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POLICIES DON'T ALWAYS FOLLOW

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OAKLAND, Calif.-Unless it is overturned, a recent California Appeals Court ruling could limit corporate successors' ability to tap the insurance coverage of predecessor companies.

By suggesting that passage of tort liability to a successor company does not imply that insurance coverage follows as a matter of law, the June ruling by the appellate court could have particularly serious implications for the coverage of companies whose ownership has changed, such as through mergers or acquisitions.

Western MacArthur Co. today was to petition California's Supreme Court to review the decision. The Appeals Court's decision came in an appeal by a group of insurance companies of a state Superior Court judge's denial of their motion for summary judgment in a coverage dispute with Western MacArthur.

In the underlying coverage litigation, filed in 1993, Western MacArthur claimed that as liability insurers for its predecessor company-Western Asbestos Co.-General Accident Insurance Co. of America, United States Fidelity & Guaranty Co. and Argonaut Insurance Co. were responsible for paying for Western MacArthur's defense and indemnifying the company for liabilities emerging from Western Asbestos' products.

In their motion for summary judgment, however, the insurers argued that the company's suit confused tort liability with the contractual relationship between insurer and policyholder.

The lower court judge denied the insurers' motion, ruling that Western Asbestos' insurance coverage did transfer to Western MacArthur as a matter of law because of successor tort liability.

But the California Appeals Court reversed that finding June 25 in General Accident Insurance Co. of America et al. vs. The Superior Court of Alameda County, deciding that the passage of tort liability to a successor company does not suggest that insurance coverage also passes to the successor as a matter of law.

The appellate court subsequently rejected Western MacArthur's petition for rehearing on the issue, prompting its appeal to the state Supreme Court.

"From our perspective it clearly doesn't make any sense at all, because then the company that ends up picking up the liability doesn't have access to the one set of insurance policies that specifically apply to the liability," said Tom Freeman, a partner with Brobeck, Phleger & Harrison in San Francisco who represents Western MacArthur.

The attorney for the insurers, though, had nothing but praise for the ruling.

"The opinion is a very well-researched, very thoughtful analysis of the issues associated with insurance coverage and successorship," said Paul E.B. Glad, a partner with Sonnenschein Nath & Rosenthal in San Francisco. "It also recognizes the importance of the differences between the public laws underlying tort law and insurance contract law."

Western Asbestos Co. was formed in the early 1900s and in the 1930s became a distributor of asbestos products. But faced with financial difficulties in the 1960s, the company was acquired by St. Paul, Minn.-based MacArthur Co., which became the parent to Western MacArthur Co. Western MacArthur later was held liable for Western Asbestos' product liability torts as a successor corporation.

Today, Western MacArthur says it faces 2,000 open asbestos-related injury claims and has settled as many as 10,000, with more than $93 million in related costs for those settlements.

"Western MacArthur blew through its own insurance program entirely paying for the Western Asbestos liabilities," said Mr. Freeman, the company's attorney.

Subsequently, Western Mac-Arthur sued the insurers, claiming Western Asbestos' liabilities should be covered by comprehensive general liability policies in place from 1948 to 1967.

In arguing that insurance coverage must transfer along with its successor liability for product liability claims, Western MacArthur cited the 9th U.S. Circuit Court of Appeal's 1992 ruling, Northern Insurance Co. of New York vs. Allied Mutual Insurance Co., which held that when a company purchases the assets of its predecessor, and subsequently acquires its pre-transfer liabilities as a matter of law, insurance coverage for those liabilities follows as well.

The Superior Court cited the 9th Circuit ruling in denying the insurance companies' summary judgment motion. But the California Appeals Court panel declined to follow Northern Insurance.

While direct impact of the appellate ruling, if upheld, may be limited to California, insurer attorney Mr. Glad predicted the ruling ultimately could expand beyond the state.

"We believe that the case will have important implications with regard to a wide array of long-tail claims ranging from asbestos to environmental claims," he said. "It will mean that insurance companies will have greater assurance that they need only confront the risks which they agreed to underwrite."

A consultant who specializes in uncovering insurance policies of predecessor companies says she is skeptical the ruling will have a broad impact.

"It's a very narrow set of circumstances," said Sheila Mulrennan, president of Insurance Archaeology Group in New York.

The case is far from over, said Ms. Mulrennan, who noted Western MacArthur is pursuing other arguments for coverage.

"There's certainly the possibility that the policyholders will be able to access coverage," Ms. Mulrennan said. "I don't think by any means they won't be able to get at it."

In this sort of case, the terms of the original policies are particularly significant, Ms. Mulrennan added. "So it seems that to do the most thorough search possible to find the policies or do whatever is necessary in terms of insurance archaeology is more important than ever."

Mr. Freeman said he thinks the ruling could be significant "if it was expanded to other jurisdictions."

However, he added, "I would hope that somebody somewhere, a judge or panel of judges, would look at it and say, 'This just doesn't make sense.'*"

That somebody could be the justices of the California Supreme Court.

Even if the Supreme Court upholds the ruling, the coverage dispute will go back to the Alameda County Superior Court, where Western MacArthur has contested the insurers' request for summary judgment on two other points.

Western MacArthur claimed there was an express assignment of Western Asbestos policies to Western MacArthur under a 1967 security agreement, and that the Western Asbestos takeover was in fact a "de facto merger." The company contends that courts have largely held that insurance coverages do transfer to the successor company in merger situations.

"It's possible that this won't have that much impact if the judge does wind up ruling in our favor on de facto merger or express assignment," Mr. Freeman said of the appellate ruling.

General Accident Insurance Co. of America et al. vs. The Superior Court of Alameda County, Western MacArthur Co., Real Party in Interest; Court of Appeal of the State of California, First Appellate District, No. 076084.s