California Supreme Court to Reexamine Prohibition on Assignment of Liability Coverage

January 31, 2013

Insurance LawDetermining coverage in continuous and progressive loss cases involving scores of policies issued over many years is complicated.  The insured, to which the policy was initially issued, may no longer exist—or at least no longer exist in the form that it had when the policy was issued. Over the years, many insureds will merge with other business, or undergo restructurings in which they spin off assets or whole divisions. Rights under the original insured’s liability policies will be assigned to the merged entity or to the new business entity, usually without obtaining the consent of the insurer.

All too often, the transactional lawyers who put these deals together forget to talk to their firm’s insurance lawyers, and consequently, overlook policy provisions prohibiting any assignment of any interest in the policies without the insurer’s consent. Since commercial liability insurance coverage typically is triggered when the injury or damage occurs, not when it is discovered—or when the insured is sued—this oversight can have catastrophic financial consequences for business entities faced with liability for the tortuous conduct of their predecessors.

This is the predicament Fluor Corporation found itself in after being sued by numerous plaintiffs for injuries suffered as a result of exposure to asbestos at its predecessor’s work sites. The California Supreme Court’s holding in Henkel Corp. v. Hartford Accident & Indemnity Co upholding the enforceability of consent-to-assignment clauses, at least in corporate restructurings and spinoffs where both the original insured and the successor business continue to exist, posed what appeared to be an insurmountable hurdle to Fluor’s ability to obtain insurance coverage in these lawsuits.

But it now appears that Fluor may have found a metaphorical lifeline in the form of a 135 year-old statute that neither the Supreme Court, nor any of the scores of briefs filed with the Court, cited, or apparently, considered in Henkel. Originally enacted in 1872 as part of the codification of California law, and later moved to the Insurance Code in 1935, the provision on which Fluor relied, Insurance Code §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…

The California Supreme Court has agreed to Fluor’s request to reconsider Henkel in light of the Court’s own oversight in failing to consider § 520’s directive. The conundrum for the Court will be whether the Legislature intended § 520 to apply to a form of insurance that did not exist in 1872, and would not exist for another 30-40 years.