What the Fluor Corp. ruling means for insurers

Specifically, the court determined in Henkel that when a liability insurance policy contained a consent-to-assignment clause, an insured could not assign its right to invoke coverage under the policy without the insurer's consent until there existed a "chose in action" against the insured, which, the court found, occurred only when the claims against the insured had "been reduced to a sum of money due or to become due under the policy."

Section 520 – a statute tracing back to 1872 – was not cited to or considered by the court when it decided Henkel. Section 520 specifically restricts an insurer's ability to limit an insured's right to transfer or assign a claim for insurance coverage.

Now, the court has decided Fluor Corp. v. Superior Court. The court determined that Section 520 changed its determination in Henkel regarding the enforceability of "consent to assignment" clauses in third party liability insurance policies.

The court pointed out in Fluor that, under Henkel, the consent-to-assignment clause contained in the insurance policy at issue in the Fluor case would have permitted the insurer, after a loss had occurred, to refuse to honor an insured's assignment of the right to invoke the policy coverage for third party losses attributable to past time periods for which the insured had paid premiums.

In Fluor, however, the court concluded that Section 520 dictated "a result different from that reached in Henkel" and, accordingly, it overruled Henkel.

The Fluor Case

For many decades, the original Fluor Corporation performed engineering, procurement, and construction ("EPC") operations through various corporate entities and subsidiaries. Beginning in 1971, Hartford Accident & Indemnity Company became one of numerous insurers of the original Fluor, issuing to it 11 "comprehensive general liability" ("CGL") policies from mid-1971 to mid-1986.

The original Fluor Corporation operated at sites where asbestos allegedly was used. Beginning in the mid-1980s (and continuing until at least the court's decision), various Fluor entities were named as defendants in numerous lawsuits alleging liability for personal injury caused over many preceding years by exposure to asbestos. At the time of the court's decision, Fluor entities were facing approximately 2,500 such suits in California and elsewhere.

Fluor Corporation tendered these early suits to Hartford and its other liability insurers, all of which subsequently accepted the defense of the claims. Hartford led the defense and settlement of those actions, ultimately expending and paying, over the course of more than 25 years, millions of dollars in the defense and indemnity of those actions.

During the 1980s, the original Fluor Corporation acquired A.T. Massey Coal Company, a mining business outside Fluor's core EPC operations, and A.T. Massey became a subsidiary of Fluor. A.T. Massey's mining operations were conducted and managed independently of Fluor's EPC operations.

In 2000, Fluor decided to refocus on its core EPC businesses and to separate those operations from the A.T. Massey coal mining operations. Fluor's goal was to "maintain the basic corporate structure, ownership, management, brand recognition and continuing operations of the EPC companies, while preserving the value of A.T. Massey's business [and several long term mining leases] for shareholders."

Fluor decided to undertake a corporate restructuring and tax-free stock distribution known as a "reverse spinoff." Accordingly, in mid-September 2000, Fluor incorporated a newly formed subsidiary with no prior corporate existence ("Fluor-2) that retained the name "Fluor Corporation" so as to acknowledge continuation of the company's longstanding EPC businesses.

As reflected in a "Distribution Agreement" dated late November 2000, the original Fluor Corporation changed its name to Massey Energy Company. At that same time, the original Fluor Corporation transferred all of its EPC-related assets and liabilities to Fluor-2, thereby making Fluor-2 the parent of the EPC subsidiaries.

The new Massey Energy Company retained A.T. Massey's coal mining and related businesses. The Distribution Agreement described the business of each entity and the parties' intent to "allocate and transfer [the] assets and allocate and assign responsibility for [the] liabilities in respect of activities of the business of such entities."

In Article V, Section 5.01 (titled "Asset Transfers"), the Distribution Agreement provided that the original Fluor "shall transfer, assign and convey any and all rights and/or obligations it may have to [Fluor-2] with respect to … all Parent Assets and Parent Liabilities except" for certain listed assets – various specified investments, accounts, and intellectual property rights. The agreement did not except any insurance rights from this otherwise broadly phrased transfer of "any and all" assets.

According to Fluor-2, the transition of the original Fluor's EPC operations was seamless and caused no discernable impact on the customers, employees, or creditors of the original and subsequent corporations. After the reverse spinoff, Fluor-2 operated as the continuation of the original Fluor Corporation's EPC business, openly claiming that it was vested with all the assets, including the insurance policies under which it regularly sought and was afforded defense and indemnification coverage, and obligations (including liability relating to the asbestos suits) arising from the EPC business.

