Insurance Coverage Alert
January 2007
Authors:
John T. Waldron, III
+1.412.355.8314
john.waldron@klgates.com
Andrew R. Stanton
+1.412.355.6583
andrew.stanton@klgates.com
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Ohio Supreme Court Announces Two
Decisions on Successor Insurance Issues
Corporate entities seeking to transfer insurance assets through a sale, merger or other
transaction must be mindful of the fact that an insurance policy often contains a condition
that purports to prohibit the assignment of interests in the insurance policy without the
insurer’s consent. Insurers frequently raise this anti-assignment condition in an attempt to
avoid providing coverage to corporations that are the successors to the original insureds and
that are saddled with long-tail liabilities, such as legacy asbestos, silica and environmental
claims.
There have been conflicting court decisions in recent years regarding whether and under
what circumstances rights to access historical liability coverage may be transferred to a
corporate successor notwithstanding the presence of anti-assignment conditions in the
applicable policies of insurance. In 2003, the California Supreme Court held that, under
certain circumstances, anti-assignment conditions in policies of insurance preclude the
transfer of rights to coverage under those policies without the insurers’ consent.1 Since that
decision, a number of other courts have weighed in on the important question of whether
and under what circumstances the link between transferred liabilities and the insurance
policies that provide coverage for those liabilities will survive an asset sale, merger or other
corporate transaction.
The Ohio Supreme Court recently issued two decisions addressing this question: Pilkington
N. Am., Inc. v. Travelers Cas. & Sur. Co.2 and The Glidden Co. v. Lumbermens Mut.
Cas. Co.3 This Alert will provide an overview of these decisions and the implications for
businesses seeking to increase the clarity and predictability associated with the potential
transfer of historical liabilities and the insurance assets that may be called upon to respond
to those liabilities.
Pilkington Court Holds That an Insured May Transfer Its Rights
to Indemnification for Pre-Transfer Losses Notwithstanding an
Anti-Assignment Condition, But That Coverage for Liabilities
Assumed by Contract Does Not Automatically Follow by
Operation of Law
In order to address whether the insurance rights could be transferred, the Pilkington Court
first examined the corporate history, which the Court set forth as follows: Prior to 1986,
various insurance companies issued occurrence policies (the “LOF policies”) to LibbeyOwens-Ford Company, formerly to Libbey-Owens-Ford Glass Company (“LOF Glass
Co.”).4 In 1986, Pilkington purchased LOF Glass Co.’s glass-manufacturing business in
a two-part transaction. First, in February 1986, LOF Glass Co. transferred the assets and
Henkel Corp. v. Hartford Accident & Indem. Co., 62 P.3d 69 (Cal. 2003). K&L Gates
provided an overview and analysis of the Henkel decision in a March 2003 Insurance
Coverage Alert.
2
No. 2005-0378, 2006 WL 3746135 (Ohio Dec. 20, 2006).
3
No. 81782, 2005-0293, 2006 WL 3743025 (Ohio Dec. 20, 2006).
4
Id. at *2.
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Insurance Coverage Alert
liabilities of its glass-manufacturing division into a new
wholly-owned subsidiary, LOF Glass, Inc., pursuant
to a Transfer and Assumption Agreement. Second,
in March 1986, LOF Glass Co. entered into a Share
Exchange Agreement with Pilkington Brothers P.L.C.
and one of its subsidiaries, Pilkington Holdings, Inc.,
pursuant to which the Pilkington entities acquired all of
the stock of the newly-formed LOF Glass, Inc. In July
2000, LOF Glass, Inc. was renamed Pilkington North
America, Inc. (“Pilkington”). Accordingly, Pilkington
obtained the glass business and its environmental
liabilities, including liabilities arising from conduct
by LOF Glass Co. prior to 1986. Pilkington sought
coverage for defense and indemnification for those
liabilities under the LOF policies.5
The court was presented with the question whether,
despite the presence of anti-assignment conditions
in the policies, Pilkington had the right to defense
and indemnification under the LOF policies for
the environmental liabilities it had assumed. The
Ohio Supreme Court certified three questions of
state law from the United States District Court for
the Northern District of Ohio, Western Division.
The three questions addressed by the court were:
(i) Whether Pilkington’s demand for defense and
indemnification constituted a “chose in action”; (ii)
whether anti-assignment conditions in the policies
barred Pilkington’s acquisition of such a chose in
action; and (iii) whether rights to coverage for pretransfer occurrences automatically followed liabilities
by operation of law when the liabilities had been
assumed by contract.
For determining when a chose in action arises, the
court found that the critical issue was one of timing—
i.e., does a chose in action arise at the time of the
covered loss or when the claim is reduced to a sum
of money owed? The court, rejecting the reasoning
of the Henkel court that a chose in action arises when
a sum certain is due and payable, held that “a chose
in action arises under an occurrence-based insurance
policy at the time of the covered loss. The distinction
created in Henkel does not align with the obligations
Id. The parties agreed that the occurrence-based
LOF policies themselves under which Pilkington
sought coverage had not been transferred to Pilkington.
