'Consent to Assignment' Clauses

The Fluor holding ' that an insurer cannot refuse to honor its insured's post-loss assignment of coverage rights (defense and indemnification), even if the amount to be recovered by the claimant against the insured is not fixed by a judgment or settlement (id. at 59) ' is consistent with the express or implicit rulings of the overwhelming majority of courts that have addressed these matters. See, e.g., Elliott v. Liberty Mut. Ins. Co., 434 F. Supp. 2d 483, 491 (N.D. Ohio 2006) (allowing assignment even though a claim had not been reduced to a judgment and observing that numerous other courts have likewise done so); In re ACandS, Inc., 311 B.R. 36, 41 (Bankr. D. Del. 2004) (permitting assignment of coverage for asbestos-related claims “because an insured's right to proceeds vests at the time of the loss giving rise to the insured's liability”); Viking Pump, Inc. v. Century Indem. Co., 2 A.3d 76, 107 (Del. Ch. 2009) (enforcing post-loss assignments of coverage rights despite insurer's policy's anti-assignment clause and even though at the time of the assignments the amount of the liabilities was unknown); In re Ambassador Ins. Co., 965 A.2d 486, 490-91 (Vt. 2008) (observing that “[m]ost courts and commentators agree that post-loss assignment of payment under an insurance policy is not subject to a consent-to-assignment clause” and holding that under an occurrence-based policy, the insurer's potential coverage liability arose when third parties were injured by its insured's products, even if such liability had not been reduced to an award); Egger v. Gulf Ins. Co., 903 A.2d 1219, 1223, 1226-28 (Pa. 2006) (observing that post-loss assignments do not increase the risk to insurers; finding that the event that occasions an insurer's liability is the occurrence to which the policy applies; rejecting the insurer's position that a jury verdict is required prior to an assignment; and commenting that the insurer's view “confuses loss with the subsequent fixing of a precise amount of damages for that loss”); Pilkington No. Am., Inc. v. Travelers Cas. & Sur. Co., 861 N.E.2d 121, 126, 129 (Ohio 2006) (observing that an insurer's coverage obligation arises at the time of the covered occurrence; concluding that the lack of a specifically defined amount of recovery “is not fatal” to whether a chose in action exists; and holding that the right to invoke coverage had been properly assigned, despite an anti-assignment clause, because the losses preceded the assignment); Gopher Oil Co. v. Am. Hardware Mut. Ins. Co., 588 N.W.2d 756, 763-64 (Minn. Ct. App. 1999) (holding that loss occurs at the time of the injury causing event; recognizing the distinction between risk and loss; and, allowing an insured to assign coverage for a loss despite an insurer's policy's anti-assignment clause because doing otherwise would provide an insurer with “the windfall of not having to insure an occurrence that it received premiums for covering”); Illinois Tool Works v. Commerce & Indus. Ins. Co., 962 N.E.2d 1042, 1050, 1055 (Ill. App. Ct. 2011) (enforcing post-loss assignment of coverage rights to a successor despite insurer's policy's consent-to-assignment clause even though the amount of the resulting loss was not known; and following the “great weight of authority” in holding that a consent-to-assignment clause should be given no effect when rights to invoke liability insurance coverage were assigned after damage or injury resulting in loss had already occurred); see also Narruhn v. Alea London, Ltd., 745 S.E.2d 90, 94 (S.C. 2013) (discussing and following the general rule; approving assignment over the insurer's objection; and observing that after a loss, the issue is “not an assignment of the policy, but the assignment of a chose in action”).

When determining whether an assignment to a successor is enforceable over an insurer's objection, courts often focus on whether there was a chose in action (i.e., right to bring an action to press insurance rights) at the time of the assignment. In Pilkington N.A. Inc. v. Travelers Casualty & Surety Co., No. 3:01CV7617, 2009 U.S. Dist. LEXIS 67291 July 27, 2009), for instance, Pilkington N.A. (“Pilkington”) acquired the manufacturing operations of another entity. When it was sued for environmental contamination caused by the predecessor, Pilkington sought coverage under the predecessor's insurance policies. The predecessor still remained in existence, however, and it had never expressly transferred its insurances policies to Pilkington. The involved insurers denied coverage, citing their policies' anti-assignment provisions, and sued Pilkington.

In 2005, the Ohio Supreme Court certified three questions of law for consideration: 1) whether Pilkington's request for defense and indemnification constituted a chose in action under Ohio law; 2) whether the policies' anti-assignment provisions barred the transfer of a chose in action; and 3) whether Pilkington received insurance benefits for the transferred liabilities by operation of law notwithstanding the anti-assignment clauses. The Ohio Supreme Court responded that a chose in action was transferable as to the duty to indemnify despite the insurer's anti-assignment provision. See Pilkington N. Am. Inc. v. Travelers Cas. & Sur. Co., 861 N.E. 2d 121 (Ohio 2006).

The Pilkington court rejected the notion that a chose of action does not exist until an underlying liability claim against an insured has been reduced to a sum of money owed. It found that Pilkington's claim constituted a chose in action under its predecessor's occurrence-based policies as of the time of loss. The court therefore concluded that the duty to indemnify for an already occurring covered loss was unaffected by the anti-assignment provision. The court's majority split, and therefore left unresolved, whether a chose in action is transferable as to the duty to defend.

