Policyholder Pulse
California’s Supreme Court has closed a loophole of its own creation. The 12-year-old Henkel decision—which permitted insurers to avoid liability for losses when the insured subsequently assigned its policy rights to another entity—has been overruled.
Virtually all insurance policies contain language prohibiting assignment of the policy without the insurer’s prior written consent. The California Supreme Court has long recognized that rights to property and other first party insurance coverage may be assigned after a loss. The rationale is straightforward—the insurance company, having accepted a premium to assume a risk, should not be allowed to avoid coverage for a loss within that risk just because the right to recover insurance proceeds was transferred. While pre-loss policy transfers could increase risk for the insurer, the insurer bears no added risk when a claim is assigned after a loss has occurred. In fact, California’s Insurance Code, in section 520, codifies that it’s against public policy for insurers to try to obtain windfalls by avoiding their obligations to pay for existing covered losses.
In the context of liability or “third party” insurance such as CGL policies, however, the insurance industry had obtained just such a windfall in the California Supreme Court’s 2003 decision in Henkel Corp. v. Hartford Accident & Indem. Co. In Henkel, the Court held the “consent-to-assignment” clause prohibited transfers of liability coverage under most circumstances.
More than a decade later, the California Supreme Court has now reversed its heavily criticized Henkel opinion in Fluor Corp. v. Superior Court. In Fluor, Hartford sought to avoid coverage for long-tail asbestos exposure claims. The policyholder, Fluor, had gone through a reverse spinoff in which its existing long-term operations were placed into a newly formed corporate entity. Although the new entity continued Fluor’s historic business and retained the associated liabilities, Hartford sought to score a windfall by arguing that the transaction freed the insurer of its obligation to defend and indemnify Fluor for what were otherwise covered claims.
The Supreme Court reviewed in detail the legislative history of California Insurance Code section 520, the predecessor of which was written in the 19th century before the advent of liability insurance. Relying on legislative history, insurance treatises from the last 100 years and numerous court decisions from other states, the Court concluded that its pro-insurer rule in Henkel could not withstand scrutiny under this controlling statute. The decision finally brings California into line with the large majority of states, and is especially relevant to corporate policyholders who have been through or face corporate spinoffs and other mergers and acquisition transactions, which often involve assigning insurance policies to new or remaining entities. While the general prohibition on assignment of policies for future injuries remains intact, Fluor allows companies to assign insurance rights for past injuries, such as asbestos exposure and other personal injuries that may take place over a period of years.