Ohio Court Appeals Allows a Successor Corporation to Receive Insurance Benefits from its Predecessor's Insurer for Pre-Acquisition Liability
January, 2005
The Ohio Court of Appeals has held that a successor corporation is automatically entitled to insurance benefits under policies issued to its predecessor by “operation of law” for pre-acquisition liability, including the right to a defense and indemnification. Glidden Co. v. Lumbermens Mut. Cas. Co., 2004 Ohio App. LEXIS 6468.
Facts
Glidden I, a manufacturer and seller of lead based paints, was a named insured on certain London policies from 1959 to 1967, when it merged into SCM (NY). Upon the merger, SCM (NY) acquired the former business operations of Glidden I, including the paint business.
On August 14, 1986, Hanson Trust Plc (Hanson), a parent corporation to SCM (NY), agreed to sell the paint business to ICI American Holdings, Inc. (ICI), in which case the name was changed to The Glidden Company (Glidden II). Pursuant to the Purchase and Sale Agreement between Hanson and ICI, Hanson retained ownership of all insurance policies. However, a side letter agreement provided that “Hanson shall give ICI and its subsidiaries the benefit of any policy of insurance to the extent the same would provide cover for liability in respect of occurrence relating to the Business prior to Closing giving rise to loss, injury, or damage thereafter subject to Indemnity on costs.”
Before closing with Hanson, ICI assigned its rights under the Purchase and Sale Agreement to two of its subsidiaries, Atkemis Seven and Atkemis Eight. On December 30, 1986, Glidden II was liquidated and its assets were distributed to Atkemis Seven and Atkemis Eight, after which Atkemis Eight was renamed Glidden III. Eventually Glidden III acquired all of ICI's assets.
SCM (NY) is the named insured on the policies issued by the defendant insurers covering the period of April 1, 1967 to January 1, 1987. Glidden III, which acquired the paint business in 1986, filed suit seeking a declaration that the defendant insurers must defend and indemnify Glidden III for a series of underlying lead-based paint actions which arose from the manufacture and sale of lead paint products over many years prior to 1974. The trial court granted judgment in favor of the insurers and Glidden III appealed.
Analysis
In determining whether the insurance benefits covering pre-acquisition risks of the paint business were assigned to or acquired by Glidden III, the Ohio Court of Appeals first considered whether the insurance benefits passed through the 1986 corporate transactions, and second, whether the benefits passed as a matter of law.
No Coverage Transfer By Contract
In determining whether the benefits passed through the 1986 corporate transactions, or by contract law, the court analyzed whether Hanson, as the parent of SCM (NY), owned the benefits of the policies and had the right to sell the benefits under the policies to ICI. Further, the court analyzed whether the fact that SCM (NY) held legal title to the policies was inapposite to Hanson's conveyance of the benefits through the side letter agreement.
The court relied on Knoll Pharmaceutical Co. v. Automobile Ins. Co. of Hartford, 167 F. Supp. 2d 1004 (N.D. Ill. 2001), to hold that “as a matter of contract law, because the parent company was not a party to the contract, it could not transfer the rights through an asset purchase agreement.” Moreover, the court recognized that when SCM (NY) distributed the paint business to Glidden II, it explicitly excluded all insurance policies, and thus, the parties manifested a clear intent to exclude the policies and its rights. Therefore, the court held that the benefits of the policies did not transfer by contract.
Coverage Transferred By Operation Of Law
In determining whether the benefits of defendants' policies passed to Glidden III by operation of law, the court considered whether insurance benefits follow the liability for pre-acquisition occurrences, since the underlying litigation related to pre-acquisition operations of the paint business. The court recognized there is limited authority on this issue.
The court relied on the Ninth Circuit in Northern Ins. Co. of N.Y. v. Allied Mutual Ins. Co., 955 F.2d 1353 (9th Cir. 1992), which explained, “Th[e] right to indemnity follow[s] the liability rather than the policy itself. As a result, even though the parties did not assign the [insurance company]'s policy in the agreement, the right to indemnity under the policy transferred to the [buying company] by operation of law.” In addition, the Glidden court relied on the dissent in Henkel Corp. v. Hartford Acc. and Indem. Co., 129 Cal. Rptr. 2d 828 (2003). In Henkel, the majority held that a company is not entitled to the benefits of liability policies issued to its predecessor when the policy benefits violate the anti-assignment clause. However, the dissent stated that the majority's holding is contrary to well-settled law and the general rule is that after a loss has occurred, the policy benefits can be assigned, notwithstanding violation of the anti-assignment clause. The Glidden court agreed with these cases, recognizing that insurance benefits may be transferred by operation of law.
In so recognizing, the court held that “a corporation which succeeds liability for pre-acquisition operations of another entity acquires rights of coverage by operation of law.” The court further noted that transferring insurance rights by operation of law will not increase insurers' risks when their duty to defend and indemnify is related to events occurring prior to transfer. The court recognized that:
[T]o find an insurance company is not obligated to provide coverage to a party that is liable for a risk the insurance company promised to insure against and for which they were paid, an agreed premium would result in an unfair windfall to the insurance company.
Thus, the court held that Glidden III was entitled to insurance benefits under the insurance policies at issue for the pre-acquisition activities of the paint business.
Learning Point:
The Glidden decision points out that policies insuring a predecessor corporation may be transferred and acquired by a successor corporation. While there must be a valid assignment of insurance rights and benefits to accomplish transfer by contract, such is not required for transfer by operation of law. A successor corporation is automatically entitled to seek coverage from its predecessor's insurer for pre-acquisition liability by operation of law. It is important to note that although this is an Ohio state court decision, other jurisdictions may apply the same analysis.
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