California Companies Now Free To Transfer Insurance Coverage for Post-Loss Claims, In Reversal of Decade-Old Henkel Decision
Purchasers and restructurers of California companies can rest a little easier after last Thursday’s landmark ruling by the California Supreme Court. In Fluor Corp. v. Hartford Accident & Indemnity Co., S205889, California’s highest court reversed its decision in Henkel Corp. v. Hartford, which prohibited post-loss transfers of insurance coverage to another party without the insurer’s consent. In Fluor, the Court found a little known provision of the California Code, first enacted in 1872, required the reversal of Henkel, now leaving companies free to transfer their insurance coverage for post-loss claims to other parties, even if the extent of the loss is yet unknown and regardless of whether the insurer consents.
The magnitude of this decision cannot be understated. In 2003, in Henkel, the California Supreme Court held that consent-to-assignment clauses commonly found in insurance policies could be invoked by the insurer to refuse to cover the defense of the assignee where the coverage had been transferred after the loss had occurred and claim had arisen, but before that claim had been reduced to a final judgment or sum certain. Under Henkel, then, only transfers of the proceeds of an insurance policy without the insurer’s consent were permitted, not transfers of coverage for a pending claim or chose in action. Henkel made the purchasing or restructuring of California companies with outstanding losses a tricky proposition, as either those losses would have to be reduced to a dollar figure prior to closing or prior insurer consent would have to be obtained.
Fluor’s odyssey to reverse the Henkel rule began in 2009. The original corporation (“Fluor”) operated at sites where asbestos was used, exposing it to some 2,500 suits nationwide. Hartford, Fluor’s insurer, led the defense and settlement of many of those actions for over 25 years. Fluor decided in 2000 to refocus its business goals and to take advantage of tax-free stock distributions in a “reverse spinoff.” Fluor created Fluor-2, in which its main operations (with the asbestos liability) were collected into a subsidiary, and its side operations were adopted as the original company’s main business, along with a name change from Fluor to Massey Energy Company. Save for the new corporate structure, Fluor-2 operated identically as original Fluor.
Despite the change, Hartford continued to defend and indemnify Fluor-2 on pending cases until 2009, when it finally invoked Henkel in response to a pending coverage action involving Fluor-2. Hartford claimed that since Fluor-2 never sought its prior consent for the assignment of insurance policies by Fluor to Fluor-2, it owed no duties to Fluor-2 under the policies. The trial court and intermediate appellate court agreed with Hartford, relying on Henkel.
Fluor-2 chafed at this interpretation that penalized it for simple corporate restructuring, and unearthed California Code Section 520, an 1872 statute that prohibits insurance companies from denying coverage based on an assignment “after a loss has happened.” Fluor-2 contended that this prohibition begins the moment of the event giving rise to liability (i.e., the injury to the third-party), not after the insured experiences the loss by the act of writing a check. The California Supreme Court in Henkel did not consider Section 520 in its decision. That omission, Fluor-2 contended, mandated reversal of Henkel. Hartford, on the other hand, contended that the phrase “after a loss has happened” was consistent with the decision in Henkel, referencing instead the moment that the loss has been reduced to a sum certain debt incurred by the insured.
The California Supreme Court agreed with Fluor-2. In a detailed 59-page decision, analyzing decades of legislative history, case law within and outside of California, and well-known treatises, the Court concluded that the language and the legislative history of Section 520 supported Fluor-2’s position, and that the rule understood by insureds and insurers alike across the country for almost a century was that a post-loss transfer of claim coverage is always valid because it does not increase an insurer’s risk for a loss accrued while premiums had already been paid. Further, the Court found that the California legislature had decided that contractual limitations on transfer of insurance coverage, such as those in the consent-to-assignment clauses in Fluor’s policies, were against public policy; Section 520’s rule facilitates “the productive transformation of corporate entities,” which fosters economic activity. Reversing Henkel and the common-law analysis on which its holding was premised, the Fluor Court found that, pursuant to Section 520, companies may freely transfer liability coverage for post-loss claims to other corporate entities and that insurance coverage would remain intact.
Fluor will have long-lasting implications in the California business world, removing a significant hurdle to mergers, acquisitions, restructuring and other corporate deal-making. This is a clear victory for policyholders, and should remain in place as long as the State legislature does not alter Section 520. The insurance community is certainly not surprised, as carriers, agents, and clients generally assume that the right to collect under a policy may be transferred to the new buyer, acquirer, or merger partner, even though the risk under an active policy may be unassignable without the consent of the carrier.
Arent Fox is well poised to provide guidance and advice to companies that are considering the effects that a contemplated merger or acquisition may have with respect to the existing insurance coverage of the companies involved, and resolving insurance coverage disputes with insurers after such transactions have occurred.
Feel free to contact Elliott Kroll, Jule Rousseau, Michael Cryan, James Westerlind or Michael McMahan if you have any questions.