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SUCCESSOR BUSINESSES MAY NOT HAVE RIGHT TO INSURANCE COVERAGE

Business clients should not assume that their internal contract language with acquired business entities will secure insurance coverage. As comprehensively reviewed by Boston Attorney Gregory May and published in the ABA's Tort Trial Law Journal (Spring 2005, Vol. 40, #3), this is a particularly important issue for business clients such as Tharpe & Howell's hospitality entities who acquire predecessor hotels and restaurants.

Introduction: The issue is whether a corporation acquiring another entity or its assets also receives the insurance coverage for those liabilities which arose out of the other entities' pre-acquisition activities. Any successor in that situation would want access to any and all available insurance coverage, including that of the predecessor whose liabilities the successor has assumed. Likewise, the predecessor's insurer whose coverage is sought would likely resist on the grounds that it did not contract with the original entity.

Types of Disputes: These disputes usually fall into two main groups: (1) A successor seeks coverage under its own policies for liabilities arising from its predecessor's pre-acquisition activities; and/or (2) A successor seeks coverage under its predecessor's policies for liabilies arising from that predecessor's pre-acquisition activities.

Law and Trends: It has been written that there has been a dearth of court authority guiding parties in these insurance and business transactions. However, the referenced article does provide significant direction and pragmatic solutions. Regarding the first dispute referenced above, it is noted that most courts, with few exceptions, have held that a policy issued to a successor will not provide coverage for claims arising out of the pre-transaction activities of a predecessor, even where the activities and resulting property damage have occurred within the relevant policy period. But it is the second general type of dispute (successor seeks coverage under its predecessor's policy) that is the more common type of dispute. Earlier authorities utilized "equity" considerations as evidenced by the trend in the 1990s (led by the U.S. Court of Appeals for the 9th Circuit) to extend liability against a predecessor insured. However, this trend, especially in California, has apparently swung in a conservative direction. In Henkel Corp. v. Hartford, 62 P.3d 69 (Cal.2003), the court weakened the 9th Circuit's persuasive effort to transfer liability to a predecessor carrier even when there was an assignment provision between the two entities. The Henkel court's strict enforcement of the anti-assignment provision (in the carrier's policy) will likely be the most important aspect of the decision.

Conclusion: The key to this ballgame is direct contact with prior and subsequent carriers. Our business clients should not merely assume that their internal contract language with business entities will secure coverage. Complete disclosure to predecessor and subsequent carriers with their written consent and opportunity to re-underwrite the loss is recommended by this reviewer. T. Howell.

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Related Attorney(s):
Todd R. Howell

Related Practice Area(s):
Business and Intellectual Property Law