Opinion ID: 577171
Heading Depth: 2
Heading Rank: 2

Heading: The policy benefits were transferred by operation of law.

Text: 23 California and Washington, like many other jurisdictions, apply a rule of product-line successor liability. Under this theory, a purchaser of substantially all assets of a firm assumes, with some limitations, the obligation for product liability claims arising from the selling firm's presale activities. Liability is transferred irrespective of any clauses to the contrary in the asset purchase agreement. See, e.g., Martin v. Abbott Laboratories, 102 Wash.2d 581, 689 P.2d 368, 384 (1984); Ray v. Alad Corp., 19 Cal.3d 22, 560 P.2d 3, 11, 136 Cal.Rptr. 574 (1977). 24 The district court found that the right to indemnity arising from California Cooler's policy transferred together with the potential liability. This right to indemnity followed the liability rather than the policy itself. As a result, even though the parties did not assign Allied's policy in the agreement, the right to indemnity under the policy transferred to Brown-Forman by operation of law. 25 The right to indemnity is, however, of little importance in this case. The Howards failed to obtain an award and there is no indemnity. The key question is whether the right to a defense also followed the liability. The district court held that it did, relying on Ocean Accident & Guar. Corp. v. Southwestern Bell Tel. Co., 100 F.2d 441 (8th Cir.), cert. denied, 306 U.S. 658, 59 S.Ct. 775, 83 L.Ed. 1056 (1939). 26 The court in Ocean Accident considered a dispute analogous to the one here. Southwestern Bell bought Kansas City Telephone. After the sale, three employees sued for injuries suffered before the sale. Kansas City's insurer, Ocean Accident, refused to pay, contending that it had not consented to an assignment of rights under the policy for presale injuries. (It had consented to an assignment of rights, but the assignment made clear that it applied prospectively, covering only post-sale injuries. Id. at 443.) The court nevertheless held that Ocean Accident had to reimburse Southwestern Bell for the loss, including attorneys' fees. Id. at 444-45. 27 We agree with the Ocean Accident court that the rationale for honoring no assignment clauses vanishes when liability arises from presale activity. Id. at 444. 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. See generally Larry D. Gaunt & Numan A. Williams, Commercial Liability Underwriting 277-309 (1978) (noting that the inherent hazard of a product is the most important factor in underwriting and discussing other factors to consider including quality control, the consumer market, claims information and warranties, but not the identity of the company). 28 The Ocean Accident court did not limit its holding to the right to indemnity. It held that Southwestern Bell was entitled to all the rights under the policy, including the right to a defense. Id. at 445. It rejected the contention that the personal nature of the relationship between Kansas City and Ocean Accident precluded a transfer of the right to a defense. The cooperation clause of the policy protected Ocean Accident from increased costs should Southwestern Bell prove a reluctant partner in the defense. Ocean Accident did not have to provide a defense if Southwestern Bell failed to satisfy its duty to aid in the defense. Hence, Southwestern Bell was entitled both to indemnity and a defense. Id. 29 Allied argues that to the extent that Ocean Accident allows a nonconsensual transfer of defense rights, it should not be followed. Allied contends that unlike potential indemnity liability, defense costs are not quantifiable until the suit is complete. It argues that the particular characteristics of the defendant affect the cost of the defense. Substituting a different defendant may alter substantially defense costs. We disagree. 30 The nature of the risk, rather than the particular characteristics of the defendant, will have the greater effect on defense costs. The extent and character of the defense will turn on the nature of the product itself and the attributes of the firm that manufactured the product. Aspects of the successor firm could affect the defense, but the shape of the defense will be determined largely by the characteristics of the risk originally insured. Admittedly, defense costs could balloon if the successor firm failed to cooperate in the defense. Inasmuch as the successor firm was not a party to the original policy, the risk of noncooperation arguably increases. Yet, the insurer is protected against this risk because it is freed of its defense obligation if the successor firm does not fulfill its duty to aid in the defense. See 14 George J. Couch et al., Couch on Insurance § 51:106 (2d ed. 1985). 