California High Court Overrules Itself, Holds Policy Consent-To-Assignment Clauses Unenforceable Post-Loss

In an exhaustive and scholarly opinion filed August 20, 2015, authored by Chief Justice Tani Cantil-Sakauye, the California Supreme Court reversed itself and overruled its own 12-year-old decision because it did not consider the effect of a state statute dating back to 1872. (Fluor Corporation v. The Superior Court of Orange County 2015 Cal.LEXIS 5631.)

The statute now reads as follows:

“An agreement not to transfer the claim of the insured against the insurer after a loss has happened, is void if made before the loss except as otherwise provided in Article 2 of Chapter 1 of Part 2 of Division 2 of this code.” (Ins. Code, § 520.)

The facts were that beginning in 1971, Hartford Insurance Company (Hartford) became one of numerous insurers of the original Fluor Corporation (Fluor), issuing to it eleven comprehensive general liability (CGL) policies between mid 1971 and mid 1986. Each of the policies contained a consent to assignment clause reading, “Assignment of interest under this policy shall not bind the Company until its consent is endorsed hereon.” The original Fluor Corporation operated at locations where asbestos allegedly was used.

Beginning in the mid-1980s and continuing until the present, various Fluor entities were named as defendants in numerous lawsuits alleging liability for personal injury caused over many years by exposure to asbestos. The Fluor Corporation tendered these early suits to Hartford and its other liability insurers, all of which subsequently accepted the defense of the claims. Hartford led the defense and settlement of these actions, ultimately spending over the course of more than 25 years, millions of dollars in the defense and indemnity of those actions.

Later on, coverage litigation began and Hartford sought reimbursement of the money it had spent in defense and indemnity. Hartford urged the court to rule that no coverage was afforded under its policies because the consent-to-assignment clause of each policy operated to prevent coverage from attaching to successor corporations that had received assignments of Fluor’s rights under the CGL policies without Hartford’s consent.

Based on a 2003 decision of the Supreme Court, Henkel Corp. v. Hartford Accident & Indemnity Co. (2003) 29 Cal.4th 934, the trial court and court of appeal found that the consent to assignment clauses were effective to prevent coverage for any of the assigned policies. Under Henkel, the consent-to-assignment clause contained in the Fluor policies assigned to Fluor’s related companies would permit Hartford, after a loss had occurred, to refuse to honor an insured’s assignment and the right to invoke policy coverage for such third party losses attributable to past time periods for which the insured had paid premiums. After examining the statute and its history, the Supreme Court concluded that Insurance Code Section 520 dictates a different result from that reached in Henkel.

Key to the new decision was the question of whether the statute applied only to “first party” insurance policies, or whether it also applied to “third party” liability policies. The court dug into that question and concluded that the statute, which refers to claims of the insured against the insurer, refers to all types of policies other than life and health policies that follow the express exception found in the statute. The Court reasoned that, although unlikely that the Legislature contemplated liability insurance in 1872, when it enacted the original statute – liability insurance was first issued in the United States in 1886 – when Section 520 was adopted, and when it was significantly amended, such insurance had become prevalent and well developed.

Next, the Court pointed out that there were competing interpretations to the statutory phrase “after the loss has happened”. It could refer, as Hartford asserted, not to the event leading to the underlying bodily injury – here to plaintiffs’ exposure to asbestos – but instead to a later point in time, after the insured has incurred a direct loss by virtue of the entry of a judgment, or finalization of a settlement, fixing a sum of money due on a claim against the insured. The Court found that either interpretation was not unreasonable and examined the legislative history of section 520 to determine whether it sheds light on the statute’s purpose and on which of the two interpretations will best serve that purpose.

The Court carefully – and at great length – researched in detail the relevant case law, the history of Section 520’s predecessor statutes, including the 1872 Civil Code and the still earlier Field Code adopted in California. The Court concluded that after personal injury or property damage resulting in loss occurs within the time limits of the policy, an insurer is precluded from refusing to honor an insured’s assignment of the right to invoke defense or indemnification coverage regarding that loss. The Court further held that this result obtains even without consent by the insurer – and even though the dollar amount of the loss remains unknown or undetermined until established later by a judgment or approved settlement. Finally, the court stated that its contrary opinion, announced in the Henkel case, was expressly overruled to the extent it conflicts with Insurance Code Section 520 and the Court’s analysis.

Richard B. Wolf is a partner in the Los Angeles office of the nationwide law firm of Lewis Brisbois Bisgaard & Smith LLP. Since 1970, Wolf has specialized in insurance coverage advice and litigation.