Insurance Survival in an M&A World: The Impact of Corporate Transactions on the Availability of Insurance for Environmental and Other Long Tail Claims

Several recent cases in Ohio, following in the wake of the 2003 California decision in Henkel Corp. v. Hartford Accident & Indemnity Co., 29 Cal. 4th 934 (Feb. 3, 2003), provide new insights into the problems companies with complex corporate histories face when seeking coverage for long tail liabilities.

The Nature of the Corporate Transaction Matters

The corporate history of many companies includes different types of transactions that may or may not result in a change to the corporate entity itself. Understanding the nature of the different types of transactions i sential to understanding the impact the transactions may have on the continued availability of pre-existing insurance for the new or surviving entity. Although such transactions are governed by the laws of the various states, the following principles generally will apply:

Stock Transactions. When a corporation's stocks, or shares, are sold, no change of corporate form occurs. The acquired corporation remains the same, but with different owners, or shareholders. It is neither a successor nor a predecessor to itself.

Statutory Mergers. A statutory merger entails one corporation that is merged into another, which then becomes the surviving corporation. Only one company remains in existence, and the surviving corporation will be considered the 'successor' and will inherit all of the rights and obligations of the merged company.

De Facto Mergers. In some instances, an asset acquisition will, as a matter of law, amount to a merger, such that the acquiring corporation will be considered the successor to the company whose assets were acquired. This typically is the case when all of the assets and liabilities of the divesting company are the subject of the transaction, such that nothing is left of that company and only the acquiring company remains in existence.

Asset Purchases. An asset acquisition entails one company acquiring some or all of the assets of another company. The liabilities may or may not be transferred as well. The new owner of the assets generally is not considered a 'successor' of the company from which the assets were acquired.

The Earlier Decisions

As a general proposition, a successor corporation to a merger or a de facto merger will inherit all of the rights and obligations of its predecessor company, including all insurance rights. For example, in Westoil Terminals Co. v. Harbor Ins. Co., 73 Cal. App. 4th 634, 86 Cal. Rptr. 2d 636 (1999), the surviving company following a de facto merger was held to be entitled to all of the insurance rights in the insurance policies sold to the predecessor company for environmental claims asserted against the surviving corporation but arising out of the predecessor company's activities. In Westoil, a closely held corporation reorganized as a limited partnership. The shareholders traded their shares for partnership interests, the corporation sold all of its assets and liabilities to the partnership, and the partnership continued the business. The court held that this was a de facto merger.

The law regarding the continued availability of insurance following an asset transaction has always been less certain. Typically, a company acquiring assets does not automatically inherit all of the rights and obligations of the seller. Even in situations where pre-existing insurance policies are demonstrated to have been among the acquired assets, or the right to insurance benefits is intended to have been transferred, consent to assignment clauses in the policies purport to preclude their transfer to the acquiring company. Courts, however, developed two exceptions that permit the transfer of insurance rights in two situations notwithstanding such clauses: 1) when an assignment of insurance rights takes place after the loss; and 2) when the sale of an entire product line results in product liability being imposed on the acquiring company as a matter of law.

The rationale for the first of these exceptions is that once the insured loss has occurred, the seller essentially transfers a cause of action, also referred to as a chose in action, rather than an unforeseen risk. The majority of courts have held that in this situation, consent to assignment is not required because there is no expansion of the risk, and the insurers would receive an unfair windfall if coverage were forfeited. Gopher Oil v. American Hardware Mut. Ins. Co., 588 N.W.2d 756 (Minn. App. 1999); Travelers Indem. Co. v. Israel, 354 F.2d 488 (2d Cir. 1965); 3 Couch on Insurance 3d, '35:7 (2000).

The product line cases begin with Northern Ins. Co. of N.Y. v. Allied Mutual Ins. Co., 955 F.2d 1353 (9th Cir. 1992). That case involved an asset purchase with no assumption of liabilities and no assignment of insurance benefits. After the transaction, the buyer was sued by a plaintiff alleging fetal alcohol syndrome arising out of pre-transaction sales. The court found that the right to indemnity, not the actual insurance policy, followed the liability and that no assignment of the policies was required. According to the court, the basis for honoring the consent-to-assignment clause does not exist where 'regardless of any transfer, the insurer still covers only the risk it evaluated when it wrote the policy.'

