General Liability Agreements

In general, some general liability insurance agreements are executed between the merging corporation and the surviving corporation, which details the disposition of certain assets and liabilities. These agreements are executed, at least in part, to address third-party claims against the successor for the activities of the predecessor corporation.

However, these agreements are often modified by existing state merger statutes and state case law that govern whether certain liabilities can be retained or transferred during a merger. Asset purchase agreements may purport to transfer or assign the predecessor corporation's insurance policies to the successor corporation. Often, these assignments conflict with no assignment clauses found in comprehensive general liability (CGL) policies issued to the predecessor corporation. As discussed briefly below, this conflict is sometimes resolved in favor of transferring coverage to the successor corporation by operation of state law.

Until 15 years ago, there was little discussion either in case law or legal journals addressing whether a state merger statute would operate to assign the liability insurance of a merged corporation to the surviving corporation, particularly in the absence of an express assignment by the merging corporation. However, in the last decade, courts generally have concluded that, by issuing comprehensive liability insurance policies to a corporation, an insurer undertakes certain contingent contractual obligations with corresponding contingent contractual rights in that corporation's favor; these obligations and rights survive the dissolution or merger of the corporation.

Upon merger, these contingent contractual rights have been held to automatically vest in the surviving corporation by operation of a state's merger statute. As one court stated: "In other words, the surviving corporation simply stands in the same position as that occupied by the merged corporation prior to the merger."

Thus, a conflict exists between the various state merger statutes, which transfer all the rights and privileges of the dissolved corporation to the surviving corporation, and the insuring agreement, which typically contains a "no-assignment" provision. These provisions commonly provide: "Assignment of interest under this policy shall not bind the Company until its consent is endorsed thereon."

Insurers may argue, pursuant to general principles of contract law, that an insurance contract is personal to the named insured and to any additional insured added by endorsement. A party cannot unilaterally add additional parties to the contract. A party must first seek the insurer's assent to the modification of the contract. However, the majority of courts that have considered the issue of coverage for successor corporations have ignored policy language and general contract principles of mutual consent by concluding that a successor corporation can avail itself of coverage issued by insurers to the merging corporation. While the state merger statutes are often cited as the basis for this conclusion, the courts justify this result utilizing either or both of the following arguments:

* The result is justified because successor liability does not materially increase the original risk for which the insurer issued coverage.

* The no-assignment clause, when read in conjunction with the state merger statutes, is ambiguous and, therefore, will not be enforced.