Insurance Law

California Joins the Majority – Henkel No Longer a Bar to Post-Loss Assignments

By Jason Frye, Associate, Neal, Gerber & Eisenberg LLP

The California Supreme Court has issued its long-awaited ruling in Fluor Corp. v. Superior Court of Orange Co. and held that California Insurance Code section 520 – a statute tracing back to 1872, [subscribers can access an enhanced version of this statute: lexis.com | Lexis Advance], – dictates “a result different from that reached in Henkel.” Under Henkel, a consent-to-assignment clause in a third party liability policy permitted an insurer to decline coverage following an assignment, even if the assignment took place after the loss occurred. With the decision in Fluor, [subscribers can access an enhanced version of this opinion: lexis.com | Lexis Advance], California joins the majority of jurisdictions and now precludes an insurer from refusing to honor an insured’s assignment after the loss has occurred, even when the insurer does not consent to the assignment.

In Henkel Corp. v. Hartford Accident and Indemnity Co., 29 Cal. 4th 934 (2003), [subscribers can access an enhanced version of this opinion: lexis.com | Lexis Advance], the California Supreme Court held that a consent-to-assignment clause in the policy was enforceable and that the clause precluded the insured’s transfer of the right to invoke coverage without the insurer’s consent even if the coverage-triggering event had already occurred. Thus, when a policy contains such a consent-to-settle assignment clause, an insured may 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 Henkel court found to occur only when the claim against the insured had been “reduced to a sum of money due or to become due under the policy.” Henkel’s holding ran contrary to the majority rule, which applied such clauses to preclude coverage only if the assignment occurred prior to the loss. See, e.g. Lain v. Metropolitan Life Ins. Co., 388 Ill. 576, 578 (1944), [subscribers can access an enhanced version of this opinion: lexis.com | Lexis Advance], (“The general rule, supported by a great wealth of authority, is that general stipulations in policies, prohibiting assignment thereof except with the insurer’s consent … have universally been held to apply only to assignments before loss, and, accordingly, not to prevent an assignment after loss, of the claim or interest of the insured in the insurance money then due in respect to the loss.”). The dissent in Henkel recognized as much, noting that the “majority’s decision is contrary to well-settled law and provides an unfair windfall to insurers.”

In Fluor, the insured argued that California Insurance Code section 520 – which was not cited or considered in Henkel – specifically restricted an insurer’s ability to limit an assignment or transfer after the loss had occurred. The Fluor court agreed. Section 520 states that “[a]n agreement not to transfer the claim of the insured against the insurer after a loss has happened, is void if made before the loss ….” The court held that section 520 applied to third party liability policies and that the phrase “after a loss has happened” in section 520, although ambiguous, should be interpreted as referring to the occurrence of bodily injury or property damage, not a judgment or settlement for a sum of money. “Only this interpretation of the statute’s language barring veto of assignment by an insurer honors the clear intent demonstrated by the history of section 520 to avoid any ‘unjust’ or ‘grossly oppressive’ enforcement of consent-to-assignment clause.” After Fluor, an insurer cannot rely on the consent-to-settle clause to disclaim coverage if the assignment took place after the occurrence.

Perhaps recognizing the frustration Henkel has caused policyholders, the court noted that “we are cognizant of not only section 520 and related authorities, but also the subsequent common law decisions of other courts, virtually all of which are at odds with our key holding in Henkel. Nor has Henkel fared better in scholarly publications or practice guides.” To the extent Henkel conflicts with section 520 and the Fluor analysis, it is now overruled.

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