Henkel Corp. v. Hartford Accident and Indemnity Company

In Henkel Corp. v. Hartford Accident & Indemnity Co., 29 Cal. 4th 934, 62 P.3d 69 (2003), the California Supreme Court held that a surviving corporation following a merger was not entitled to the former company's rights under occurrence-based liability policies because the policies were not properly assigned.

The Henkel case, which concerned occurrence-based product liability insurance, involved Union Carbide's purchase of Amchem and subsequent sale of Amchem's metalworking business. The key transactions were as follows: After Union Carbide acquired Amchem ('Amchem 1'), it created another subsidiary, Amchem 2. By resolutions of the boards of both Amchems, 'all of [Amchem 1's] right, title and interest ' in and to its domestic assets utilized in its metalworking business' and the liabilities and goodwill of that business were transferred to Amchem 2. There was no asset purchase agreement spelling out exactly what was transferred. Amchem 1 continued to exist, operating the non-metalworking business. Later, Amchem 1 was acquired by Rhone-Poulenc and Amchem 2 was acquired by Henkel, both in stock transactions. A products liability suit was brought against both Amchems for exposure to metalworking chemicals that occurred prior to the split of the company. Amchem 2 sought indemnification under insurance policies that had covered the pre-split company.

The California Supreme Court held that Amchem 2 was not entitled to coverage under the policies. The heart of the decision in Henkel, and its point of departure from the majority rule, was the California court's determination that a chose in action for insurance proceeds only arises when the claim has been reduced to a sum of money owed. Accordingly, the court found inapplicable the rule that permits a transfer of insurance rights so long as the transfer takes place after the loss has occurred. The court ruled that even if the board resolutions had intended to effect an assignment of insurance policies, they were ineffective because the policies contained non-assignment clauses that required the consent of the insurers.

The Henkel decision created a stir, but few courts have followed Henkel, although the Western District of Michigan did in Century Indemnity v. Aero-Motive Corp., 318 F. Supp. 2d 530 (W.D. Mich. 2003). Others continue to adhere to the majority rule, as reflected in Globecon Group, LLC v. Hartford Fire Ins. Co., 434 F.3d 165 (2d Cir. 2006); Massachusetts Elec. Co. v. Commercial Union Ins., 2005 WL 3489658 (Mass. Super. Oct. 18, 2005); OneBeacon America Ins. Co. v. A.P.I., Inc., 2006 WL 1473004 (D. Minn. May 25, 2006).

Distinguishing Both Henkel And Northern Insurance: The Ohio Cases

In 2005, the Ohio Supreme Court accepted two cases for review, Pilkington North America, Inc. v. Travelers Cas. & Sur. Co., 112 Ohio St. 3d 482, 861 N.E.2d 121 (2006), and The Glidden Company v. Lumbermens Mutual Cas. Co., 112 Ohio St. 3d 470, 861 2d 109 (2006), both of which presented issues regarding the availability of insurance for liabilities arising out of the past activities of a related company. Each case involved a complex series of corporate transactions that included the internal transfer of assets to a newly formed subsidiary, and the subsequent sale of the subsidiary. While these cases were pending, the U.S. District Court for the Northern District of Ohio decided similar issues in Elliott Co. v. Liberty Mutual Ins. Co., 434 F. Supp. 2d 483 (N.D. Ohio 2006), predicting the result that would be reached by the Ohio Supreme Court.

