California Supreme Court Reverses Self on Assigned Insurance Rights

September 2, 2015
Paul K. Schrieffer
P. K. SCHRIEFFER LLP

Dear Clients and Colleagues,

In Fluor Corporation v. Superior Court, Orange County (August 20, 2015), the California Supreme Court reversed itself on the subject of whether an insured may assign its rights under a third party liability policy without the consent of the insurance company. The Supreme Court overruled its holding in Henkel Corp. v. Hartford (2003) 29 Cal. 4th 934 on the basis that the Court in Henkel had not considered an obscure statute in the California Insurance Code, section 520, which previously had been seen by some commentators and earlier decisions as limited to first party coverage.

The Supreme Court also recognized that courts around the nation rejected the holding in Henkel and that comity with other courts was a consideration, though not a primary consideration, in deciding to overrule Henkel.

In Fluor, Fluor Corp. originally purchased tail coverage to protect against continued asbestos litigation. It later spun off parts of its company to other companies, which were then sold to still other companies. The Hartford and other insurance companies as amici argued for the continuation of the Henkel holding, which was based upon common law contract principles. The Supreme Court rejected the arguments, holding the statute was properly seen as applying to both third and first party coverage, and that amendments to the statute after the rise of liability coverage (which did not exist at the time the statute was originally passed in 1872) showed an intent by the legislature that the statute was meant to be broad enough to include more than first party coverage.

California law in this area will now be consistent with the common and statutory law in many other States. We will now see more assignment of rights from insureds under third party insurance policies. However, we see no reason to believe the Supreme Court will reverse the prohibition in California against assigning claims for punitive damages and emotional distress in an insurance bad faith action. The holding in this case is likely interpreted as more limited to situations where insureds sell parts of their companies and subsequent owners seek insurance coverage under third party liability policies which are based upon an “occurrence” which may have happened before the portion of the company was sold or merged.