California Supreme Court Overrules Existing Law on Assignment of Claims After Loss

by Selman Breitman LLP

[author: Neil Selman]

Henkel addressed the issue of whether the insured conveyed its liability insurance policies by operation of law when it sold certain assets to a successor corporation, where those assets included liabilities (i.e., a chemical products business).  Claimants sued the successor corporation for personal injuries allegedly caused by the predecessor corporation's chemical products business.  The predecessor corporation's liability insurers refused to defend the claim against the corporate successor, contesting the assignment of the insurance policies.  The successor corporation sued the liability insurers for refusing to defend. 

Henkel held that anti-assignment clauses in liability insurance policies are enforceable except if:

(1) at the time of the assignment the benefit has been reduced to a claim for money due or to become due, or

(2) at the time of the assignment the insurer has breached a duty to the insured, and the assignment is of a cause of action to recover damages for that breach.

(Henkel at 945.)  In other words, with regard to a liability policy, a court will enforce an anti-assignment clause unless the claim has already been reduced to a judgment or settlement, or the insurer has committed an assignable breach.

Fluor's facts are nearly identical to Henkel's. A successor corporation seeks coverage for asbestos claims under a predecessor corporation's liability policies. (Fluor at 528.)  The policyholder, seeking to avoid an anti-assignment clause, argues that Henkel was wrongly decided.  The policyholder argues that Henkel ignored California Insurance Code section 520, enacted in 1872, which states "[a]n agreement not to transfer the claim of the insured against the insurer after a loss has happened, is void if made before the loss...."  In other words, Henkel appears to conflict with Insurance Code section 520. 

The Court of Appeal began its opinion by noting:

During the 130 years since its enactment, the 1872 statute has been cited only once. No one raised it in Henkel. This decision will be the second judicial opinion in the history of the state to even mention the statute, and the first to address it.  (Id.)

After reviewing cases in both California and other states, the court of appeal concluded:

Here is the nub. The 1872 Legislature drew no bright lines and made no controlling pronouncements about liability insurance, or about how "loss" in the context of such policies is to be defined. We see nothing in Insurance Code section 520 or in Henkel to support Fluor–2's assumption that the Supreme Court would have reached a different result had the parties in that appeal briefed or argued the statute's applicability. In the absence of an express legislative directive, stare decisis controls.  (Id. at 537.)

In sum, Henkel held that a policyholder can assign its rights, despite an anti-assignment clause, only after liability had been established (or a breach occurred).  Fluor Corporation argued, based on statute and on common law grounds, that a policyholder can assign its rights any time after a "loss" has occurred.  In the case of a liability policy, the "loss" is the event that triggers coverage under the policy (e.g., "bodily injury" or "property damage").

The California Court of Appeal in Flour sided with Hartford. The Court of Appeal concluded that section 520 does not apply to liability insurance. The appellate court further suggested that even assuming the statute applies to such policies, it should be construed to reflect the same rule articulated in Henkel.  On appeal to the California Supreme Court, Fluor argued against both propositions. 

The California Supreme Court's Opinion in Fluor.

In a unanimous decision written by the Chief Justice, the Supreme Court agreed with Fluor on both issues.  The Court, applying section 520, found that the statute applies to third party liability insurance, and that, properly construed in light of its relevant language and history, section 520 bars an insurer from refusing to honor an insured's assignment of policy coverage regarding injuries that predate the assignment.  The Court concluded that "It follows that the decision in Henkel, which assessed the proper application of a consent-to-assignment clause under common law principles, cannot stand in view of the contrary dictates of the controlling statutory provisions of section 520." (Slip Op. at 3.)

The Court concluded:

As further explained below, the rule embodied in section 520 is consistent with the overwhelming majority of cases decided before and since Henkel. The principle reflected in those cases — precluding an insurer, after a loss has occurred, from refusing to honor an insured's assignment of the right to invoke policy coverage for such a loss — has been described as a venerable one, borne of experience and practice, facilitating the productive transformation of corporate entities, and thereby fostering economic activity. (Id.)

In short, after the Fluor decision the law in California is that courts will not enforce anti-assignment provisions in liability insurance policies after the loss has occurred.  With regard to standard occurrence-based liability policies, the "loss" is the coverage-triggering event, such as "property damage" or "bodily injury," and not the finding of liability.

DISCLAIMER: Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

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