Pineapples, soil fumigants and assignment of insurance policies: these were among the facts the Hawaii Supreme Court faced in Del Monte Fresh Produce (Hawaii), Inc. v. Fireman’s Fund Ins. Co., et al., 2007 Haw. LEXIS 380 (Haw. Sup. Ct. Dec. 26, 2007). At issue was whether assigning a policy to a successor corporation was valid.

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[Editor’s Note: Please extend a warm welcome to Tred Eyerly, the first contributor to the LexisNexis Top 50 Blogs for Insurance: Guest Blogger Series. Tred comes to the Insurance Law Center all the way from Honolulu, Hawaii. He and his assistant Tracey use expressions like “aloha” and “surf’s up” in their emails, and his guest blog is on a case about pineapples. Tred and his colleague Robert D. Harris are attorneys at the Hawaii firm of Damon Key Leong Kupchak Hastert and co-author the popular blog Insurance Law Hawaii. Their blog offers a commentary on insurance coverage issues in Hawaii and was named by LexisNexis as one of the Top 50 Blogs for Insurance in 2008.]

Background

The predecessor, Del Monte Corporation, began its pineapple growing operations in Hawaii in the 1940's. Del Monte Corp. entered a stock and asset purchase agreement with Del Monte Fresh Produce (Hawaii), Inc. (“Del Monte Fresh”) in 1989. Further, a Bill of Sale and Assumption Agreement was executed in, 1989, whereby Del Monte Corp. transferred the assets and liabilities associated with its Hawaii operations to Del Monte Fresh, including its insurance policies. Del Monte, 2007 Haw. LEXIS, at *5.

In 1994, the Environmental Protection Agency listed the Del Monte plantation at Kunia as a Superfund site due to leaks of soil fumigants used to grow pineapples. The EPA’s action was primarily based on a spill of ethylene dibromide (“EDB”) in 1977, causing contamination of the soil at Kunia and the Kunia Camp Well. Id., 2007 Haw. LEXIS, at *6. The EPA’s investigation also discovered additional releases of fumigants that occurred on the plantation. Del Monte Fresh eventually entered an “Administrative Consent Order” with the EPA, agreeing to undertake the remedial investigation and feasibility study related to the spills. Del Monte Fresh then tendered the defense of the EPA claim to all liability insurers of Del Monte Corp. since the 1940's. Id., 2007 Haw. LEXIS, at *8.

Most insurers denied coverage. Their policies had been in effect during the spills, but had expired prior to the 1989 sale. Id., 2007 Haw. LEXIS, at *9. The insurers based denial of coverage on the “no assignment clause” in the policies, requiring the consent of each insurer to bind it to any assignment of the policy made by the insured. Id.

Circuit Court Finds Policies Assigned to Successor

Del Monte Fresh sued Del Monte Corp.’s insurers. Id., 2007 Haw. LEXIS, at *10. The parties cross-moved for summary judgment. Relying primarily on Henkel Corp. v. Hartford Accident and Indemnity Co., 106 Cal. Rptr. 2d 341 (Cal. Ct. App. 2001), rev’d, 62 P.3d 69 (Cal. 2003), the Circuit Court held that where a successor corporation seeks coverage which does not increase the carrier’s risk, then by operation of law, coverage under a policy should be extended to Del Monte Fresh. Del Monte, 2007 Haw. LEXIS, at *24. Because the release of contaminants took place while Del Monte Corp. was operating the plantation, the insurer’s risk was not increased by assignment of the policies.

Henkel Decision

Subsequent to the Circuit Court’s decision in Del Monte, the California Supreme Court reversed the Court of Appeal’s decision in Henkel. See Henkel Corp. v. Hartford Accident and Indemnity Co., 62 P.3d 69 (Cal. 2001). In Henkel, plaintiffs in the underlying case alleged injuries arising from exposure to metallic chemicals from 1959 to 1976, before Henkel Corp. succeeded to all rights and obligations of its predecessor. Henkel Corp. tendered to the defendant insurers, whose policies had insured the predecessor company. Henkel Corp. eventually settled with the underlying plaintiffs, but the predecessor’s insurers refused to contribute to the settlement.

Consequently, Henkel Corp. sued the predecessor’s insurers. The trial court held the insurers were not obligated to cover. The California Court of Appeal reversed, however, relying on Northern Ins. Co. of New York v. Allied Mut. Ins. Co., 955 F.2d 1353 (9th Cir. 1992).

On appeal to the California Supreme Court, Henkel Corp. argued when it bought the business from its predecessor, it incurred liability as a matter of law for injuries caused by the products manufactured and distributed by the predecessor. Henkel, 62 P.3d at 73. The Supreme Court disagreed. Henkel Corp.’s liability was not imposed involuntarily by law, but was assumed voluntarily by contract. Id. at 74. Moreover, any assignment of the policies by contract would be invalid because the policies contained clauses providing there would be no assignment without the insurer’s consent. Id. at 75.

Hawaii Supreme Court Follows Henkel

Since Henkel was decided, most of the court decisions that have considered issues of corporation succession to insurance rights have followed Henkel in one way or another. The Hawaii Supreme Court joined this trend in Del Monte, holding that insurance coverage was not assigned from Del Monte Corp. to Del Monte Fresh by operation of law. The Hawaii Supreme Court agreed with the California cases holding that insurance coverage did not transfer by operation of law merely because of successor liability for product liability torts. Instead, these cases determined that a transfer by operation of law was a violation of the basic principles of contract and was also bad public policy. Del Monte, 2007 Haw. LEXIS, at *32.

Second, the Hawaii Supreme Court determined there was no assignment by contract because Del Monte Corp. never obtained the consent of its insurers pursuant to the terms of the policies. Del Monte, 2007 Haw. LEXIS, at *36. Even though the Bill of Sale transferred Del Monte Corp.’s policies to Del Monte Fresh, id. at * 36-37, the policies contained “no assignment” clauses requiring the consent of the insurer to bind it to any assignment made by the named insured.

Conclusion

On the one hand, the Del Monte decision makes sense. Del Monte Fresh was never a party to the policies and was not a named insured. Although the policies required the insurers’ consent before an assignment of the policies took place, Del Monte Corp. never obtained such consent.

On the other hand, Del Monte Corp. sold to Del Monte Fresh all of its rights and liabilities related to the operations, including its insurance policies. The damage occurred while the named insured, Del Monte Corp., was responsible for the operations. Transfer of the policies by operation of law would not increase the risk to the insurance companies. Risk was evaluated and premiums were established based on Del Monte Corp.’s pineapple operations at Kunia. As a result of the Del Monte decision, the insurers received a windfall by not being bound by their policies.

Read more from Tred Eyerly on his blog Insurance Law Hawaii.