In Elliott Co. v. Liberty Mutual Ins. Co., the U.S. District Court was confronted with a complex and convoluted corporate history. Elliott Company became a div n of Carrier Corporation after the two companies merged in 1957. From 1957 to 1963, Liberty Mutual insured Carrier Corporation and 'The Elliott Company, a Division of Carrier Corporation.' United Technologies Corporation ('UTC') subsequently purchased Carrier in 1979, and in 1981, the Elliott division was incorporated as Elliott Turbomachinery ('Elliott Turbo'). A subsequent 1981 Agreement and Plan of Reorganization and Separation between UTC, Carrier, and Elliott Turbo listed the assets transferred to Elliott Turbo in a document titled Exhibit A. The parties, however, could not locate a copy of Exhibit A and, thus, had to resort to secondary evidence to prove its contents. Liberty Mutual relied on a later 1987 Stock and Asset Purchase Agreement through which a third party acquired Elliott Turbo to show that Elliott Turbo never acquired rights to the earlier Carrier policies. The 1987 purchase agreement did not include any former Carrier policies in a list of insurance policies under which Elliott Turbo was an owner, insured, or beneficiary. Liberty Mutual argued, therefore, that Elliott Turbo never acquired them in the earlier 1981 transaction. On May 10, 2006, the district court granted summary judgment to Liberty Mutual on that basis, finding that Elliott was not entitled to coverage for asbestos-related claims under insurance policies issued by Liberty Mutual to the Carrier Corporation (the 'Carrier policies'), finding that the policies had not been assigned or transferred and that the coverage did not transfer by operation of law, declining to follow the Northern Insurance line of cases. Indeed, in reaching its decision, the District Court stated:

This Court believes that the Ohio Supreme Court and the highest courts in the other relevant jurisdictions will agree with what most other courts to address the issue have recognized ' namely, that the Northern Insurance line of cases is too weak a foundation upon which to build a far-reaching blanket rule that coverage always follows liability, even when the parties to the corporate agreement chose not to assign coverage. (Memorandum Opinion, pp. 21-22).

Notwithstanding this strong prediction, on Aug. 8, 2006, the district court granted Elliott's motion to reconsider its May 10th decision. In granting the motion for reconsideration, the court found that Elliott had identified an error of apprehension ' namely, the court's decision to refer to the 1987 agreement as a sale or assignment of assets. According to the court, this error affected the weight it assigned to that agreement as secondary evidence concerning the transfer of the Carrier policies. It explained that because the 1987 agreement was a sale of stock, rather than a sale of assets, and because a change in the ownership of a corporation's stock does not affect the rights or obligations of the corporation, it was unnecessary for the parties to the stock sale to list all of Elliott Turbo's assets in the 1987 purchase agreement. There was, therefore, a reasonable explanation for the omission of the Carrier policies in the 1987 agreement. Based on the foregoing and upon considering the secondary evidence presented, the court concluded that a genuine issue of material fact remained as to whether the Carrier policies transferred to Elliott Turbo in Exhibit A. Accordingly, the court granted Elliott's motion for reconsideration and denied both parties' motions for summary judgment. The court, however, did not reconsider its determination that the coverage did not pass by operation of law. Elliott Co. v. Liberty Mut. Ins. Co., 239 F.R.D. 479 (N.D. Ohio 2006).

Shortly after the Elliott case was decided, the Ohio Supreme Court decided the Pilkington and Glidden cases, confirming in large part the Elliott court's predictions. Pilkington, a case certified to the Ohio Supreme Court by the U.S. District Court for the Northern District of Ohio, involved environmental liabilities arising out of the former glass manufacturing business of Libbey-Owens Ford ('LOF'), which was insured under occurrence-type CGL policies from 1951 to 1972.

The facts in Pilkington were as follows. Prior to 1986, the glass manufacturing business was operated as an unincorporated operating division of LOF. In 1986, LOF created a newly formed subsidiary, LOF Glass, Inc., and transferred the assets and the environmental liabilities of its glass manufacturing business to it. Shortly thereafter, LOF sold all the shares of LOF Glass, Inc. to Pilkington Holdings, Inc. Pilkington Holdings, Inc. changed the name of the subsidiary to Pilkington North America, Inc. ('PNA'). PNA continues to own and operate the former LOF glass business.

