Synopsis
In Henkel Corp. v. Hartford Accident and Indemnity Co., 29 Cal. 4th 934 (Sup. Ct. 2003) ("Henkel"), the California Supreme Court upset settled expectations by holding that the right to insurance proceeds did not pass to the successor corporation in an asset transaction. Most courts conclude that the successor is entitled to coverage, irrespective of the no-assignment clause that is standard in most insurance policies, where the entity seeking insurance coverage is the formal legal successor to the named insured in the insurance policy.
The Henkel decision may portend negative consequences for corporate policyholders facing liability for long-tail claims such as asbestos and silica exposure. In many of these cases, the corporate entity being sued is liable for harms that occurred many decades and many corporate transactions ago. The ability to access a predecessor's insurance coverage is therefore a critical consideration in a company's decision to acquire all or part of a business and/or to negotiate a more stringent indemnity for "legacy" liabilities.
Thankfully, a recent decision in the Eighth Circuit has rejected the reasoning of the Henkel court, opting to follow the line of prior cases holding that insurance benefits pass to a successor corporation along with liabilities, by operation of law.
Introduction
Abundant case law establishes that when a deal is accomplished by merger, insurance rights transfer to the successor corporation by operation of law. See, e.g., Knoll Pharmaceutical Co. v. Automobile Ins. Co. of Hartford , 167 F. Supp. 2d 1004 (N.D. Ill. 2001); and Fed'l Ins. Co. v. Purex Industries, Inc., 972 F. Supp. 872 (D. N.J. 1997). However, when the deal is accomplished by asset purchase agreements, which are not governed by state merger statutes, ambiguities and disputes tend to arise.
To be sure, most disputes should be avoided by giving careful consideration to the insurance asset in the due diligence process and addressing the asset expressly in the purchase agreement. Even in the absence of such language, however, many courts have held that the right to insurance benefits, as an asset of the acquired corporation, passes to the acquiring corporation by operation of law. The consent-to-assignment requirement, which is standard in most commercial general liability policies, has been held to be inoperable by many courts where the predecessor's liability passes to the successor corporation as part of the asset transfer.
Courts adopting this reasoning have held that an insurer can only prohibit assignment of policy coverage, but not assignment of an accrued cause of action. See, e.g., Guaranty Nat'l Ins. Co. v. McGuire, 192 F. Supp. 2d 1204, 1208 (D. Kan. 2002); and Peck v. Public Service Mut. Ins. Co., 114 F. Supp. 2d 51, 56 (D. Conn. 2000). These courts reason that enforcing the anti-assignment clauses in the post-loss context would be an unfair windfall to the insurer, who would escape paying for a covered occurrence for which the original insured paid premiums, merely because of the fact that the insured happened to transfer its business to another entity.
The Henkel Decision
In Henkel , the California Supreme Court held that the right to insurance benefits did not pass to a successor corporation after an asset acquisition of one product line of a predecessor corporation. While this decision departs from California precedent, the facts of the case shed light on the court's reasoning and likely isolate the precedential value of the holding to similarly unusual facts.
In 1979, Anchem Products, Inc. was split into two separate subsidiary corporations - Anchem I and Anchem II. Plaintiff Henkel Corporation ("Henkel") acquired the assets of Anchem II and assumed all related liabilities. Henkel succeeded to the rights and obligations of Anchem II by contract. In 1989, former workers filed a lawsuit against Henkel, alleging exposure to metallic chemicals during the period between 1959 and 1976, before the product lines were separated into different corporations, and long before the acquisition of Anchem II by Henkel.
Henkel argued that since it had assumed the liabilities of Anchem II, it should also get the benefits of the insurance policies of the predecessor company, by operation of law. The court disagreed, reasoning that while a company that acquires a product line may be held liable as a matter of law for injuries caused by a predecessor's defective products if the injured party has no remedies against the original company, in Henkel, the plaintiff could still assert a claim against the original manufacturer of the product.
Contrary to a merger, in an asset acquisition, liabilities are not imposed as a matter of law on the successor company by statute. Rather, liabilities are assumed by contract, and therefore, the court reasoned that Henkel's rights to benefits under its predecessor's insurance policies was also governed by contract. Since the original corporation was still in existence, the insurer could face the added burden of having to defend both the predecessor and successor corporation. Therefore, the court held that insurer consent was necessary for the successor corporation to have rights under the insurance policy.
Other Recent Henkel -Type Decisions
The Henkel decision is very similar to a holding in an earlier case in the Supreme Court of New York. See EM Industries Inc. v. Birmingham Fire Ins. Co., 141 A.D.2d 494 (1988). In that case, the successor corporation had purchased all of the "business and properties" of a division of the predecessor's corporation, and also agreed by contract to assume all of the liabilities related to that business. The court stated that the predecessor's insurance company never insured the successor corporation and did not become its insurance carrier by virtue of the acquisition. The court held that plaintiff could not succeed on either an assignment theory (since there was no consent) or on a successor-enterprise liability theory (since there was no merger).
