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Insurance Law News - September 2015

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Pursuant to Insurance Code Section 520, Once "Loss" Happens, Insured May Assign Right to Recover to Third Party

Pursuant to California Insurance Code section 520, once a covered "loss" has happened, the insured may assign its right to recover to a third party. (Fluor Corporation v. Superior Court (2015) 61 Cal.4th 1175)


In 1924, the original Fluor Corporation ("Fluor-1") was created. Between 1971 and 1986, Fluor-1 obtained general liability insurance coverage through Hartford Accident & Indemnity Company ("Hartford"). Each policy contained a "consent-to-assignment" clause stating that "assignment of interest under this policy shall not bind the [insurer] until its consent is endorsed hereon."

Starting in the mid-1980's, various third parties sued Fluor-1 for injuries arising from exposure to asbestos-containing materials. The third parties' injuries occurred, in part, during the time that Fluor-1's policies through Hartford were in effect. Hartford thus participated in defending Fluor-1 against the asbestos suits.

In 2000, as part of a corporate restructuring transaction called a "reverse spinoff," a second Fluor Corporation ("Fluor-2") was created. In the reverse spinoff, Fluor-1 transferred its engineering, procurement and construction services to Fluor-2. Fluor-1 retained various coal mining and energy operations and renamed itself "Massey Energy Company." As part of the transaction, Fluor-1 allegedly assigned its rights under the Hartford policies to Fluor-2, but did not obtain Hartford's consent to the assignment. Fluor-1 and Fluor-2 became independent public companies, with neither having an ownership interest in the other.

Between 2001 and 2008, Hartford contributed toward the costs of defending and indemnifying both Fluor-1 and Fluor-2 against the asbestos lawsuits.That is, Hartford paid claims on behalf of Fluor-2 for injuries Fluor-1 had allegedly caused to third parties during the Hartford policy periods.

Eventually, Fluor-2 and Hartford became involved in coverage litigation arising from the underlying asbestos lawsuits. In the coverage litigation, Hartford asserted, among other things, that it only insured Fluor-1; that the Hartford policies contained "consent-to-assignment" provisions prohibiting any assignment of the policies without Hartford's written consent; and that Hartford had never consented to any assignment of Fluor-1's policies to Fluor-2. Hartford thus sought a ruling that it had no duty to defend or indemnify Fluor-2 against the asbestos lawsuits.

In response, Fluor-2 moved for an order that Hartford's "consent-to-assignment" clauses were invalid under California Insurance Code section 520. That statute 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…." The trial court, citing the California Supreme Court's prior decision in Henkel Corp. v. Hartford Accident & Indemnity Co. (2003) 29 Cal.4th 934, held that Hartford's consent-to-assignment clauses were valid and thus denied Fluor-2' motion. The Court of Appeal, also relying on Henkel, affirmed the trial court's ruling. Fluor-2 then sought, and obtained, review by the California Supreme Court.


The California Supreme Court reversed, finding that Hartford's "consent-to-assignment" clauses conflicted with Insurance Code section 520. As noted above, section 520 prohibits any policy provision which bars an insured from transferring a claim against the insurer "after a loss has happened."

The Supreme Court rejected Hartford's contention that section 520 only applies to first-party property policies. Rather, after an exhaustive review of statutory and case law from California and other jurisdictions, the Supreme Court held that section 520 applies to both first-party property policies and third-party liability policies.

The Supreme Court then held that, with respect to third-party liability policies, a "loss" arises at the time of the "occurrence" that results in injury or damage to the third party, even though the dollar amount of that loss may be unknown and unknowable until much later. Thus, section 520 does not require that the third party claimant obtain a money judgment against, or reach a settlement with, the insured before the insured may assign a claim for the "loss" without the insurer's consent. Rather, once a third party has sustained a "loss" that is covered by the insured's policy, and for which the insured may be liable, the insured may assign a claim for the loss without the insurer's consent.

The Supreme Court held that in light of the above, and given California's "continuous injury" trigger of coverage, the loss "happened" after a third party's exposure to asbestos resulted in bodily injury between 1971 and 1986, when Fluor-1 was insured by Hartford. Therefore, in 2000, Fluor-1 had the authority, without Hartford's consent, to assign to Fluor-2 the right to defense and indemnification under the Hartford policies for bodily injury that had occurred during the policy periods. In short, Hartford could not rely on its "consent-to-assignment" clauses to defeat Fluor-2's claim for coverage.

In reaching this result, the Supreme Court in Fluor expressly overturned its earlier decision in Henkel. The Supreme Court noted that in Henkel, the litigants had not cited, and the Supreme Court had not considered, the effect of section 520 on a "consent-to-assignment" clause. The Supreme Court also observed that the Henkel decision has been widely criticized by other courts and commentators, and clearly represented a minority view. After reviewing the relevant statutory and case law, the Supreme Court determined that Henkel had been incorrectly decided.


The Fluor decision is in accord with the general principle that an insurer may prohibit an insured from assigning the policy itself to another person before the loss occurs. That is because insurance is considered a personal contract, with the insurer having the right to choose who it will insure.

However, after a covered loss occurs, the insured may assign to another person the right to recover from the insurer for the loss which has already occurred. This latter situation involves only the payment of a claim for a loss the insurer agreed to cover, and the insured is thus entitled to designate another person to receive the policy proceeds.


