Insurance Law

California Supreme Court: Insureds May Freely Transfer Insurance Rights

In 2003, the California Supreme Court ruled, [subscribers can access an enhanced version of this opinion: lexis.com | Lexis Advance], that a company’s contractual transfer of insurance rights to a subsequent purchaser was invalid, as it violated the policy condition against assignments without insurer consent. (Henkel Corp. v. Harford Accident & Indemnity Co.) The decision was surprising to many, as Asset Purchase Agreements routinely assign insurance policies along with other assets and liabilities of the seller. Many of these companies faced enormous exposure for so-called “long-tail exposures”—claims that individuals had been exposed to an injurious substance over a substantial period of time. Such liabilities are generally covered by the historical insurance policies issued at the time of such exposure or injury, and these policies are transferred as part of the sale to provide coverage for this assumed liability. The Henkel decision frustrated the intent of these transactions. It left purchasers holding the bag on liabilities without the assets that were intended to pay for such liabilities, and it gave a windfall to insurers who had agreed to cover those liabilities.

Fortunately, the California Supreme Court was presented with an opportunity to re-visit this issue, and has now reversed Henkel. It held that insurance rights may be transferred pursuant to an Asset Purchase Agreement, even if the insurance policies have an anti-assignment clause. (Fluor v. Superior Court). In Fluor, [subscribers can access an enhanced version of this opinion: lexis.com | Lexis Advance], the insured argued that Henkel had not addressed California Insurance Code Section 520, [subscribers can access an enhanced version of this statute: lexis.com | Lexis Advance], which gives the insured the unfettered right to assign policy rights “after a loss has happened.” The Court rejected the insurer’s argument that a “loss” did not occur until liability was reduced to a sum certain by judgment. General liability policies are triggered when injury has occurred during the policy period and the Court concluded that Section 520 applies once there is a “loss sustained by a third party that is covered by the insured’s policy....” That is, the “loss has happened” as soon as the claimant is injured, not when he or she sues or obtains a judgment.

The Fluor decision is a welcome relief for the many companies who assumed liabilities years ago under Asset Purchase Agreements with the understanding and intent that the seller’s historical insurance would accompany such liabilities. These companies now have free access to the historical insurance they contracted to acquire, and those assets can be put to their intended use, defending and indemnifying the company from liability for decades-old injuries.

    By John Green, Partner, Farella Braun + Martel LLP

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