In The Wake Of Henkel--Four Recent State Supreme Court Decisions Refine The Legal Landscape Regarding Enforceability Of Anti-Assignment Clauses In Insurance Policies

In recent years there has been an increase in litigation over the issue of whether alleged corporate successors and assignees have a right to seek coverage under insurance policies which do not list them as named or additional insureds.  The seeds of this increased litigation were planted in part by the seminal 2003 California Supreme Court decision in Henkel Corp. v. Hartford Acc. & Indem. Co.,  62 P.3d 69 (Cal. 2003).  Henkel involved a series of corporate transactions and agreements under which Henkel obtained the chemical product line of another company, Amchem, and assumed by contract all of Amchem’s liabilities.  Henkel was subsequently sued by a number of plaintiffs with respect to injuries arising from these chemicals, and Henkel sought coverage under insurance policies issued to Amchem.  The California Supreme Court held that Henkel did not have a right to coverage under the Amchem policies.  The Henkel court first held that the insurance policies did not transfer to Henkel by operation of law, because Amchem remained a separate legal entity after the aforementioned transaction. 

Henkel further held that any contractual assignment of insurance benefits was invalid under the policies’ anti-assignment clause because the insurers did not consent to the transfer.  In reaching this conclusion, Henkel rejected the assertion that the assignment was permitted because the loss had already occurred and that therefore the transfer involved a freely assignable chose-in-action.  The Court reasoned that as of the time of assignment, the underlying claims had not been reduced yet to a sum of money due or to become due under the policy, and that the insurers had not yet breached any alleged duty to defend so no breach of contract action had ripened.  The Henkel court also rejected Henkel’s contention that the assignment could occur without the insurers’ consent because it did not increase the insurers’ risk.  The Court reasoned that the insurers faced the increase risk of having to defend multiple entities, noting in particular that an additional burden may exist when the predecessor corporation still exists or can be revived.

Henkel emboldened insurers’ efforts to challenge coverage claims by strangers to the insurance policy, as insurers sought to apply Henkel’s reasoning to disputes arising in other jurisdictions.  These efforts have met with mixed success, exemplified most recently during the latter half of 2006 by four state Supreme Court decisions dealing directly with corporate successor and/or policy assignment issues.

Holloway v. Republic Indemnity Co., 147 P.3d 329 (Ore. 2006)

Holloway addresses the enforceability of an anti-assignment clause in an insurance policy stating that “[y]our rights or duties under this policy may not be transferred without our written consent.”  The policyholder Fields was a restaurant owner.  Holloway, an employee of the restaurant, sued Fields for sexual harassment based upon the allegedly lewd and vulgar acts of another restaurant employee.  Holloway alleged that Fields ignored her complaints and that Fields ratified the inappropriate conduct and deliberately allowed the harassment to continue “with the specific intention that it would force [her] to resign.” 

Republic disclaimed coverage and refused to defend Fields.  Thereafter, Fields reached a settlement with Holloway under which: (1) Fields stipulated to entry of a $50,000 judgment against her; (2) Holloway agreed that Fields would only pay her $6,000 of this judgment; and (3)  Fields purported to assign to Holloway all the rights Fields may have against Republic for breach of contract.  Holloway then sued Republic for the unpaid portion of the judgment and attorneys fees, alleging that Republic breached its duty to defend and indemnify Fields against Holloway’s sexual harassment lawsuit.

Reversing the appellate court, the Oregon Supreme Court held the purported assignment violated the policy’s anti-assignment clause and was therefore invalid.  The appellate court had found the clause was ambiguous because it did not state whether the prohibition applied to pre-loss rights or duties, post-loss rights or duties, or both.  The appellate court reasoned that it made sense for the insurer to prohibit the assignment of pre-loss rights and duties because such a prohibition would protect the insurer against increased risks of loss from the assignment of coverage to a new insured; however, it was reasonable for the policy to insulate the insured from exposure to third party claims after a loss has already occurred.

The Oregon Supreme Court disagreed with that analysis, holding that the only reasonable interpretation of the anti-assignment clause was that it applied to both pre-loss and post-loss transfers.  The Court reasoned that the clause was worded broadly and contained no exception or qualifications, and that it would be improper to insert a pre-loss limitation on the scope of the clause merely because the clause was silent as to its application in a given situation. 