In 2000, PNA was sued in a number of environmental lawsuits, all based on the pre-1972 waste disposal activities of LOF's former glass manufacturing business. PNA tendered the lawsuits to LOF's pre-1972 insurers, and subsequently sought a judgment from the U.S. District Court for the Northern District of Ohio declaring that it was entitled to coverage under LOF's pre-1972 policies. In response, the insurers asserted, among other arguments, that they had no legal obligation to defend PNA because PNA was not a named insured in the insurance policies. The insurers also asserted that the policies contained a non-assignment provision that prohibited LOF from assigning its interest in the policies to another party, including its own wholly owned subsidiary, without the prior consent of the insurer. None of the insurers had been asked to consent and none had in fact consented to the assignment of the policies.

The Ohio Supreme Court decided three questions that were presented to it. First, it decided that a chose in action arises under an occurrence-based insurance policy at the time of the covered loss. In this regard, the Ohio Supreme Court rejected the Henkel decision, in which the California court determined that a chose in action for insurance proceeds only arises when the claim has been reduced to a sum of money owed.

Next, the Ohio Supreme Court considered whether the chose in action could be transferred. The court noted that generally, contractual rights are transferable except under three circumstances: 1) if there if clear contractual language prohibiting the assignment; 2) if the assignment will materially change the duty of the obligor, or, in the case of insurance, increase the insurers' risk; or 3) if assignment is forbidden by statute or public policy. The court determined that while the first circumstance appeared to exist by virtue of the policies' anti-assignment clauses, law has developed creating an exception for the assignment of insurance rights after the loss has occurred, recognizing the longstanding majority rule. With respect to the second circumstance, however, the court determined that while the insurer's duty to indemnify remained fixed, and an assignment did not materially change such duty, the duty to defend could be materially affected by an assignment, particularly where the original policyholder remains in existence. Accordingly, the Ohio Supreme Court held that the chose in action with respect to the duty to in ify could be assigned, but it declined to decide on the facts before it whether the chose in action with respect to the duty to defend could be assigned.

Finally, the Ohio Supreme Court turned to the question of whether insurance coverage should follow liabilities as a matter of law. In addressing this situation, the court distinguished situations where the underlying liabilities are contractually assumed with situations where the underlying liabilities are imposed on the second party by operation of law. The court noted that in Northern Insurance, the underlying products liabilities were imposed on the new company under a rule of product-line successor liability that is not the law in Ohio. The court declined to extend Northern Insurance to cases where the second party voluntarily assumed the liabilities by contract. Accordingly, the court held that when a covered occurrence under an insurance policy occurs before liability is transferred to a successor corporation, coverage does not transfer to that corporation by operation of law when the liability was assumed by contract.

The Glidden Company v. Lumbermens Mutual Cas. Co. involved facts similar to those in Pilkington, including a long and complicated corporate history that included asset transfers to newly formed subsidiaries and the subsequent sale of those subsidiaries. At issue was whether earlier policies issued to the original Glidden Company would provide coverage to the company that had acquired the line of business that manufactured and sold lead-based pigments used in paint.

The Ohio Supreme Court decided Glidden on the same day but after it decided Pilkington, and it, in large part, based the decision on its decision in Pilkington. In Glidden, the court held that insurance coverage does not transfer by operation of law to a successor company where that company voluntarily assumed the liabilities by contract.

The Pilkington and Glidden decisions depart from both the Henkel decision and the previous majority rule in significant ways. These cases reject the notion that insurance coverage transfers by operation of law where liabilities are assumed voluntarily, but they leave open the question of whether insurance coverage would transfer by operation of law in situations where the liabilities for which coverage is sought are imposed on the successor company by operation of law. These cases also reinforce the majority rule that a chose in action for insurance proceeds may be transferred notwithstanding a non-assignment clause, but at the same time acknowledge a possible exception in situations where the risk to the insurer is increased, distinguishing between the duty to indemnify and the duty to defend in this regard. The law will continue to develop in this area and the lesson for now is that the question of coverage for successor companies will depend on the facts of each case, with courts potentially focusing on the possibility of a heightened risk to the insurer that may be presented when more than one company survives and seeks coverage.

Keven Drummond Eiber is a partner at Brouse McDowell, and she heads the insurance coverage practice group in the firm's Cleveland, Ohio, office. Amanda M. Leffler is an associate in the firm's Akron, Ohio, office. The authors focus their practices on the representation of policyholders in insurance coverage disputes.

