Liability insurance contracts are very direct and literal instruments. The parties insured are clearly stated, and variances can be fatal. See, e.g., VRV Dev., L.P. et al. v. Mid-Continent Co., No. 3:09-CV-1382 (N.D. Tex., Feb. 3, 2010) (a corporate conversion under Tex. Bus. Org. Code Act section 10.106 changes the named insured and thus the policy issued pre-conversion to the converted entity does not provide coverage for the newly converted company). Automatic coverage for newly acquired ventures is typically limited to 90 days. The coverage must match the names of the entities generating liability.
Texas enforces anti-assignment clauses prohibiting assignment of the insurance policy absent consent of the carrier. Ford, Bacon & Davis, L.L.C. v. Travelers Ins. Co., 635 F.3d 734, 737 (5th Cir. 2011). In Texas, unlike many other jurisdictions, the insurance does not follow the business through the various types of transfers, whether those transfers involve a merger, asset sale, etc. Keller Foundations, Inc. v. Wausau Underwriters Ins. Co., 626 F.3d 871, 878 (5th Cir. 2010). Involvement of the insured with an undisclosed enterprise will also run afoul of business enterprise exclusions. See, e.g., Bott v. J.F. Shea Co., Inc., 299 F.3d 508, 511 (5th Cir. 2002) (joint venture exclusion).
From the perspective of the acquiring company, the potential insurable liability risks must be identified and the related coverage analyzed for sufficiency. Existing general liability policies of the acquiring company are unlikely to provide it coverage as to claims involving the acquired company because (1) the named insured is the acquiring company, not the company or operation being acquired; and (2) the bodily injury or property damage must have occurred during the policy period of the acquiring company’s policy.
If the acquired company is in a business where “claims-made” policies are utilized, such as with professionals like lawyers and doctors, care must be taken to make sure that the purchase of a new policy by the acquiring company does not include a “retro date” that matches the date of issuance. This is typical with a new policy. While it clearly costs more, the best approach is to pay for retro coverage that would at least match any retro dates used on the policies of the acquired company.
An acquiring company should consider the following checklist in protecting itself from an insurance standpoint in a merger and/or acquisition:
- In the context of target companies with large scale exposure, such as toxic tort exposure, a detailed review of the remaining liability exposure and the available insurance resources should be undertaken by the acquiring company.
- Seek an assignment of the acquired company’s policy and seek the consent of the carrier to place the name of any new combined entity and/or the acquiring company on that policy or policies;
- If assignment of that policy is not possible, then make sure the acquired company or enterprise is added to the acquiring company’s existing policy, and beware that a claim against the acquiring company for injury before the transfer, which would pre-date addition to the policy, will not be covered absent some special manuscript endorsement;
- Absent an assignment of the acquired company’s policy, seek contractual indemnity from the owners of the acquired company as a part of the acquisition itself, but understand coverage for such indemnity is unlikely if the injury occurred before the indemnity was entered into.
The acquired company or its owner should consider the following checklist:
- Do not assign the acquired company’s policy, and add with carrier consent the new name of the acquired entity as an additional named insured; the coverage should be continued for a period that tracks potential statutes of limitations;
- Contract to have the acquiring company add the acquired company or its owner or both as additional named insureds for post-transfer injuries and claims.
- If liabilities are retained, make sure to retain or add onto existing coverage, if any attached to those liabilities.
- Dissolve the acquired company in the event of an asset sale or other form of merger, thus assuring a more limited period of additional exposure under Tex. Bus. Corp. Act § 7.12 (allowing three years of corporate existence after dissolution; suit must be brought within the three year period in order to avoid the time limit requirements).
Both the acquiring company and the target or its owner should involve current insurance agents in the process. The ease of obtaining consent and manuscript policy solutions to insurance and risk management problems can be increased by use of an astute and well-connected agent.