After the Supreme Court's ruling, Pilkington and its insurers renewed their motions for summary judgment before the district court, with Pilkington arguing that the predecessor had transferred all of its choses in action arising from its glass business to Pilkington. The insurers argued that the agreement between Pilkington and the predecessor did not effectuate a transfer of choses in action and, therefore, only the predecessor could seek coverage for any liabilities resulting from its earlier operations. The district court determined the agreement transferred all of the choses in action from the predecessor to Pilkington. It stated that the predecessor agreed to “convey, assign, transfer and set over to Pilkington all of [the predecessor's] right, title and interest in and to all of the rights and property.” Because under Ohio law choses in action arising under an insurance policy are transferable as assets even if the policy contains an anti-assignment clause, the agreement transferred the insurance assets to Pilkington, including the coverage rights it was pressing against the insurers. Accord Glidden Co. v. Lumbermens Mut. Cas. Co., 112 Ohio St.3d 470, 861 N.E.2d 109 (Ohio 2006).

Likewise, in Givaudan Fragrances Corporation v. Aetna Casualty and Surety Company, Docket No. A-2270-12T4 (N.J. App. Div. Aug. 12, 2015), the New Jersey Appellate Division recently confirmed once an occurrence, like environmental contamination, takes place, the insurance coverage for it attaches even though claims against the policyholder for such occurrence may not follow for years. Therefore, even though an insurance policy may provide that it cannot be transferred without the insurer's consent, that prohibition is ineffective when the insurer's liability has become fixed. Like any other chose in action, that against the insurer is assignable regardless of the terms and conditions of the policy. The court emphasized that this approach “is settled by the great weight of authority” and “has been approved by most insurance law reporters and commentators.” Id. at *12-13 (citations omitted). The court further observed:

The purpose behind a no-assignment clause is to protect the insurer from having to provide coverage for a risk different from what the insurer had intended. ' Insurers provide policies of insurance to those ' that insurers have determined are acceptable risks. If an insured assigns the policy to a third party without the insurer's consent, the insured may cause the insurer to bear a risk the insurer never agreed to accept and never would have accepted. ' But if there has been an assignment of the right to collect or to enforce the right to proceed under a policy after a loss has occurred, the insurer's risk is the same because the liability of the insurer becomes fixed at the time of the loss. [This] does not alter ' the obligations the insurer accepted under the policy ' [it] only changes the identity of the entity enforcing the insurer's obligation to insure the same risk. ' Moreover, once the insurer's liability has become fixed due to a loss, an assignment of rights to collect under an insurance policy is not a transfer of the actual policy but a transfer of the right to a claim of money. It is a transfer of a chose in action as opposed to a transfer of an actual policy.

Id. at *13-14.

Other Jurisdictions

As the California Supreme Court recently observed in Fluor, there is only one out-of-state exception to this line of authority, and that decision has not been followed by any other jurisdiction. In Travelers Casualty & Surety Co. v. U.S. Filter Corp., 895 N.E.2d 1172, 1179, 1180 (Ind. 2008), the Indiana Supreme Court declined to enforce a post-loss assignment of rights to invoke coverage under third-party liability policy for “incurred but not yet reported losses.” The court rejected the majority rule allowing post-loss assignments, finding instead that to transfer coverage rights, a “loss must be identifiable with some precision” and “must be fixed, not speculative.” Id.

In the seven years since that decision was issued, this aspect of the Indiana Supreme Court's decision has not been followed by any out-of-state courts. In fact, only one court, in the related litigation, followed the Travelers court's ruling. See Cont'l Ins. Co. v. Wheelabrator Techs., Inc., 960 N.E.2d 157, 163 (Ind. Ct. App. 2011) (describing and enforcing the “narrow” post-loss exception carved out by the Indiana Supreme Court).

That said, rulings from minority jurisdictions have enforced post loss, anti-assignment clauses. They employ an approach significantly different from Henkel; they recognize no post-loss exception to anti-assignment clauses, even when the underlying claim against an insured has been reduced to a money judgment. These courts are animated by the view that freedom of contact requires consent-to-assignment clauses to be rigidly enforced. Each case, without any significant analysis, rejects the majority rule allowing post loss assignment of claims under third-party liability policies. See Holloway v. Republic Indem. Co. of Am.,'147 P.3d 329 (Or. 2006) (declining to enforce post-loss assignment of claim under a liability policy; barely acknowledging the contrary view of most jurisdictions; and, finding no public policy that requires courts to void the clause); In re Katrina Canal Breaches Litig., 63 So.3d 955, 959 (La. 2011) (acknowledging the overwhelming majority rule and the same prior rule in Louisiana, but concluding that an intervening statute protects the “freedom of contract” and strictly bars assignments); see also Keller Found., Inc. v. Wausau Underwr. Ins. Co., 626 F.3d 871, 874-78 (5th Cir. 2010) (acknowledging the overwhelming majority rule, but applying Texas law, enforcing consent-to-assignment pro- visions in all circumstances).

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, acknowledge 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 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 overreaching 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 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 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.