United States: California Supreme Court Gets It Right In Fluor Corp.: Insurers Barred From Refusing Coverage Based On Policyholders' Assignment Of Rights Under Policies After Loss Has Occurred, Thereby Reversing Prior Henkel Decision

Last Updated: August 26 2015

On August 20, 2015, the California Supreme Court issued a landmark decision overruling the limitations on assignments of third party liability insurance policy benefits previously recognized in Henkel Corp. v. Hartford Accident & Indemnity Co., 29 Cal.4th 934 (2003).  In Henkel, the Court held that when a liability insurance policy contains a consent-to-assignment clause, an insured may not assign its rights to coverage under the policy without the insurer's consent even after the coverage-triggering event has already occurred.  More specifically, Henkel held that a policyholder may not assign its rights to coverage without obtaining its insurers' consent until there exists a "chose in action" against the insured, which the court held occurs only when the claims against the insured have "been reduced to a sum of money due or to become due under the policy."  Henkel, 29 Cal.4th at 944.  In Fluor Corp. v. Superior Court of Orange County, Case No. S205889 (August 20, 2015), the California Supreme Court determined that Insurance Code section 520 (a long-standing statute which was not cited to or considered by the court in deciding Henkel), bars an insurer from refusing to honor a policyholder's assignment of coverage for injuries that predate the assignment.  The Court overruled Henkel to the extent that it is inconsistent with the provisions of Insurance Code section 520 and the analysis in the Fluor opinion.  A more detailed discussion of the decision in Fluor is set forth below.

Fluor purchased numerous comprehensive general liability policies from mid-1971 to mid-1986 which covered, among other things, "personal injury liability."  Fluor Corp. v. Superior Court No.  S205889, slip op. at 4 (Cal. Aug. 20, 2015).  Commencing in the mid-1980s and continuing through the present, various Fluor entities were sued in numerous lawsuits alleging liability for personal injury caused by exposure to asbestos.  Id.  Fluor tendered these lawsuits to its liability insurers, each of which agreed to defend the claims, with Hartford Accident & Indemnity Company ("Hartford") leading the defense and settlement of those actions.  Id.  In subsequent coverage litigation, Hartford sought to avoid its coverage obligations based on its assertion that a reverse spinoff by which Fluor was separated into two publicly traded companies reflected a purported assignment of insurance rights which was done without Hartford's consent, thereby rendering the assignment void.  Hartford argued that it had no obligation to defend or indemnify the entity which was the subject of the asbestos lawsuits, even though it was a continuation of the original Fluor Corporation whose operations were at issue in those suits.

The trial court agreed with Hartford's argument that it need not consider or apply Insurance Code section 520 on the ground that the decision in Henkel had definitely addressed and resolved the enforceability of the same consent-to-assignment clause and it denied Fluor's motion for summary adjudication on this issue.  Fluor filed a petition for a writ of mandate in the Court of Appeal, seeking to determine whether section 520 or Henkel controls on this issue.  The Court of Appeal denied the writ petition.  The California Supreme Court granted review to consider whether Insurance Code section 520 changes the determination in Henkel regarding the enforceability of consent to assignment clauses in third party liability insurance policies.

In reaching its decision to overrule Henkel, the Supreme Court discussed that Henkel was decided without considering the language, legislative history or purpose of California Insurance Code section 520.  Unlike Henkel, the Court's decision in Fluor was based upon its analysis of section 520, the "wealth of judicial authorities . . . bearing on the proper interpretation of section 520," "the subsequent common law decisions of other courts, virtually all of which are at odds with our key holding in Henkel," and the fact that the Henkel decision "has not been well received" or "fared better in scholarly publications or practice guides."  Id. at 55-56.

The relevant language of Section 520 provides that an agreement not to transfer a claim of the policyholder against its insurer "after a loss has happened, is void if made before the loss."  Id. at 25.  After thoroughly examining the legislative history, the Court found that section 520 applies not only to first party policies, but also to third party liability policies.  Id. at 24.  The Court then found that the phrase "after a loss has happened" is ambiguous when viewed in the context of liability policies.  Id. at 26.  Based upon its analysis of the case law of numerous jurisdictions as well as the legislative intent regarding the predecessor to section 520, the Court concluded 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."  Id. at 52.  The Court further concluded that the statutory phrase "after a loss has happened" "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."  Id.  As explained by the Court, "[o]nly 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."  Id. at 52-53.

Thus, the law in California is now in accord with the majority of other jurisdictions and there is no dispute 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."  Id. at 59.  There is also no dispute that under California law, "[t]his 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.

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