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Corporate Spin-Off Does Not Transfer Insurance Coverage
In Fluor Corp. v. Superior Court (2012), the court held that an insurance policy’s clause requiring the insurer’s consent to an assignment of rights under the policy was valid. Fluor Corporation (here called Fluor-1) was formed in 1924 Fluor-2 was formed in the fall of 2000 to take in part in a corporate restructuring referred to by the court as a “reverse spinoff.”
Fluor-1 transferred its engineering, procurement, construction and project management services to Fluor-2. Fluor-1 retained various coal mining and energy operations and renamed itself as “Massey Energy Company.” Fluor-1 and Fluor-2 became independent public companies, with neither having an ownership interest in the other.
Between 1971 and 1986, Hartford Accident & Indemnity Co. (Hartford) provided comprehensive liability insurance coverage to Fluor-1 through eleven different policies. These policies were invoked when various Fluor entities were sued for injuries arising out of asbestos-containing materials at sites where Fluor-1 allegedly did business. Since 1985, Hartford had participated in the defense of these asbestos lawsuits. Between 2001 and 2008, Hartford paid defense and indemnity costs in connection with its defense of the asbestos lawsuits, including a defense of both Fluor-1 and Fluor-2.
In 2009, in a coverage dispute, Hartford alleged that only Fluor-1 was its named insured on the policies in question and the policies each contained consent-to-assignment provisions that prohibited any assignment of any interest under the policy without Hartford’s written consent. Hartford further alleged that neither Fluor-1 nor Fluor-2 ever sought or obtained Hartford’s consent to the purported assignment of insurance rights. Hartford sought a declaration that it was neither obliged to defend nor to indemnify Fluor-2 for the asbestos claims, and it asked to be reimbursed for defense costs and indemnity payments already made on Fluor-2’s behalf.
Fluor-2 had an uphill battle ahead of it since there was adverse California Supreme Court precedent right on point. In Henkel Corp. v. Hartford Accident & Indemnity Co. (2003) 29 Cal.4th 934, the supreme court had ruled, in a case with an identical consent-to-assignment clause and a similar fact pattern, that consent-to-assignment clauses were valid.
Like Fluor-2, the plaintiff in Henkel had argued it was entitled to coverage because the liability insurance policies were written on an “occurrence” basis, thereby fixing the insurer’s coverage obligations when the tort claimants were injured as a result of their exposure. But because the assigning corporation still existed, the supreme court recognized the potential for disputes over the existence and scope of the assignment. If both assignor and assignee were to claim the right to defense, the insurer might effectively be forced to undertake the burden of defending both. In view of the potential for such increased burdens, the supreme court vali- dated an insurer’s contractual right to accept or reject an assignment, holding that consent-to-assignment clauses are generally valid and enforceable until the time that claims are “reduced to a sum of money due or to become due under the policy.”
Flour-2, faced with this adverse precedent, contended that Henkel was not precedent because it was a “case decided in ignorance of statute…” and the lower courts were bound to follow the statute and not the supreme court. The statute Flour-2 pointed to was originally enacted in 1872 (since re- codified as Insurance Code § 520), which provides: “An agreement not to transfer the claim of the insured against the insurer after a loss has happened is void if made before the loss….”
The court, however, found that the statute could have no bearing as a “controlling” legislative expression on the assignability of liability insurance for the simple reason that liability insurance did not exist in 1872.
Accordingly, the court of appeal denied a petition for writ of mandate and returned the case to the trial court for further proceedings, including a determination whether Fluor-1 assigned the Hartford policies to Fluor-2 and whether Fluor-2 legally retained an interest in the Hartford policies as a “mere continuation” of Fluor-1 or otherwise.
Comment
When transferring assets to or from a corporation or other entity, it is often important to think about the applicable insurance. An existing policy typically will not cover a new owner for either liability or casualty.
Parties who own real property often transfer title to a limited liability company (an LLC) as a contribution to the LLC, or an LLC may transfer title to the members as a distribution (so they can own as tenants-in-common and then make a Starker exchange). Under the CLTA policy of title insurance, the term “insured” includes those who succeed to the interest of the named insured by operation of law as distinguished from purchase. The insurer can argue that a contribution to capital or a distribution to members is not a transfer by operation of law. Thus, the transferee might not be treated as an insured even though the transferor purchased title insurance and the transferee is an affiliate of the transferor. In that case, an endorsement to the policy may be desirable.