Fluor-2 asserted that in conducting the same EPC business under the Fluor Corporation name, it was treated as the accounting successor to the original (pre-spinoff) Fluor for financial reporting purposes. Fluor-2 also used the same stock symbol ("FLR"), was owned by the same shareholders, was managed by the same executive team, was headquartered in the same location, and retained all of the books, licenses, permits, contracts, and agreements associated with the original Fluor Corporation's EPC business.

After the reverse spinoff, Hartford continued for approximately seven years to defend Fluor-2 against claims triggered by occurrences during the terms of the original Fluor's expired policies and provided defense and indemnity payments concerning those claims on Fluor-2's behalf. Although Hartford had, between 2001 and 2008, occasionally disclaimed defense and indemnification coverage concerning specific companies or subsidiaries that it asserted did not qualify as insureds under its policies, during this period Hartford raised no objection based on the reverse spinoff to coverage for third party liability claims presented by Fluor-2. From 2002 until 2008, during the same time it defended the asbestos suits and provided indemnification, well after the reverse spinoff, Hartford continued to collect from Fluor-2, as the claimant, nearly $5 million in "retrospective premiums."

Various questions arose concerning the scope of Hartford's coverage obligations under the liability policies and Fluor-2 sued Hartford in February 2006, seeking declaratory relief on behalf of itself and its insured subsidiaries.

In a cross-complaint it filed in 2009, Hartford asserted that assuming the original Fluor Corporation had attempted to assign its insurance coverage claims to Fluor-2, the original corporation had failed to comply with the consent-to-assignment provision found in each policy.

Specifically, Hartford alleged 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.

Based on these allegations, Hartford sought a declaration that it had no obligation to defend or indemnify Fluor-2.

In early 2011, Fluor-2 moved for summary adjudication of Hartford's cross-complaint. Fluor-2 argued that Hartford's claims failed as a matter of law because Section 520 by its terms barred enforcement of the policies' consent-to-assignment clauses after a loss had happened. Fluor-2 asserted the asbestos suits alleged that the continuing exposures leading to bodily injury occurred during the terms of the various policies (between 1971 and 1986); the "loss" triggering Hartford's duty to defend and indemnify had already happened; thus, pursuant to Section 520, claims concerning insurance coverage for injuries resulting from those occurrences were properly assignable without Hartford's consent; and these claims were assigned to Fluor-2 along with the original Fluor Corporation's other assets in the 2000 Distribution Agreement.

Hartford opposed the summary adjudication motion based on Henkel, arguing argued that the trial court was "duty-bound to apply Henkel, not [Section] 520."

The trial court agreed with Hartford, declining to consider or apply Section 520 on the ground that Henkel had definitively addressed and resolved the enforceability of the same consent-to-assignment clause. It denied Fluor-2's motion for summary adjudication.

An intermediate appellate court rejected Fluor-2's petition for a writ of mandate, finding that Section 520 applied only in the context of first party insurance and not to cases involving third party liability insurance.

The dispute reached the California Supreme Court.

The Hartford CGL Policies

Each Hartford policy covered, among other things:

personal injury liability.

In that respect, Hartford agreed:

[t]o pay on behalf of the insured all sums which the insured shall become legally obligated to pay as damages because of personal injury, sustained by any person and caused by an occurrence."

(Underscoring omitted, italics added.)

The policies defined:

occurrence

as:

an accident, including injurious exposure to conditions, which results, during the policy period, in bodily injury or property damage neither expected nor intended from the standpoint of the insured.

(Underscoring omitted.)

Each of the policies contained a consent-to-assignment clause reading:

Assignment of interest under this policy shall not bind the Company until its consent is endorsed hereon.

Section 520

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 [i.e., life insurance and disability insurance].

The California Supreme Court's Decision

The California Supreme Court reversed the intermediate appellate court's decision.

First, the court found that Section 520 applied not only to first party policies, but also to third party liability policies.

The court then held that the phrase "after a loss has happened" in Section 520 "should be interpreted as referring to a loss sustained by a third party that [was] covered by the insured's policy, and for which the insured may be liable." The court decided that the phrase did "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."

Accordingly, the California Supreme Court concluded that:

• Section 520 applied to third party liability insurance;
• under that provision, after personal injury (or property damage) resulting in loss occurred within the time limits of a policy, an insurer was precluded from refusing to honor an insured's assignment of the right to invoke defense or indemnification coverage regarding that loss; and
• this result obtained even without consent by the insurer – and even though the dollar amount of the loss remained unknown or undetermined until established later by a judgment or approved settlement.

The case is Fluor Corp. v. Superior Court, No. S205889 (Cal. Aug. 20, 2015).