Two Recent Insurance Coverage Decisions May Increase Merger and Acquisition Activity

September 29, 2015

Insurance LawProblematic for attorneys handling business reorganizations, mergers and acquisitions are provisions in liability insurance policies that prohibit the insured from assigning the policy without the insurer’s consent. In order to ensure that the acquiring business entity has insurance for any liabilities that are acquired along with the predecessor business entity’s assets, the transactional attorney must include an assignment of the predecessor’s liability policies. Consequently, the policies’ consent-to-assignment provision effectively gives the predecessor’s insurers veto power over the merger. Without such consent, the insurers will assuredly contest coverage when plaintiffs who were injured or suffered damage as a result of exposure to the predecessor business’s products or business activities sue the successor business.

Two recent court decisions provide relief for successor businesses faced with the prospect of uninsured liability due to the failure to obtain consent when insurance policies were assigned as part of a business reorganization.

Fluor Corporation v. Superior Court, __ Cal.4th __, 191 Cal.Rptr.3d 498, 2015 WL 4938295 (Aug. 20, 2015)

In Fluor, the California Supreme Court reversed its 13-year-old decision in Henkel Corp. v. Hartford Accident & Indemnity Co., 29 Cal.4th 934, 129 Cal.Rptr.2d 828, 62 P.3d 69 (2003) (Henkel), until now the nation’s leading authority for allowing the enforcement of provisions in liability policies requiring the insurer’s consent to the assignment of coverage, even after the coverage-triggering event occurred. In Fluor, the successor business challenged the validity of Henkel based on the supreme court’s failure to consider a “statutory directive” that none of the scores of briefs filed with the supreme court in Henkel had cited and that only one court has cited in the 130 years since its enactment. Originally enacted in 1872 as part of the original codification of California law, Insurance Code § 520, provides: “An agreement not to transfer the claim of the insured against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…”

With five new justices who did not participate in Henkel, the California Supreme Court agreed that Henkel can not be reconciled with § 520. After determining that § 520 applies to liability insurance, the court turned to the question of when “a loss has happened” under a liability policy for purposes of applying § 520’s prohibition on enforcement of anti-assignment clauses to assignments after the date of loss. The court acknowledged that the phrase “after a loss has happened” is subject to two reasonable interpretations in the context of liability insurance: It can mean either (1) when bodily injury or property damage occurred during the policy term, even if the insured had not been held liable—the interpretation advanced by the successor business, or (2) when the insured incurred actual monetary loss through a judgment or settlement—the interpretation advanced by the insurer. In concluding that successor’s interpretation was the “most reasonable,” and the interpretation intended by the legislature, the court focused on the justification for anti-assignment clauses—protecting the insurer against new risks that the insurer did not consider before issuing the policy. The court reasoned that the risk imposed by a particular insured—and thus the need for an anti-assignment clause—is no longer a factor once the coverage-triggering event occurs, which in California and most states is when injury or damage occurs.

Givaudan Fragrances Corp. v. Aetna Casualty & Surety Co., __ A.3d __, 2014 WL 10212769 (N.J. Super., A.D., Aug. 12, 2015)

In Givaudan Fragrances, a New Jersey appellate court reached the same result as the California Supreme Court in Fluor, albeit on slightly different grounds. Like the California Supreme Court in Fluor, the New Jersey court agreed that an assignment of liability coverage for property damage or bodily injury after the damage or injury occurs is consistent with the purpose of the policies anti-assignment clauses, which is to protect the insurer from having to cover a risk different from that which it contracted to cover. In the court’s view, “after a loss has occurred, the insurer’s risk is the same because the liability of the insurer becomes fixed at the time of the loss. Thereafter, the insurer’s risk is not increased merely because there has been a change in the identity of the party to whom a claim is to be paid.”

Unlike Fluor, which was based on a statutory prohibition against post-loss assignments, Givaudan Fragrances was based on common law. The absence of an outcome-determinative statute in Givaudan Fragrances affords insurers the opportunity to distinguish Givaudan Fragrances and urge enforcement of their policies’ anti-assignment clauses when the public policy favoring assignment might not be as compelling. For example, an assignee insured who is demonstrably less sympathetic to a jury than the assignor insured arguably does pose a greater risk for an insurer charged with providing a defense. Similarly, an insurer’s risk is increased following an assignment if it faces potential claims from both the assignee and the assignor insureds because original insured remains in existence. In Givaudan Fragrances, the court dismissed the potential for competing claims because Flavor expressly abandoned its claim for coverage in the assignment.

Titles by John DiMugno