The California Supreme Court recently decided to break with its own precedent and declare that insurers can’t stop policyholders from assigning the benefits of their policies before a claim is settled.
Like many developments in the world of insurance law, the court’s decision in Fluor Corp. v. Superior Court of Orange County  is of great importance, while also being simultaneously impenetrable and dishearteningly boring. The first sign that it might have some less than salutary effects is that it has plaintiffs’ attorneys hollering “Eureka!”
To understand why, let’s consider the tale of three California miners (Joe, Steve and Jerry) and their evening at a bar in the state’s gold-filled hills.
Sitting at the bar, Joe turns to Jerry and says, “Hey, Jerry, I’ll buy you a drink if you sing ‘Workin’ on the Railroad’ to the entire bar.”
Jerry narrows his eyes, steels himself and begins to croon: “I’ve been workin’ on the railroad/all my live long days/I’ve been workin’ on the railroad/just to pass the time away…”
Before Jerry can finish, the bartender slams his fist on the table and shouts: “Quiet down or get out!” A startled Jerry complies.
At this point, Steve turns to Jerry with a smile and reminds him: “Hey, Jerry, you owe me a drink for that gold pan I left at your claim last week.”
Jerry shrugs and tells him: “Sure, Steve, Joe will get it for you. He owes me a drink.”
Joe observes that Jerry did not complete his rendition of “Workin’ on the Railroad” and is, therefore, not entitled to the promised drink. But Steve, incensed by Joe’s unwillingness to just be cool, turns to him and punches him in the face.
Steve’s frontier justice, in the absence of a civil-justice system, makes sense in light of a typical assignment of benefits scenario, in which one party to an agreement designates a third party as the new recipient of the bargain’s benefit. Such a scenario is foundational in the law of contracts. Economists and lawyers agree, when people are free to make voluntary bargains, all parties are better off. The law wants Steve to get a beer from Joe – provided that Jerry in entitled to a beer in the first place.
That wrinkle, whether a benefit exists to be assigned, is particularly relevant in the context of insurance contracts. Whether there is a benefit to be included in the bargain is subject to a claim earning approval and triggering coverage. When an assignment occurs before a claim is settled, there is always a risk that the claim may be denied, a risk that is resolved by litigation between the insurer and the assignee.
That kind of litigation already has come to clog the courts in Florida. Rates have jumped because Florida courts consistently have prevented insurers from limiting the circumstances under which policy benefits may be assigned. Non-catastrophe water claims have been particularly problematic, because vendors require insureds to transfer their benefits as a condition of undertaking repairs.
Once transferred, vendors are tempted to charge excessive rates. Insurers that balk at paying what’s charged, much less denying the claim outright, are immediately sued by enterprising trial attorneys for bad faith and contractual breaches. Between 2013 and 2014, Florida insurers were subject to 92,000 such suits.
The Legislature in Tallahassee made an attempt to address the issue earlier this year, but the bill  failed even to receive a floor vote. Entrenched interests realize the significance of the regular windfall they enjoy and they’ve fought like hell to protect it.
Before something similar comes to pass in the Golden State, and before its costly impact begins to be felt by insureds in the form of higher premiums, the California Legislature should contemplate fixing the Fluor decision. Short of overturning the decision outright – the best option – policymakers could place a limit on the size of the benefit that may be assigned or limit the sorts of parties who may receive an assignment. Either option would foster the predictability necessary to restrain a 49er-esque gold rush.
- “Fluor Corp. v. Superior Court of Orange County”: https://scholar.google.com/scholar_case?case=18136361056945998262&hl=en&as_sdt=6&as_vis=1&oi=scholarr
- “bill”: http://www.flsenate.gov/Session/Bill/2015/669/?Tab=Analyses