Approximately 12 years ago, the California Supreme Court permitted an insurer, after a loss has occurred, to refuse to honor an insured’s assignment of the policy coverage for such a loss. Henkel Corp. v. Hartford Accident & Indemnity Co., 29 Cal.4th 934 (2003). However, the Court reached that conclusion without consideration or analysis of Insurance Code section 520. The Court recently reexamined its decision in Fluor Corp. v. Superior Court, 208 Cal. App. 4th 1506 (2015), and after reviewing section 520, related authorities, and decisions of other courts, determined that its holding in Henkel, 29 Cal.4th 934, conflicts with the rule prescribed by statute. Accordingly, the Fluor court held that an insurer cannot refuse to honor an assignment of an insurance policy which takes place after the loss has happened.
The Henkel case involved an insured entity spinning off into a newly created corporation that assumed the assets and liabilities of the original entity. Various workers sued the corporation alleging personal injuries arising from exposure to metallic chemicals. The Henkel Court held that “when a liability insurance policy contains a consent-to-assignment clause an insured may not assign its right to invoke coverage under the policy without the insurer’s consent until there exists a ‘chose in action’ against the insured,” which the Court found, occurs only when the claims against the insured have “been reduced to a sum of money due or to become due under the policy.” 29 Cal. 4th 934, 944. Thus, because the workers’ claims were based on losses that occurred prior to the assignment, but had not yet been reduced to judgment, the court found that the consent-to-assignment clause had been violated and the insurance policy did not have to respond to the claims.
The Fluor case involved facts similar to Henkel. In 1971, Hartford became one of many insurers of Fluor, issuing to it 11 “comprehensive general liability” policies for approximately 15 years between 1971 and 1986. Personal injury liability was covered by each policy. The policies also contained a consent-to-assignment clause, preventing an assignment of the insured’s interest under each policy without Hartford’s consent.
Approximately 20 years later, in 2000, Fluor undertook a corporate restructuring and incorporated a newly formed subsidiary with no prior corporate existence (“Fluor-2”). Meanwhile, Fluor changed its name to Massey Energy Company and transferred all of its assets – including the insurance policies – and liabilities to Fluor-2.
After the reverse spinoff, Hartford continued to provide defense and indemnification coverage for Fluor-2 for seven years and never raised concerns or objections to coverage for third party liability claims. However, a coverage lawsuit ensued in 2006 after questions arose concerning the scope of Hartford’s obligations under the liability policies. Hartford claimed that the original Fluor Corporation had attempted to assign its insurance coverage claims to Fluor-2, but the original corporation had failed to comply with the consent-to-assignment clause.
Fluor argued that section 520 barred Hartford from refusing to honor the assignment. Section 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 except as otherwise provided in Article 2 of Chapter 1 of Part 2 of Division 2 of this code.” The Court of Appeal found that “section 520 applies only in the context of first party insurance – not to cases . . . involving third party liability insurance.” The California Supreme Court reversed. In reaching its conclusion, the Supreme Court reviewed the legislative history of section 520 and various out-of-state cases.
Although the Legislature likely did not contemplate liability insurance in 1872 when the predecessor to section 520 was enacted, by 1935, when section 520 was adopted, and by 1947 when that section was amended, third party liability insurance had become “prevalent and well developed.” The Court then determined that the 1935 Legislature intended for section 520 to apply generally to all classes of insurance. Then, in 1947, section 520 was amended to exempt two specific types of insurance policies (life and disability) from its coverage. The Court relied on the well-established rule in Sierra Club v. State Bd. Of Forestry that “if exemptions are specified in a statute, we may not imply additional exemptions unless there is a clear legislative intent to do so.” 7 Cal.4th 1215, 1230 (1994).
The Court’s next task was to determine how section 520 applies in the context of third party liability insurance. Specifically, the Court needed to decide how to interpret the phrase “after a loss has happened” in section 520. Fluor-2 argued that the phrase referred to the time period after the injury (loss) to a third party happened. In contrast, Hartford contended that “after a loss has happened” referred not to the event leading to the underlying bodily injury but to the period after the insured has incurred a loss by virtue of the entry of a judgment, or finalization of a settlement, fixing a sum of money due on a claim against the insured by a person or entity injured by the insured. The Court again looked to the legislative history to determine the most reasonable interpretation of the phrase. Since the Court received no assistance from the sole published opinion citing section 520 or secondary sources, it turned to the history of the predecessor statute (former Civil Code section 2599) and old decisions from New York and California, “relating to and preceding that statute, addressing assignability of rights to invoke coverage in the context of first party insurance.” 61 Cal. 4th 1175, 1200. The case law associated loss with the time that the injury occurs and demonstrated that former Civil Code section 2599 “was intended to codify a rule precluding an insurer from prohibiting assignment of an insured’s rights to invoke policy coverage in situations in which the insurer’s restriction would be . . . ‘unjust’ and ‘grossly oppressive.’” Id. at 1205.
This did not end the analysis, however. “Merely because the phrase ‘after the loss has happened’ has a certain accepted meaning in the first party context, however, does not necessarily indicate that the phrase has the same meaning in the third party liability insurance context.” Id. at 1206.
However, the Court ultimately concluded that it does indeed have the same meaning. The Court reached this conclusion by reviewing subsequent early third party liability insurance cases from various jurisdictions. In American Casualty Ins. Company’s Case, the Maryland Supreme Court determined that “a liability insurer’s inchoate obligation to indemnify the insured arises when personal injury or property damage results during the term of the policy, even though the dollar amount of the liability continues to be unascertained until later.” 34. A. 778 (Md. 1986). That key principle was “repeated and applied in subsequent decisions over the following decades.”
Another a leading case was decided in 1939, just a few years after the enactment of section 520. In Ocean Accident & Guarantee Corp. v. Southwestern Bell Telephone Co., the appellate court held that “after the event occurs giving rise to the liability the reason for the rule [against assignment] disappears and the cause of action arising under the policy is assignable.” 100 F.2d 441 (8th Cir. 1939). It further determined that “the liability, the loss and the cause of action arise simultaneously with the happening of the accidental injury to the employee.” Id. at 446. The appellate court’s holding was quickly recognized and quoted and continues to be. Furthermore, the underlying principle (that a loss occurs at the time of injury during the policy period) in Ocean Accident and the cases that built upon its holding has been recognized in California. Although the California cases do not address the assignability of a right to invoke policy coverage, interpretation of “loss” is consistent with the overwhelming majority approach. State of California v. Continental Ins. Co. 55 Cal.4th 186 (2012) (equating the term “loss” with the occurrence of bodily injury and property damage).
The Court ended its analysis by applying the principles recognized from its review of the legislative history and case law to the interpretation of section 520. It ultimately held that the phrase “after a loss has happened” does not “contemplate that there need have been a money judgment or approved settlement before such a claim concerning that loss may be assigned without the insurer’s consent.” This interpretation protects the insured and prevents unjust or grossly oppressive enforcement of a consent-to-assignment clause.