Page 8 - Litigation

S8 | MONDAY, DECEMBER 14, 2015 | Litigation | NYLJ.COM

Majority Rule:
Returning to the

Liability Insurance Rights

K
OC
Follow Liability
IST
Can the

majority rule in California will have a pro- claims relating to that activity, no matter when Under some formulations of the product-
BY WILLIAM G. PASSANNANTE, business impact, given the current pace those claims are raised.
line rule, a purchaser of substantially all
CORT T. MALONE
of mergers and acquisitions. Such activity, These occurrence-based policies have assets of a company assumes, with some
AND BRUCE STRONG
essential to the efficient functioning of a helped facilitate the creative restructuring limitations, the obligation for product liability
Cmodern economy, depends on the ability and the mergers and acquisitions of the claims arising from the selling company’s pre-
orporate deal lawyers had for many to assign insurance assets, or the ability to past few decades. A company contemplat- sale activities. Courts have held that liability
decades designed corporate acquisi- assign the inchoate “chose in action” (the ing an asset or stock purchase of another insurance passes to the purchaser along with
tions and divestitures on the long-held as-yet undeveloped potential claim) under company may be less concerned about an the potential liability. Under the theory of cor-
foundation that historical rights to insurance a liability insurance policy.
acquisition target’s ancient IBNR liabilities if porate succession, the purchasing company

proceeds were freely assignable, and that the An assignment of insurance rights may the prospective acquisition has maintained assumes the burdens and becomes invested
rights to the proceeds of liability insurance be particularly vital with respect to liability a robust program of bought-and-paid-for with the rights of the predecessor company.
could freely follow the liabilities. The design of policies that provide coverage for long-tail occurrence-based liability policies covering Courts have held that one of these “rights”
those deals was called into question in 2003 in claims—typically referred to as “occurrence- potential historic risk.
includes the right to the predecessor com-
Henkel Corp. v. Hartford Accident & Indemnity based” policies. While “claims-made” poli- An acquiring company could acquire rights pany’s liability insurance.
Co., 29 Cal. 4th 934 (Cal. 2003), which severely cies generally are triggered only when an under occurrence-based liability policies in ‘Henkel’ Diverged from the Majority Rule
impeded companies involved in such transac- “occurrence” and reporting of the occur- different ways. First, it could expressly indi- Allowing Assignment of Insurance. While
tions by enforcing consent-to-assign clauses rence take place during the policy period, cate in the asset purchase agreement that it courts in various states around the country
even though policy periods had expired and occurrence-based policies provide cover- was acquiring all of the to-be-acquired compa- have differed in the applicable theory jus-

the right to insurance already had accrued. In age for an occurrence that happens during ny’s insurance policies. Second, many courts tifying insurance policy assignment, in the
2015, California reversed course and restored a given policy period regardless of when it over many decades (and even centuries) have majority of states the end result was clear:
the ability of corporations to freely assign is reported.
held that the insurance policies covering Occurrence-based insurance policies passed
the rights available under insurance policies Occurrence-based liability insurance poli- IBNR losses and owned by the to-be-acquired to the acquiring company and provided cov-
after a loss. Fluor Corp. v. Superior Court, 61 cies never expire, and thus provide lasting company pass to the acquiring company “by erage for IBNR claims. This principle repre-
Cal. 4th 1175 (Cal. 2015).
protection. In insurance-speak, this pro- operation of law.” Under this doctrine, even sented the majority rule without much con-
Mitigation of Risk and Transfer of tection is referred to as protection against when there is no explicit agreement that the troversy until one decision took the opposite
Insurance Rights in a Corporate incurred but not yet reported (IBNR) losses. insurance policies transferred to the acquiring view. In Henkel, the California Supreme Court
Restructuring.
The reversal to return to the
Occurrence-based policies enable an entity to company or the new resulting entity, courts held that insurance companies that issued
purchase liability insurance protection at the deem the insurance policies transferred by occurrence-based policies could refuse to
time it engages in a potentially loss-causing operation of law in one of two ways. Either honor a policyholder’s assignment of these
WILLIAM G. PASSANNANTE and CORT T. MALONE are operation and be assured that, as long as the the policies transfer through the product-line policies for which the policyholder already
shareholders and BRUCE STRONG is an attorney in amount of insurance purchased is adequate, rule of successor liability or under the theory had paid premiums if the policies in question
Anderson Kill’s insurance recovery group.
the entity will have protection against future
of corporate succession.
contained clauses purportedly requiring the