Several recent cases in Ohio, following in the wake of the 2003 California decision in Henkel Corp. v. Hartford Accident & Indemnity Co. , 29 Cal. 4th 934 (Feb. 3, 2003), provide new insights into the problems companies with complex corporate histories face when seeking coverage for long tail liabilities.

The Nature of the Corporate Transaction Matters

The corporate history of many companies includes different types of transactions that may or may not result in a change to the corporate entity itself. Understanding the nature of the different types of transactions i sential to understanding the impact the transactions may have on the continued availability of pre-existing insurance for the new or surviving entity. Although such transactions are governed by the laws of the various states, the following principles generally will apply:

Stock Transactions. When a corporation's stocks, or shares, are sold, no change of corporate form occurs. The acquired corporation remains the same, but with different owners, or shareholders. It is neither a successor nor a predecessor to itself.

Statutory Mergers. A statutory merger entails one corporation that is merged into another, which then becomes the surviving corporation. Only one company remains in existence, and the surviving corporation will be considered the 'successor' and will inherit all of the rights and obligations of the merged company.

De Facto Mergers. In some instances, an asset acquisition will, as a matter of law, amount to a merger, such that the acquiring corporation will be considered the successor to the company whose assets were acquired. This typically is the case when all of the assets and liabilities of the divesting company are the subject of the transaction, such that nothing is left of that company and only the acquiring company remains in existence.

Asset Purchases. An asset acquisition entails one company acquiring some or all of the assets of another company. The liabilities may or may not be transferred as well. The new owner of the assets generally is not considered a 'successor' of the company from which the assets were acquired.

The Earlier Decisions

As a general proposition, a successor corporation to a merger or a de facto merger will inherit all of the rights and obligations of its predecessor company, including all insurance rights. For example, in Westoil Terminals Co. v. Harbor Ins. Co. , 73 Cal. App. 4th 634, 86 Cal. Rptr. 2d 636 (1999), the surviving company following a de facto merger was held to be entitled to all of the insurance rights in the insurance policies sold to the predecessor company for environmental claims asserted against the surviving corporation but arising out of the predecessor company's activities. In Westoil, a closely held corporation reorganized as a limited partnership. The shareholders traded their shares for partnership interests, the corporation sold all of its assets and liabilities to the partnership, and the partnership continued the business. The court held that this was a de facto merger.

The law regarding the continued availability of insurance following an asset transaction has always been less certain. Typically, a company acquiring assets does not automatically inherit all of the rights and obligations of the seller. Even in situations where pre-existing insurance policies are demonstrated to have been among the acquired assets, or the right to insurance benefits is intended to have been transferred, consent to assignment clauses in the policies purport to preclude their transfer to the acquiring company. Courts, however, developed two exceptions that permit the transfer of insurance rights in two situations notwithstanding such clauses: 1) when an assignment of insurance rights takes place after the loss; and 2) when the sale of an entire product line results in product liability being imposed on the acquiring company as a matter of law.

The rationale for the first of these exceptions is that once the insured loss has occurred, the seller essentially transfers a cause of action, also referred to as a chose in action, rather than an unforeseen risk. The majority of courts have held that in this situation, consent to assignment is not required because there is no expansion of the risk, and the insurers would receive an unfair windfall if coverage were forfeited. Gopher Oil v. American Hardware Mut. Ins. Co. , 588 N.W.2d 756 (Minn. App. 1999); Travelers Indem. Co. v. Israel , 354 F.2d 488 (2d Cir. 1965); 3 Couch on Insurance 3d, '35:7 (2000).

The product line cases begin with Northern Ins. Co. of N.Y. v. Allied Mutual Ins. Co. , 955 F.2d 1353 (9th Cir. 1992). That case involved an asset purchase with no assumption of liabilities and no assignment of insurance benefits. After the transaction, the buyer was sued by a plaintiff alleging fetal alcohol syndrome arising out of pre-transaction sales. The court found that the right to indemnity, not the actual insurance policy, followed the liability and that no assignment of the policies was required. According to the court, the basis for honoring the consent-to-assignment clause does not exist where 'regardless of any transfer, the insurer still covers only the risk it evaluated when it wrote the policy.'

