In a unanimous decision that will have a serious impact on long-tail exposures, the California Supreme Court in Fluor Corp. v. Superior Court (Hartford Acc. & Indem.) has determined that policyholders may transfer liability policies to new entities formed after the policies were purchased. In so holding, the court reversed the Court of Appeal decision and overruled its prior decision in Henkel v. Hartford Accident & Indemnity, 29 Cal.4th 934 (2003). The court held that an obscure statute enacted in 1872 trumps the anti-assignment language in the policies. The court concluded that “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.”

The statute, California Insurance Code section 520, states: “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.” The court determined that “after the loss has happened” refers to “a loss sustained by a third party that is covered by the insured’s policy, and for which the insured may be liable.” The court further explained:  “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.”   

In reaching this decision, the court reviewed 150 years of statutory history and case law from multiple jurisdictions. The court determined that the much-maligned Henkel decision did not reflect the majority view. The minority view, contained in Henkel and decisions such as Travelers Casualty & Surety Co. v. United States Filter Corp., 895 N.E.2d 1172, 1179, 1180 (Ind. 2008) and Holloway v. Republic Indemnity Company of America, 147 P.3d 329 (Or. 2006) are “animated by the view that ‘freedom of contract’ requires consent-to-assignment clauses be rigidly enforced.” The court concluded that the minority view does not reflect a more modern business model, and that only an interpretation allowing assignment “protects the ability of an insured, in the course of transferring assets and liabilities to another business entity in connection with a corporate sale or reorganization, to assign rights to claim defense and indemnification coverage provided by prior and existing insurance policies concerning the business’s previous conduct.” 

We anticipate that the California Supreme Court’s reasoning may be adopted by other jurisdictions, and that it could have an impact on reserving, allocation and reinsurance issues.