United States: Fluor Corp.v. Superior Court

(Insurer’s Right to Invoke Consent to Assignment Provision Limited by Insurance Code Section 520)

In Fluor Corp. v. Superior Court, 61 Cal. 4th 1175 (August 20, 2015) the California Supreme Court considered the effect of Insurance Code section 520 on its prior decision in Henkel Corp. v. Hartford Accident & Indemnity Co., 29 Cal. 4th 934 (2003) regarding consent to assignment provisions (“non-assignment”). The Court summarized its decision in Henkel as:

[W]hen a liability insurance policy contains a consent-to-assignment clause an insured may not assign its right to invoke coverage under the policy without the insurer’s consent until there exists a “chose in action” against the insured, which we found in Henkel occurs only when the claims against the insured have “been reduced to a sum of money due or to become due under the policy.”

The Court reversed the Court of Appeal’s decision, finding that Section 520 does operate to limit an insurer’s ability to enforce consent to assignment clause “after a loss has happened,” disapproving of Henkel to the extent it is inconsistent.

The “original” Fluor Corporation “performed engineering, procurement, and construction (EPC) operations through various corporate entities and subsidiaries.” Hartford Accident & Indemnity Company (“Hartford”) issued 11 commercial general liability policies to Fluor, for the period from approximately 1971 to 1986. Beginning in the mid-1980s, various Fluor entities were named as defendants in personal injury lawsuits, alleging exposure to asbestos. Fluor tendered these suits to Hartford and its other insurers, who accepted the defense.

During the 1980s, Fluor acquired A.T. Massey Coal Company, a mining business. In 2000, Fluor decided to restructure in a “reverse spinoff”: Fluor incorporated a newly formed subsidiary (“Fluor-2”), which retained the name “Fluor Corporation” and received from Fluor all EPC-related assets and liabilities, while the original Fluor changed its name to Massey Energy Company, which retained A.T. Massey’s coal mining and related business. Of note, the Distribution Agreement governing this restructuring provided:

[T]he original Fluor “shall transfer, assign and convey any and all rights and/or obligations it may have to [Fluor-2] with respect to . . . all Parent Assets and Parent Liabilities except” for certain listed assets—various specified investments, accounts, and intellectual property rights. (Italics added.) The agreement did not except any insurance rights from this otherwise broadly phrased transfer of “any and all” assets.

Fluor-2 essentially operated as the original Fluor:

After the reverse spinoff, Fluor-2 operated as the continuation of the original Fluor Corporation’s EPC business, openly claiming that it was vested with all the assets—including the insurance policies, under which it regularly sought and was afforded defense and indemnification coverage—and obligations (including liability relating to the asbestos suits) arising from the EPC business. Fluor-2 asserts that in conducting the same EPC business under the Fluor Corporation name, it was treated as the accounting successor to the original (pre-spinoff) Fluor for financial reporting purposes. Fluor-2 also used the same stock symbol (FLR), was owned by the same shareholders, was managed by the same executive team, was headquartered in the same location, and retained all of the books, licenses, permits, contracts and agreements associated with the original Fluor Corporation’s EPC business.

Approximately six months after the spinoff, in May 2001, Fluor-2 sent Hartford a letter summarizing the reverse spinoff. For the following seven years, Hartford continued to provide defense and indemnity coverage to Fluor-2 for the asbestos litigation. During that time, “Hartford raised no objection based on the reverse spinoff to coverage for third party liability claims presented by Fluor-2 [and] continued to collect from Fluor-2, as the claimant, nearly $5 million in ‘retrospective premiums.’”

In response to “various ancillary questions” about the coverage owed by Hartford, Fluor-2 initiated a declaratory relief action on behalf of itself and its subsidies. In mid-2009, Hartford filed a second amended cross-complaint asserting, for the first time, that the transfer of coverage to Fluor-2 violated the non-assignment provisions of the policies and seeking reimbursement of its prior defense and indemnity payments to Fluor-2.

Fluor-2 moved for summary adjudication of this issue, arguing that Section 520 “by its terms bars enforcement of the policies’ consent-to-assignment clauses ‘after a loss has happened.’” Hartford opposed this motion, citing to the Court’s precedent in Henkel. The trial court agreed with Hartford and found Henkel to be controlling.

In Henkel, the Court found (1) such a transfer was not as a matter of law, but effectuated by contract, (2) the transfer occurred before the claim was reduced to a sum of money due or to become due, and (3) therefore, any assignment was invalid for lack of the insurer’s consent. Notably, Henkel did not consider application of Section 520.

The Court of Appeal concluded Section 520 applied only to first party claims, and did not apply to third party liability claims, basing this decision on its determination that third party liability was not conceived of in 1872 when Section 520 was initially enacted.

