Issue by:
David L. Blinn
dblinn@lowball.com
and
Guy W. Stilson
gstilson@lowball.com
www.lowball.com

Fluor v Superior Court (Hartford)
California Supreme Court (August 20, 2015)

In 2003, the California Supreme Court ruled in Henkel Corp. v. Hartford Accident & Indemnity Co. (2003) 29 Ca.4th, 934, that a “consent-to-assignment” provision in a liability insurance policy barred the insured’s assignment of the rights of coverage to a successor company.  The insured in this case, Fluor Corporation, sought a determination that an assignment of the rights to coverage to a successor corporation through a reverse spin-off was not barred under Insurance Code §520, and that the Henkel Corp. court was wrong in overlooking that section.  Fluor took that argument to the California Supreme Court, which has recently agreed, and reversed its ruling in Henkel.

Fluor Corporation performed engineering, procurement, and construction (EPC) operations through various corporate entities and subsidiaries.  Beginning in 1971, Hartford became one of numerous insurers of the original corporation, issuing 11 Comprehensive General Liability (CGL) policies between 1971 to 1986.  During the 1980’s, Fluor acquired A.T. Massey Coal Company, a mining business.  Massey became an independently managed subsidiary of Fluor.  Around 2000, Fluor decided to restructure, and underwent a “reverse spinoff,” in which it formulated a new subsidiary (Fluor-2) which carried on the EPC business, and the original corporation changed its name to Massey Energy Company, retaining the coal mining and related businesses.  Significantly, the Distribution Agreement establishing the new companies provided that the 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 certain listed investments, accounts and intellectual property rights.  No exception was made for any coverage under any liability policies.

Beginning in the mid-1980’s and continuing to the present, various Fluor entities were named as defendants in numerous asbestos related personal injury lawsuits.  There are currently some 2,500 such suits pending against Fluor entities in California and elsewhere.  Over the course of more than 25 years, Hartford participated in the defense of Fluor against these claims, expending millions of dollars in the defense and indemnity of those actions.  It continued to do so on behalf of Fluor-2 for at least seven years after being notified of the assignment of assets and establishment of the new corporation.  Despite this, concerns over that defense led Fluor-2 to file a declaratory relief suit in 2006.  In a cross-complaint in 2009, Hartford for the first time argued that, assuming the Distribution Agreement between Fluor and Fluor-2 had attempted to assign Fluor’s insurance coverage for claims to Fluor-2, Hartford had never consented to any such assignment.   Hartford thus sought a declaration that it had no obligation to defend or indemnify Fluor-2, asserted claims of unjust enrichment against Fluor-2, and sought reimbursement of defense and indemnity payments it had made.

Fluor-2 brought a motion for summary adjudication of Hartford’s cross-complaint, relying on Insurance Code §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.”  Fluor-2 argued that this section by its terms barred enforcement of the policies’ consent-to assignment clauses “after a loss has happened.”   Hartford opposed the motion, arguing that this issue had already been decided in the insurer’s favor by the California Supreme Court in the Henkel case, and that the court was “duty bound” to follow Henkel.

In Henkel, Amchem was a company with both metalworking chemical and agricultural chemical businesses.  It spun off the metalworking line into a new corporation the court referred to as “Amchem No. 2,” in a process similar to that of Fluor and Fluor-2.  Amchem No. 2 was acquired by Henkel Corporation a year later.  In 1989, various workers sued Henkel and “Amchem,” without distinguishing which Anchem, for personal injuries from exposure to metallic chemicals.  Henkel tendered to Hartford, which refused coverage, relying on the consent-to-assignment clauses in its policies.  Henkel settled directly with the workers, and sued the original Amchem insurers (including Hartford), asserting it acquired the right to coverage under those policies.  The trial court ruled against Henkel, but the Court of Appeal reversed, finding the assignment valid.  The Supreme Court reversed, ruling that Henkel was not entitled to assign rights to coverage in contravention of the consent-to-assignment clauses in the policies.  The Henkel court established the rule that an assignment in contravention of a consent-to-assign clause could only be made if there first existed a fixed sum of money due or to become due prior to assignment.  Since plaintiffs’ claims against Henkel “had not been reduced to a sum of money,” there could be no assignment.

Relying on Henkel in the instant matter, the trial court denied Fluor-2’s motion, declining to consider or apply §520 on the grounds that the Henkel decision was dispositive on the issue.   Fluor-2 filed a writ of appeal, which the Court of Appeal denied.  Fluor-2 appealed to the Supreme Court.

The Supreme Court reversed the trial court, holding that Insurance Code §520 mandated that assignments such as this were permissible, even in the face of consent-to-assign provisions, because the “loss” to the claimants had happened earlier, prior to the assignment to the subsidiary company.  It also overruled as inconsistent with this statute its earlier decision to the contrary in Henkel.

The Supreme Court first noted that §520 had not been cited to the Court or considered at the time Henkel was decided.   The appellate court thought this inconsequential, ruling that when §520 was originally written in 1872, there was no discussion of (and practically no existence of) liability insurance, and therefore §520 was not meant to apply to third party liability insurance.  The Supreme Court analyzed the legislative history of the section and determined that, in particular when the Code was amended in 1935 and later in 1947, liability insurance was prominently featured and discussed, and that if this liability coverage was not to be dealt with by §520, there would have been express mention of the same.  Consequently, the section had to be considered.

Section 520 by its terms states that an insurer is barred from enforcing consent-to-assignment provisions “after a loss has happened.”  This left the Court to determine the meaning of the phrase “after a loss has happened.”  Hartford argued that this meant, as the Court had ruled in Henkel, that the claim had been reduced to a judgment.   Fluor-2 argued this phrase referred to the injury (loss) to a third party that had happened (an occurrence for which the insured may be potentially liable), and for which the insured obtained and paid for liability coverage.  “Loss” did not necessarily mean an actual judgment.

The Supreme Court held that either interpretation of the phrase was reasonable.  However, in reviewing the legislative history of §520, as well as historic first party (and to a lesser extent third party) cases pre-dating Henkel, it was most reasonable to treat the “loss” as being the injury causing event to the third party.  At that point in time, even though a claim had not yet been made, the duty to indemnify under third party liability insurance generally has accrued.  The Court found this consistent with how almost all jurisdictions had handled the issue prior to the Henkel ruling, and that it was consistent with the Court’s determination of when a loss occurs in long-tail losses, such as Montrose Chemical Corp. v. Admiral Ins.  Co. (1995) 10 Cal.4th 645 and its progeny.

The Court took pains to distinguish between assignment of an insurance policy itself without consent, which was not permissible, and “post-loss” assignment of the rights to coverage for a claim on a loss that had previously occurred, such as here, where the workers were all injured (allegedly due to the actions of Fluor) prior to Fluor’s assignment of rights and liabilities to Fluor-2.  The carrier was not being asked to take on new risk in the case of the latter.  All actions of the original insured had been completed as they related to the claim, and the insurer would not be taking on any new risk, if the rights to coverage for that claim were assigned to another related party who would otherwise bear responsibility for the original assignor’s actions.   The Court also noted that this interpretation of the “loss” accruing from the time of injury was consistent with its recent rulings on “long-tail” losses.

Comment and Evaluation:

This decision will help sort out coverage for successor entities on losses such as these asbestos claims, as well as others (including “long-tail” losses), where the “loss” occurred prior to the establishment of the successor corporation.  From now on, depending on the wording of agreements establishing these successor corporations, they should be entitled to coverage for earlier claims under the original company’s policies.
For the full decision see: Fluor v Orange Co. [Hartford]

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