Insurance Law Hawaii

Post-Loss Assignment Upheld By Another Louisiana Federal Court

    Consistent with the recent decision issued in In Re Katrina Canal Breaches Consolidated Litigation [prior post here], the District Court for the Western District of Louisiana upheld a post-loss assignment of a property policy.  See Disaster Relief Serv. of North Carolina, LLC v. Employers Mutual Cas. Ins. Co., No. 07-1925, 2009 U.S. Dist. LEXIS 29443 (W.D. La. April 6, 2009).

    The insured's apartment complex was damaged by Hurricane Rita.  The property was insured by Employers under a business protection policy that included coverage for damage to property and loss of business income.  The insured hired Paramount Insurance Repair Service to do initial damage mitigation work.  Without the insured's permission, Employers contacted Paramount and negotiated the scope and cost of all repairs to the property, notwithstanding the limited authority the insured had given Paramount.  The insured later fired Paramount and hired Disaster Relief Services (DRS) to complete the repairs.  DRS's Complaint alleged Employers then failed to adjust and provide coverage for certain property losses and damage despite receiving sufficient proofs of loss.

    After purchasing the property and receiving an assignment of future insurance proceeds, DRS sued Employers.  Employers moved for summary judgment, arguing the policy prohibited the assignment of "rights and duties" without the insurer's consent.  Noting the decision in Katrina Canal Breaches, the court found the insured was entitled to assign the rights under Employer's policy because the assignment to DRS was executed after the property damage occurred.  The assignment of rights under the policy included the insured's bad faith claims if such claims accrued to the insured at the time of the assignment.  Neither party had submitted a copy of the assignment of rights to the policy, so the court could not determine when the bad faith claims accrued. 

    Nevertheless, the court determined Employers did not act in bad faith in failing to timely pay a claim after receiving satisfactory proofs of loss.  Such a claim could only be asserted under Louisiana law if the failure to timely pay was arbitrary, capricious or without probable cause.  There was no evidence of unjustified refusal to pay amounts due.  Therefore, Employers' motion for summary judgment as to DRS's bad faith claims was granted.

Anti-Assignment Clause Does Not Bar Post-Loss Assignment

    It's now late April.  Posting on a decision rendered in March, early March at that, breaches a blogger's protocol.  And In Re: Katrina Canal Breaches Consolidated Litigation; Pertains to: Road Home, Louisiana State, No. 05-4182, 2009 U.S. Dist. LEXIS 30406 (E.D. La. March 5, 2009), received press when issued.  The case allowed individual claims of homeowners to proceed with a class action suit even if they did not file individual suits by the deadline.  Nevertheless, because it involves hurricanes, flood damage and anti-assignment provisions, issues we follow with interest at this site, the latest installment of Katrina Canal Breaches deserves another look. 

    The Louisiana Road Home program was funded by a HUD grant to provide disaster relief to victims of Hurricanes Katrina and Rita.  Road Home grants were designed to compensate homeowners up to $150,000 for structural damage.  The Road Home program prohibited providing any relief funds that would duplicate payments from other sources.  Accordingly, recipients had to reimburse the State if they subsequently received any insurance payments from losses covered by their Road Home grants.  To facilitate reimbursement, the Road Home program required recipients to execute a Subrogation/Assignment, assigning the right to such duplicate funds to the State. 

    Approximately 90,000 Agreements were executed, making in excess of eight billion dollars of federal funds available to hurricane victims through the Road Home program.  The State filed a class action suit to recover those funds from Insurers to which Road Home recipients were entitled and which had been assigned to the State.

    The Insurers moved to dismiss on various grounds.  First, the Insurers argued the State had no standing because the assignments from the homeowners were invalid based on the policies anti-assignment clauses.  Louisiana law permitted the enforcement of anti-assignment clauses.  But here the Court was faced with a post-loss assignment, i.e., the homeowners assigned their rights under the policies to the State after loss from the hurricanes.  

