No Assignment Assessments

In Northern Insurance, the underlying plaintiffs sought damages from the makers of California Cooler after their child was born suffering from fetal alcohol syndrome. They claimed that the consumption of California Coolers by the mother during her pregnancy caused the birth defects. However, in July 2004, two years after the birth of the underlying plaintiffs injured child and two years before the plaintiffs filed suit, Brown-Forman Corporation purchased California Cooler through an asset purchase agreement.

When Brown-Forman received the plaintiffs' complaint in November 2006, it secured counsel to provide a defense and then tendered the defense to Northern Insurance Company which had insured California Cooler during the last 12 days of the pregnancy. Northern acquiesced and agreed to assume the defense.

A few months later, in February 2007, Northern tendered the defense to a second insurer, Allied Mutual. Allied had provided coverage to California Cooler for the period commencing in approximately the fourth month of pregnancy and ending 12 days before birth. Brown-Forman also tendered the defense to Allied. Ultimately, Northern brought a contribution action against Allied to recover defense costs. Allied declined and argued that the policies it had issued to California Cooler contained a "no-assignment" clause and that the asset purchase agreement excluded the insurance policies from the purchased assets.

Despite the existence of an unambiguous "no-assignment" clause in a professional liability contract, courts often look past the contract to the underlying circumstances of the case to determine whether an assignment is proper. One court stated, "no assignment clause should not be applied ritualistically or mechanically so as to forfeit coverage as a result of a transfer of the policy without the insurer's consent pursuant to a statutory merger of the insured."

According to courts that adhere to this view, only an explicit "no-assignment through merger" clause would be sufficient to defeat an assignment by operation of law to a successor corporation. Even if the merger or agreement does not expressly assign insurance to the succeeding corporation, these courts will find that the policy benefits are transferred by operation of law.

The court agreed with this but nevertheless found that Allied's policy benefits were transferred by operation of law. In so holding, the court observed:

Insurers take account of the nature of the insured when issuing a policy. Risk characteristics of the insured determine whether the insurer will provide coverage, and at what rate. An assignment could alter drastically the insurer's exposure, depending on the nature of the new insured.

"No-assignment" clauses protect against any such unforeseen increase in risk. When the loss occurs before the transfer, however, the characteristics of the successor are of little importance: regardless of any transfer, the insurer still covers only the risk it evaluated when it wrote the policy.