Will liability coverage for past occurrences exist after a merger or asset purchase? Yes…and no.

Paint manufacturer, The Glidden Co., was bought and sold numerous times. When liability claims from lead based paints arose, insurers sought to deny coverage due to the anti-assignment provisions in Glidden’s general liability insurance policies. (Please refer to our previous newsletter discussing policy assignment at www.equityrisk.com/WhitePapers/white05_04.htm)

On December 17, 2004, an Ohio appellate court ruled in favor of Glidden. While the court did not grant policy assignment to the new owners, they did allow coverage for pre-acquisition liabilities. Please note that coverage was only granted for previous (not open) policies. Essentially, the court recognized that insurers collected a premium and must meet their obligation to cover Glidden’s risks. The fact that Glidden’s ownership changed did not increase the risk to insurers.

As with many legal rulings, there are dissenting opinions and plans for more appeals. In fact, some observers believe Ohio’s ruling contradicts another ruling in California.

Quite often, insurance due diligence only summarizes the current insurance premiums. In light of the conflicting case law surrounding policy assignment, a critical review must include the following:

1. Private equity firms making a stock or asset purchase should obtain written policy assignment from underwriters for any in-force policies. On a related matter, any “Change in Control” wordings should be waived or replaced.
   
2. Identify exposures from current and discontinued products. Did the target ever produce a durable product or one with hazardous materials (lead, asbestos)?
   
3. Review indemnity and hold harmless agreements relating to previous liabilities, claims and/or products. Are the financials or insurance policies supporting these agreements collectable?
   
4. Identify any previous insurers that are no longer solvent.
   
5. Affirm, contractually, who is responsible for future claims resulting from prior products.
   

An exit strategy is vital to any private equity investment. If possible, we suggest that current policies be endorsed to allow policy assignment.

We appreciate your continued support and look forward to an opportunity to be of service.

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