Next week the California Supreme Court will hear argument in Fluor Corporation v. Superior Court, a case which raises (again) the question whether an insurer must provide coverage for third party claims arising from injuries or property damage incurred during the period covered by its insurance policy but after the insured transferred the business in which the loss arose, and where the insurance company had not consented to the assignment of the policyholder’s rights under the insurance contract (whether it had been asked to consent or not).
Not long ago, the Court decided essentially the same question, ruling that where a tortfeasor corporation had reorganized after it caused numerous injuries due to exposure to metallic chemicals, the reorganized company would not be covered for defense or indemnity of those cases since the corporate entity on whose watch these events occurred had not specifically assigned its liability insurance policies to the reorganized entity or obtained the insurers’ consent to such assignment. Henkel Corporation v. Hartford Accident & Indemnity Company (2003) 29 Cal. 4th 934. So, why should the Court hear another case on the same subject so soon, and why is this case of interest?
It turns out that there is an “overlooked statue,” a law passed by the California Legislature in 1872 and cited only once since then, now codified as section 520 of the Insurance Code. That section provides that “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 except as otherwise provided in Article 2 of Chapter 1 of Part 2 of Division 2 of this code.” The excluded part concerns life and disability insurance, not liability insurance. Thus the statute seems to state, if indirectly, that a transfer of the insured’s rights against the insurer is valid if it occurs after the loss - and presumably even if the named insured simply included the insurance contract in the bundle of legal rights transferred incident to a corporate reorganization, even if the insurance company had not been consulted and given its consent at the time of that transfer.
The statute was presented to the Court of Appeal in Fluor. That court rejected its application on the ground that liability insurance did not exist in 1872, and the Legislature could not have foreseen - and tried to address - situations that did not exist when a statute was enacted. That seems a questionable premise: no statutes enacted before the late 1980s affect electronic media because the computer age only began then?? The First Amendment does not apply to non-print media because none of them existed in 1789?? But by granting review, the Supreme Court has again opened the door to this question.
To this writer, there is a difference between an assignment of an insurance contract before a loss or after it, since an insurer would properly want to evaluate the insured’s history and record before underwriting coverage for prospective risks. Thus, if for instance a company known for its careful safety record wished to sell its insurance policy - along with its business or separately - to a party with a history of high risk taking, the insurer might not want to transfer its risk from seller to buyer without careful study or higher premiums. Thus the insurer’s right to consent to an assignment of its policy before loss is incurred is sound public policy. But after the loss is incurred, at least with respect to “occurrence” policies different considerations apply. The loss is a past event although its quantification and the determination of liability may still need to be resolved. Why would it matter to the insurer whether the original insured, A, or a successor, B, was the party who had to pay the loss, or when and under whose watch the loss was assigned and quantified? In that context, Henkel provides a free pass for the insurer to avoid its obligations. We shall see whether that free pass survives reexamination.