    The Court decided that assignments were permitted under Louisiana law, despite anti-assignment clauses.  In other jurisdictions, courts generally permitted the assignment of an insurance claim despite an anti-assignment clause if the assignment occurred post-loss.  After the loss occurred, assignment of the claim did not modify the risk.  Therefore, there was no reason to limit the assignment of a claim, regardless of an anti-assignment clause.  Recall that in Del Monte Fresh Produce (Hawaii), Inc. v. Fireman's Fund Ins. Co., 117 Haw. 357, 183 P.3d 734 (2007), the Hawai`i Supreme Court held that transfer of a policy in disregard of an anti-assignment provision was invalid.  Del Monte dealt with a post-loss assignment loss, but an assignment made prior to the successor's entry of a Consent Decree under CERCLA with the EPA.

    The Katrina Canal Breaches court next agreed with the Insurers that any claims outside the contract, such as allegations of bad faith and breach of fiduciary duty, were barred because these claims had not been assigned to the State.

    Finally, the Court  dismissed the State's Valued Policy Law claims.  The State argued under Louisiana law, if any insurer placed a valuation on the property and used such valuation to determined the premium, the insurer had to indemnify the covered loss at such valuation without deduction or offset.  The Court agreed with the Insurers that Louisiana law only applied the Valued Policy Law to claims brought under fire insurance policies. 

Tenth Circuit Enforces Anti-Assignment Provision

    Our last post [here] summarized a case in which the Ninth Circuit found the anti-concurrent provision to be ambiguous.  See Alexander Mfg., Inc. v. Illinois Union Ins. Co., No. 07-35812 (9th Cir. March 25, 2009) [here].  Today we review a case in which the anti-assignment provision was strictly construed by the Tenth Circuit.  See Manchester v. Certain Underwriters at Lloyds, London, No. 08-6119, 2009 U.S. App. LEXIS 6033 (10th Cir. March 23, 2009).

    The insureds, the Rutzes, owned a water park, operated as Sun 'N Fun Family Recreation, Inc. ("Inc.").  In mid-June 2005, they decided to sell the water park to the Behars.  Inc. held a liability policy with Underwriters that was set to expire on June 25, 2005.  On June 25, 2005, Inc. mailed a premium check to Underwriters.  On July 27, 2005, Underwriters issued and mailed to Inc. a renewal policy.  The policy listed Inc. as the insured.  The policy included a non-assignment provision which provided the policy could not "be assigned without the prior written consent of the Insurer."  During the negotiations for the sale of the water park, the parties had discussed having Inc.'s policy transferred to the Behars.  This never took place, however, nor did Underwriters ever approve transfer of the policy to the Behars.

    The Behars took over operation of the water park on June 29, 2005.  On July 14, 2005, an employee fell from one of the water slides and died.  On July 25, 2005, a payment was due on the policy.  The Behars sent a premium payment to Underwriters, using the checking account that had previously been used by Inc. and the Rutzes.  In October 2005, Underwriters returned the payment to the Behars. 

    When the victim's family sued, the Behars tendered to Underwriters.  Coverage was denied and suit was filed.  The district court found there was no coverage under the policy.

    On appeal, the Tenth Circuit affirmed.  The Court determined Underwriters had neither waived nor was estopped from asserting the non-assignment provision.  Underwriters could not waive the requirement because they were never provided with notice that Inc. wanted to transfer the policy to the Behars.  Nor was there evidence of any statement or admissions by Underwriters that could reasonably be considered inconsistent with its reliance on the non-assignment provision.

Ninth Circuit Determines Anti-Assignment Provision Ambiguous

    Historically, the Ninth Circuit has not favored anti-assignment clauses.  See, e.g., Northern Ins. Co. of New York v. Allied Mut. Ins. Co., 955 F.2d 1353 (9th Cir. 1992)(benefits of policy transfer by operation of law to successor corporation despite anti-assignment provision). Applying Oregon law, the Ninth Circuit recently continued its pattern, determining the anti-assignment clause in Alexander Mfg., Inc. v. Illinois Union Ins. Co., No. 07-35812 (9th Cir. March 25, 2009) [here] was ambiguous.

