'Consent to Assignment' Clauses Held Unenforceable

The recent California case involved an engineering and construction company, Fluor Corporation (Fluor), which had purchased insurance from various insurers including Hartford Accident & Indemnity Company (Hartford). Each Hartford policy contained the following anti-assignment provision: “Assignment of interest under this policy shall not bind the Company until its consent is endorsed hereon.” When Fluor was sued in asbestos litigation, it tendered its defense to Hartford, and the latter accepted it.

Fluor also had a mining business, A.T. Massey Coal Company (Massey), that it had acquired during the 1980s. Massey remained Fluor's subsidiary until 2000, when Fluor decided to refocus on its engineering and construction operations, and separated those operations from Massey's coal-mining operations. Fluor did so by reverse spinoff. It took on the name and operations of Massey, and became known as Massey Energy Company. At the same time, a new company, which retained the name Fluor Corporation (Fluor-2), was formed. After the reverse spinoff, Fluor-2 operated as a continuation of the original Fluor.

Fluor and Fluor-2 entered into a Distribution Agreement, describing the respective businesses of each entity. The agreement detailed the parties' intent to “allocate and transfer [the] assets and allocate and assign responsibility for [the] liabilities in respect of activities of the business of such entities.” The agreement provided that the original Fluor “shall transfer, assign and convey any and all rights and/or obligations it may have to [Fluor-2].” The agreement did not except insurance rights from this broad transfer of “any and all” assets to Fluor-2.

Fluor-2, therefore, continued its engineering and construction business. Fluor-2 used the same stock symbol (FLR), and was owned by the same shareholders, managed by the same executives, and headquartered in the same location. It also retained all of the books, licenses, permits, and contracts associated with the original Fluor's operations. Fluor-2 openly claimed that it was vested with all Fluor's assets, including its insurance policies. It regularly sought and was afforded coverage for its asbestos defense and liabilities arising from Fluor's previous engineering and construction work. Moreover, and more importantly, Hartford continued to defend Fluor-2 against asbestos claims for approximately seven years after the reverse spinoff. Hartford also continued to collect from Fluor-2 nearly $5 million in retrospective premiums under its insurance policies.

When ancillary coverage issues arose concerning Hartford's obligations, Fluor-2 sued Hartford in February, 2006. In mid-2009, Hartford alleged that Fluor's attempt to assign its insurance coverage to Fluor-2 failed to comply with its insurance policies' consent-to-assignment provisions. Hartford, therefore, sought a declaration that it had no obligation to defend or indemnify Fluor-2, and demanded reimbursement of amounts it had already paid on Fluor-2's behalf.

In the Court

The California Supreme Court came to consider the validity of the assignment, and in so doing rejected Hartford's claims that the assignment was invalid because it ran afoul of its policies' anti-assignment clauses. The court concluded that Section 520 of California's Insurance Code prohibited Hartford from refusing to honor its insured's post loss assignment. The court also overruled its prior decision in Henkel, on which Hartford relied.

By way of explanation, Henkel also concerned an insured's assignment of the rights to invoke coverage under a Hartford liability policy for asbestos losses. The California Supreme Court there, however, had held that a consent-to-assignment clause was enforceable at common law, precluding an insured's transfer of coverage rights without the insurer's consent, even after coverage-triggering events had already occurred. The Henkel court determined that when a liability policy contains an anti-assignment clause, an insured could not assign its coverage rights without the insurer's consent until there was a “chose in action” ' or right to bring an action to recover insurance money ' against the insured. According to the court, this occurred only when the claims against the insured have “been reduced to a sum of money due or to become due under the policy.” See Henkel, 29 Cal. 4th at 944. But, Section 520 of California's Insurance Code was not cited to, or considered by, the Henkel court.