Henkel Corp. v. Hartford Accident and Indemnity Company

In Henkel Corp. v. Hartford Accident & Indemnity Co. , 29 Cal. 4th 934, 62 P.3d 69 (2003), the California Supreme Court held that a surviving corporation following a merger was not entitled to the former company's rights under occurrence-based liability policies because the policies were not properly assigned.

The Henkel case, which concerned occurrence-based product liability insurance, involved Union Carbide's purchase of Amchem and subsequent sale of Amchem's metalworking business. The key transactions were as follows: After Union Carbide acquired Amchem ('Amchem 1'), it created another subsidiary, Amchem 2. By resolutions of the boards of both Amchems, 'all of [Amchem 1's] right, title and interest ' in and to its domestic assets utilized in its metalworking business' and the liabilities and goodwill of that business were transferred to Amchem 2. There was no asset purchase agreement spelling out exactly what was transferred. Amchem 1 continued to exist, operating the non-metalworking business. Later, Amchem 1 was acquired by Rhone-Poulenc and Amchem 2 was acquired by Henkel, both in stock transactions. A products liability suit was brought against both Amchems for exposure to metalworking chemicals that occurred prior to the split of the company. Amchem 2 sought indemnification under insurance policies that had covered the pre-split company.

The California Supreme Court held that Amchem 2 was not entitled to coverage under the policies. The heart of the decision in Henkel, and its point of departure from the majority rule, was the California court's determination that a chose in action for insurance proceeds only arises when the claim has been reduced to a sum of money owed. Accordingly, the court found inapplicable the rule that permits a transfer of insurance rights so long as the transfer takes place after the loss has occurred. The court ruled that even if the board resolutions had intended to effect an assignment of insurance policies, they were ineffective because the policies contained non-assignment clauses that required the consent of the insurers.

The Henkel decision created a stir, but few courts have followed Henkel , although the Western District of Michigan did in Century Indemnity v. Aero-Motive Corp. , 318 F. Supp. 2d 530 (W.D. Mich. 2003). Others continue to adhere to the majority rule, as reflected in Globecon Group, LLC v. Hartford Fire Ins. Co. , 434 F.3d 165 (2d Cir. 2006); Massachusetts Elec. Co. v. Commercial Union Ins., 2005 WL 3489658 (Mass. Super. Oct. 18, 2005); OneBeacon America Ins. Co. v. A.P.I., Inc., 2006 WL 1473004 (D. Minn. May 25, 2006).

Distinguishing Both Henkel And Northern Insurance: The Ohio Cases

In 2005, the Ohio Supreme Court accepted two cases for review, Pilkington North America, Inc. v. Travelers Cas. & Sur. Co. , 112 Ohio St. 3d 482, 861 N.E.2d 121 (2006), and The Glidden Company v. Lumbermens Mutual Cas. Co. , 112 Ohio St. 3d 470, 861 2d 109 (2006), both of which presented issues regarding the availability of insurance for liabilities arising out of the past activities of a related company. Each case involved a complex series of corporate transactions that included the internal transfer of assets to a newly formed subsidiary, and the subsequent sale of the subsidiary. While these cases were pending, the U.S. District Court for the Northern District of Ohio decided similar issues in Elliott Co. v. Liberty Mutual Ins. Co. , 434 F. Supp. 2d 483 (N.D. Ohio 2006), predicting the result that would be reached by the Ohio Supreme Court.