Similarly, a Michigan court recently held that the right to policy proceeds was not transferred to a successor corporation after an asset acquisition. See Century Indemnity Co., et al. v. Aero-Motive Co., et al., 254 F. Supp. 2d 670 (W.D. Mich. 2003) ( "Aero-Motive "). The plaintiffs insured Aero-Motive I ("Aero I") from 1964 to 1972. In 1972, all the assets of Aero I were sold to Aero-Motive II ("Aero II"), which continued to operate the same manufacturing site as the predecessor company. In the early 1990s, Aero II discovered contamination at the site and was required by the state environmental agency to remediate. Aero II sought a defense under certain insurance policies, including those issued by Century Insurance Company to Aero I.
The court held that Aero II was not a named insured under the Century policies, had never paid any premiums on the policies, and only received an express assignment of Aero I's rights under two other insurance policies (neither of which were the Century policies). Moreover, Aero II's liability did not exist when Aero I's assets were sold, but was imposed years later when environmental laws were enacted. If the court held that Aero II was covered for this liability, the court would be asking Century to bear the additional burden of defending not only the predecessor and its directors against the successor's claims but also the successor against the environmental agency's claims. See also Quemetco Inc. v. Pacific Auto. Ins. Co., 29 Ca. Rptr. 2d 627 (Cal. App. 1994).
These decisions are bad news for policyholders, who rely on occurrence-based policies to provide protection against legacy liabilities, regardless of when the loss is reported or reduced to a monetary sum. In many instances, the Aero-Motive and Henkel holdings can be distinguished on the basis of their specific fact patterns. Where a company is sold piecemeal, creating multiple companies which are amenable to suit for product injuries, or the risk to the insurer has increased due to a change in circumstances or legal liability, courts may be hesitant to extend coverage to an acquiring company.
Moreover, the Henkel court left open the important question of whether an asset purchaser may still accrue rights to insurance coverage by operation of law in situations where the successor is subjected to liability by operation of law, i.e., (1) when the transaction amounts to a merger; (2) when the purchasing corporation is a mere continuation of the seller; or (3) when the transfer of assets is for the fraudulent purpose of escaping liability ( i.e., where the purchaser of defective products has no remedies against the original company). Thus, the preceding line of cases in California that allow for such a transfer of insurance benefits may still provide good law on this issue. See, e.g., Northern Ins. Co. v. Allied Mutual Ins. Co., 955 F.2d 1353 (9th Cir. 1994); Westoil Terminals v. Harbor Ins. Co., 73 Cal. App. 4th 634 (1999); but see General Accident Ins. Co. v. Western MacArthur Co., 55 Cal. App. 4th 1444 (Cal. Ct. App. 1997) (holding that there was no automatic transfer of insurance benefits where a successor corporation was held liable for damages caused by the asbestos-containing products of the predecessor corporation).
The Glidden Court Rejects Henkel
A recent decision by the Court of Appeals of Ohio may signal an even more limited application of Henkel's reasoning and a return to the trend of finding successor rights to insurance. In The Glidden Co. v. Lumbermens Mutual Casualty Co., et al., Civ Act. No. 81782 ( "Glidden "), the Court of Appeals held that Glidden III succeeded to its predecessor's insurance coverage.
The original Glidden (Glidden I) was an Ohio paint business in existence from 1917 to 1967. It was insured by London for property damage. Through a series of transactions, Glidden III, the current-day entity, succeeded to the original paint business of Glidden I. The liability currently facing Glidden III was a result of the pre-acquisition sales of lead paint by Glidden I. The main issue before the court was whether the insurance benefits covering pre-acquisition risks of the paint business were assigned to, or acquired by, Glidden III. To make this determination, the Court considered whether the insurance rights and benefits passed through the various corporate transactions or as a matter of law.
The Glidden court rejected the reasoning of Henkel as contrary to well-settled law, and cited approvingly the Henkel dissent's arguments that after a loss has occurred, policy benefits can be assigned without insurer consent or regard to the no-assignment clause (citing Henkel at 837, Moreno, J., dissenting). The Glidden court, like the Henkel dissent, refused to enforce anti-assignment provisions against claims that arise from pre-assignment occurrences.
The Glidden court held that a corporation which succeeds to liability for pre-acquisition operations of another entity acquires rights of coverage by operation of law and that this theory applies even where the acquisition was a purchase of assets or only part of a predecessor corporation. The Glidden court rejected Henkel 's reasoning that such a result presents an increased risk to the insurer, since "risks of mergers, acquisitions, sale of assets and other corporate restructures were present when the policies were written." Glidden is among several courts that have recognized that insurers' risks have not increased when their duty to indemnify and defend relates to events occurring prior to transfer. Moreover, the court was cognizant that a contrary result could have the undesirable effect of restricting corporate restructuring, reorganization and sales since acquiring corporations would succeed to a company's liabilities but have no way to insure against this exposure.
Conclusion
The Glidden decision may signal a revival of the pre- Henkel rule that insurance benefits follow liability for losses arising from pre-acquisition activities by operation of law. This is very good news for corporate policyholders. As the divergent Henkel and Glidden decisions reveal, different states may come out very differently on the issue of insurance coverage for a corporate successor. Corporate lawyers should be mindful of these differences when considering how to structure corporate transactions.
Published March 1, 2005.