In Egger, the Pennsylvania Supreme Court interpreted the scope of an anti-assignment clause in a manner opposite the Oregon Supreme Court in Holloway.  Foulke, the policyholder, was sued in connection with a fatal workplace accident.   The case proceeded to trial and Gulf, Foulke’s excess insurer, denied coverage before the jury verdict. Immediately thereafter and before the jury verdict, Foulke and the plaintiff Egger reached a settlement agreement under which: (1) Egger agreed not to enforce against Foulke any excess judgment beyond the $1,000,000 primary policy limits; and (2) Foulke assigned to Egger its rights under the Gulf excess policy.   The jury subsequently returned a verdict against Foulke in the amount of $3,500,000.  Egger then sued Gulf for recovery of that portion of the verdict in excess of the primary policy limits.

Gulf asserted that Foulke’s purported assignment of policy rights was invalid because it contravened the policy’s anti-assignment clause, which was substantially identical to that considered in Holloway.  Affirming the trial and  intermediate appellate courts, the Pennsylvania Supreme Court held that Foulke’s assignment was valid and that the anti-assignment clause at issue was not enforceable against post-loss assignments.  Egger reasoned that prohibitions against post-loss assignments were generally regarded as void on public policy grounds.   The logic behind these public policy considerations was that post-loss assignments do not change the risk the insurer undertook to insure but instead assigned the right to a money claim.

The Pennsylvania Supreme Court also rejected Gulf’s assertion that Foulke’s assignment was pre-loss because there was no loss to Foulke until the verdict was returned against it. In support of its position, Gulf had cited to policy language stating that Gulf would pay those sums exceeding the primary limits which Foulke “by reason of liability imposed by law shall become legally obligated to pay.”  The Court affirmed the appellate court’s finding that this provision was ambiguous as applied because the phrase “by reason of liability imposed by law” could mean any number of things, including the occurrence upon which Foulke’s liability was based.  Amplifying this holding, the Court concluded that a “loss” occurs, for purposes of determining if a policy assignment is valid, at the time of the underlying occurrence giving rise to the liability.  The Court reasoned that allowing post-loss assignments without insurer consent did not violate the purpose of the anti-assignment clause, which was designed to guarantee that an increase in risk caused by a change in policy ownership would not occur without the insurer’s consent. 

Applying these legal principles, the Court found that the pre-verdict assignment did not increase Gulf’s risk in any manner.  Once Foulke, the original insured, acted negligently in causing the death of Egger, the bargained-for risk was realized and was not increased or otherwise changed by the assignment—the loss had occurred “and it remained only for that loss to be liquidated through legal proceedings.”  The Court rejected Gulf’s contention that the pre-verdict assignment increased Gulf’s risk because after the settlement Foulke had no motivation to aggressively defend against Egger’s claims.  The Court reasoned that Gulf had the right under its policy to participate in the defense of Egger but elected not to do so.

Pilkington involved a series of corporate transfers of glass manufacturing operations analogous to those in Henkel.  Various environmental claims were subsequently asserted against Pilkington with respect to contamination caused by releases before Pilkington bought the glass business.  Pilkington sought coverage against those environmental claims under insurance policies issued to the corporate predecessor, which was still in existence.  The insurers contested Pilkington’s claim and Pilkington filed suit in federal court.  The federal district court certified three questions of law to the Ohio Supreme Court: (1) whether Pilkington’s request for defense and indemnification constituted a chose in action under Ohio law, (2) whether the policies’ anti-assignment clause barred the transfer of a chose in action, and (3) whether insurance benefits for the transferred glass business liabilities were transferred by operation of law to Pilkington, notwithstanding the anti-assignment clause in the policies.  It was agreed that these policies were not transferred to Pilkington and that the predecessor corporation still owned the policies. 

In a split decision that exposed deep divisions amongst the seven Justices who  heard the appeal, the Ohio Supreme Court accepted in part and rejected in part Pilkington’s coverage claims.  By a 4 to 3 decision, the Pilkington court first declined to follow the ruling in Henkel that a chose of action did not exist until the underlying claims have been reduced to a sum of money owed.  Instead, the court held that Pilkington’s defense and indemnity claim constituted a chose in action under the occurrence based policies which arose at the time of loss, and that the lack of a specifically defined amount of recovery was not fatal to this determination.

A bare majority (three Justices declined to answer the second certified question) next held that the indemnification claim portion of this chose in action was transferable to Pilkington notwithstanding the anti-assignment clauses at issue.  The majority  opinion acknowledged that transfers of choses in action would be barred under a bright line application of the anti-assignment clause.  However, the majority reasoned by implication that post-loss transfers of indemnity rights should be

allowed nonetheless because the losses were fixed at the time of the occurrence.  The Court was unable to definitively answer whether such a chose in action is transferable as to the duty to defend due to a split within the majority. 

