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Mergers & Acquisitions: California Supreme Court Issues Corporate Friendly Insurance Decision

When companies engage in growth through a merger or acquisition, the intent is to build a stronger entity that will reap bigger benefits for shareholders. There are numerous complex considerations that a company’s leaders face when making such a decision, including whether there are any outstanding litigation issues that they need to be aware of regarding the valuation of the company that is being acquired or brought on board as an equal. The California Supreme Court recently issued a decision that may help with this type of decision, at least as it depends on insurance coverage

Fluor Corporation v. Superior Court

In 2003, the California Supreme Court decided that an anti-assignment clause in a corporate insurance policy can act as a bar to assignment of the policy in the event of a transfer of ownership of the company. The Fluor decision changes this by overturning the court’s earlier decision.  In this case, the court found that transfer can occur even after a loss, such as a lawsuit or potential liability for one. For the business world, this case may have long-lasting positive effects. More than merely bringing California’s law in line with the majority of other states, this case helps pave the way for businesses to continue to grow rather than stagnate in the face of potential adverse loss.

The court based its decision on its interpretation of California’s Insurance Code Section 520.  This section is not long, and states that “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.” According to the court, its previous holding that a consent-to-assignment clause could prevent a successor company from filing a claim if the insurer does not consent was misguided based on the law, as it prevented such an assignment even if the coverage-triggering event had already occurred.

As many businesses likely have been pointing out since the previous decision, the court’s previous finding allowed insurers to decline consent after the triggering event occurred, which effectively tied the hands of a company’s leaders to the growth options provided by mergers and acquisitions. The latest decision by the court corrects this imbalance of power previously given to insurance companies, as in reality, how many insurers would grant consent that would open themselves to more liability from a successor company? The question was a rhetorical one that the court has now answered by this latest decision.

Have questions?

The effects of the Fluor decision are likely to have a positive impact for business as usual in California. The complex field of mergers and acquisitions has become a little more friendly to businesses that are seeking to grow and expand. If you have any questions about this decision or are seeking representation to help your company grow, call the law office of Garcia & Gurney.  Our attorneys have years of knowledge and experience helping California businesses continue to move forward.

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