The Supreme Court disagreed with the Court of Appeal, finding Section 520 does apply to third party liability insurance. The California code commission and the Legislature created the Insurance Code, including this provision, in 1935. Based on the modifications to the different provisions (including Sections 100 and 108), the Court determined the Legislature did intend Section 520 to apply to third party liability insurance. The Court also found further support for this decision in that fact that the Legislature amended Section 520 in 1947, to specifically exempt life and disability insurance from its coverage.

The Court then turned to the proper construction of Section 520:

Section 520 provides: “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.” As alluded to earlier, the exception referred to in the concluding clause of section 520 concerns life insurance and disability insurance, neither of which is involved in this case. Consequently, the relevant language of section 520 provides that an agreement not to transfer a claim of an insured against an insurer “after a loss has happened, is void if made before the loss.” The controversy at this stage of the analysis concerns the meaning of the phrase “after a loss has happened” as used in the statute.

The Court noted the ambiguity in the phrase “after a loss has happened” in the context of third party liability insurance: the loss could occur when, e.g., the third party is exposed to asbestos, or when there is an entry of judgment, or at some other point. The only published decision applying Section 520 related to its application to first party insurance. To ascertain the proper interpretation, the Court turned to various New York decisions (concerning the predecessor to Section 520) and California decisions regarding first party insurance: Goit v. National Protection Ins. Co., 25 Barb. 189 (N.Y. Gen. Term 1855) (enforcing non-assignment clause while the risk is continuing, noting that this logic does not apply to an assignment after a loss when the insurer and insurer essentially become debtor and creditor); Courtney v. New York City Ins. Co.; 28 Barb. 116 (N.Y. Gen. Term 1858) (allowing assignment of “liability to pay damages which have accrued”); Dey v. Poughkeepsie Mutual Ins. Co., 23 Barb. 623 (N.Y. Gen. Term 1857) (minority holding enforcing non-assignment); Bergson v. Builders’ Ins. Co., 38 Cal. 541 (1869) (noting the reasons for enforcing non-assignment clauses do not apply when the difference is only to whom the money is paid). The Court determined that, in the context of first party insurance, the “loss has happened” immediately after the injury or damage. The Court then discussed case law in analyzing when the “loss has happened” for a third party liability claim: American Casualty Ins. Company’s Case, 82 Md. 535 (1896) (insurer’s obligation to reimburse the insured arises from insured’s responsibility for the occurrence); Maryland Casualty Co. of Baltimore, Maryland v. Omaha Electric Light & Power Co., 157 F. 514 (8th Cir. 1907) (upholding post-loss, and post-judgment, assignment as the reasons for enforcing non-assignment no longer apply); Rodgers v. Pacific Coast Casualty Co., 33 Cal. App. 70 (1917) (following Maryland Casualty in enforcing assignment after entry of judgment); Ocean Accident & Guarantee Corp. v. Southwestern Bell Telephone Co., 100 F.2d 441 (8th Cir. 1939) (enforcing post-loss assignment where the liability had not yet been reduced to judgment at the time of assignment); Montrose Chemical Corp. v. Admiral Ins. Co., 10 Cal. 4th 645 (1995) (determining insurer’s duty to defend arises when there is the “potential for coverage” for “long tail” insurance coverage); State of California v. Continental Ins. Co., 55 Cal.4th 186 (2012) (extending Montrose to duty to indemnify).

In its determination, the Court noted that, post-loss, an insurer no longer needs the protection of non-assignment provisions to ensure the insurer does not receive a risk or burden greater than that for which it contracted. The Court held:

In view of the history described above, and consistent with the California cases touching on the subject [citations] 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.

The Court addressed challenges to its interpretation of Section 520. The Court rejected Hartford’s contention that “’loss’ must be interpreted as arising only after the underlying matter is first reduced to a judgment or approved settlement for a sum of money due,” finding that loss and liability can arise at the same time, and not just when a party “loses a lawsuit.” The Court also rejected Hartford’s argument that Henkel is controlling pursuant to Li v. Yellow Cab Co., 13 Cal.3d 804 (1975), determining that, as the Court did not address Section 520 in the Henkel decision, “there is no basis on which to discount the primacy of the statute or to interpret it contrary to our present understanding of the common law.” Further, the Court rejected the argument that Section 520’s perceived obscurity should afford it less weight: “until the Henkel litigation, it appeared generally unnecessary for litigants or courts to cite or rely upon it.” Finally, the Court rejected Hartford’s suggestion that stare decisis urges against overruling Henkel. As the Henkel decision overlooked an existing statute, the Court found there was a basis for overruling Henkel.

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