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California insurance cover transfer ruling may change the game

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California insurance cover transfer ruling may change the game

The California Supreme Court's decision that transferring insurance coverage in a merger or acquisition does not require insurer consent could have ramifications beyond the Golden State, according to legal observers.

The state high court's ruling Thursday in Fluor Corp. v. Superior Court of Orange County (Hartford Accident & Indemnity Co.) overturned its 2003 ruling in Henkel Corp. v. Hartford Accident & Indemnity Co., in which it came to the opposite conclusion.

The case involved a dispute between Fluor and Hartford arising from a 2000 corporate restructuring in which Fluor split itself into two companies. Hartford wrote general liability coverage for the original Fluor, but when sued in California Superior Court for coverage by the new Fluor, “Hartford asserted that assuming the original Fluor Corporation had attempted to assign its insurance coverage claims to (the new Fluor), the original corporation had failed to comply with the consent-to-assignment provision found in each policy,” according to the Supreme Court decision.

Fluor argued that Hartford's claims failed as a matter of law because California Insurance Code Section 520, by its terms, bars enforcement of the policies' consent-to assignment clauses “after a loss has happened,” and that the losses in question occurred before the restructuring and that these claims had been assigned to the new Fluor along with the original company's other assets.

The trial court disagreed with Fluor, holding that the Supreme Court had addressed the issue in the 2003 Henkel decision.

Fluor subsequently appealed to the state' 4th District Court of Appeal in Santa Ana which also held against Fluor, leading Fluor to appeal to the California Supreme Court.

But the state Supreme Court has now ruled that Section 520 of the state Insurance Code applies to third-party liability.

“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,” Chief Justice Tani Cantil-Sakauye wrote for the unanimous court. “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. Our contrary conclusion announced in Henkel Corp. v. Hartford Accident & Indemnity Co., is overruled to the extent it conflicts with this controlling statute and this opinion's analysis.”

The case was sent back to the Court of Appeal for reconsideration.

Effect on insurers could be 'enormous'

Attorneys who represent policyholders and insurers agreed that the decision is important, albeit for different reasons.

“It's really important, because Henkel is such an outlier,” said Traci Rea, a partner in the Pittsburgh office of Reed Smith L.L.P. “The vast majority of courts went the other way.”

Ms. Rea, who represents policyholders, said the effect of the decision won't be confined to California. “Even though California was an outlier, it was still unattractive for businesses wanting to do transactions with California entities,” she said.

“I think it's a very big deal,” said Julia Molander, a member in the San Francisco office of Cozen O'Connor who represents insurers.

“The Henkel decision, I believe, was not so much of an outlier,” she said. “The Fluor decision is broadly written. I think it will have an enormous impact on the insurance industry.”

She said it could affect reinsurers and reserving, because insurers previously had an expectation that a policy would not respond to a loss if the original insured was no longer in business or had sold a business to another owner, “because the court has said yes,” the policies can be assigned to successor corporations.

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