    Plaintiff was an employee stock ownership plan and the sole shareholder of Alexander Manufacturing, Inc. (AMI).  Plaintiff sued three of its former fiduciaries, alleging breach of fiduciary duty under ERISA.  These same individual were former directors and officers of AMI. 

    Plaintiff's policy with Illinois Union included coverage for "Directors & Officers and Company" and fiduciary liability.  The policy had an anti-assignment clause, which stated, "[a]ssignment of interest under the Policy shall not bind Insurer unless their consent is endorsed hereon."  In the underlying suit, the fiduciaries settled for $10,000 each and assigned their rights under the policy to Plaintiff.  Illinois Union never consented.  When Illinois Union failed to honor the assignment, Plaintiff sued.  The district court granted summary judgment to Illinois Union and dismissed the case.

    The Ninth Circuit reversed.  Under Oregon law, the policy's anti-assignment clause applied only to pre-loss assignments.  Moreover, the anti-assignment clause was ambiguous because there were two plausible interpretations of the word "interest."  First, "interest" could be interpreted to not encompass post-loss assignments.  "Interest" could refer to a financial stake in the policy, as distinct from a financial stake in a post-loss cause of action.  In that sense, no "interest" in the policy could be assigned because the insurer accepts only the known risk of a particular insured.  Under a second interpretation, however, "interest" could apply to post-loss as well as pre-loss assignments.  One could plausibly interpret "interest" to encompass all rights, including post-loss assignments.  Because two interpretations of the clause were reasonable, it was construed against Illinois Union.  

    It is unlikely the Hawai`i Supreme Court would determine the anti-assignment clause to be ambiguous. In Del Monte Fresh Produce (Hawaii), Inc. v. Fireman's Fund Ins. Co., 117 Haw. 357, 183 P.3d 734(Haw. 2007) [reviewed here], the Court held the policy did not transfer to a corporate successor because of the anti-assignment provision.

    Carriers, do not despair.  Our next post will review a case in which the Court enforced the anti-assignment provision.

Assignee Bound by Policy's Obligations

    We have previously discussed here, here, here, and here the validity of assigning liability policies to corporate successors without securing the insurer's consent as required by the policy. Coverage issues arise when the successor seeks benefits under the policy assigned to it by the predecessor.  Although the validity of the assignment was not at issue in Ohio Cas. Ins. Co. v. Granja Planalto, No. 08-405-P-H, 2009 U.S. Dist. LEXIS 19925 (D. Maine March 11, 2009), the magistrate recommended that the assignee be bound by the policy's obligations in receiving "any and all rights" under the policy.

    Avian Farms, the insured, was a primary breeder of poultry.  It was insured by Ohio Casualty under a commercial umbrella policy.  Granja Planalto purchased poultry from Avian, but the stock allegedly sustained an avian leukose virus.  Granja Planalto sued Avian in 2001 and eventually took an assignment of Avian's rights under the policy

    In 2003, Granja Planalto first provided Ohio Casualty with notice of its claims in the 2001 action.  Granja Planalto, as Avian's assignee, participated in settlement discussions with Avian's other insurers in 2003 and 2004 and eventually settled with the other insurers, but never notified Ohio Casualty.  Granja Planalto entered a settlement stipulation with Avian, agreeing to an entry of default.  An uncontested damage hearing was conducted, resulting in an award of $13,200,000.  Ohio Casualty was not informed of these developments, either.

    Ohio Casualty sued, seeking a judgment that Granja Planalto, as the assignee of Avian, breached conditions of the umbrella policy because it was obligated to inform Ohio Casualty before executing the settlement agreements and before the damages hearing.  The opinion does not discuss an anti-assignment provision, so we assume there was no requirement in the umbrella policy for the insurer's prior consent to an assignment. 

    Granja Planalto moved to dismiss, contending Avian assigned only the rights relating to Granja Planalto's claim against it, and not the insurance contract or any obligations Avian might have had under the contract.  According, Granja Planalto argued it could not have breach any conditions of the policy.  The magistrate disagreed.  The assignment language between the parties assigned to Granja Planalto "any and all rights" of Avian "under any contract of insurance relating in any way to the claims asserted by Planalto against Avian."  Under section 328 of the Restatement (Second) of Contracts, this was an assignment of all of an insured's rights, including obligations under the policy.  Therefore, the magistrate recommended the motion to dismiss be denied.

