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Liability cover transfers in acquisition: Ruling

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INDIANAPOLIS--Companies that acquire liabilities through mergers or acquisitions have the right to seek coverage under the acquired companies' occurrence-based insurance policies for losses that occurred before the transaction, an Indiana appellate court has ruled.

The Indiana Court of Appeals also found in Travelers Casualty and Surety Co. et al. vs. United States Filter Corp. that the insurance company doesn't have to approve the transfer of coverage to the acquiring company for it to have the right to tap the policies when necessary.

The case stems from U.S. Filter's and Waste Management Inc.'s efforts to seek coverage from insurance policies issued to Wheelabrator Technologies and several successor companies, which Waste Management acquired in 1990. U.S. Filter and Waste Management had been sued by thousands of claimants who claimed bodily injury as a result of exposure to silica while working near a metal-cleaning machine Wheelabrator manufactured in Mishawaka, Ind., in 1932.

The insurers maintained that while they had issued policies to Wheelabrator and its many successor companies, the coverage did not extend to Waste Management--nor to U.S. Filter, which acquired the assets and liabilities of Wheelabrator from Waste Management in 1996.

A trial court held for the plaintiffs, prompting the insurers to appeal the decision. The appellate court agreed with the trial court, finding that if U.S. Filter and Waste Management were unable to seek coverage under the policies, it "would provide an unfair windfall for insurers."

Moreover, the court found that it would deter companies from making acquisitions "if it were impossible for a business to insure against historic liabilities that may come with the new asset, especially when a purchaser could not purchase insurance retroactively to cover a past loss."

Why ruling is important

The decision is significant because it counters a 2003 California Supreme Court decision in Henkel Corp. vs. Hartford Accident & Indemnity Co. that found that unless the acquiring company receives acknowledgment from the insurer that the coverage has been transferred to it as part of a merger or acquisition, the coverage "simply disappears" after such a deal has closed, according to William Passannante, co-chair of the insurance coverage group at Anderson Kill & Olick P.C., a New York-based law firm that regularly represents policyholders in coverage disputes.

Anderson Kill filed an amicus brief on behalf of United Policyholders and in conjunction with Duke Energy Shared Services and the Indiana Manufacturers Assn. in support of U.S. Filter's position.

The ruling "is very important because the insurance industry really picked up on this corporate dodge defense about six years ago, and they've had a couple of successes...but the more that it gets rejected, the less that companies facing historic liabilities will have to put up with the nonsense of reservation of rights letters based on the fact that they don't have rights to the insurance because of an innocent and completely proper corporate transaction," Mr. Passannante said.

Travelers Casualty & Surety Co., et. al., vs. United States Filter Corp., et. al., No. 49A02-0604-CV-289, Indiana Court of Appeals, July 24, 2007.