Cost-Effective, Proactive Representation

888.557.3311

CONSENT TO ASSIGNMENT CLAUSES IN CALIFORNIA

CONSENT TO ASSIGNMENT CLAUSES IN CALIFORNIA

Fluor Corp. v. Superior Court (2015) 61 Cal.4th 1175.

There is a long standing tradition that parties should be free to contract for and against various types of risks. This has formed the backbone of the insurance industry for over a century. But what happens to existing insurance policies when a company with several core operations decides to split its operations into new individual entities? Do the existing policies become void, or do they extend to the newly formed entities?

The Court in Fluor Corp. v. Superior Court tackled the enforceability of consent-to-assignment clauses under California Insurance Code section 520. It establishes that when a subsidiary acquires the insurance policies of its parent company through assignment, the insurer of the original policy must defend or indemnify the subsidiary for losses that occurred within the time limits of the original policy. The assignment is valid without the insurer’s consent.

The plaintiff, Fluor Corporation was involved in engineering, procurement, and construction operations through various entities and subsidiaries; Hartford was one of many insurers who issued CGL policies. Each policy covered damages for personal injury sustained by any person caused by an occurrence. An “occurrence” was defined as an accident, including exposure to conditions, which resulted in bodily injury or property damage. Each policy contained a consent-to-assignment clause which read: “Assignment of interest under this policy shall not bind the Company until its consent is endorsed hereon.”

In the 1980’s, Fluor acquired A.T. Massey Coal Company, a mining business outside Fluor’s core EPC operations; Massey became a subsidiary of Fluor, but its operations were conducted independently of Fluor’s operations. In 2000, Fluor decided to restructure its core EPC business through a reverse spinoff. A new subsidiary called Fluor 2 was formed. All EPC related assets and liabilities were transferred to Fluor 2. The original Fluor changed its name to Massey Energy Company, which retained all coal mining related business. These transitions were seamless and caused no impact on customers, employees, or creditors.

In May 2001, 6 months after the reverse spinoff, Fluor 2 sent Hartford a letter with annual reports and documents regarding the separation of Fluor 2 and Massey Energy Company. For 7 years, Hartford continued to defend Fluor 2 against claims triggered by occurrences during the terms of the original Fluor Corporation’s expired policies. Hartford continued to collect premiums from Fluor 2. Ultimately, a dispute arose between Fluor 2 and Hartford. Hartford argued that the original Fluor had failed to comply with the consent-to-assignment provision found in each policy. Hartford further argued that the reverse spinoff reflected a “purported assignment of insurance rights under the distribution agreement to Fluor 2, and because this was done without Hartford’s consent, no effective assignment of the right to invoke coverage under the policies occurred.” Hartford sough a declaration that it had no obligation to defend or indemnify Fluor 2, and it sought reimbursement of the defense and indemnity payments it had already made on Fluor 2’s behalf. Fluor 2 filed an action seeking declaratory relief; Hartford cross-complained.

Fluor 2 moved for summary judgment, arguing that Hartford’s claims failed as a matter of law because Insurance Code section 520 bars enforcement of the policies’ consent-to-assignment clauses after a loss has happened. Fluor 2 asserted that ongoing lawsuits, which allege that continuous exposure to asbestos led to bodily injuries, occurred during the terms of the policies between the original Fluor Corporation and Hartford. These “losses” triggered Hartford’s duty to defend and indemnify. Thus, claims concerning coverage for injuries resulting from those occurrences were properly assignable from the original Fluor Corporation to Fluor 2 without Hartford’s consent. Hartford opposed the motion, citing the California Supreme Court’s opinion in Henkel Corp. v. Hartford Accident and Indemnity Co. (2003) 29 Cal.4th 934, which held that an insurer’s consent is necessary when a corporation attempts to assign rights to its subsidiary. Henkel did not address the implication of Insurance Code section 520.

The Trial Court agreed with Hartford, declining to consider or apply section 520 based on the California Supreme Court’s decision in Henkel. This case ultimately made its way to the California Supreme Court.

The first issue in this case was whether section 520 applied only in the context of first party insurance, and not in cases involving third party liability. The Court of Appeal believed that section 520 applied only in the context of first party insurance. The Supreme Court disagreed, stating that when section 520 was adopted in 1935, and especially by 1947 when section 520 was amended, third party liability insurance was prevalent and well developed. It was clear that the legislature intended section 520 to apply to third party liability coverage.

A second issue required determining when a duty to indemnify was triggered in third party liability cases. The Supreme Court found that the duty arises when personal injury or property damage occurs during the term of the policy, even if the insured has not yet been held liable and the dollar amount of the liability had not yet been ascertained.

A third issue involved determining the meaning of the phrase “after a loss has happened” under section 520. Here, the Supreme Court found that 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.” A money judgment or settlement is not required to establish liability.

Ultimately, the Supreme Court held that an insurer is precluded from refusing to honor an insured’s assignment of the right to invoke coverage for a loss (personal injury or property damage) occurring within the time limits of a policy. Hartford owed a duty to defend and indemnify Fluor 2 for losses that originated during the time limits of policies provided to the original Fluor Corporation.

Categories