Overlooked insurance issues in mergers and acquisitions.

Almost every business transaction has insurance implications. However, while businesses place great importance on procuring insurance coverage, they typically pay less attention to insurance issues in mergers and acquisitions. In fact, in many business transactions, particularly mergers and acquisitions, companies do not specifically address insurance policies, do not secure the coverage that they are attempting to secure, or actually undermine their arguments for coverage. The following are some examples:

Assignments of Insurance: In mergers and acquisitions, the acquiring company frequently wants to acquire rights under the acquired company's insurance policies. Therefore, transaction documents often state that the insurance policies are being assigned by the insured to the acquiring party. Unfortunately, most insurance policies have clauses specifically barring assignment. Thus, unless the insurers consent, the assignments may be invalid.

Acquisition of Liabilities: An entity that acquires another company's assets and liabilities may face the liabilities without the benefits of the acquired company's insurance policies. Rights under insurance flow, by operation of law, to the acquiring company in certain circumstances. See, e.g., No. Ins. Co. v. Allied Mut. Ins. Co., 955 F.2d 1353, 1357 (9th Cir.) (right to indemnity arising from seller's policy "followed the liability rather than the policy itself ... even though the parties did not assign seller's policy"), cert. denied, 505 U.S. 1221 (1992). However, the successor corporation may be able to take advantage of the acquired company's insurance only when the transaction is a consolidation or merger of the two corporations, or the acquiring corporation is a continuation of the seller. Henkel Corp. v. Hartford Accident & Indem. Co., 29 Cal. 4th 934, 941 (2003). Thus, if an acquisition is not done by consolidation or merger, or the selling company continues to separately exist, then the coverage may not be available.

Inventory of Insurance: Many claims, such as asbestos, silica, construction defects, pollution, and product claims, can trigger coverage going back years, if not decades. Therefore, it is important to inventory the acquired company's insurance to determine the potential state and value of that coverage. For example, does the seller have sufficient proof of its historic insurance coverage? Has any of that insurance coverage been exhausted? Have any rights under those insurance policies been released? This last question is particularly important and usually requires more than a simple review of the insurance policies themselves. It is not unusual for insureds to have entered into settlements over the years by which they have released certain claims, or have "sold back" some or all of their insurance rights. In such circumstances, what appears to be valuable coverage may, in fact, turn out to be of limited, or no, value.

Evidence of Insurance: Many transactions have documents that call for one party to "add" the other party to its insurance policies, and to provide "evidence" of insurance. The documents require that the evidence of insurance be a certificate of insurance. The parties frequently assume that the certificate of insurance actually will bind the insurer in some way. However, that too often is not the case. See, e.g., RIMS Research Committee, Certificates of Insurance 7 (2000) (referring to certificates of insurance as "the illusion of protection").

Change of Control Provisions: Finally, various insurance policies contain "change of control" provisions that limit or terminate coverage if there is a change of control. These clauses typically provide that if the insured consolidates with, merges into, or sells all or substantially all of its assets to another entity, the policy continues in force only as to covered events that took place before the effective date of the transaction. Therefore, the transaction itself may result in the elimination of ongoing coverage. This possibility should be considered well in advance so that extensions of coverage, or alternative coverage, can be procured. Furthermore, if the transaction itself may give rise to claims, that possibility should be considered in assessing whether to notify existing insurers and what disclosures to make to new insurers.

The review of transactional documents for insurance and risk assumption/transfer issues is not an overly time-consuming process, but is necessary to guard against unpleasant surprises. If the appropriate review and consideration is undertaken, then the true value of the insurance assets may be maximized.

Kirk Pasich is a partner in the Los Angeles law firm of Pasich & Kornfeld, LLP. He represents insureds in complex coverage litigation and provides strategic coverage advice in business transactions. He may be reached at [e-mail].