When Does an Insured Loss Occur
The California Supreme Court concluded it had erred in the past and that since an insured loss occurs or happens at the time of injury during the policy period, and well before there might be any judgment or approved settlement for a sum of money. In such a situation the policy is not being assigned – as prohibited by most policies – but the right to defense and indemnity (no longer a contingent event) – is being assigned.
In Fluor Corp. v. Superior Court, — P.3d —-, 2015 WL 4938295 (Cal., 8/20/2015) the California Supreme Court, Cantil-Sakauye, J., held that after injury resulting in loss occurs within the time limits of a policy, an insurer must honor an insured’s assignment of the right to invoke defense or indemnification coverage regarding that loss, overruling by applying the provisions of California Insurance Code Section 530, that 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 … ”
Addressing the point in time at which “injury or damage” that is continuous and occurs during successive policy periods triggers the insurer’s duty to defend under occurrence-based CGL policies, the California Supreme Court explained that the insurer’s duty arises when there is a potential for coverage, and even though there ultimately may be no duty to indemnify. The Supreme Court rejected the insurer’s position that manifestation (the latest possible trigger time) should be used, and determined that the fourth option was the most appropriate under the words of the CGL policies and the relevant majority-rule cases.
Accordingly, the Supreme Court concluded in Montrose Chemical Corp. v. Admiral Ins. Co. (1995) 10 Cal.4th 645, 664, 42 Cal.Rptr.2d 324, 913 P.2d 878 (Montrose ) that bodily injury and property damage that is “continuous or progressively deteriorating” throughout successive policy periods is covered by all insurers’ policies in effect during those periods even though, it acknowledged the injuries at issue in such cases are latent, unknown and unknowable at the time the insurance policies were issued.
In the process of reaching these determinations concerning the trigger of the insurers’ duty to defend, the Supreme Court repeatedly employed and equated the term “loss,” not with a judgment or settlement for a sum of money, as Hartford urged it should do, but as synonymous with occurrence of bodily injury and property damage. In the third party context, the relevant risk is the insured’s act or omission, and the resulting damage, injury, or loss to another, which together form the basis of legal liability. In State of California v. Continental Ins. Co. (2012) 55 Cal.4th 186, 145 Cal.Rptr.3d 1, 281 P.3d 1000 (Continental), the Supreme Court extended its analysis and holding in Montrose to cover not only the duty to defend, but also the duty to indemnify.
California Insurance Code Section 520
The recognized rationale for enforcing a consent-to-assignment clause is to protect an insurer from bearing a risk or burden relating to a loss that is greater than what it agreed to undertake when issuing a policy. It is undisputed that an insured may not transfer the policy itself to another without the insurer’s consent, and in this sense all parties agree. But the post-loss exception to the general rule restricting assignability, recognized in the many cases discussed earlier and codified in section 520, is itself a venerable rule that arose from experience in the world of commerce.
The general rule permitting post-loss assignment is a good rule—which is why the courts have crafted it over the years even though it appears to contradict the clear text of many insurance policies and the courts’ expressed fidelity to contract language. The post-loss exception to the general rule of restricted insurance assignability is a venerable rule borne of experience and practicality. The post-loss rule prevents an insurer from engaging in unfair or oppressive conduct—namely, precluding assignment of an insured’s right to invoke coverage under a policy attributable to past time periods for which the insured had paid premiums.
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 a consent-to-assignment clause. If the insurer were able to prevent its insured from assigning rights to assert such claims unless first reduced to a money judgment or approved settlement, it would effectively exert precisely the type of unjust and oppressive pressure on the insured that the early decisions, California Code Commissioners, and Legislature sought to foreclose.
“Loss” As Used in Section 108
Section 108 provides: “Liability insurance includes: [¶] (a) Insurance against loss resulting from liability for injury, fatal or nonfatal, suffered by any natural person, or resulting from liability for damage to property, or property interests of others but does not include worker’s compensation, common carrier liability, boiler and machinery, or team and vehicle insurance.”
Contrary to Hartford’s view, liability can arise simultaneously with loss and injury—at the same time someone causes a compensable injury—and not only when someone loses a lawsuit. There is no indication from section 108 or section 520, or other related contemporaneous statutes proposed by the California Code Commissioners and enacted by the 1935 California Legislature, that anyone understood the term “loss” as used in section 520 to have the meaning that Hartford proposes now—as arising only upon imposition of liability by entry of a judgment or approved settlement for a sum of money.
The Supreme Court rejected the related suggestion that section 520 is entitled to less judicial respect. In any event, we perceive a simple explanation for any prior relative obscurity or absence of express reliance on section 520 in any published case becayse it appeared generally unnecessary for litigants or courts to cite or rely upon it.
It was not until 2009 that Hartford for the first time asserted that assignment of claims for defense and indemnification coverage under its policies had been improperly made without its consent and hence was ineffective. This conduct further demonstrates that until insurers recently began to disallow and contest such assignments, there was little cause for insureds to think about, much less rely on Section 520 until very recently remained relatively obscure affords no basis to decline to construe and apply it now .
Of course, a rule once declared in an appellate decision constitutes a precedent that should normally be followed in cases involving the same problem. As Witkin observes, however, courts have articulated reasons for overruling a prior decision—among them
(1) that it overlooked an existing statute; and
(2) that it is contrary to the general law as reflected in other cases, including out-of state cases before and after the decision.
In Henkel Corp. v. Hartford Accident & Indemnity Co., 29 Cal.4th 934, 129 Cal.Rptr.2d 828, 62 P.3d 69, a post-loss assignment of rights to invoke coverage under a third party liability policy, the Supreme Court rendered a common law-based holding, concluding that such an assignment is subject to consent by the insurer unless “the benefit has been reduced to a claim for money due or to become due.”
The Supreme Court now concludes that this determination, reached without consideration or analysis of section 520, conflicts with the rule prescribed by that statute. In analogous circumstances the Supreme Court has overruled our own prior authority. (Martin v. Palmer Union Oil Co. (1920) 184 Cal. 386, 389, 193 P. 950; Alferitz v. Borgwardt (1899) 126 Cal. 201, 207–209, 58 P. 460.) In light of section 520, the Henkel decision is overruled to the extent it is inconsistent with this opinion’s analysis.
Insurance Code section 520 applies to third party liability insurance. Under that provision, after personal injury (or property damage) resulting in loss occurs within the time limits of the policy, an insurer is precluded from refusing to honor an insured’s assignment of the right to invoke defense or indemnification coverage regarding that loss. This result obtains even without consent by the insurer—and even though the dollar amount of the loss remains unknown or undetermined until established later by a judgment or approved settlement. The contrary conclusion announced in Henkel Corp. v. Hartford Accident & Indemnity Co., supra, is overruled to the extent it conflicts with this controlling statute and this opinion’s analysis.
The California Supreme Court in a lengthy and well reasoned decision, corrected an earlier error and now allows an insured, once a claim for damage is presented, to assign the right to claim defense and indemnity to another entity. In this case Flour assigned the right to a new Flour entity that took over its rights and liabilities. Insurance Code Section 520 clearly gives every insurer the right to assign a claim, whether first or third party, and eliminated the right of the insurer to enforce an agreement against such assignment.
Barry Zalma, Esq., CFE, has practiced law in California for more than 42 years as an insurance coverage and claims handling lawyer. He now limits his practice to service as an insurance consultant and expert witness specializing in insurance coverage, insurance claims handling, insurance bad faith and insurance fraud almost equally for insurers and policyholders. He also serves as an arbitrator or mediator for insurance related disputes.
He founded Zalma Insurance Consultants in 2001 and serves as its only consultant.
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