    

    

Outline on Transfer of Liabilty Policies When No-Assignment Clause

    The outline on transfer of liability policies to a successor created by Rina Carmel and me for our round table presentation last week at the ABA Section of Litigation, Insurance Coverage Litigation Committee in Tucson, is here.  Materials from the plenary and breakout sessions are available at the ABA Section of Litigation website.

Post-Henkel Cases Consistently Find No Assignment by Operation of Law

    Cases decided after the California Supreme Court's decision in Henkel Corp. v. Hartford Accident and Indemn. Co., 62 P.3d 69 (Cal. 2001) seem to universally continue the trend that an assignment of comprehensive liability policies to a successor is invalid where there is a no assignment clause and the insurer's consent was not secured.  I have found no post-Henkel case that follows the opposite view espoused by cases such as Northern Ins. Co. of New York v. Allied Mut. Ins. Co., 955 F.2d 1353 (9th Cir. 1992)(benefits of policy transfer by operation of law to successor corporation).

    In preparation for my upcoming presentation on "Transfer of Coverage Under the Predecessor's Liability Policies" at the ABA, Section of Litigation, Insurance Coverage Litigation Committee's annual insurance seminar [see brochure and agenda here], I recently read two more cases aligned with Henkel.  The court in Globecon Group, LLC v. Hartford Fire Ins. Co., 414 F.3d 165 (2d Cir. 2006) acknowledged the "majority rule": the "no-transfer" provision is valid for transfers that were made prior to the insured-against loss has occurred.  And in Pilkington N. Am, Inc. v. Travelers Cas. & Sur. Co., 861 N.E. 2d 121 (Ohio 2006), the court held that when the injury occurs before the liability is transferred to a successor, coverage does not arise by operation of law when the liability is assumed by contract.

    In addition to the Hawaii Supreme Court's decision in Del Monte Fresh Produce (Hawaii), Inc. v. Fireman's Fund Ins. Co., 117 Haw. 357, 183 P.3d 734(Haw. 2007) [see post here and here], cases following Henkel in one way or another are as follows: 

Century Indemn. Co. v. Aero-Motive Co., 318 F.Supp. 2d 530 (W.D. Mich. 2003)

Atlanta Gas Light Co. v. UGI Util., Inc., No. 3:03-CV-614-J-20MMH (M.D. Fla. March 22, 2005)

SR Int'l Bus. Ins. Co. v. Word Trade Ctr. Props., 375 F.Supp. 2d 238 (S.D.N.Y. 2005)(cited in Globecon Group)

Elliot C. v. Liberty Mut. Ins. Co., 434 F. Supp. 2d 483 (N.D. Ohio 2006)

Travelers Cas. and Sur Co. v. United States Filter Corp., 895 N.E. 2d 1172 (Ind. 2008) [see post here]

    Are there any more relevant, post-Henkel cases I have missed?

More on Insurance Policy Assignments (Del Monte Fresh v. Fireman's Fund)

     Robert gave his initial impressions of this new Hawaii Supreme Court (Del Monte Fresh Produce (Hawaii), Inc. v. Fireman’s Fund Ins. Co., et al.) case last week.  I add some thoughts and a summary below.  By way of disclaimer, my name appears in the decision as one of the attorneys representing Del Monte.

     It is not every day that a Hawaii appellate court issues decisions on insurance law, so this was a major event for insurance practitioners.  The decision is a victory for insurance companies and a blow to policy-holders, departing from the commonly held belief that Hawaii is one of the most policy-holder friendly jurisdictions in the country.

     At first blush, the reasoning in the opinion seems logical and makes sense.  Party A enters a contract with Party B; Party B assigns his rights to the contract to Party C, but never secures consent to the assignment from Party A.  Why should Party A be bound by contract to Party C when Party A never agreed to be so bound?

