Liabilities Acquired with New Firms Covered under Existing Policies

July 27, 2007 ( - The Indiana Court of Appeals has ruled that companies that acquire liabilities through mergers or acquisitions have the right to seek coverage under the acquired companies' occurrence-based insurance policies.

Business Insurance reports that, in affirming a lower court decision, the appellate court also found the insurance company does not have to first approve the transfer of coverage for the acquiring company.

The appellate court said if acquiring companies were unable to seek coverage under the policies it “would provide an unfair windfall for insurers” and would deter companies from making acquisitions “if it were impossible for a business to insure against historic liabilities that may come with the new asset, especially when a purchaser could not purchase insurance retroactively to cover a past loss,” according to Business Insurance.

In Travelers Casualty and Surety Co. et. al vs. United States Filter Corp., U.S. Filter and Waste Management Inc. sought coverage from insurance policies issued to Wheelabrator Technologies and several successor companies, which Waste Management acquired in 1990. U.S. Filter and Waste Management had been sued by thousands who claimed they suffered bodily injury as a result of exposure to silica while working near a metal-cleaning machine Wheelabrator manufactured in 1932.

The insurance companies argued that coverage under policies issued to Wheelabrator and its many successor companies did not extend to Waste Management nor to U.S. Filter, which acquired the assets and liabilities of Wheelabrator from Waste Management in 1996.

The decision in the case counters a 2003 California Supreme Court decision in Henkel Corp. vs. Hartford Accident & Indemnity Co. which found that unless the acquiring company receives acknowledgment from the insurer that coverage has been transferred to it as part of a merger or acquisition, it “simply disappears” after such a deal has closed, William Passannante, co-chair of the insurance coverage group at Anderson Kill & Olick P.C., a New York-based law firm that regularly represents policyholders in coverage disputes, told Business Insurance.

The ruling “is very important because the insurance industry really picked up on this corporate dodge defense about six years ago, and they’ve had a couple of successes…but the more that it gets rejected, the less that companies facing historic liabilities will have to put up with the nonsense of reservation of rights letters based on the fact that they don’t have rights to the insurance because of an innocent and completely proper corporate transaction,” Passannante said, according to the news report.