Long-tail scenarios: when is a company entitled to insurance coverage issued to a predecessor company?

The focal point in many insurance coverage disputes is whether a company facing a loss is entitled to the benefits of insurance coverage issued to a corporate predecessor. We look back on corporate "family trees" because corporations face claims for so-called "long-tail" injuries (for example, exposure to a substance, such as asbestos, caused an injury or damage that was not apparent until many years after first exposure.)

One of the most difficult issues in this area involves claims to the coverage of an earlier entity that transferred its assets and liabilities: When the current company faces the earlier company's liability because of an asset purchase (as opposed to a stock purchase), is the current company entitled to the earlier company's insurance coverage?

This issue was addressed this past December in a pair of decisions from the Ohio Supreme Court, Glidden Co. v. Lumbermens Mutual Casualty Co. and Pilkington North America Inc. v. Travelers Casualty & Surety Co.

It presents at least three questions. First, does the transfer of liabilities automatically transfer the insurance coverage? Policyholder advocates often cite the Ninth Circuit decision in Northern Insurance Co. v. Allied Mutual Insurance Co. (1992), a decision that allowed, under certain circumstances, the transfer of insurance coverage by operation of law.

The policyholder camp argues that the operation by law approach is necessary to protect tort victims and maintain predictability in corporate restructuring. The policyholder position, however, ignores the fact that insurers analyze risk characteristics of specific entities and then issue coverage to these specific entities. On this issue, the Ohio Supreme Court accepted the insurers' view and rejected the effort to transfer coverage by operation of law.

Second, does the insurance policy provision stating that the policy cannot be assigned mean that the policy cannot be assigned? Admittedly, my phrasing of this question reveals my bias. The language restricting assignment is clear and it should be enforced. In fact, the Ohio Supreme Court recognized that "any assignment of the rights after the losses would be, on its face, in direct contravention of this [anti-assignment] provision."

Nevertheless, Ohio decided that coverage can be assigned (at least in the indemnification context) once the loss is reduced to a chose in action.

The third question, of course, is when does a loss become a chose in action? In a 2003 California decision discussed in this column (Henkel Corp. v. Hartford Accident & Indemnity Co.), the court held that to be a chose in action, the loss must be "reduced to a sum of money due." Policyholders intensely dislike Henkel and the "money due" standard.

The Ohio Supreme Court found for policyholders and held that the coverage is transferable as a chose "at the time of the covered loss" or "when the damage occurred"; that is, Ohio found that the loss matures into a chose at an early stage.

Ultimately, the Ohio Supreme Court found for the policyholder on two of the three issues before it. Insurer advocates must hope to resolve these questions differently in other states, and isolate the Ohio approach.

Alan S. Rutkin, a Best's Review columnist, is a partner at Rivkin Radler LLP, Uniondale, N.Y. He may be reached at [e-mail]