Finally, by a 5 to 2 decision, the Ohio Supreme Court rejected Pilkington’s contention that insurance rights for glass manufacturing liabilities transferred by operation of law to Pilkington as part of Pilkington’s purchase of that business.  In reaching its conclusion, the court rejected Pilkington’s reliance on the product line successor rule, articulated most prominently in the Ninth Circuit Court of Appeal decision of Northern Ins. Co. v. Allied Mutual Ins. Co., 955 F.2d 1353 (9th Cir. 1992).  Northern Insurance held that in instances where a successor corporation is liable by operation of law for defective products manufactured by a predecessor, rights to insurance coverage against those liabilities also transferred by operation of law to the successor corporation.  Pilkington reasoned that this doctrine was inapplicable under Ohio law, which had adopted the general rule of successor liability under which the purchaser of a corporation’s assets is not liable for the tortious conduct of the seller corporation, and that liability was therefore not imposed upon Pilkington by operation of law.  The lead opinion expressly criticized those courts which had expanded the Northern Ins. holding to cases where, as in Pilkington, the liability was contractually assumed.  The Court reasoned that to require coverage to follow liability as a matter of law would interfere with contractual rights, and could increase the insurer's risk by requiring the insurer to defend more than one entity. 

The concurring and dissenting opinions in Pilkington exposed sharp differences of opinion amongst the Ohio Supreme Court Justices as to the proper legal principles to be applied to the resolution of this dispute.  Three of the Justices (Lanzinger, Lundberg Stratton and O’Donnell) dissented from the conclusion that Pilkington’s demand for defense and indemnification was a chose in action, stating that it was unnecessary to even reach the question of whether the chose in action could be transferred to Pilkington.  The dissenting justices embraced the reasoning of Henkel, stating that a chose in action did not accrue at the time of the loss, because the insurers’ duty to defend and indemnify had not yet accrued, as no claim had been asserted against the seller of the glass business before Pilkington purchased the same. 

As to the second certified question, no definitive could be reached on whether the  right of transfer extended to the defense obligation.  Justices O’Connor and Moyer addressed the distinction between defense and indemnity transfers, stating that the transfer of a defense obligation could increase the risk to the insurer by requiring the insurer to defend multiple entities.   Justices Pfeifer and Resnick contrarily opined that the transfer of Pilkington’s defense claim should also have been allowed notwithstanding the anti-assignment clause, reasoning that there was no increased risk because the right to a defense could not both be retained and transferred.  These Justices also asserted that the Court’s failure to allow transfer of a chose in action by operation of law threatened economic activity by inhibiting the ability of corporations to freely structure corporate transactions.

Glidden, which was decided by the Ohio Supreme Court on the same day as Pilkington, also involved issues pertaining to whether a successor corporation obtained by operation of law insurance rights under policies issued to the predecessor corporation.  The successor corporation (“Glidden III”) sought insurance coverage under policies issued to predecessor corporations for liability arising from lead paint injuries which occurred during the time the business was owned and operated by the predecessor entities.  Affirming the trial court ruling and reversing the appellate court, the Glidden court held that Glidden III was not entitled to coverage under any of the policies. 

Relying on its reasoning in the separate Pilkington decision, the Ohio Supreme Court held that Glidden III assumed the liabilities in question by contract and that when a covered occurrence under an insurance policy occurs before liability is transferred to a successor corporation, coverage does not arise by operation of law when the liability was assumed by contract.  The Court also ruled that insurance benefits were not transferred to Glidden III as part of Glidden III’s purchase of the lead paint business.  The Glidden court focused on the specifics of a side agreement to the alleged corporate asset transfer, under which the parent of the subsidiary being sold purported to transfer insurance rights belonging to the subsidiary to the buyer.  The Court held that: (1) the parent did not have the authority to bind the subsidiary with respect to the transfer of insurance rights without express authorization; and (2) even if express authorization had existed, the subsidiary did not own the insurance policies and that the transfer was therefore invalid on that basis as well.

These decisions, which are not always consistent in their treatment of the anti-assignment issue, have important implications for legal practitioners, insurers and policyholders alike.  First, these decisions confirm again the importance of the forum in which the issue is litigated.  Apart from forum issues, these decisions do provide some further refinement to the enforceability of anti-assignment clauses.  It must be remembered that what is at issue here is the right of an assignee or corporate successor to claim coverage or insurance benefits for losses arising from operation which preceded the alleged transfer.  Collectively, Pilkington, Glidden, Egger and Holloway confirm that, in this situation, determining whether a policy’s anti-assignment clause will void an attempted transfer of insurance rights or proceeds requires analysis of at least three separate sub-issues. 

