In the wake of the devastating California wildfires, a noteworthy trend is unfolding that merits attention. In essence, this trend revolves around the treatment of insurance claims as a form of currency—an intricate gamble that varies significantly based on one’s position in the process.
Consider, for instance, the elderly homeowner who finds themselves racing against time to rebuild their cherished residence, or the individual who lacks the expertise, patience or time to navigate the complexities of first-party insurance negotiations. Then there are hedge funds strategically acquiring subrogation rights from insurers at a fraction of their potential worth. In each of these scenarios, the wildfire claims emerging from Southern California represent an elusive value that savvy investors are eager to capitalize on.
As Southern California strives to recover from the Pacific Palisades and Altadena fires, many insured homeowners are seeking to assign their insurance benefits to contractors, restoration companies, and public adjusters to expedite the rebuilding process. However, insurers are increasingly contesting these assignments, citing anti-assignment clauses embedded in their policies. While California Insurance Code §520 typically invalidates such provisions after a loss has occurred, the protections it offers are not absolute. A nuanced understanding of the exceptions to §520 is crucial for policyholders, insurers, and the legal professionals guiding them through this landscape.
This article delves into the complexities surrounding the assignment of benefits in wildfire claims, explores the exceptions to California Insurance Code Section 520, and examines two distinct emerging trends where insurance claims are treated as currency. These trends are likely to ignite prolonged litigation and escalate associated costs, making it imperative for all stakeholders to stay informed and prepared.
The General Rule: Insurance Code Section 520
California Insurance Code §520 reflects a fundamental principle of insurance law in California: once a covered loss occurs, the right to collect under an insurance policy becomes a "chose in action"- a legally transferable right to payment.
The statute states, "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." In practical terms, this means an insured may assign their right to receive policy benefits after a triggering event (such as a wildfire), even if the policy includes an anti-assignment clause. Insurers cannot deny benefits solely because the insured has assigned the claim after the loss.
The boundaries of this rule have evolved through a series of pivotal court decisions. In Henkel Corp. v. Hartford Accident & Indemnity Co., 29 Cal.4th 934 (2003), the California Supreme Court held that an insurer could refuse to honor a post-loss assignment of rights under certain general liability policies. The court reasoned that the insurer's consent was still necessary because the assignment involved coverage for future and uncertain liabilities. This interpretation significantly curtailed §520's reach and created confusion about when post-loss assignments would be enforceable.
That interpretation was later overruled in Fluor Corp. v. Superior Court, 61 Cal.4th 1175 (2015), in which the California Supreme Court reconsidered the Henkel decision in light of the statutory language. Fluor clarified that once a loss has occurred, even if payment has not yet been made, the insured's right to collect benefits can be assigned, and the insurer must honor the assignment. The court emphasized that §520 does not require the insurer's consent for a valid post-loss assignment and reaffirmed that public policy favors the free transfer of insurance proceeds owed after a covered event.
This marked a return to the broader view of §520 and aligned California with the majority of states that enforce post-loss assignments even in the face of contractual prohibitions.
The Exceptions: Statutory and Regulatory Carve Outs
Despite the broad reach of Section 520, not all policies or assignments are subject to this rule, several exceptions, rooted in both statutory law and administrative regulation- limit the general principle and uphold anti-assignment clauses under specific conditions.
1. Assignments Made Before the Loss
One clear boundary of §520 is temporal. It only applies to post-loss assignments. If an insured attempts to assign policy rights before a loss occurs, §520 provides no protection. In such cases, insurers may rely on anti-assignment clauses to void the transfer.
2. Mortgage Guaranty Insurance
Mortgage guaranty insurance is one of the clearest exceptions. Under the California Code of Regulations, Title 10, §2510.9, insurers are required to include specific language about the assignment and transfer of interests:
"No assignment of any mortgage insurance policy or interest therein shall be valid unless made with the prior written consent of the insurer and in accordance with the insurer's filed plan of operations."
This regulatory override of §520 is based on the unique underwriting risks of mortgage guaranty insurance, which ties coverage to the creditworthiness of a specific borrower, The Commissioner of Insurance has authorized stricter controls to protect the financial solvency of these insurers, making anti-assignment clauses enforceable even after a loss.
3. Personal Injury Related Coverage: Medical Payments (MedPay) and Uninsured Motorist (UM) Coverage
While §520 generally applies to property and casualty policies, California courts have acknowledged that certain benefits tied to personal injury or individual status may resist assignment.
In Progressive West Ins. Co. v. Superior Court, (2005) 135 Cal.App.4th 263, the Court of Appeal upheld restrictions on the assignment of UM benefits, noting that such coverage is "personal to the insured" and dependent on the contractual relationship with the insurer. This approach reflects a judicial inclination to interpret some benefits, especially those arising from bodily injury as inherently non-transferable absent insurer consent.
Similarly, Medical Benefits (MedPay) benefits are often considered non-assignable because they are triggered by medical treatment received by a specific individual under terms defined by the policy. Courts have recognized that allowing assignments could expose insurers to risks and obligations they did not underwrite. As a result, insurers may enforce anti-assignment clauses for MedPay and UM coverage, even after a triggering event has occurred.
4. California Uniform Commercial Code (UCC) and Contractual Rights
In a commercial context, assignments of rights under insurance policies may also intersect with provisions of the California Uniform Commercial Code. UCC §9406 addresses the rights of an assignee of a secured interest in a policy and clarifies when assignments must be honored, depending on whether the assignment materially changes the insurer's duties or increases risk. While not directly an exception to section 520, the UCC can provide a statutory framework that either reinforces or limits the enforceability of assignments in commercial insurance disputes.
