One of the more difficult questions that business people often overlook is the issue of how to structure a business transaction to ensure that the insurance purchased by the selling company remains with the liabilities that may also transfer to the acquiring company, either expressly or by operation of law. Many business people understand tax law completely; but many do not think much about the impact of the insurance issues until it is too late. Unfortunately, many transactions are structured and completed by business people or by lawyers with no insurance background before anyone can advise them on the risk that they are taking solely by the form and structure of their acquisition.
The safest way to ensure that the insurance follows the assets and any 'attached' liabilities is for the purchasing company to acquire the stock of the selling company and not the assets. But many companies, for tax or other business reasons, do not want to or cannot do that. When they acquire only assets from the seller or transfers through multiple new corporations created for the acquisition, they may run directly into anti-assignment clauses in the insurance policies that were issued to the selling entity.
While decisional authority is quick to find the acquiring company liable for the mass torts of the predecessor no matter how the transaction is structured, some states (such as California) have been very hostile to the logical extension of that tort liability and have ruled that the selling entity may not assign its rights under historical policies. Those policies, however, may be the only protection the acquiring company has for what often turns out to be massive liabilities -- as in the asbestos context. And insurers fight to the death to avoid the coverage for the liabilities associated with these transactions notwithstanding that they face no increase in risk -- only the increase in payments they might need to make.
There is hope, though, even for asset sales. In a 90 page decision last week by the Delaware Chancery Court, Viking Pump Inc. vs. Century Indemnity Co., the court applied New York law and ruled that the company that acquired the assets of its predecessor was covered as an insured. The court ignored the anti-assignment provisions of the hundreds of millions of dollars of insurance policies before it. The court deemed such clauses unreasonable with respect to losses that had already been sustained by the allegedly injured asbestos workers.
Simple as that. (Actually, it was not that simple because there was a large dispute as to whether the selling company had in fact intended to transfer the historical insurance rights with it - yet another reason why lawyers skilled in insurance issues need to be involved in large property and asset transactions. And the parties fought over what state's law applied given that few liability policies ever so state.)
By way of background, New York law recognizes that an assignment of policies with respect to losses that have already occurred prior to the assignment does not increase the insurers' exposure for risks that it did not agree to insure. New York law, therefore, refuses to enforce anti-assignment clauses with respect to such losses. But be aware that not all states are that reasonable. As noted, California law is directly contrary.
As important as was the assignment ruling for the policyholders, the court also ruled that under New York law, each of the many policies were liable for all damages sustained by an asbestos plaintiff, both before and after the policy period, so long as at least some damage occurred during the policy period. In other words, any such policy was not liable, as the insurance companies argued, for just a tiny percentage of the liability. While other insurers that also issued policies during the period of the damage to the claimant might be liable as well, under this ruling it will be up to the insurance company that sold the policy in issue -- not the policyholder -- to chase the others and to deal with insolvent insurers. This ruling in Viking Pumps is the first court to rule that New York law so holds and has important ramifications for long-term liabilities like asbestos and environmental damage.
Given the reputation of the judge that issued this decision, the ruling likely will have a strong impact on future litigation. Of course, I assume that the insurers will fight this ruling given who they are.
I am pleased to say that my law firm was the lead counsel for the policyholders.
The safest way to ensure that the insurance follows the assets and any 'attached' liabilities is for the purchasing company to acquire the stock of the selling company and not the assets. But many companies, for tax or other business reasons, do not want to or cannot do that. When they acquire only assets from the seller or transfers through multiple new corporations created for the acquisition, they may run directly into anti-assignment clauses in the insurance policies that were issued to the selling entity.
While decisional authority is quick to find the acquiring company liable for the mass torts of the predecessor no matter how the transaction is structured, some states (such as California) have been very hostile to the logical extension of that tort liability and have ruled that the selling entity may not assign its rights under historical policies. Those policies, however, may be the only protection the acquiring company has for what often turns out to be massive liabilities -- as in the asbestos context. And insurers fight to the death to avoid the coverage for the liabilities associated with these transactions notwithstanding that they face no increase in risk -- only the increase in payments they might need to make.
There is hope, though, even for asset sales. In a 90 page decision last week by the Delaware Chancery Court, Viking Pump Inc. vs. Century Indemnity Co., the court applied New York law and ruled that the company that acquired the assets of its predecessor was covered as an insured. The court ignored the anti-assignment provisions of the hundreds of millions of dollars of insurance policies before it. The court deemed such clauses unreasonable with respect to losses that had already been sustained by the allegedly injured asbestos workers.
Simple as that. (Actually, it was not that simple because there was a large dispute as to whether the selling company had in fact intended to transfer the historical insurance rights with it - yet another reason why lawyers skilled in insurance issues need to be involved in large property and asset transactions. And the parties fought over what state's law applied given that few liability policies ever so state.)
By way of background, New York law recognizes that an assignment of policies with respect to losses that have already occurred prior to the assignment does not increase the insurers' exposure for risks that it did not agree to insure. New York law, therefore, refuses to enforce anti-assignment clauses with respect to such losses. But be aware that not all states are that reasonable. As noted, California law is directly contrary.
As important as was the assignment ruling for the policyholders, the court also ruled that under New York law, each of the many policies were liable for all damages sustained by an asbestos plaintiff, both before and after the policy period, so long as at least some damage occurred during the policy period. In other words, any such policy was not liable, as the insurance companies argued, for just a tiny percentage of the liability. While other insurers that also issued policies during the period of the damage to the claimant might be liable as well, under this ruling it will be up to the insurance company that sold the policy in issue -- not the policyholder -- to chase the others and to deal with insolvent insurers. This ruling in Viking Pumps is the first court to rule that New York law so holds and has important ramifications for long-term liabilities like asbestos and environmental damage.
Given the reputation of the judge that issued this decision, the ruling likely will have a strong impact on future litigation. Of course, I assume that the insurers will fight this ruling given who they are.
I am pleased to say that my law firm was the lead counsel for the policyholders.