First, if the claiming entity is a successor to the corporation named as an insured under the policy, it must be determined whether the successor corporation succeeded to the assets and liabilities of the predecessor corporation by operation of law.  Pilkington and Glidden instruct that, at least under Ohio law, policy rights do not transfer by operation of law where the successor corporation purchases a business line or other discrete assets, as contrasted from a merger with the predecessor corporation such that there is only one surviving entity.  Glidden further instructs that in situations involving multiple and complex corporate asset transfers, a predicate determination should be made as to whether the selling corporation possessed any insurance rights in the first instance.  

Second, if the policies or policy rights were allegedly transferred by contract or other agreement, it must be determined whether the insurance claim constituted a chose in action at the time of the transfer.  Collectively, these four decisions illustrate several distinct lines of thought on this issue, ranging from the bright line test in Holloway, under which the anti-assignment clause will bar all non-consensual transfers of insurance rights without regard to whether the transfer involved a chose of action, to the rationale of the Egger court and Pilkington majority, under which a chose of action is effectively created under a liability policy at the time of the underlying occurrence, even if a claim is not asserted until long after the transfer has taken place.  Staking out a middle ground on this issue is the dissent in Pilkington, which asserted that a chose in action did not exist until a claim had been asserted against the original policyholder triggering a defense and/or indemnity obligations.  This rationale has in fact been embraced in other jurisdictions.  See, e.g., Litwin v. Timbercrest Estates, 347 N.E.2d 378, 380 (Ill.App. 1976)(holding that prior owner of house was unaware of latent building defects at time of sale to subsequent purchaser, and therefore did not possess a chose in action which could be transferred to purchaser).  Further muddying the legal waters is the Henkel case itself, which held that a chose in action does not exist until the claims have been reduced to a sum of money owed, or the insurers had breached a duty to defend or indemnify.

Third, if it is assumed that the claim does in fact constitute a chose in action, it must be determined whether the anti-assignment clause nevertheless bars transfer of it to another person or entity.  This inquiry focuses on whether the transfer has the effect of increasing the insurer’s risk, which lies at the core of the purpose of the anti-assignment clause.  Here, as with the question of whether the insurance claim constitutes a chose in action, the recent decisions are divided.  Egger and Pilkington held that such a chose in action was freely transferable, at least with respect to indemnity claims, on the grounds that the liability was already fixed at the time of transfer and that the transfer did not increase the insurers’ risk.  However, Pilkington was unable to reach the same consensus regarding the transfer of defense claims.  Of the four justices that ruled that indemnity claims were transferable notwithstanding an anti-assignment clause, two opined that defense claims were not transferable because they could potentially require insurers to defend multiple entities and therefore increased the insurers risk in contravention of the purpose of the anti-assignment clause¹.  This concern about potentially increased defense obligations was also articulated at some length by the Henkel court. 

The distinction drawn in Pilkington between indemnity and defense claim transfers brings to mind another potentially crucial distinction which courts to date have not directly addressed--the distinction between indemnity claim transfers involving single event occurrences and indemnity claims involving long-tail occurrences spanning more than one policy period.  Where the underlying liability at issue arises from a single event which preceded the policy transfer, such as the fatal injury at issue in Egger, the liability was arguably fixed at the time of the injury itself, and it does not appear that a subsequent transfer of policy rights to an assignee or successor corporation would increase the liability risk to the insurer. However, the same conclusion does not necessarily follow when a loss continues after the transfer, as with long tail claims such as a silica exposure injury spanning decades of business operations.  Although the predecessor corporation’s liability may have arisen before the silica generating business was sold because the injured worker was first exposed to silica before the sale, the nature, character and extent of the liability may have been materially increased by continued exposure after the business was sold.  This potential increase in liability is magnified by the laws of most states, which impose joint and several liability upon joint tortfeasors, thereby subjecting the insurer to the risk of indemnifying the successor against liability caused primarily by the successor’s business operations, operations that the insurer had no opportunity to assess when underwriting the policy. 

In sum, Holloway, Egger, Pilkington and Glidden refine the legal landscape pertaining to the enforceability of anti-assignment clauses but also reveal a lack of consensus amongst the courts as to the proper analytical framework to be applied to the resolution of disputes involving the clause. 

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¹ Egger involved an excess policy and therefore did not directly address the transferability of defense claims.