In Elliott Co. v. Liberty Mutual Ins. Co., the U.S. District Court was confronted with a complex and convoluted corporate history. Elliott Company became a div n of Carrier Corporation after the two companies merged in 1957. From 1957 to 1963, Liberty Mutual insured Carrier Corporation and 'The Elliott Company, a Division of Carrier Corporation.' United Technologies Corporation ('UTC') subsequently purchased Carrier in 1979, and in 1981, the Elliott division was incorporated as Elliott Turbomachinery ('Elliott Turbo'). A subsequent 1981 Agreement and Plan of Reorganization and Separation between UTC, Carrier, and Elliott Turbo listed the assets transferred to Elliott Turbo in a document titled Exhibit A. The parties, however, could not locate a copy of Exhibit A and, thus, had to resort to secondary evidence to prove its contents. Liberty Mutual relied on a later 1987 Stock and Asset Purchase Agreement through which a third party acquired Elliott Turbo to show that Elliott Turbo never acquired rights to the earlier Carrier policies. The 1987 purchase agreement did not include any former Carrier policies in a list of insurance policies under which Elliott Turbo was an owner, insured, or beneficiary. Liberty Mutual argued, therefore, that Elliott Turbo never acquired them in the earlier 1981 transaction. On May 10, 2006, the district court granted summary judgment to Liberty Mutual on that basis, finding that Elliott was not entitled to coverage for asbestos-related claims under insurance policies issued by Liberty Mutual to the Carrier Corporation (the 'Carrier policies'), finding that the policies had not been assigned or transferred and that the coverage did not transfer by operation of law, declining to follow the Northern Insurance line of cases. Indeed, in reaching its decision, the District Court stated:

This Court believes that the Ohio Supreme Court and the highest courts in the other relevant jurisdictions will agree with what most other courts to address the issue have recognized ' namely, that the Northern Insurance line of cases is too weak a foundation upon which to build a far-reaching blanket rule that coverage always follows liability, even when the parties to the corporate agreement chose not to assign coverage. (Memorandum Opinion, pp. 21-22).

Notwithstanding this strong prediction, on Aug. 8, 2006, the district court granted Elliott's motion to reconsider its May 10th decision. In granting the motion for reconsideration, the court found that Elliott had identified an error of apprehension ' namely, the court's decision to refer to the 1987 agreement as a sale or assignment of assets. According to the court, this error affected the weight it assigned to that agreement as secondary evidence concerning the transfer of the Carrier policies. It explained that because the 1987 agreement was a sale of stock, rather than a sale of assets, and because a change in the ownership of a corporation's stock does not affect the rights or obligations of the corporation, it was unnecessary for the parties to the stock sale to list all of Elliott Turbo's assets in the 1987 purchase agreement. There was, therefore, a reasonable explanation for the omission of the Carrier policies in the 1987 agreement. Based on the foregoing and upon considering the secondary evidence presented, the court concluded that a genuine issue of material fact remained as to whether the Carrier policies transferred to Elliott Turbo in Exhibit A. Accordingly, the court granted Elliott's motion for reconsideration and denied both parties' motions for summary judgment. The court, however, did not reconsider its determination that the coverage did not pass by operation of law. Elliott Co. v. Liberty Mut. Ins. Co. , 239 F.R.D. 479 (N.D. Ohio 2006).

Shortly after the Elliott case was decided, the Ohio Supreme Court decided the Pilkington and Glidden cases, confirming in large part the Elliott court's predictions. Pilkington, a case certified to the Ohio Supreme Court by the U.S. District Court for the Northern District of Ohio, involved environmental liabilities arising out of the former glass manufacturing business of Libbey-Owens Ford ('LOF'), which was insured under occurrence-type CGL policies from 1951 to 1972.

The facts in Pilkington were as follows. Prior to 1986, the glass manufacturing business was operated as an unincorporated operating division of LOF. In 1986, LOF created a newly formed subsidiary, LOF Glass, Inc., and transferred the assets and the environmental liabilities of its glass manufacturing business to it. Shortly thereafter, LOF sold all the shares of LOF Glass, Inc. to Pilkington Holdings, Inc. Pilkington Holdings, Inc. changed the name of the subsidiary to Pilkington North America, Inc. ('PNA'). PNA continues to own and operate the former LOF glass business.