Id. (“All parties agree that the insurance policies
under which Pilkington is seeking coverage were not
transferred to Pilkington . . . .”).
5
recognized in Ohio that the insured’s right to recover
arises automatically at the time of loss.”6
Having found that a chose in action arises at the time
of the loss, the court next addressed whether such a
chose in action could be transferred in the face of an
anti-assignment condition in the insurance policy.
With respect to the insurers’ duty to indemnify,7 the
court rejected the insurers’ broad contention that
the anti-assignment conditions in the LOF policies
“contractually eliminate[d] any possibility of a chose
in action being passed to Pilkington.”8 Instead, the
court recognized a distinction between the assignment
of rights after the occurrence of a covered loss, as
opposed to a transfer before such an occurrence. On
that point, the court held that “[w]e see no reason to
deviate from the standard rule on this issue, and thus we
hold that the chose in action as to the duty to indemnify
is unaffected by the anti-assignment provision when
the covered loss has already occurred.”9
Finally, the court rejected Pilkington’s argument that,
because it had assumed liabilities by contract, it should
be able to access the insurance rights by operation
of law. Rather, the court recognized that insureds
Id. at *4.
With respect to the insurers’ duty to defend, the
court stated that it was “unable to answer definitively
whether such a chose in action is transferable as to the
duty to defend.” Id. at *1.
8
Id.
9
Id. at *7. The Oregon Supreme Court recently
addressed a successor’s rights to coverage from a
different perspective, finding that an anti-assignment
clause in the policy prohibited an assignment of an
insurance claim under the facts at issue in that case.
See Holloway v. Republic Indem. Co. of America,
147 P.3d 329 (Oregon 2006). Holloway involved an
attempt to transfer, by way of a settlement agreement,
rights under an Employers’ Liability Policy from an
employer-insured to her employee, who had sued
the insured. The Oregon Supreme Court held that
the assignment violated the plain and unambiguous
language of the anti-assignment clause regardless of
when the covered loss occurred relative to the putative
transfer: “Nothing in the [anti-assignment] clause
suggests a limitation to pre-loss rights or duties or
provides an exception for post-loss rights or duties.
Reading such an exception into the policy would
not be reasonable and would ‘insert what has been
omitted.’” Id. at 334 (citation omitted).
6
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Insurance Coverage Alert
may intend to transfer liabilities while retaining the
insurance assets that may respond to those liabilities,
and reasoned that “[t]he parties specifically contract
to control liability. Allowing indemnity to follow
liability as a matter of law interferes with that
control.”10 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 arise by operation of
law when the liability was assumed by contract.”11
The Glidden Court Similarly Rejects
Arguments That Insurance Assets
Transfer by Operation of Law for
Liabilities Assumed by Contract
Relying on the reasoning set forth in the Pilkington
decision, the Ohio Supreme Court in Glidden reversed
the holding of the Ohio Court of Appeals that rights to
coverage were transferred to a party by operation of
law where that party assumed the liabilities at issue
by contract.12 Specifically, the Ohio Court of Appeals
had held that Glidden’s rights to coverage arose by
operation of law, following certain historical liabilities
that it had assumed by contract. In so holding, the
Court of Appeals had rejected the reasoning in Henkel
that permitting such a transfer of insurance rights
by operation of law would undercut the freedom of
parties to contract as they please.13 Reversing the
10
11
12
13
2006 WL 3746135 at *9.
Id. at *10.
No. 81782, 2005-0293, 2006 WL 3743025 at *4.
K&L Gates analyzed the Glidden decision by the
Court of Appeals, the Ohio Supreme Court reiterated
the reasoning set forth in Pilkington and held that
rights to insurance coverage do not follow the transfer
of liabilities by operation of law where the liabilities
were assumed by contract.14
Conclusion
The ability of corporate entities to control the transfer
of assets and liabilities in sales, mergers and other
corporate transactions is critical to the success
of such transactions. To some extent, conflicting
court decisions inject a lack of predictability into the
process. Given the inconsistent case law, including the
conflict between the Ohio Supreme Court’s decision in
Pilkington and the Henkel decision of the California
Supreme Court, corporations that have been parties
to such transactions will want to analyze closely the
effect of those transactions on their ability to access
the insurance assets in question.
Ohio Court of Appeals in a prior Insurance Coverage
Alert.
14
Based on the specific facts presented, the court
further rejected Glidden’s arguments that rights to
coverage were expressly transferred by the terms of
the corporate transactional documents at issue, that
the insurers were collaterally estopped from raising
certain defenses to coverage, and that the insurers’
“corporate history” defense was barred by waiver
and/or equitable estoppel. 2006 WL 3743025 at
*7-8.
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