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Defending Insurer Not Liable for Excess Judgment Where Settlement Demand Exceeded Applicable Policy Limits and Insured Stipulated to Judgment Without Insurer's Consent

A liability insurer which provided a defense to its insured was not liable for an excess judgment where (1) the settlement demand against the insured exceeded the applicable policy limits, and (2) in any event, the insured stipulated to the judgment without the insurer's consent. (21st Century Insurance Company v. Superior Court (2015) WL 5285822)


Cy Tapia's grandfather owned a pickup truck which he allowed Tapia to drive as Tapia pleased. The pickup truck was a covered vehicle, and Tapia was a listed driver, on a 21st Century Insurance Company auto policy with liability limits of $100,000.

Tapia lived with his grandmother and aunt, both of whom had 21st Century auto policies with liability limits of $25,000. The two $25,000 auto policies covered "resident relatives" (which included Tapia) while driving "non-owned automobiles" (defined as any vehicle "not owned nor available for regular use by you, a relative or a resident of the same household in which you reside, used with the permission of the owner").

Tapia was driving the pickup truck when he caused an accident which resulted in severe injuries to his passenger, Cory Driscoll. Driscoll subsequently sued Tapia. 21st Century accepted coverage for Tapia under the $100,000 auto policy and retained defense counsel to represent Tapia. Several months later, 21st Century offered the $100,000 policy in settlement of Tapia's alleged liability to Driscoll.

Driscoll rejected the $100,000 settlement offer because he believed that Tapia was also covered under the two $25,000 policies which 21st Century had issued to Tapia's grandmother and aunt. Driscoll thus communicated a $150,000 settlement offer to Tapia's defense counsel. However, Tapia's defense counsel allegedly failed to communicate the $150,000 settlement offer to 21st Century, and as a result 21st Century failed to timely accept that settlement offer.

Shortly thereafter, 21st Century affirmatively offered the "full" $150,000 limit of all three policies in settlement of Tapia's liability to Driscoll. Driscoll responded by serving a $3,000,000 statutory offer to compromise on Tapia. Shortly before the expiration of the $3,000,000 statutory offer, 21st Century sent Tapia a letter warning Tapia that 21st Century would not agree to be bound if Tapia accepted the statutory offer.

Notwithstanding the above, Tapia stipulated to the entry of a $3,000,000 judgment in favor Driscoll. At that point, 21st Century partially satisfied the judgment against Tapia by paying Driscoll $150,000 (the amount of all three policies).

Driscoll and Tapia then entered into an agreement pursuant to which Driscoll received an assignment of any rights Tapia had against 21st Century. As part of this agreement, Driscoll promised not to execute on the judgment against Tapia's personal assets.

Driscoll as assignee of Tapia then filed a bad faith action against 21st Century. 21st Century moved for summary judgment, asserting that (1) Driscoll's $150,000 settlement demand against Tapia exceeded the applicable policy limits, and (2) in any event, Tapia's stipulation to a judgment without 21st Century's consent vitiated any claim in excess of the policy limits. The trial court denied 21st Century's motion. 21st Century sought appellate review.


The Court of Appeal ruled that 21st Century was entitled to summary judgment, for two reasons.

First, Driscoll's excess judgment against Tapia was based on 21st Century's alleged failure to timely accept a $150,000 settlement offer on behalf of Tapia. In fact, however, Driscoll's $150,000 settlement offer to settle to exceeded the $100,000 limit of the only 21st Century policy that applied. The two $25,000 policies that 21st Century had issued to Tapia's grandmother and aunt did not apply because those policies only covered Tapia while he was driving a vehicle that was not available for his "regular use." Here, Tapia had "regular use" of the pickup truck, and thus the pickup truck was not an insured vehicle on the two $25,000 auto policies. As a result, Driscoll's alleged "policy limit demand" of $150,000 was actually a demand that exceeded the applicable policy limit of $100,000. Thus, 21st Century had not failed to accept a reasonable "settlement demand within limits." The fact that 21st Century had eventually offered and paid $150,000 was not a waiver of 21st Century right to contest coverage under the two $25,000 policies.

Second, and more importantly, following 21st Century's alleged failure to timely accept the $150,000 settlement offer on behalf of Tapia, Tapia – without 21st Century's consent – had stipulated to the entry of a $3,000,000 judgment in favor Driscoll. Because 21st Century was providing a legal defense to Tapia, Tapia was not entitled to stipulate to a judgment in favor of Driscoll. Rather, if Tapia believed that 21st Century had breached its duty to settle, Tapia could have assigned his rights to Driscoll, such assignment to become operative in the event a trial in the underlying action resulted in an excess judgment against Tapia. Here, the $3,000,000 judgment was not the product of an adversarial proceeding between Driscoll and Tapia, but rather was simply the product of an agreement between Driscoll and Tapia.


This case underscores two points in situations where a liability insurer's alleged failure to accept a "reasonable settlement demand within policy limits" leads to an "excess judgment" against the insured.

First, the plaintiff's attorney should attempt to ensure that the purported "settlement demand within policy limits" is indeed "within policy limits." A demand in excess of the policy limits may simply allow the insurer to argue that the insurer had no contractual duty to accept such a demand. (However, note that the insurer may nevertheless have a duty to communicate the "excess" demand to the insured so that the insured can attempt to come up with the additional funds necessary to meet the demand.)

Second, if an insurer is providing a defense to its insured, the insured may not, without the insurer's consent, stipulate to a judgment in favor of the plaintiff. If the insurer is defending the insured, and the insurer allegedly breaches its duty to accept a reasonable settlement demand within the policy limits, the insurer's breach becomes actionable only after a trial results in an excess judgment against the insured. (See, Hamilton v. Maryland Casualty Co. (2002) 27 Cal.4th 718.)


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