Policyholder Pulse
Corporate transactions are carefully negotiated to allocate assets and liabilities. However, one valuable asset is frequently overlooked and may fall by the wayside during this process: the right to recover under historic insurance policies. This can result in one entity holding the liabilities, while rights under the insurance policies purchased to cover the risk remain with another entity. Companies considering any form of corporate transaction should consult with experienced coverage counsel to ensure transaction documents allocate rights to insurance coverage as intended.
When Liability and Insurance Become Separated
Sometimes, in a corporate acquisition, divestiture or reorganization, little consideration is paid to liability insurance policies that “expired” years or decades earlier. When there is no presently known exposure, transacting parties may feel there is little reason to believe those policies will ever matter.
But occurrence-based liability insurance—and the risks they are designed to insure against—often operate on a much longer timeline. As a practical matter, they don’t expire because they provide continuing coverage for “occurrences” that were in progress during their respective policy periods. Thus, environmental contamination, asbestos exposures, PFAS, product liabilities and other long-tail claims frequently implicate policies issued decades before exposure is known or a claim is asserted. During the interim between the conduct and the claim arising, businesses may be acquired, sold, merged, reorganized or divided multiple times. Unless historic policies are properly accounted for in the transaction documents, the company facing liability by the time a claim finally arises may no longer be the company with clear rights to the insurance policies purchased to cover that risk. The result may be delayed policy benefits, costly coverage disputes or a loss of coverage altogether.
Consider a parent company that purchases liability insurance covering itself and its subsidiaries. Years later, it sells the assets of one of those subsidiaries, and the buyer assumes responsibility for liabilities arising from those operations. Unless the transaction documents also transfer the right to pursue coverage under the parent’s historic insurance program, the buyer may inherit the liability while the seller retains the insurance rights. In other words, the liability and the insurance intended to cover it have become separated.
The reverse problem can also occur. A company may inadvertently transfer valuable insurance rights while retaining liabilities those policies were expected to insure. Or multiple entities may possess competing rights under the same historic insurance program, leading to disputes over ownership of coverage or claims competing for a policy’s finite policy limits.
These issues often remain hidden until years later, when a significant claim is asserted, and a company attempts to trace and confirm coverage through transaction documents completed years earlier.
Whether the rights to a policy were clearly and effectively transferred during a corporate transaction depends on a number of factors, including contract language, the nature of the transaction and the governing law. This analysis grows in complexity as the duration of exposure or the number of corporate transactions increases. For example, different policy years may involve different insurance program structures and governing law, while successive corporate transactions may involve different asset transfers, transaction documents and governing law.
How Courts Determine Ownership of Historic Insurance Rights
In Elliott Co. v. Liberty Mutual Insurance Co., the U.S. District Court for the Northern District of Ohio provided a useful survey of the ways courts consider these issues. The Elliott Company sought insurance coverage for claims alleging asbestos-related injuries between 1957–1963 and 1980–1986. During the same period, Elliott’s ownership and corporate structure changed a number of times:
- In 1957, Elliott merged with Carrier Corporation, was dissolved, and continued to operate as a division of Carrier (“Elliott Division”), insured under Carrier’s occurrence-based liability insurance policies.
- In 1979, Carrier was purchased by United Technologies Corporation (UTC), and the Elliott Division continued as an unincorporated division of Carrier.
- In 1981, UTC and Carrier underwent a corporate reorganization, separating the Elliott Division, which was incorporated as Elliott Turbomachinery, Inc. (“Elliott Turbo”). Elliott Turbo assumed the liabilities of the Elliott Division and was assigned the assets identified in a schedule to the separation agreement. Thereafter, Elliott Turbo was an insured under UTC’s occurrence-based liability insurance policies.
- Finally, in 1987, UTC sold Elliott Turbo, with a stock and asset purchase agreement assigning all of Elliott Turbo’s liabilities to the successor entity, the Elliott Company (“Elliott Co.”).
Adding to the complexity, UTC and Carrier had incurred losses of more than $150 million in connection with environmental remediation for which Liberty was disputing coverage. To resolve that dispute, in 1994, UTC and Carrier entered into a settlement agreement with Liberty, releasing Liberty “from any and all claims … which they now have, ever had or may have in the future” with respect to policies “that Liberty may have issued to UTC or its predecessors, successors, subsidiaries, parents, affiliates and divisions.”
By 1995, Elliott Co. was facing thousands of asbestos-related claims for events that occurred at Elliott Division and Elliott Turbo. Elliott Co. sought coverage under the UTC and Carrier policies in place during the years in which the exposure was alleged to have occurred. Liberty disputed coverage, arguing that, inter alia: (i) Carrier and UTC did not transfer to Elliott Co. the right to bring claims under the policies, and that any attempt would be invalid as a result of the policies’ “no-assignment clauses”; and (ii) UTC’s settlement agreement released Liberty from any claims Elliott Co.—as a former subsidiary—might have under the policies and exhausted the policy limits. Elliott Co. argued that rights to coverage were transferred via contractual assignment and by “operation of law.”
