This morning the California Supreme Court announced the thoroughly sensible ruling that a corporation may transfer its rights under liability insurance policies without obtaining the consent of the insurance company.  Fluor Corporation v. Superior Court, Case No. S205889.

In Fluor, the court held that a liability insurer could not invoke a policy’s anti-assignment clause to deny coverage as a result of the policyholder’s corporate reorganization.  The old liability policies issued to Fluor were defending a series of asbestos injury cases at the time Fluor reorganized and formed Fluor 2 and assigned the liability policies to Fluor-2.  Hartford argued that its insured did not have its consent and thus Hartford could refuse coverage to the assignee Fluor-2.  Initially the Court of Appeal relying on Henkel Corp. v. Hartford Accid. & Indem. Co. (2009) 29 Cal.4th 934, agreed with Hartford.  The Supreme court reversed the Court of Appeal and found in favor of the assignee of the policyholder.

In reaching that conclusion, the court overturned its own 12-year-old precedent in Henkel, which held the assignee had no right to coverage where the policyholder transferred the liability policies without the insurer’s consent even where there was already a loss on the policy.  Few other jurisdictions interpreted liability policies as Henkel did.  Most recognized that assignment of policies after a loss occurred does not invalidate coverage and would only allow the insurer a free pass—collecting premiums without providing the coverage it agreed to provide.  By overturning the Henkel precedent, the Supreme Court puts California firmly in line with the law in the overwhelming majority of jurisdictions.

This is a very important and well-reasoned decision which provides key guidelines for statutory construction.  The Court carefully reviewed the law preceding and post-dating Ins. Code Section 520 (which voids no assignment clauses after loss has occurred) and succinctly determined that the statute applies to liability policies.  The Court also found a loss “occurs” when the injury causing event occurs.

For corporate policyholders going through mergers or other corporate reorganizations, the Fluordecision means that their rights to insurance coverage for product liability claims, construction defects, asbestos claims and other losses that have already occurred will be transferred along with the corporation’s other corporate assets to the successor corporation.  Such transfers do not in any way change the risk insurers agreed to insure and makes sense under law and policy.  These issues are discussed more fully in a recent article by our eminent partner, Kurt Melchior.

Policyholders must nonetheless be aware of anti-assignment clauses in policies that are currently in effect when a merger or transaction occurs.  For example, if Annie’s Cupcake Shop decides to acquire Acme Explosives, Inc., it’s easy to see that the nature and extent of the business’ liability risk has changed.  An insurer reasonably should have a chance to reevaluate premiums and other terms of Annie’s existing liability policy.  That is the core and proper concern of the anti-assignment clause.  However, if there are pending losses in existence at the time of the acquisition, the acquired company may assign its liability policies as the no assignment clauses are void.  The liability policies may indeed be assigned like any other asset of the acquired company.  Policyholders undertaking significant corporate transactions are well-advised to consult with coverage counsel and their insurance professionals that coverage issues are handled correctly.