| M&A, Bankruptcy, and Insurance (Part 1) | |||
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Successor liability A "successor" refers to a corporation that, through amalgamation, consolidation, or other legal successions, becomes invested with rights of and assumes burdens of another corporation. The acquiring company is simply assumed to be a successor in an asset and liability purchase, and the courts can impose the label of successor even in an asset-only acquisition. There are some misunderstood areas of liability relating to an asset-only purchase. Since we are not attorneys, this is a discussion of generalities. Any discussion of this issue with your client needs to be conducted in conjunction with their attorney. At the very least a disclaimer in writing to review issues with their legal representative needs to done. The courts are imposing responsibility to a much greater degree than previously, thereby allowing injured parties greater access to assets for compensation. In discussing this with a corporate attorney, it is always necessary to remember that these lawyers are experts in business law, but just as in many professions, they are not necessarily expert in tort. An analogy is in the insurance world, although you may have training in life and health at some time, and may even be licensed, if you don't practice in this area, you probably do not have a fully formed understanding of the ins and outs of this area. It's the same with attorneys. The court may impose successor liability even in an asset-only acquisition if: A plaintiff certainly can name both the sold corporate name and probably officers and directors of purchased as well as the succeeding corporation, but it is not a guarantee that both entities will always be named. Take for example this situation in Indiana a few years ago: A young lady, who we'll call Ms. Jones, had taken over her father's insurance agency. Her father had written an account for many years. This client was a manufacturer of paper shredders. As a small closely held corporation, the shareholders were limited to a man and his wife, we will call Mr. and Mrs. Smith. The decades passed, and the Smith's two children, at the advice of their attorney, formed a new corporation (we will call it ABC Inc.) and bought the assets of the former Smith Corporation. Soon afterward Mr. Smith died. A man using one of the old paper shredders made by the Smith Corporation was injured while attempting to remove a blockage and one of his arms was severed. The man sued the Smith Corporation and Mrs. Smith (as a former director and officer of that corporation). Do you think that they named the original Smith Corp. and their policy in the lawsuit? The answer is of course no, as their attorney had previously advised them not to pick up the past and future liabilities. Did Smith Corp. buy discontinued products? No, as their attorney assured them that once assets were distributed (as shareholders), their future liability is limited. There may or may not have been a discussion of continuing risk as D&O's. Who knows? Bottom line, Mama Smith was sued and there was no coverage. Mama Smith lost, paid damages personally, and then cross-complained against the insurance agent, Ms. Jones. As all of this happened many years prior, absolutely no documentation remained to show why the Smith Corp. was not named on the ABC policy. And the young lady insurance agent could not turn to her father for the information, as he had passed away. The end of this story is that the E&O case was lost by Ms. Jones. And as a side note, she also lost the client. Is this fair? Probably not, but the Smith children were angry that their mother lost a great deal of her personal assets and were looking to place blame. Successors liability may be incurred when: Some factors are: The last point is the big one. This failure to warn is where the courts are focusing on assigning responsibility as tortfeasors to the succeeding corporation. Some states have codified successor liability, sometimes through product liability reform statutes. Some have specified the liability in the general law governing corporations. This imposition of responsibility upon the acquiring party will be greater should the selling party no longer be in operation. The state statutes or applicable case law regarding the buyer's responsibilities may also be a factor. There are a few states (California, New Jersey, and Pennsylvania) that impose successor liability as the rule and not as the exception. In most states the codified law states the following principles of imposition of successor liability if any of the following is found to be the case: Successor liability is of particular importance when acquiring a manufacturing concern. The liability being imposed upon acquirers of manufacturers of products that could injure or damage others can be under a strict liability doctrine, without regard to negligence. There is less concern with a contracting operation. The principles of strict liability are still an emerging area in construction defect litigation. |
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Not only are policy forms, clauses, rules and court decisions constantly changing, but forms vary from company to company and state to state. This material is intended as a general guideline and might not apply to a specific situation. The authors, LunchTimeCE, Inc., CEfreedom, and Insurance Skills Center, and any organization for whom this course is administered will have neither liability nor responsibility to any person or entity with respect to any loss or damage alleged to be caused directly or indirectly as a result of information contained in this course.
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