ABA's Insurance Coverage Litigation Committee and current Chair of the ABA's Roundtable Committee. This article is for educational purposes. It does not provide legal advice and it does not necessarily reflect the positions of its author, her current or future clients, or her law firm.