     On the other hand, Del Monte Corp., the named insured, sold all of its rights and liabilities to Del Monte Fresh, including the responsibility for remediating a Superfund site.  Under the assignment of the insurance policies, Del Monte Fresh did not increase the risk to the insurance companies, but absorbed the duty to clean the site.  Nevertheless, by merely changing the party responsible for the cleanup, the Del Monte opinion relieves the insurers from any coverage obligations.  Therefore, although the opinion seems logical, the result seems harsh.

     A summary follows:

     Del Monte Corporation was insured under polices issued by Fireman’s Fund and others prior to its sale of its Hawaii operations in 1989.  The policies contained no assignment clause requiring consent of the insurers to bind them to any assignment of the policies.   Through the sale, Del Monte Corp. transferred its assets and liabilities to Del Monte Fresh Produce (Hawaii), Inc.  Del Monte Fresh maintained that the transfer of all assets and liabilities assigned to it the right to claim and recover under Del Monte Corp.’s insurance policies in effect prior to the 1989 sale, notwithstanding the absence of an assignment provision in the policies.

     In 1994, the Del Monte pineapple plantation at Kunia, Hawaii was designated a Superfund site by the EPA.  An investigation revealed that a major spill of a soli fumigant had occurred in 1977, in addition to smaller spills over the years. Del Monte Fresh eventually entered an Administrative Consent Order with the EPA and agreed to undertake a remedial investigation and feasibility study.   Del Monte Fresh tendered the defense of the EPA claim to all liability insurers of the plantation since the 1940’s, but coverage was denied.

     Consequently, Del Monte Fresh sued its insurers in 1997.  In 2001, the trial court granted Del Monte Fresh’s cross-motion for summary judgment, holding that where a successor corporation seeks coverage and the coverage does not increase the risk to the insurer, by operation of law coverage extends to the claimant. Therefore, the insurers had a duty to defend and to indemnify Del Monte Fresh.

     The Hawaii Supreme Court reversed and entered summary judgment in favor of the insurers and against Del Monte Fresh.  The Court found a decision by the California Court of Appeal persuasive.  In General Accident Ins. Co. of America v. Superior Court, 64 Cal. Rptr. 2d 781 (Cal. Ct. App. 1997), the court held that a transfer of a policy to a successor corporation by operation of law was a violation of the basic principles of contract and was also bad public policy.  Similarly, under Hawaii law, every insurance policy is subject to the general rules of contract interpretation.  Therefore, the trial court erred in ruling that an assignment by operation of law is consistent with Hawaii’s rules governing construction of insurance policies.

     The policies had a no assignment clause that required the consent of the insurer to bind it to any assignment made by the insured.  Del Monte Corp. was the only named insured covered by the policies.  Del Monte Corp. had never obtained any consent from the insurers prior the 1989 assignment. Therefore, Del Monte Fresh was not an insured under the policies.

Insurance Policies Cannot Be Assigned Without Insurer Consent

The Hawaii Supreme Court just held yesterday that insurance policies with an “assignments require consent” clause cannot be assigned without the insurance company’s consent.  In Del Monte Fresh Produce (Hawaii), Inc. v. Fireman’s Fund Ins. Co. the Hawaii Supreme Court expressly held an assignment will not occur as a matter of law, but rather only by the policy’s term.

A concurrence, written by Justice Acoba and joined by Justice Duffy, would have reached the same result but concluded that “an explicit conveyance by contract is but one way to transfer insurance benefits.”  Thus, the concurrence would have held that an analysis of the insurance contract language itself is not always dispositive.

In my opinion (and I will attempt to expound upon this opinion later), the majority decision is deeply flawed.  As a pragmatic matter, it is virtually impossible to contact an insurance company several years after a policy is written.  Moreover, it is highly unlikely -- assuming you were to find a contact person -- that an insurance company would ever consent to an assignment.  Thus, this ruling effectively states that insurance policies can not be assigned. 

One has to wonder why the majority reached this conclusion.  An insurance company does not need to be insulated from pre-sale activities that it voluntarily and contractually agreed to cover.  On the other hand, this ruling will have a chilling effect on the sale or transfer of a company with any potential product or environmental liability regardless of the fact that the company had dutifully obtained insurance coverage for these risks.