California Supreme Court should overturn Henkel in Fluor Ruling
In 1869 the California Supreme Court opined that an insurance policy "may also be assigned after the loss occurs, the assured, of course, retaining his interest in the property up to the time of the loss. The assent of the insurer is not essential, unless expressly required by the policy — and it is doubtful whether the insurer could restrain the assignment after the loss occurs — but the general provision in the policy forbidding an assignment without the consent of the insurer, does not cover an assignment after the loss." (Bergson v. The Builders Insurance Company, 38 Cal. 541, 543-4.)
When the California Legislature enacted the first statutory codes in 1872, it also enacted many other laws as the result of recommendations of the California Code Commission, with statutes not incorporated in codes left uncodified in the California statutes. In 1935, California collected such at large statutes about insurance in the Insurance Code, which remains in effect until this day. As stated by the California Legislative Intent Service, "Although the Insurance Code was enacted in 1935, this was a nonsubstantive codification of laws derived from early acts, common law and former Civil Code, Code of Civil Procedure and Political Code sections regulating insurance contracts and the business of insurance from as early as 1850 and 1872."
Thus, a decision of the California Supreme Court shortly before an insurance statute was enacted should be regarded as having provided meaning and context for such enactment.
The insurance statute which the legislature enacted in 1872 is now Section 520 of the Insurance Code. It provides that "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." That excluded part concerns life and disability insurance, not liability insurance.
In 2003, the California Supreme Court ruled with one dissent in Henkel Corporation v. Hartford Accident and Indemnity Company, 29 Cal. 4th 934, that where a tortfeasor corporation had reorganized after it caused numerous injuries due to exposure to metallic chemicals, the reorganized company would not be covered for defense or indemnity of those cases since the corporate entity on whose watch these events occurred, had not specifically assigned its liability insurance policies to the reorganized new entity or obtained the insurers' consent to such assignment. Neither the majority nor the dissent discussed Section 520. There is general agreement today that Section 520, which has been cited only once since its enactment more than 140 years ago, was just simply overlooked. I believe that the same must be said about the Bergson case, which precedes Section 520 by three years. But now the California Supreme Court is about to hear argument in Fluor Corporation v. Superior Court, where the policyholder was denied coverage in the Superior Court and the Court of Appeal based on Henkel, and argues to the Supreme Court that Henkel was wrongly decided because it overlooked Section 520, as most of the California bar and judiciary had done until it was recently rediscovered.
The Court of Appeal in Fluor was not impressed with Section 520 and cast it aside. In its view, "[t]here is a logical reason for this obscurity. The 1872 statute can have no bearing as a ‘clear' or ‘controlling' legislative expression on the assignability of liability insurance for the simple reason that liability insurance did not exist in 1872. We will not ascribe to the dead hand of the 1872 Legislature controlling power over a medium that had yet to come into being." But it also, properly, cited Auto Equity Sales Inc. v. Superior Court (1962) 57 Cal. 2d 450, for the proposition that it had no power — although it also eschewed any "inclination" — to reverse the Supreme Court's decision in Henkel. Justice Raymond Ikola believed that in a third-party liability context a loss is sustained only when the insured becomes subject to a judgment and that therefore the 1872 Legislature could not have meant to establish the date of loss as a point after which a right to insurance coverage for the claim could be assigned. What defendants who are not sufficiently protected by their insurance carriers assign to the claimants who had sued them would be a chose in action against the insurer, not the insurance policy, though that distinction is not discussed in the Court of Appeal's Fluor opinion.
Clearly, there is a difference between an assignment of an insurance contract before a loss or after it (the policy being treated universally as the contract between insured and insurer), since an insurer would properly want to evaluate the insured's history and record before underwriting any coverage for prospective risks. Thus, if for instance a company known for its careful safety record wished to sell its insurance policy — along with its business or separately — to a party with a history of high risk taking, the insurer might not want to transfer its risk from seller to buyer without careful study or higher premiums. Thus the insurer's right to consent to an assignment of its policy before loss is incurred is sound public policy.
But after the loss is incurred, at least with respect to "occurrence" policies different considerations apply. The loss is a past event although its quantification and the determination of liability may still need to be resolved. Why would it matter to the insurer whether the original insured, A, or a successor, B, was the party who had to pay the loss, or when and under whose watch the loss was assigned and quantified? Any policyholder is required to cooperate with its liability insurer or it will lose the coverage; and in any event the insurer controls the defense in most instances. All this was foreseen by the Supreme Court in 1869 and by the legislature in 1872, when each determined that an insurance policy (including, as I will show, a liability policy) can be assigned without the insurer's consent after a loss has occurred — meaning that the loss will be covered.
