California Supreme Court Finds Liability Policies Are Assignable in Some Circumstances
By Andrew B. Downs
In a sharp U-Turn, the California Supreme Court decided last week that rights under liability insurance policies for harm that has already happened are assignable without the insurer's consent. In California, pre-loss assignments without the insurer's consent are invalid under California Insurance Code § 520. In Fluor Corporation v. The Superior Court of Orange County, 2015 WL 4938295 (2015), the California Supreme Court concluded section 520's prohibition on assignment did not bar an assignment happening after the liability causing event, but before any suit was filed. The Court did leave intact the prohibition on an assignment that increases the scope of the risk the insurer undertook to assume.
Twelve years ago in Henkel Corporation v. Hartford Accident and Indemnity Co., 29 Cal.4th 934 (2003), the California Supreme Court had reached the opposite conclusion. Henkel, which did not discuss section 520, had permitted assignment without the liability insurer's consent in only two narrow circumstances: (1) after a judgment had been entered against the policyholder; or (2) if at the time of assignment the policyholder already held a cause of action against the insurer for breach of contract. In Fluor, the Supreme Court overruled Henkel.
Fluor involves asbestos claims based on exposure to occuring in the 1970s and early 1980s. In 2000, as part of a corporate restructuring, Fluor transferred all its pre-1980s business, assets and liabilities to a new entity to be renamed Fluor, while the original corporation was renamed and spun off. Among the assets transferred were the liability policies in force in the 1970s and early 1980s. At issue in this case was whether those assignments were valid. The Supreme Court's decision turned on its interpretation of the word "loss" in section 520. It held:
[T]he phrase "after a loss has happened" in section 520 should be interpreted as referring to a loss sustained by a third party that is covered by the insured's policy, and for which the insured may be liable. We conclude that the statutory phrase does not contemplate that there need have been a money judgment or approved settlement before such a claim concerning that loss may be assigned without the insurer's consent.
It's important to recognize what the Fluor decision does not do. It does not permit the assignment of a liability policy in a manner that would extend coverage to losses that never were within the scope of the policy to begin with. Thus, Company A cannot assign its policies to Company B and by doing so extend coverage to Company B for existing liabilities Company B had before the transaction. If Company B assumes Company A's liabilities, however, policies which covered those liabilities before they were assumed may be assigned. The Fluor decision also does not extend coverage for liabilities based upon events that have not yet occurred. Company A cannot assign an in force policy to Company B so as to provide coverage to Company B for a loss that does not occur until the day after the assignment. That type of assignment, which materially changes the risk the insurer assumed, continues to be barred by anti-assignment clauses.