Friday, August 21, 2015
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High Court Justices Overrule Earlier Case, Lift Barrier To Assignment of Liability Insurance Policies
By a MetNews Staff Writer
An insured has a statutory right to transfer its rights to coverage of prior losses under a liability policy to a successor company, and any contrary provision in the policy is unenforceable, the state Supreme Court unanimously ruled yesterday.
Chief Justice Tani Cantil-Sakauye acknowledged that an earlier high court decision, Henkel Corp. v. Hartford Accident & Indemnity Co. (2003) 29 Cal.4th 934, upheld just such a clause, in a case involving the same insurer and similar facts. But that case was an outlier, she suggested, and didn’t consider the statute, Insurance Code §520.
Section 520 bars an insurer, “after a loss has happened,” from refusing to honor an insured’s assignment of the right to invoke the insurance policy’s coverage for such a loss.
Fluor Corporation invoked the statute in a declaratory action against Hartford Accident and Indemnity Co., which had defended and indemnified Fluor against asbestos claims both before and after a 2000 “reverse spinoff” involving A.T. Massey, a Fluor subsidiary.
The “old” Fluor Corporation absorbed A.T. Massey and was renamed Massey Energy Corporation. A new Fluor Corporation, referred to by the high court as Fluor-2, took over the old corporation’s operations, along with its stock symbol, management team, and headquarters, and claimed ownership of all of its assets and liabilities, including insurance policies and the obligations arising from asbestos litigation.
In 2001, Fluor-2 notified Hartford of the reverse spinoff, and explained that shareholders of “old” Fluor had been issued stock in the new company. Hartford continued to provide coverage to Fluor-2 under its predecessor’s policies for about seven years.
Other disagreements, however, had led Fluor-2 to bring a declaratory action in 2006, seeking a judicial determination of the parties’ rights and obligations under its policies with Hartford. In 2009, Hartford filed an amended cross-complaint, asserting for the first time that the insured had breached the policies’ “consent-to-assignment” clauses by purporting to transfer “old” Fluor’s rights to Fluor-2 without the insurer’s approval.
The insured moved for summary adjudication, citing §520. Orange Superior Court Judge Ronald L. Bauer denied the motion, saying he was bound by Henkel. The Court of Appeal affirmed, holding that §520 does not apply to liability insurance.
But Cantil-Sakauye, writing yesterday for the high court, said Fluor-2’s position is correct.
“[T]he rule embodied in section 520 is consistent with the overwhelming majority of cases decided before and since Henkel,” she explained. “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.”
While consent-to-assignment clauses are a recognized means of protecting an insurer form having to bear a greater risk than what it agreed to undertake when it issued the policy, the chief justice further explained, §520’s “postloss exception” is an essential aspect of modern commerce, with its constant mergers, acquisitions, and asset sales.
“In view of the history described above, and consistently with the California cases touching on the subject…we conclude that the phrase ‘after a loss has happened’ in section 520 should be interpreted as referring to a loss sustained by a third party that is covered by the insured’s policy, and for which the insured may be liable,” the chief justice wrote. “We conclude that the statutory phrase does not contemplate that there need have been a money judgment or approved settlement before such a claim concerning that loss may be assigned without the insurer’s consent. Only this interpretation of the statute’s language barring veto of assignment by an insurer honors the clear intent demonstrated by the history of section 520 to avoid any ‘unjust’ or ‘grossly oppressive’ enforcement of a consent-to-assignment clause.”
Fluor Corporation v. Superior Court (Hartford Accident & Indemnity Co.), 15 S.O.S. 4270, was argued in the high court by John M. Wilson of Latham & Watkins for Fluor Corp. and John A. Taylor Jr. of Horvitz & Levy for Hartford.
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