Commercial Litigation and Arbitration

Insurance Coverage for Pre-Acquisition Liabilities Does Not Transfer by Operation of Law to Acquiror Who Assumes the Liabilities — Caselaw Split

From Keller Founds., Inc. v. Suncoast Post-Tension, LP, 2010 U.S. App. LEXIS 23838 (5th Cir. Nov. 19, 2010):

Wausau *** challenges the *** holding that the policy covering Old Suncoast transferred by operation of law when the Keller Companies acquired the assets of Old Suncoast. The question of whether insurance coverage for pre-acquisition liabilities transfers by operation of law to a purchasing company who assumed those liabilities by contract is one of first impression for Texas courts.

The Keller Companies argue that Texas courts would follow Northern Insurance Co. of New York v. Allied Mutual Insurance Co., [955 F.2d 1353, 1358 (9th Cir. 1992)] a Ninth Circuit case that held that insurance coverage for pre-acquisition losses transferred by operation of law when the liabilities in question were transferred by operation of law. In Northern Insurance, the asset purchase agreement specified that all liability for the selling company's pre-acquisition activities would remain with the selling company, as would any contracts that required consent to assign, including the insurance policy covering the liabilities at issue. Nevertheless, the court applied California's rule of product-line successor liability, which provides that a purchaser of substantially all assets of a firm assumes the obligation for product liability claims arising from pre-acquisition activities. The court held that both the liability for the pre-acquisition activities and the insurance coverage for that liability transferred by operation of law to the acquiring company. The court disregarded the insurance policy's non-assignment clause, which prevented assignment of the policy without consent. he court reasoned that non-assignment clauses were enforceable because assignments could "alter drastically the insurer's exposure depending on the nature of the new insured," and this rationale "vanishes when liability arises from presale activity," since the characteristics of the successor would not affect that risk.

Subsequent decisions by California state courts raise questions as to the validity of the Northern Insurance rule even in California. ***

Other courts have also rejected the Northern Insurance rule where the acquiring company assumes liability through contract. In Pilkington North America, Inc. v. Travelers Casualty & Surety Co., [861 N.E.2d 121, 130-31 (Ohio 2006)] the Ohio Supreme Court rejected the idea that coverage should follow liability, holding that, where liability is assumed contractually, allowing indemnity to follow liability as a matter of law would interfere with the parties' ability to contract to control liability or assign liability while preserving rights under the policy for the original insured. T he court also noted that "if coverage were to arise by operation of law and the original insured remains in operation, the limits of its coverage available under the policy may be reduced by any indemnity payments made on behalf of the additional insured," and "the insurer may be placed in the position of defending an additional insured where there was only one under the policy." Washington and Hawaiian state courts have held similarly. [See Del Monte Fresh Produce (Haw.), Inc. v. Fireman's Fund Ins. Co., 183 P.3d 734, 745 (Haw. 2007) (holding that an assignment of an insurance policy by operation of law to a party who acquired liabilities through contract was inconsistent with Hawaiian law's requirement that insurance policies be subject to general rules of contract interpretation); Unigard Ins. Co. v. Leven, 983 P.2d 1155, 1164 (Wash. Ct. App. 1999) (refusing to extend the Northern Insurance rule to "nonsuccessors who voluntarily enter into partial indemnification agreements in exchange for substantial personal compensation").]

We believe that Texas courts would reject the Northern Insurance rule where, as here, the liabilities in question were assumed through a contract that also specifically excluded the transfer of the insurance policy covering those liabilities.

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