United States: Cal. Ins. Code 520 Prohibits Insurers From Relying On Anti-Assignment Provision After Loss Has Occurred

Last Updated: August 26 2015
Article by Kathryn Ashton

In an August 20, 2015 opinion, the California Supreme Court overruled its prior decision in Henkel Corp. v. Hartford Accident & Indemnity Co. (2003) 29 Cal.4th 934 and found that under California Insurance Code section 520, an insurer may not refuse to honor the insured's assignment of policy coverage based on an anti-assignment provision where the personal injury or property damage resulting in a loss occurred during the policy period.  See Fluor Corp. v. Superior Court of Orange County (Hartford Accid. & Indem. Co.) __ Cal.4th __ (August 20, 2015, Slip Opinion ("Slip Op.")).

Discussion of the Fluor Decision

In 2003, the California Supreme Court issued the Henkel decision, which held that a consent-to-assignment provision in a third-party liability policy could be enforced by an insurer to refuse to honor an insured's assignment of policy coverage, after a loss occurred, unless such loss had already "been reduced to a sum of money due or to become due under the policy."  (Slip Op., at 1-2, emphasis omitted, quoting Henkel, 29 Cal.4th at 944.)  In rendering the Henkel decision, the court did not consider California Insurance Code section 520 ("Section 520"), which states:  "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."  (Slip Op., at 1-2, 16, 25; see also Slip Op., at 10-15)

In Fluor, a restructured insured argued that under Section 520, when an assignment of coverage rights takes place after a third-party's exposure to asbestos, which results in personal injury for which the insured may be potentially liable, the insurer cannot thereafter rely on a consent-to-assignment clause in a liability insurance policy to avoid the effect of the assignment because "a loss has happened" within the meaning of that statute.  (Slip Op., at 2)  The California Supreme Court agreed with this construction.


Beginning in 1971, Hartford Accident & Indemnity Co. ("Hartford") became one of numerous insurers of Fluor Corporation, which performed engineering, procurement, and construction operations through various corporate entities and subsidiaries.  (Slip Op., at 3-4)  Hartford issued 11 CGL policies to Fluor Corporation from mid-1971 to mid-1986.  (Id.)  Each policy issued by Hartford contained a consent-to-assignment clause stating:  "Assignment of interest under this policy shall not bind the Company until its consent is endorsed thereon."  (Slip Op., at 4)

Beginning in the mid-1980s and continuing to the present, various Fluor Corporation entities were named as defendants in lawsuits alleging liability arising from exposure to asbestos in the years preceding the policy assignment at issue.  At present, about 2,500 such suits are pending in California and elsewhere.  The suits were tendered to Hartford, which defended and indemnified the actions for over 25 years.  (Id.)

Also during the mid-1980s, Fluor Corporation acquired a mining business, A.T. Massey Coal Company, which became a subsidiary of Fluor Corporation.  In 2000, Fluor Corporation conducted a corporate restructuring known as a "reverse spinoff," which resulted in a newly formed subsidiary which retained the name Fluor Corporation (referred to by the court as "Fluor 2").  The original Fluor Corporation changed its name to Massey Energy Company and retained A.T. Massey's coal mining and related businesses.  (Slip Op., at 5.)  About six months after the reverse spinoff, Fluor 2 notified Hartford of the restructuring.  (Slip Op., at 5-6.)

After the reverse spinoff, Hartford continued for the next seven years to defend Fluor 2 against claims triggered by occurrences during the terms of the original Fluor Corporation's CGL policies and raised no objection based on the reverse spinoff.  (Slip Op., at 7)  Hartford also continued to collect from Fluor 2 nearly $5 million in "retrospective premiums."  (Id. at 7-8)

When other coverage issues arose, Fluor 2 filed a declaratory relief action in 2006, prompting a cross-complaint from Hartford in mid-2009, which for the first time raised the issue that Fluor Corporation's failure to obtain consent from Hartford to assign coverage rights to Fluor 2 barred recovery of such rights under the consent-to-assign provision.  (Slip Op., at 8)

Ultimately, the issue made its way to the California Supreme Court, which granted review to decide the impact of Section 520 on its prior decision in Henkel.

Decision by the Court

As an initial matter, the court held that Section 520 applies not only to first-party insurance policies but also to third-party liability policies.  (See Slip Op., at 19-24)

The court next construed the meaning of the phrase "after a loss has happened," as used in Section 520, which the court held was ambiguous when used in the context of liability policies because the meanings offered by both Fluor 2 and Hartford were reasonable.  For its part, Fluor 2 argued that "after a loss has happened," means that after a third-party's exposure, the insured could assign, without the consent of its insurer, any rights to coverage under its liability policies for personal injuries that occurred during the policy period.  (Slip Op., at 26)  Hartford, on the other hand, argued that "after a loss has happened," refers not to the event leading up to the underlying bodily injury, but instead to the period after the insured has incurred a direct loss by virtue of a judgment or a final settlement.  (Id.)

After an extensive examination of the legislative history of Section 520 and both out-of-state and California decisions (see Slip Op., at 27-53), the California Supreme Court agreed with Fluor 2:

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.  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.

(Slip Op., at 52, citations omitted)  In justifying this conclusion, the court reasoned:  "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 would effectively exert precisely the type of unjust and oppressive pressure on the insured that the early decisions, California Code Commissioners, and Legislature sought to foreclose."  (Id., at 53)

In support of its decision, the court rejected other arguments raised by Hartford, including an argument that interpreting "loss" in Section 520 as not requiring a judgment or approved settlement will conflict with Cal. Insurance Code section 108.  (See Slip Op., at 53-54)  In rejecting this argument, the court acknowledged that "an insurer's obligation to actually 'cut a check' and transfer funds in performance of its duty to indemnify does not arise until there is a judgment or approved settlement for a sum of money due."  (Slip Op., at 54, emphasis in original, citing Montrose Chemical Corp. v. Admiral Ins. Co. (1995) 10 Cal.4th 645, 659 fn.9)  The court went on to hold that "[t]here is no indication from section 108 or section 520, or other related contemporaneous statutes proposed by the California Code Commissioners and enacted by the 1935 California Legislature, that anyone understood the term 'loss' as used in section 520 to have the meaning that Hartford proposes now ...."  (Slip Op., at 54, emphasis in original)

The court also went on to find that not only is the Henkel decision inconsistent with Section 520 but that it "has not been well received" and should not be applied simply on the basis of stare decisis.  (See Slip Op., at 55-56, 58-59 & fn.52).

The court confirmed in its ruling that under Section 520, "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."  (Slip Op., at 59)  "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."  (Id.)

In sum, insurers may no longer rely on the Henkel decision as support for their right to assert a consent-to-assignment provision as a means for barring the transfer of coverage rights with respect to losses that have occurred during the policy period but have not yet been reduced to a final judgment or an agreed-upon settlement.

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