Section 520 of the California Insurance Code bars an insurer, “after a loss has happened,” from refusing to honor an insured's assignment of the right to invoke an insurance policy's coverage for the loss. The parties in Fluor, therefore, debated whether the involved asbestos losses had, in fact, happened by the time of the assignment. Fluor-2 urged that the loss for which it was potentially liable happened upon a third party's exposure to asbestos, resulting in alleged personal injury. Hartford argued that the loss did not happen until an asbestos claimant's final judgment was entered, or a claim was settled. The Fluor court agreed with Fluor-2, observing that the phrase, “after a loss has happened” is ambiguous when viewed in the context of liability policies. It may refer to that time after the injury or loss to a third-party claimant has occurred ' an occurrence for which the insured then is potentially liable.

On the other hand, the court agreed that the phrase could refer, not to the event leading to the underlying injury, but to the time when the insured incurs a direct loss by judgment or settlement, fixing the money due to the claimant. Although neither interpretation was unreasonable, the court concluded that Fluor-2's was most reasonable given the relevant legislative history. It noted that the legislature, consistent with earlier insurance decisions, had recognized that once a loss happens, the insurer lacks appropriate justification for barring an assignment. It therefore enacted Section 520 to prevent an insurer from arbitrarily withholding consent to a post-loss assignment to unjustly leverage its insured into accepting less coverage than its insurance policy offered.

The Fluor court, therefore, held that Fluor's assignment of rights to Fluor-2 was effective, without the insurer's consent and over its insurer's objection, because the insurance policy's anti-assignment clause was rendered ineffective by the Insurance Code. The court acknowledged that its Fluor holding might be contrary to its Henkel decision. It observed, however, that Henkel had assessed the proper application of a consent-to-assignment clause under common law principles, not controlling statutory law. Given the provisions of the Insurance Code, the result in Henkel could not stand.

The California Supreme Court also observed that the rule it articulated in Fluor was consistent with the overwhelming majority of cases decided both before and since Henkel . The court explained that the principle its ruling reflected ' that an insurer, after a loss has occurred, cannot refuse to honor its insured's assignment of the right to invoke coverage for such a loss ' was a “venerable one, borne of experience and practice, facilitating the productive transformation of corporate entities, and thereby fostering economic activity.” The court explained that early, first-party insurance cases had likewise sought to protect insureds' rights and needs to assign their coverage rights after manifestation of loss or damage. Those decisions rejected the notion that any assignment of coverage rights should somehow await litigation establishing an insured's liability to a claimant. Section 250 of the Insurance Code was intended to codify a rule preventing an insurer's “unjust” and “grossly oppressive” conduct, in prohibiting assignment of an insured's coverage rights after the injury or damage covered by its policy had already occurred.

As early insurance decisions and the Fluor court recognized, once a loss happens, the insurer lacks appropriate justification for barring an assignment. An insurer, therefore, should not be permitted to withhold its consent to assignment in hopes of getting its policyholder to accept less coverage than that to which it is entitled: “It is undisputed that an insured may not transfer the policy itself to another without the insurer's consent, and in this sense all parties agree. But the 'post-loss exception' to the general rule restricting assignability, recognized in the many cases discussed earlier and codified in section 520, is itself a venerable rule that arose from experience in the world of commerce. The rule has been acknowledged as contributing to the efficiency of business by minimizing transaction costs and facilitating economic activity and wealth enhancement.” Id. at 51.

As the Fluor court discussed, allowing assignment after a loss protects the ability of an insured, in the course of transferring assets and liabilities to another business entity in connection with a corporate sale or reorganization, to assign rights to claim defense and indemnification coverage provided by prior and existing insurance policies concerning the business's previous conduct. Because any such new business entity typically will assume both the assets and the liabilities of the prior business entity, the new business entity will understandably expect to obtain the rights to claim defense and indemnification coverage for such liabilities triggered during the policy period. If the insurer were able to prevent its insured from assigning rights to assert such claims unless first reduced to a money judgment or approved settlement, it could effectively exert unjust and oppressive pressure on the insured to reduce its own obligations and liabilities.

We conclude this discussion next month with a look at how the Flour holding compares to those in similar cases in other jurisdictions.

Sherilyn Pastor 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.