In 2000, PNA was sued in a number of environmental lawsuits, all based on the pre-1972 waste disposal activities of LOF's former glass manufacturing business. PNA tendered the lawsuits to LOF's pre-1972 insurers, and subsequently sought a judgment from the U.S. District Court for the Northern District of Ohio declaring that it was entitled to coverage under LOF's pre-1972 policies. In response, the insurers asserted, among other arguments, that they had no legal obligation to defend PNA because PNA was not a named insured in the insurance policies. The insurers also asserted that the policies contained a non-assignment provision that prohibited LOF from assigning its interest in the policies to another party, including its own wholly owned subsidiary, without the prior consent of the insurer. None of the insurers had been asked to consent and none had in fact consented to the assignment of the policies.

The Ohio Supreme Court decided three questions that were presented to it. First, it decided that a chose in action arises under an occurrence-based insurance policy at the time of the covered loss. In this regard, the Ohio Supreme Court rejected the Henkel decision, in which the California court determined that a chose in action for insurance proceeds only arises when the claim has been reduced to a sum of money owed.

Next, the Ohio Supreme Court considered whether the chose in action could be transferred. The court noted that generally, contractual rights are transferable except under three circumstances: 1) if there if clear contractual language prohibiting the assignment; 2) if the assignment will materially change the duty of the obligor, or, in the case of insurance, increase the insurers' risk; or 3) if assignment is forbidden by statute or public policy. The court determined that while the first circumstance appeared to exist by virtue of the policies' anti-assignment clauses, law has developed creating an exception for the assignment of insurance rights after the loss has occurred, recognizing the longstanding majority rule. With respect to the second circumstance, however, the court determined that while the insurer's duty to indemnify remained fixed, and an assignment did not materially change such duty, the duty to defend could be materially affected by an assignment, particularly where the original policyholder remains in existence. Accordingly, the Ohio Supreme Court held that the chose in action with respect to the duty to in ify could be assigned, but it declined to decide on the facts before it whether the chose in action with respect to the duty to defend could be assigned.

Finally, the Ohio Supreme Court turned to the question of whether insurance coverage should follow liabilities as a matter of law. In addressing this situation, the court distinguished situations where the underlying liabilities are contractually assumed with situations where the underlying liabilities are imposed on the second party by operation of law. The court noted that in Northern Insurance, the underlying products liabilities were imposed on the new company under a rule of product-line successor liability that is not the law in Ohio. The court declined to extend Northern Insurance to cases where the second party voluntarily assumed the liabilities by contract. Accordingly, the court held that when a covered occurrence under an insurance policy occurs before liability is transferred to a successor corporation, coverage does not transfer to that corporation by operation of law when the liability was assumed by contract.

The Glidden Company v. Lumbermens Mutual Cas. Co. involved facts similar to those in Pilkington, including a long and complicated corporate history that included asset transfers to newly formed subsidiaries and the subsequent sale of those subsidiaries. At issue was whether earlier policies issued to the original Glidden Company would provide coverage to the company that had acquired the line of business that manufactured and sold lead-based pigments used in paint.

The Ohio Supreme Court decided Glidden on the same day but after it decided Pilkington, and it, in large part, based the decision on its decision in Pilkington. In Glidden, the court held that insurance coverage does not transfer by operation of law to a successor company where that company voluntarily assumed the liabilities by contract.

The Pilkington and Glidden decisions depart from both the Henkel decision and the previous majority rule in significant ways. These cases reject the notion that insurance coverage transfers by operation of law where liabilities are assumed voluntarily, but they leave open the question of whether insurance coverage would transfer by operation of law in situations where the liabilities for which coverage is sought are imposed on the successor company by operation of law. These cases also reinforce the majority rule that a chose in action for insurance proceeds may be transferred notwithstanding a non-assignment clause, but at the same time acknowledge a possible exception in situations where the risk to the insurer is increased, distinguishing between the duty to indemnify and the duty to defend in this regard. The law will continue to develop in this area and the lesson for now is that the question of coverage for successor companies will depend on the facts of each case, with courts potentially focusing on the possibility of a heightened risk to the insurer that may be presented when more than one company survives and seeks coverage.

Keven Drummond Eiber is a partner at Brouse McDowell, and she heads the insurance coverage practice group in the firm's Cleveland, Ohio, office. Amanda M. Leffler is an associate in the firm's Akron, Ohio, office. The authors focus their practices on the representation of policyholders in insurance coverage disputes.