In October, in a case of first impression, the Kentucky Supreme court decided that Kentucky will follow the “majority rule,” under which anti-assignment clauses in insurance policies may not be enforced, if the assignment is made after the underlying loss has occurred. In December, the Supreme Court of California agreed to decide whether to extend that rule to “assignments” that occur by virtue of the merger of an insured into another business.
In re Wehr Constructors, Inc. v. Assurance Company of America, No. 2012-SC-000221-CL (Ky. Oct. 25, 2012), involved a “builder’s risk” policy issued to a hospital that was constructing an addition to its facilities. Among other things, the policy provided that the rights of the insured could not be transferred without the insurer’s written consent. When the floors in the addition were damaged, the hospital submitted a claim under the policy, but the insurer denied the claim. The hospital later settled a claim by the contractor that had installed the floors; one term of the settlement was the assignment of the hospital’s claim against its insurer. The contractor sued the insurer in federal court, and that court certified the question of whether an anti-assignment clause “is enforceable or applicable when the claimed loss occurs before the assignment.”
The Supreme Court of Kentucky held that such clauses are void as against public policy, noting that this conclusion has been overwhelmingly endorsed as the legally sound position and is considered the “majority rule.” The court also rejected an argument based on a Kentucky statute, which states that “[a] policy may be assignable or not assignable, as provided by its terms.” Once a loss has occurred, the court explained, the insured’s claim has ripened into a chose in action, and it is that property right, rather than the policy itself, that the insured has a right to assign.
One limit to the scope of that argument was established by the California Supreme Court ten years ago, in Henkel Corp. v. Hartford Accident and Indemnity Co., 29 Cal. 4th 934 (2003). In Henkel, the court held that, because of an anti-assignment clause, the surviving company in a merger was not entitled to the acquired company’s liability insurance coverage, even though the surviving company had expressly assumed all of the acquiree’s liabilities, including those covered under the policy.
In some cases, the court explained, the acquiring company assumes liabilities by operation of law, and, in those cases, the “right to indemnity follow[s] the liability.” But the plaintiff in Henkel voluntarily assumed the liabilities in question by contract, and, where that is the case, its rights were subject to the terms and limitations (including the anti-assignment term) of the insurance contract.
The court further held that its ruling applied to claims for losses that occurred before the acquisition, and it did so in a way that ran counter to the argument the Kentucky court just accepted. Until a claim has been reduced to “a sum of money due or to become due under the policy,” the court held, it does not constitute a chose in action that is freely assignable.
But that might change. The petitioner in a case called Fluor Corp. v. Superior Court, 208 Cal. App. 4th 1506, 146 Cal. Rptr. 3d 527 (Cal. Ct. App. 2012), argued that the ruling in Henkel is in direct conflict with a 19th-century California statute, Cal. Ins. Code § 520, which states that “[a]n agreement not to transfer the claim of the insured . . . after a loss has happened . . . is void if made before the loss . . . .” Last August, a California Court of Appeals rejected that argument, finding, among other things, that the statute could not be applied to liability policies, because it was first enacted at a time when first-party coverage was the only type of insurance in existence. When a “loss” occurs for purposes of a liability policy is a controversial question, the court noted, and it is one that the statute was never intended to resolve.
On December 12, 2012, however, the California Supreme Court granted certioriari in Fluor Corp. The battle over assignment is not over yet.