31 In short, we find that the benefits of Allied's policy, including the right to a defense, transferred by operation of law to Brown-Forman when Brown-Forman purchased substantially all of California Cooler's assets. Of course, these benefits extend only to coverage for presale occurrences.III 32 The next question is whether Allied fulfilled its duty to provide a defense when it hired Betts, Patterson. Under Washington law, it did; under California law, it did not. California protects insureds by requiring insurers to pay the reasonable costs of independent counsel when a conflict of interest exists between the insured and insurer. Conflicts arise when, as here, the insurer reserves its rights on an issue over which defense counsel exerts some degree of control. San Diego Navy Fed. Credit Union v. Cumis Ins. Soc'y, 162 Cal.App.3d 358, 208 Cal.Rptr. 494 (1984); see also Cal.Civ.Code § 2860 (West Supp.1992) (codifying, with modifications, the Cumis rule). 33 In diversity actions, this court applies the forum state's choice of law rules. Klaxon Co. v. Stentor Elec. Mfg. Co., 313 U.S. 487, 496, 61 S.Ct. 1020, 1021, 85 L.Ed. 1477 (1941). Washington courts have adopted the Restatement's most significant relationship test for resolving choice of law issues in contract disputes. Potlach No. 1 Federal Credit Union v. Kennedy, 76 Wash.2d 806, 459 P.2d 32, 34 (1969). The Restatement explains that absent an express choice of law by the parties, the law of the state with the most significant relationship to the transaction and the parties governs. Restatement (second) Conflict of Laws § 188 (1971). The contacts courts should consider include: 34 (a) the place of contracting, 35 (b) the place of negotiation of the contract, 36 (c) the place of performance, 37 (d) the location of the subject matter of the contract, and 38 (e) the domicil[e], residence, nationality, place of incorporation and place of business of the parties. 39 Id. The Restatement directs courts to evaluate these contacts according to their relative importance with respect to each issue. Id. 40 These parties negotiated and contracted in California. The insured and the insurer's agent were located in California. But, the injury occurred in Washington, and the Howards brought suit there. According to Allied, California lacks any interest in this case because only Washington is interested in enforcing its ethical rules. 41 The underlying concern is not, however, the enforcement of ethical rules, but rather the protection of the insured when its interests conflict with those of its insurer. Cumis, and now section 2860, accomplishes this by requiring insurers to provide independent counsel when a conflict arises. California has a strong interest in protecting its insureds from the risks inherent in a defense provided under a reservation of rights. See Cumis, 162 Cal.App.3d 358, 208 Cal.Rptr. 494, 498 (1984). Applying California law does not harm Washington's interest. Attorneys practicing in Washington still must abide by local ethical rules and may be sanctioned for failing to do so. 42 Allied argues further that even if California law applies, the fulfillment of the obligation to provide a defense is a mere detail of performance, subject to the law of the place of performance. Restatement (Second) Conflict of Laws § 206 (1971). Whether something constitutes a detail of performance or a substantial right is more a matter of degree than kind. Typical examples of details of performance include the exact time and place of payment and the currency allowed for payment. Substantial rights, on the other hand, include the amount to be paid and whether payment may be withheld under a moratorium statute. Id. 43 Allied relies on Raymond v. Monsanto Co., 329 F.Supp. 247 (D.N.H.1971) and Gates Formed Fibre Products v. Plastic Vac, Inc., 687 F.Supp. 688 (D.Me.1988). Each held that the location of the insured risk rather than the place of contracting determined the law to be applied. But in each case, the state of the insured risk had an interest in having its own law applied. See 329 F.Supp. at 249; 687 F.Supp. at 691. Washington has no specific interest in having its more lenient standard applied here. California, on the other hand, has a strong interest in seeing its law applied to protect both an insured domiciled in California and the substantive rights of parties to a contract negotiated and executed there. 44 The obligation to provide a defense is one of the two essential promises in the Allied policy. Given the central role this obligation plays in the contract, we find that rules such as the Cumis rule, which play a defining role in determining the scope of this obligation, relate to a substantial right rather than a mere detail of performance. We agree with the district court that California law applies and that under California law Allied failed to meet its obligation to provide a defense.