United States: New Jersey Supreme Court to Hear Transfer of Insurance Rights Case

Last Updated: December 7 2015
Article by Harry J. Moren

On November 16, the New Jersey Supreme Court announced it would review Givaudan Fragrances Corp. v. Aetna Casualty & Surety Company Co. The dispute, correctly decided by the New Jersey Appellate Division, centers around whether the assignment of insurance rights in corporate transactions validly transfers coverage for prior occurrences. This issue has gripped policyholders and insurers since 2003, when the California Supreme Court upset then-settled expectations of corporate transactional lawyers and risk managers in its decision of Henkel Corp v. Hartford Accident & Indemnity.

In Henkel, the Court held that an asset seller's contractual assignment of insurance coverage rights to the buyer after a loss had already occurred was ineffective if the policy contained a standard "no assignment" clause and the insurer had not consented to the assignment. As a result, companies who had bought assets, including both liabilities as well as all contracts related to those assets, found themselves confronted by an argument (raised by insurers) that the historic insurance purchased by the seller to protect against those liabilities was unavailable. Thus, Henkel—and many other courts around the country that subsequently were asked by insurers to weigh in on the issue—injected uncertainty into corporate transactions. Henkel and its progeny were roundly criticized by policyholders and corporate lawyers, as they were contrary to an overwhelming majority of decisions nationwide freely permitting post-loss assignment of insurance rights. As we have described in a prior post, the California Supreme Court recently took a mulligan and reversed itself in Fluor in August 2015 in a decision policyholders welcomed.

The decision in Fluor is consistent with the purpose of consent-to-assignment clauses. Before a loss occurs, these provisions protect an insurer from exposure to losses caused by a different policyholder than the one whose risk the insurer underwrote. Yet once a loss has occurred, the insurer's risk is unaffected by a change in the identity of the party making a claim for coverage on that loss. Occurrence-based policies provide coverage for "occurrences" that take place during the policy period; once an occurrence has taken place, the insurer's liability becomes fixed. A transfer of rights to pay for claims due to occurrences that already have taken place therefore creates no additional risk. To the contrary, allowing insurers to escape responsibility on the ground that they did not consent to such a post-loss assignment would grant insurers a windfall, allowing them to accept premiums and avoid payment obligations on the basis of a no-assignment-without-consent technicality. Indeed, in one of the few cases where a policyholder actually requested consent, the insurer refused for no reason other than it could and ultimately was held to have acted in bad faith. San Diego Unified Port Dist. v. Argonaut Ins. Co., No. GIC874394, Minute Order (Cal. Super. Ct., San Diego County Mar. 17, 2009).

The same month that Fluor was decided, an appellate court in New Jersey in Givaudan Fragrances considered a transfer of insurance rights and found—correctly we believe—that the assignment of rights to liability coverage for losses that already have occurred is valid, even without insurer consent. Finally, it seemed, the courts all were getting the fact that an assignment of insurance rights should be permitted as long as it does not materially increase the risk to the insurers. Yet just when it finally seemed safe to go back in the water, the New Jersey Supreme Court has agreed to review the Givaudan Fragrances dispute. The high court's decision to grant review does not provide insight into its reasons for taking up the appeal. However, clearly there is some uncertainty among New Jersey's courts about this issue, and the Supreme Court's decision will resolve this uncertainty. No date for argument has been set.

In Givaudan Fragrances, a company previously known as the Givaudan Corporation manufactured flavors, fragrances, and other chemicals in New Jersey. The defendant insurers provided policies to the Givaudan Corporation from 1964 to 1986. In 1987 and 1988, the Givaudan Corporation entered into administrative consent orders with the N.J. Department of Environmental Protection for the remediation of contaminated soil and groundwater from certain of its New Jersey manufacturing facilities.

In a series of corporate transactions in the 1990s, the Givaudan Corporation became the Givaudan Flavors Corporation (Flavors) and transferred the assets and liabilities of its fragrances division to a newly formed spin-off, Givaudan Fragrances Corporation (Fragrances). The same parent company owns both Flavors and Fragrances.

Litigation ensued over the historic environmental liabilities against Fragrances. In 2004, the U.S. Environmental Protection Agency notified Fragrances it was potentially liable under CERCLA for discharges from one of the Givaudan plants. In 2006, the N.J. Department of Environmental Protection (DEP) sued Fragrances for discharges from the same plant. In 2009, defendants in another DEP action relating to other contamination sought third-party contribution from Fragrances.

In 2010, Flavors assigned to Fragrances all of the rights to insurance coverage under the 1964-1986 policies of the Givaudan Corporation, its predecessor, for all occurrences that took place before the original transfer of assets and liabilities to Fragrances, and for all resulting losses. The insurers contended that the assignment was invalid because the policies prohibited assignment without the insurers' consent, which had not been given. The trial court agreed with the insurers, finding that the assignment was a global assignment of claims and therefore an invalid assignment of policies, rather than a permissible assignment of a chose in action for a particular claim.

As discussed above, the New Jersey Appellate Division disagreed and reversed the trial court. The Appellate Division's holding in Givaudan Fragrances is consistent with New Jersey precedent and the common law in other jurisdictions.  It also is consistent with the result of Fluor.

So why did the Supreme Court take the case?  We note that before the Givauden Fragrances appellate court decision was handed down, a New Jersey trial court confronted a similar issue and ruled against the policyholder. In Haskell Properties v. American Insurance Company, No. BER-L-5396-13 (N.J. Super. Ct. Law Div. June 6, 2014), the trial court held that an assignment out of bankruptcy entitling the purchaser of real property assets to historic insurance to cover environmental liabilities was invalid. The trial court's primary ruling was that the rights to insurance did not belong to the Bankrupt Estate and so there was nothing to assign. However, the court went on to rule that insurer consent was required and there was no assignable chose in action because the ongoing environmental loss had not matured into a right to payment at the time of assignment. Like the California Supreme Court in Henkel, the Haskell Properties court reasoned that an assignable "chose in action" required an immediate, fixed obligation to pay.

While the wrongly decided Haskell Properties case was not appealed, the New Jersey Supreme Court now has an opportunity to clarify that under New Jersey law post-loss assignments of occurrence-based policy insurance rights are proper, even without insurer consent where there is no change in risk. In the Givaudan Fragrances case, assets and insurance rights were transferred within the same corporate family and the clearly drafted assignment leaves no room for insurers to argue that their risk is expanded. That should be the end of the story.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

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