Assignment Anxiety: Implications of Fluor Corp. v. Superior Court on Insurance Policy Assignments
Tuesday, July 19, 2016
Those of us involved in title insurance are not often given reason to pause and consider the assignability of insurance policies. Indeed, unlike other forms of insurance, assignment of a title policy is fairly cut and dry. If the policy at issue is a mortgage policy, the answer is simple: the policy is freely assignable (in fact, this is the foundation of the national mortgage lending market).
If the policy is an owner’s policy, the opposite is true: the policy may not be assigned except in limited circumstances involving the death of the insured or through specific enumerated transfers. Otherwise, if the person making a claim is not the “insured” listed in the policy, that person is not insured under the plain language of the policy. However, the recent California Supreme Court case of Fluor Corp. v. Superior Court (2015) 61 Cal.4th 1175 gives us occasion to reflect on assignability of insurance policies, even though that case does not specifically address title insurance. Fluor overturned the Court’s prior ruling in Henkel Corp v. Hartford Accident & Indemnity Co. (2003) 20 Cal.4th 934 and has important implications for the insurance industry, in general.
Prior to 2003 California was in the majority of states that enforced “consent for assignment” clauses (which require an insurer’s consent before an insured may assign its right to make a claim) as generally effective, but only until an “injury” has occurred under the policy. After that point, the policy is assignable notwithstanding the fact that a claim may not yet have been made or the amount due under the policy may not be fixed. The reasoning for this approach is that prior to an injury, the insurer’s risk calculus may be adversely affected by assignment of the policy to a new entity (imagine a country club assigning its liability policy to a night club). That calculus is unaffected, however, after the compensable injury has occurred (at that point, the risk has occurred, and the insured’s identity does not affect the outcome of the claim).
This all changed in 2003, when the Supreme Court decided Henkel Corp v. Hartford Accident & Indemnity Co. (2003) 20 Cal.4th 934. Henkel maintained the prior rule that consent to assignment clauses are only effective until a “loss” has occurred. Henkel ruled however that a “loss” only occurs, for the purposes of overcoming a consent to assignment clause, after a claim has been “reduced to a sum of money due or to become due under the policy.” Any assignment made before a claim was reduced to a judgment or settlement, even assignments after the injury or damage occurred, would extinguish coverage under a consent to assignment clause. This redefinition of “loss” divorced California from the majority of states and limited the ability of corporate insureds to transfer assets and reorganize while being assured their insurance coverage would survive such reorganization.
Fluor v. Superior Court, however, brings California back in line with the majority. In Fluor, the Court held that California Insurance Code Section 520 (which provides that an agreement not to transfer an insured’s claim after a loss has happened is void if made prior to the loss) is controlling, and the Court thus overruled the holding of Henkel. Most important to Fluor’s decision was the fact that Henkel did not discuss or cite section 520. Given this oversight of the statute, Fluor decided to overrule Henkel, holding that consent to assignment clauses are ineffective to bar an insured’s assignment after an injury has occurred. While Henkel required that a “loss” only occurs when reduced to a monetary amount, Fluor found that no such restriction was necessary, or indeed permitted, under section 520. Rather, Fluor found that a “loss” occurs simply when an injury is sustained, notwithstanding any uncertainty regarding the amount of injury.
While the Fluor decision will have profound effects on the assignment of many insurance policies, the decision’s effect on title insurance will likely be less pronounced. Setting aside lender’s policies (which freely allow assignment), owner’s title policies have clear language that only allows assignment in specific circumstances. For example, one of the most common residential form policies is the 2010 Homeowner’s policy. That policy provides for assignment in Conditions 2(a) and (b). The policy provides in Condition 2(a) that “This Policy insures You forever, even after You no longer have Your Title. You cannot assign this Policy to anyone else.” (Emphasis added.) At the same time, Condition 2(b) provides that “This Policy also insures: (1) anyone who inherits Your Title because of Your death; (2) Your spouse who receives Your Title because of dissolution of Your marriage; (3) the trustee or successor trustee of a Trust or any Estate Planning Entity to whom Your transfer Your Title after the Policy Date; (4) the beneficiaries of Your Trust upon Your death; or (5) anyone who receives Your Title by a transfer effective on Your death as authorized by law.” (Emphasis added.) The policy language unambiguously prohibits assignment of the policy except in the limited circumstances prescribed in Condition 2(b). At the same time, this language does not appear to bring title policies within the auspices of Insurance Code section 520, as there is no “agreement not to assign a claim.” Rather, the owners’ policy merely defines the “insured” under the policy to include certain successors, which by implication means all other successors are not insured under the policy. This is not an “agreement not to assign a claim,” but rather an agreement that the definition of “insured” only includes certain specific successors of the insured. For this reason, we believe that title insurance policies are beyond the scope of Fluor. However, we believe that Fluor is significant and warrants reviewing, as zealous claimants (and their counsel) may rely on it to support their claims that they are somehow “assignees” of the title policy.
by Zi C. Lin, Garrett & Tully. Mr. Lin is a partner at the Pasadena office of Garrett & Tully. Mr. Lin’s practice focuses primarily on real estate litigation and business disputes. Mr. Lin provides handles all aspects of title insurance defense, with an emphasis in bad faith litigation.