For instance, in Essex Ins. Co. v. Five Star Dye House, Inc. (2006) 38 Cal.4th 1252, the California Supreme Court addressed how a post-loss assignment of rights under a commercial policy did not require insurer consent under §520 but noted that commercial assignment rights may be influenced by broader contract law principles, particularly where the assignment increases the insurer's risk or materially alters its obligations.
Commercial assignments may also be governed by secured transaction law if the policyholder pledges insurance proceeds as collateral. In these cases, the UCC provides a statutory framework that supplements and at times narrows, the protection afforded by §520. (Cal. Com. Code §9406(h))
The Wildfire Context: Heightened Stakes and Increased Litigation
In the wake of catastrophic wildfires like those in Pacific Palisades and Altadena, the disputes over the assignment of insurance proceeds have become more pronounced. Homeowners often lack the liquidity to fund repairs up front, leading to increased use of assignments of benefits (AOBs) to restoration contractors or public adjusters. These AOBs are sometimes executed without insurer consent, triggering disputes over enforceability.
Insurers are responding with heightened scrutiny, invoking anti-assignment provisions and contesting payments to third parties. While §520 is often cited in favor of insureds, the exceptions discussed above offer insurers legitimate legal grounds for denial, especially where policies are governed by regulatory frameworks or involve coverage benefits.
This issue presents the potential for litigation between insureds, insurers, and assignees, particularly where assignments are executed without notice to the insurer or in cases where the underlying policy falls into an exception.
Emerging Trend: Vacant Lots with Conditioned Insurance Assignments
An increasing number of buyers in high-risk wildfire zones are structuring vacant lot purchases to include the assignment of any existing or future insurance benefits related to recent fires. This may include ongoing or disputed claims. Hartford Cas. Ins. Co. v. Fireman's Fund Ins. Co., (N.D. Calif., Sept. 3, 2015). In these transactions, the buyer and seller expressly condition the sale on the assignment of any insurance proceeds tied to the property. This is within the scope of post-loss assignments that §520 protects. Since the assignment occurs after the loss and the completion of a successful sale, the buyer essentially "steps into the shoes" of the prior homeowner and gains the same contractual rights. This scenario has quickly become a more realistic option for many who lost homes especially the elderly, those financially unable to rebuild, and others who may not have the time or resources to spend rebuilding a home.
Anti-assignment clauses at issue in these situations remain void under both the statutory framework and case law detailed above. By structuring the sale with a post-loss assignment, buyers also gain the ability to pursue denied or unresolved claims. Id. Once transferred, they may negotiate claim values, initiate third party demands, or sue for bad faith breach- just as the original homeowner could have done.
This trend represents a legally sound and strategic path for investors aiming to recover value from wildfire-impacted properties, while enabling struggling homeowners to divest burned-out lots.
Emerging Trend: Hedge Funds Buying Subrogation Assignments
In addition to prospective buyers seeking assignments to insurance assets, Hedge Funds are also chasing the assignments related to wildfire claims by purchasing subrogation claims from insurers linked to the catastrophic wildfires in Southern California. This practice, while legal, has raised significant concerns among state officials regarding the ethical implications of profiting from disasters that have caused immense loss of life and property.
Subrogation claims arise when an insurance company seeks to recover costs it has incurred by paying out claims to policyholders. If it is determined that a utility company, such as Southern California Edison, is liable for causing a wildfire, insurers can file claims against the utility to recoup their losses. The Los Angeles Times reported that hedge funds are now offering to buy these claims from insurers, often at a steep discount depending on the fire, allowing insurers to recover some funds quickly instead of waiting for lengthy legal proceedings. Interestingly, reports for purchase of the subrogation rights to the Eaton fire claims are trading at a higher value than claims against the public utility in the Palisades fire suggesting there is some sophisticated underwriting behind the valuation.
The appeal for hedge funds lies in the potential for substantial profits. By acquiring these claims, they gamble on the outcome of liability determinations, hoping that if the utility is found liable, the settlements they receive will far exceed their initial investment. For instance, if claims are bought at 47 cents on the dollar, the profits could be significant if the payouts from the utility exceed this buy-in price.
This financial maneuvering has alarmed state officials, especially considering that over $17 billion has already been paid out in insurance claims from the recent wildfires. The California wildfire fund, which is designed to assist in covering such damages, currently holds about $21 billion. State leaders fear that the speculative nature of these investments could lead to inflated settlements, ultimately straining the fund and impacting its ability to serve its intended purpose.
The practice of trading subrogation claims highlights a growing trend where insurance claims are treated as a form of currency, especially in the aftermath of disasters. The ramifications of this trend extend beyond the immediate financial implications. It raises ethical questions about the role of investors in situations of tragedy and loss. Instead of focusing solely on recovery and assistance, the presence of profit-driven investors introduces a layer of complexity that can potentially compromise the integrity of the recovery process for affected individuals and communities. Subrogation claims directed by hedge funds have the potential to protract litigation and increase costs and have been likened to litigation funding companies which have had an outsized impact in the area of personal injury litigation.
Furthermore, as hedge funds engage in this speculative trading, they create a scenario where settlement negotiations may become complicated. If these funds hold on to claims in hopes of maximizing their returns, it could lead to prolonged legal battles and increased costs for all parties involved.
Conclusion
Though California Insurance Code §520 broadly invalidates anti-assignment clauses in insurance policies after a loss has occurred, the rule is not absolute. Regulatory exceptions for mortgage guaranty policies, judicial exceptions for personal injury-related coverages like UM and MedPay, and commercial frameworks under the UCC all carve out enforceable limitations on post-loss assignments.
For attorneys and claims professionals responding to wildfire-related litigation, the key is to identify which policies are subject to §520 and which fall into exceptions. In a time of increasing climate-driven disasters, clarity on assignment rights can mean the difference between swift recovery and prolonged legal enforcement.
