- Risky Research: Negligent Product Testing Can Lead To Liability
- Legislative Update - A Return to Modest Proposals
- Corporate Successor Liability
- Corporate Successor's Right To Insurance Coverage Purchased By A Predecessor
Corporate Successor's Right To Insurance Coverage Purchased By A Predecessor
In an age of corporate mergers and acquisitions, courts are increasingly asked to resolve the issue of a corporate successor's right to coverage under a corporate predecessor's insurance policies, for the predecessor's liabilities. So far, California courts have been asked to decide the issue in at least two contexts: toxic torts actions where companies are held liable for contamination remediation regardless of fault under federal, state and local environmental laws, or product liability actions where companies are held liable under a product line successor rule. See, e.g., Ray v. Alad Corp., 19 Cal. 3d 22 (1977). Two Courts of Appeals in California have held that absent an express agreement, although liability may flow from predecessor to successor, assets, such as insurance policies, do not necessarily flow to the successor to cover those liabilities.
In Quemetco Inc. v. Pacific Automobile Ins. Co., 24 Cal. App. 4th 494 (1994), the court held that policy benefits did not transfer by operation of law from the predecessor firm to the successor for the successor's CERCLA liability. See id. at 501. The court reasoned that no potential for liability existed at the time of the asset purchase (because CERCLA was not yet adopted) and, therefore, that there was no liability to transfer as a matter of law. See id. In addition, the successor was not a party to the insurance policy under which it was seeking coverage. See id. The court also found it significant that the insurance companies did not consent to an assignment of the policies from successor to predecessor. See id. at 503.
Quemetco seemed to leave some room for corporate successors to claim coverage under a predecessor's policies for liability other than CERCLA liability. The court differentiated between CERCLA and products liability and apparently was swayed by the fact that the successor corporation had insurance to cover the predecessor's liability-producing conduct. See id. at 501. Furthermore, the court carefully distinguished its CERCLA-based facts from the facts in Northern Insurance Co. v. Allied Mutual Insurance Co., 955 F.2d 1353 (9th Cir. 1992). In Northern Insurance the Ninth Circuit held for the policyholder in finding that insurance policies transferred to a corporate successor by operation of law for the predecessor's product liabilities, where the corporate transaction provided for broad transfer of "all the assets" of the predecessor and where the liability arose from presale activity that resulted in no increased risk to the predecessor's insurance companies. See id. at 1358.
Four years later, General Accident Insurance Co. of America v. Superior Court, 55 Cal. App. 4th 1444 (1997) further curtailed the rights of corporate successors to use a predecessor's insurance policies. In General Accident, Western MacArthur Company had acquired substantially all of the assets of a dissolved predecessor, Western Asbestos Company. Western MacArthur subsequently was held liable in tort for injuries caused by asbestos-containing products distributed by Western Asbestos prior to the asset sale. Western MacArthur therefore sought coverage under insurance policies issued to the predecessor corporation before the take over. The court held that "a finding of successor liability in tort does not create from whole cloth an insurance relationship between strangers, and insurance coverage under these circumstances does not transfer by operation of law." Id. at 1446. Like Quemetco, the General Accident court stated that any question of who is and who is not covered by an insurance contract must be decided strictly by reference to the terms of the insurance contract and without regard to the fact that the successor corporation inherited the liability directly from the predecessor. See id. at 1451-52 (citing Oliver Mach. Co. v. United States Fidelity & Guar. Co., 187 Cal. App. 3d 1510 (1986)). The General Accident court did not completely close off all avenues; it remanded the case to the superior court to determine whether, by virtue of the parties' transactions, Western Asbestos conveyed the insurance policies by express assignment or whether the policies transferred via a de facto merger between Western Asbestos and Western MacArthur. See id. at 1455.
Also in this issue:
- Risky Research: Negligent Product Testing Can Lead To Liability
- Legislative Update - A Return to Modest Proposals
- Corporate Successor Liability