Movable coverage: successor coverage may be narrower than successor liability. (Property/Casualty: Loss/Risk Management Insight).

Complex insurance claims often involve questions concerning whether liability arising from an earlier company is covered under the earlier company's insurance.

This question frequently arises in the environmental context because of the "long tail" aspect of these claims. Environmental claims may arise from activities that took place years ago. During the period between the activities and the claim, the acting company may sell its assets, product line or entire company. Consequently, the company that is sued--the new company--may be very different from the old company that caused the problem and bought the insurance.

The new company may seek coverage under policies issued to the old company. Although even sophisticated insureds mistakenly assume that they are always covered under the earlier policies, the company's coverage does not necessarily move on to the new company.

This issue often has been mistakenly swept into the "trigger" analysis: which insurance policy applies to circumstances that took place over extended periods of time. The trigger analysis may--in certain circumstances and states--lead to an old policy applying to a new claim. This phenomenon seemingly led companies to assume that the policy of an old company applies to a new company. But, corporate succession issues are discrete from trigger issues.

A recent California Supreme Court decision, Henkel Corp. vs. Hartford Accident & Indemnity Co., provides helpful guidance on the corporate succession issue.

In Henkel, a manufacturing company evolved into different companies. One of these companies acquired the manufacturing company's "assets, liabilities and goodwill utilized in its metal working chemical activities." This transaction was conducted by contract.

Ultimately, the new company, having acquired "assets" and "liabilities," faced a substantial lawsuit that was finally settled for $7.65 million, The new company, having paid $7.65 million, sought coverage under the policies issued to the old company.

Since the new company acquired the old company 5 assets, it argued that it acquired the old company's insurance. In effect, the new company claimed an assignment of coverage.

To evaluate the effect of this assignment, the court reviewed the policy. The insurance policies stated that there could be no "assignment of interest under this policy" without the insurer's consent. There was no evidence that the insurer consented. Thus, the court found that the new company was not entitled to the old company's insurance coverage.

Importantly, the court indicated that the result could have been different had the liability been assumed as a matter of law, as opposed to an assignment, but the court expressly declined to decide this issue.

This decision demonstrates several important lessons:

* Both insureds and insurers must remember that when an old company evolves into a new company, even though the liabilities move on to the new company, the insurance coverage may not move on to the new company. Coverage for the new company depends upon the transaction.

* Given the difference between liability and coverage, corporate succession must be conducted with greater sensitivity to insurance concerns.

When engaged in a transaction, the succeeding company should consult corporate lawyers to structure the transaction so that coverage is likely to flow with liabilities; consult brokers and insurers to provide the requisite coverage; and identify the insurance policies for which assignments are sought and seek the requisite consent.

* Some will scoff at the concept of obtaining consent, but carriers may find it in their interest to consent. For example, the carriers may seek a relationship with the new company.

The ultimate lesson of the Henkel decision is that companies--even sophisticated companies--gloss too quickly over the insurance aspects of corporate succession. It is a mistake to assume that the old company's coverage automatically moves to the new one.

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