Many insurance policies contain provisions barring assignment of the insured’s rights without the insurer’s consent, which have been interpreted to include “assignments” via merger or corporate reorganization. Last week, in Fluor Corp. v. Superior Court (Hartford Accid. & Indem. Co.), the California Supreme Court ruled that such restrictions do not apply after the event triggering coverage has occurred. Instead, the law “bars an insurer from refusing to honor an insured’s assignment of policy coverage regarding injuries that predate the assignment.”

The decision is likely to have particular resonance in the environmental and toxic tort area. Many such claims are notoriously “long-tail” – the injuries do not manifest, or clean-up responsibilities do not mature, until decades after the “occurrence” of exposure, with more time, and often more reason, for corporate reorganization. The California decision follows a recent New Jersey decision to the same effect, and both states are venues for many environmental and toxic tort claims.

The California Supreme Court held that this result was compelled by a little-known statute. “An agreement not to transfer the claim of the insured against the insurer after a loss has happened, is void if made before the loss.” (Ins. Code, § 520.) “Under that provision, after personal injury (or property damage) resulting in loss occurs within the time limits of the policy, an insurer is precluded from refusing to honor an insured’s assignment of the right to invoke defense or indemnification coverage regarding that loss. This result obtains even without consent by the insurer — and even though the dollar amount of the loss remains unknown or undetermined until established later by a judgment or approved settlement.”

The decision distinguished assignments of policy rights before and after the triggering event, which it somewhat imprecisely referred to as the difference between assigning a risk and assigning a loss. “The insurer has a right to know, and an interest in knowing, for whom he stands as insurer. He may be willing to insure one person and unwilling to insure another … But these considerations have no application to the assignee of [a claim for coverage under] the policy, for it makes no difference to the insurer to whom he pays the insurance in case of a loss.” A “postloss assignment generally does not ‘increase the risk to the insurer associated with an undesirable assignee.’” Further, the court reasoned, not allowing an insured to assign policy benefits after the coverage-triggering event would provide “an insurer … the windfall of not having to insure an occurrence that it received premiums for covering.”

Fluor is a corporation with many subsidiaries, all covered under CGL insurance policies with Hartford. Insurer Hartford assumed defense and indemnity of many claims, including many personal injury and wrongful death claims related to asbestos. After the relevant exposures, Fluor created a new entity (Fluor II) into which it put assets and operations, including those related to the asbestos activities. Hartford sued for declaratory relief that this was an invalid assignment under standard consent-to-assignment provision in the CGL policies. Fluor moved for summary adjudication on the issue and lost. Fluor thereupon filed a writ petition, which the Court of Appeal denied twice (once summarily and once after full briefing), before the Supreme Court granted review, reversed and remanded.

“[P]recluding an insurer, after a loss has occurred, from refusing to honor an insured’s assignment of the right to invoke policy coverage for such a loss,” said the court, has the beneficial effect of “facilitating the productive transformation of corporate entities, and thereby fostering economic activity.” Although the decision arose in the context of a big corporation’s complex reorganization, the principle should be no less applicable in reorganizations of smaller operations as well. After Fluor, an insurer may have a hard time arguing that its permission is necessary when an insured small LLC turns into an S corporation with the same participants, or vice versa.

The decision is contrary to, and expressly disapproves, the earlier California Supreme Court decision of Henkel Corp. v. Hartford Accident & Indemnity Co. (2003) 29 Cal.4th 934, 945 [“an assignment is subject to consent by the insurer unless ‘the benefit has been reduced to a claim for money due or to become due.’”]) The rationale for departing from precedent is that section 520 was neither briefed nor addressed in the earlier case. “We now recognize that [Henkel’s] determination, reached without consideration or analysis of section 520, conflicts with the rule prescribed by that statute.”