Your company is about to close on an acquisition that will cement its position in the marketplace. You have done your due diligence and believe you are aware of all of the other company's potential liabilities that are included in the deal. The figurative champagne
bottle is about to be uncorked...and then your insurance broker calls with a problem. There is a clause in the other company's insurance policy that prevents assignment of the policy to your company without the insurer's express consent.It is a scenario that plays out on a regular basis across the country, where all too often, no one in an acquiring company even thinks about the insurance policy until the deal is nearly closed. If the deal is structured as an asset acquisition, the acquiring company does not expect to take on any of the liabilities. Or, it is just assumed that if the liabilities are part of the deal, the insurance coverage will follow. While these are perfectly reasonable assumptions, it is important to know when they do not apply-or at least when to inquire whether they do or not.
The issue of which organization assumes the liabilities comes into play when the acquired company will cease to exist after the transaction. If the acquired company will continue to operate (as a subsidiary, for example), then it usually retains its own assets and liabilities-and its own insurance policies.
In a merger, the surviving company generally assumes both assets and liabilities. Conversely, if the deal is structured as an asset-only acquisition, the default rule is that the acquiring company gets only those liabilities it expressly assumes. But every rule has exceptions. Courts generally do not allow companies to evade legal obligations by structuring a merger to look like an asset sale.
When the seller's liability is transferred to the buyer, the understanding has been that the seller's insurance coverage would also transfer. That changed-at least in California-with the case of Henkel Corp. v. Hartford [29 Cal. 4th 934, 62 P.3d 69 (2003)].
After Henkel purchased the assets and liabilities of metalworking chemicals maker Amchem, it was sued for damages resulting from pre-sale exposure to metallic chemicals manufactured by the acquired company. Henkel tendered defense to Amchem's insurer (Hartford) as well as its own. Henkel's own policies did nol provide coverage because they were not in effect at the time of the alleged exposure. But the California Supreme Court held that even though Amchem's policy had been in effect, Henkel could not benefit from that coverage either. Because Henkel chose to assume the liabilities, the Court said, it was bound by policy language that required the insurer's consent to transfer Amchem's policy. As a result, Henkel was left without any insurance protection whatsoever.
When structuring corporate acquisitions, therefore, it is important to be aware of the Henkel precedent. If either company does business in California, the case will likely apply. Even if neither company has a link to California, however, another state's courts may be convinced to adopt the same rationale.
That said, it is not always easy to make sure your company does not wind up in the same situation as Henkel. Start by getting brokers, underwriters and experienced attorneys involved as early as possible.
* Next, evaluate all potential risks your company may be acquiring-including errors and omissions, environmental risks, or foreign or political risk exposures.
* Obtain copies of the to-be-acquired company's insurance policies early on in the negotiations.
* Have those policies immediately reviewed by your insurance broker and an attorney versed in mergers and acquisitions to determine what the assignment clauses do or do not allow.
* Make sure the merger deal includes an assignment of the predecessor's insurance policies.
* In addition, get written consent from the to-be-acquired company's insurer for assignment of the coverage to the acquiring company.
* Have your company added as an additional insured on the to-be-acquired company's policies.
* Ask your own insurer to add retroactive coverage for pre-merger or pre-sale activities of the other company.
* Explore the notion of mergers and acquisitions insurance. Be aware, however, that this often can be prohibitively expensive.
AUTHOR_AFFILIATIONStephanie Grassia, CPCU, is an attorney with the Seattle law firm of Stafford Frey Cooper. Previously, she was a commercial insurance broker for both publicly held national and independent regional insurance firms.