Assignment of Coverage by Contract
The District Court first held that no-assignment clauses do not preclude the assignment of the right to claim coverage for pre-assignment occurrences, as opposed to assignment of the policies themselves, noting that the vast majority of courts hold the same. The court next found that the 1987 purchase agreement divesting UTC of Elliott Turbo purported to assign coverage to Elliott Co. for “events, occurrences, or losses sustained prior to the Closing Date which are covered by such policies,” and was therefore effective to transfer to Elliott Co. rights to pursue coverage under the UTC Policies.
However, with respect to the Carrier Policies, Elliott Co. was unable to locate the schedule of assets assigned to Elliott Turbo through Carrier’s 1981 separation agreement. Without proof that the Carrier Policies were listed in the schedule of assets, the court found that Elliott Co. could not demonstrate it was contractually assigned rights to coverage. Moreover, the 1987 purchase agreement divesting UTC of Elliott Turbo—while listing the UTC Policies—did not list the Carrier Policies in the schedule of insurance transferred to Elliott Co.
Coverage by Operation of Law
Elliott Co. also argued that, even in the absence of contractual assignment, coverage under the Carrier Policies transferred to Elliott Co. by “operation of law”—a doctrine of corporate law dictating that all assets and liabilities of a corporation transfer to the surviving entity in a merger. The court noted that some courts had broadened the “operation of law” doctrine beyond mergers to extend its application to more general successor liability situations to find that coverage follows the liability in transactions such as a purchase of assets or only part of a predecessor corporation. However, the Elliott Court rejected the reasoning of these cases and held that, like the majority of courts, the “operation of law” doctrine was limited to mergers and did not apply to the situation here, where Elliott Division (a division of Carrier) was incorporated as Elliott Turbo (a subsidiary of UTC) before separating as an independent entity.
In reaching this holding, the court noted several factors that cut against a finding that coverage follows the liability. Corporations are sophisticated entities that are presumed to have intentionally priced in and negotiated the transfer of assets and liabilities. Given that insurance policies often have coverage limits, a predecessor entity may intentionally retain coverage rights to avoid a successor entity depleting those limits, or the seller may choose to transfer coverage rights to a buyer at a premium price. “In any event, this decision is for sophisticated entities with freedom of contract to make without interference from the courts.” Moreover, the court reasoned that a legal doctrine holding that coverage always follows liability would place insurers at risk of having to separately defend multiple parties (e.g., the predecessor and any number of spin-offs), despite the fact that the insurer entered into an agreement in which it contemplated that the named insured would be the sole entity covered by the policy. Finally, the court concluded, an expansive “operation by law” doctrine creates uncertainty and encourages coverage disputes, both of which add to an insurer’s costs.
Settlement Agreement and Policy Limits
The court rejected Liberty’s argument that the settlement agreement released Elliott Co.’s coverage rights, reasoning that the release expressly referred to UTC’s “subsidiaries,” not “former subsidiaries.” Nevertheless, despite Elliott Co.’s right to seek coverage, the court held that the settlement agreement exhausted the limits of most of the UTC Policies, thereby precluding Elliott Co. from actually recovering under them.
Takeaways for Future Transactions
The lessons from Elliott (and similar cases) is straightforward and many of the risks are avoidable.
Companies considering acquisitions, divestitures or other corporate transactions should think about insurance coverage as part of the deal—before it closes. Identifying historic insurance assets and engaging experienced insurance coverage counsel during the transaction process can help preserve valuable coverage rights, avoid unintended consequences, and reduce the risk of costly disputes, delays, or loss of coverage when long-tail liabilities emerge. Companies should keep the following principles in mind:
- Insurance rights do not necessarily follow transferred liabilities. Whether historic coverage transfers depends on the governing law, the structure of the transaction and, most importantly, the language of the transaction documents. In drafting transactional documents, the intent to transfer coverage rights should be stated in clear terms that avoid running afoul of any anti-assignment language in the policies.
- General assignment language may not answer the question. Courts frequently must determine whether provisions transferring “all assets” or “all rights” were intended to include historic insurance rights, particularly where multiple agreements, schedules or exhibits are involved. Locating and specifically identifying historic insurance policies in transaction documents helps eliminate legal uncertainty if a claim later arises.
- Historic insurance may be a shared asset impacted by multiple entities’ settlement agreements and claims competing for finite coverage limits. Even where insurance rights are successfully transferred, other insureds may—intentionally or unintentionally— retain rights under the same policies. Settlements by one insured or exhaustion of shared policy limits may significantly impact the availability and value of coverage among multiple insureds.
- Courts generally enforce transactional agreements as written and presume that corporate actors are sophisticated parties that negotiated their agreements with intention. If the parties intend historic insurance rights to transfer, remain with a particular entity or be shared among multiple entities, those intentions should be reflected clearly in the transaction documents.
These issues are generally far easier (and less expensive) to address with coverage counsel while the transaction is being negotiated rather than years later, when the parties are attempting to reconstruct corporate history in the midst of coverage litigation.
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