The Court of Appeal's Fluor opinion relies on the famous case which established comparative negligence as the rule for tort liability in California, Li v. Yellow Cab Co. (1973) 13 Cal,. 3d 804, 816-819, to show that the legislators of 1872 did not foresee the development of tort law in the direction of comparative negligence, noting that as Li indeed points out, in 1872 the concept of comparative negligence was scarcely established in European countries and nowhere in the English-speaking world. From this, Justice Ikola projected that the law of 1872 just did not apply to social structures that came later — similar to the argument that since gay rights were not debated in 1789, they are not subject to the freedoms of the Bill of Rights in our Constitution.
But Li actually encourages projection of the concepts of 1872, based as they were on the common law of its time, onto later developments. It states at p. 823 "that ... [in 1872] the Legislature in no way intended to thwart future judicial progress toward the humane goal which it had embraced. Therefore ... we hold that [ the] section ... of the Civil Code [under examination] was not intended to and does not preclude present judicial action in furtherance of the purposes underlying it." In other words, because the court found the 1872 statute to have been supportive of similar legal improvements of its time, that statute included an invitation that the law should also recognize new concepts of liability that might later arise.
In parallel, then, even if the concept of liability insurance did not yet exist in 1872, the principle of Section 520, that policy rights can be assigned without the insurer's consent after a loss has occurred, can readily be applied to liability insurance under the Li case's reasoning, since the events that obligate the insurer to cover the risk are all in place: just as would be the case for property insurance if, for instance, there had been a fire on an insured property that was sold after the fire had occurred but before the loss was paid. Why should the law allow buyer and seller to allocate the cost of dealing with the carrier in that situation among themselves, but not if the loss concerned third party coverages?
The Court of Appeal's Fluor opinion claims that "loss' does not occur until the indemnity is paid;" but that is not the law. Rather, as the California Supreme Court held in a leading decision, in cases of developing personal injuries such as were before the court, and presumably in other cases as well, "the definition of 'occurrence' identifies the time of loss for purposes of applying coverage — the injury must take place during the policy period. (3 Cal. Insurance Law & Practice, supra, Property and Liability Insurance, § 49.12, at pp. 49-2049-21, fns. omitted.)" (Montrose Chemical Corp. v. Admiral Ins. Co. (1995) 10 Cal. 4th 645, 672-3.)
Requiring the insurer's consent to a transfer of the policyholder's rights with respect to losses already incurred creates a free pass for insurers where there are known losses and the insured reorganizes its business — something almost always done for reasons completely unrelated to insurance coverage issues. I can think of no reason, related to insurance coverage as such, why a policyholder would want to assign its rights under a liability insurance policy with regard to existing losses: the reasons for any such transfer must be found in business considerations which are causing the incurred company to reorganize. Why, then, should the consent of the liability insurer to such a transaction be required, where the loss has already occurred and the only remaining concerns are to quantify and resolve it? As noted earlier, the policyholder plays a distinctly secondary role in that process. In a complete reorganization the successor is likely liable for the torts committed by the predecessor company, Ray v. Alad Corporation (1977) 19 Cal. 3d 22. Why shouldn't the predecessor's liability insurance coverage then apply?
Henkel is not a sound basis for denying such relief. First, only a part of the original business had been sold and the third party claimant had actually asserted his claims against both the remaining halves of the former company; and there was also a concern that the claimant could sue even the dissolved corporations. And as the court noted, "Henkel's liability for injuries caused [by the original operator] arises from, contract and was not imposed by operation of law" (p. 940). But assume that as the result of a corporate reorganization, the original business was merged into the successor entity and ceased to exist or be subject to suit. Assume that the reorganization had sound business reasons whose economic value was several times the projected total of tort risks being assumed by the new entity. And assume further that the business was one where there were recognized high risks of tort injury, with the liability policy of the original company obtained at a high premium cost.
In that hypothetical, the only reason why an insurer would refuse to consent to transfer of the policy rights is that it receives a windfall in being relieved of what have become certain, even estimable, costs. Likewise, regardless of their prudence in first buying adequate coverage and then seeking a transfer of those rights incident to the reorganization, the businesses did everything right, but will still be deprived of the insurance coverage they had carefully sought to maintain, by the insurer's refusal to consent to the assignment of the insurance policies to the buyer as an incident of the deal. That is poor policy and should not be required by law. The Supreme Court should overrule its Henkel ruling when it decides the Fluor case. Instead it should follow the direction of the 1872 statute, which, to quote Li v. Yellow Cab again, has clearly encouraged "present judicial action in furtherance of the purposes underlying it."
