Hidden Value In a Target’s Expired Insurance: Old insurance policies, even those long expired, may be golden nuggets to a company fielding expensive damage claims after an acquisition.

Receiving claim payments from insurance policies carried by the former owners of an acquired company is like finding diamonds hidden under the target’s loading dock. They have been there the whole time, waiting for someone to find and cash in on them, and their value is often undimmed by the passage of time. The trick, of course, is to find these hidden diamonds, including policies that already have expired, early enough to take advantage of them, preferably before encountering an unexpected legal liability. A timely find could open the way for claims under a “long-tail” feature in many policies. A highly prized acquisition or joint venture agreement may seem like an ideal way to increase market share. But after closing the deal, you could find that it has exposed your company to a costly legal claim that more than wipes out the deal’s benefits. When that happens, the results can be disastrous. The claim may be based on remote historical facts, such as improper disposal of waste by the acquired company that creates an environmental problem which the buying organization has to clean up. Or the problem may result from past financial or personnel practices of the seller that expose the successor company to a shareholders’ derivative lawsuit for waste and fraud or a class-action suit for discriminatory hiring practices. Such potential liabilities are often difficult to spot, but the impact of unpleasant surprises can be reduced by taking the right precautions. To protect against such claims, the buyer should ask the seller to disclose its insurance history and to assign its policies to the acquirer. There is a good reason for that precautionary action. The seller’s old, expired comprehensive general liability (CGL) policies may be more valuable in dealing with post-sale liabilities than a seller’s promise to indemnify against loss arising out of the its past operation of the purchased business. That is why a thorough exploration of insurance coverage and related liabilities should be an integral part of the due diligence investigation during purchase negotiations. Although filing an insurance claim does not always produce coverage of a legal defense, settlement, and/or judgment costs, insurance rights are often more easily enforced than contractual indemnity rights. In negotiating purchase terms for an acquisition, ask the seller if it has any expired CGL policies and try to determine the extent to which such policies would pay for liabilities that are actually disclosed by the seller or can be reasonably anticipated because of the seller’s loss history. The answers to these inquiries may enable a buyer to use the seller’s insurance policies as a basis for deciding whether to assume any of the seller’s liabilities. They may also allow the buyer to negotiate a better price for the seller’s business or assets. The benefits derived from exploring the seller’s insurance coverage can be substantial. Consider the following acquisition scenario: As the acquirer’s lawyers exercise due diligence during negotiations, they ask the seller to disclose its ongoing liabilities and its loss history. As a result of having that information, the buyer can disclaim the seller’s pre-closing liabilities, accept future liabilities, and receive a promise of “indemnification” from the seller for pre-closing liability claims. The indemnity promise is secured by seller’s funds which are placed in escrow and controlled by the seller. Under most circumstances, the buyer has done its homework and should be safe. Unfortunately, there may be a hidden danger in the form of a claim emerging against the buyer following the acquisition. Let’s say the claim involves product liability. The buyer then discovers to its chagrin that the sales contract does not define “pre-closing liability” in detail. It turns to the seller to enforce an indemnification promise, but the seller denies that its indemnity applies to this particular claim. What the acquirer thought was covered as a pre-closing claim is viewed by the seller as a post-closing claim. In addition, the design, manufacture, distribution, and sale of the product may span the closing date of the sales contract. The two sides are then left to debate the meaning of “pre-closing liability” and will probably have to resolve the issue in court a highly undesirable outcome. Even if the seller accepts defense of the product liability claim and uses the escrow funds to defray claim costs, the buyer can still be in big trouble. If the amount needed to finance the defense and settlement of pre-closing liabilities was grossly underestimated, the seller’s cooperation means little since the buyer may get stuck with paying a sum that exceeds the funds placed in escrow. The buyer would be in a much better position to defend that first post-closing claim if it had helped the seller find and disclose not only the existence of the seller’s historic insurance policies but also the policies of other corporations previously acquired by the seller, and had received an assignment of all the policies involved. The use of “occurrence form” insurance policies to pay for today’s legal defense costs, damages, and settlements has been well established in environmental and asbestos liability cases. What is not yet well established, however, is the buyer’s request during the acquisition process that the seller search for, disclose, and assign to the buyer the insurance policies owned by the seller and its predecessors. Through assignment of the seller’s insurance policies during preacquisition due diligence, you buy the opinions of thousands of courts that have decided when insurance policies pay for losses. With only a seller’s indemnity promise and escrow fund, you merely buy a promise and someone’s guess as to how much money is needed to defend and pay for damages stemming from an unknown number of potential legal liabilities. Comprehensive general liability insurance policies generally cover accidents resulting in injury or property damage. The coverage is for third-party claims that normally occur away from the insured business’s premises. A typical CGL policy states that the insurance company will pay all sums that the policyholder becomes legally obligated to pay as damages because of bodily injury or property damage that is covered by the policy and is caused by an “occurrence.” Before 1966, CGL policies typically covered liability “for damages because of injury to or destruction of property, including the loss of use thereof, caused by an accident.” The dictionary defines an “accident” as “a happening that is not expected, foreseen, or intended.” Between 1966 and 1986, with some variations, the CGL policy covered liability for bodily injury or property damage caused by an “occurrence.” The word “occurrence,” in turn, was defined in terms of an accident. In particular, from 1973 to 1986, the standard-form CGL policy defined “occurrence” as “an accident, including continuous or repeated exposure to conditions, which result in bodily injury or property damage neither expected nor intended from the standpoint of the insured.” The reason why claims can be made under older, expired CGL policies is because of this “accident” or “occurrence” factor. Historically, CGL policies have had more elasticity than many of today’s “claims made” policy forms, which require that policyholders know of and/or report occurrences to the insurers before the policies expire. In the Wings If you can prove that a current liability stems from occurrences or accidents that took place during past policy periods and caused property damage or bodily injury during those periods, legal costs may be covered by your company’s older CGL policies. Such policies live on forever, and buyers always should try to obtain them from sellers in any acquisition transaction. By the same token, you should never discard any CGL policies that your own company has purchased. Expired CGL policies should pay out on any of the types of losses they were written to cover. They apply to long-term, gradual losses or past damage. The key factor is that the events occurred in the past and only insurance policies that existed contemporaneously with such events can cover the damages arising from them, even if the damages only recently came to light. A typical claim is that the conduct or action complained of occurred gradually, usually over many years. Such claims or lawsuits are said to be “long-tail” claims. Conduct or action that began before, proceeded through, and continued after the expiration of a policy period is typical of a long-tail claim. Environmental property damage, “toxic torts” (e.g., exposure to chemicals or electromagnetic waves), product liability (e.g., asbestos, silicone implants), lead exposure, and property damage are among typical covered losses. Older-form CGL policies also may pay for damages and legal defense costs resulting from employment discrimination, sexual harassment, and intellectual property infringement cases, many of which have the potential for high-dollar damage awards and thus could be “bet-the-company” cases. When you are purchasing a company, you should always ask the seller to disclose its loss history as well as its insurance policies. A loss history is a compilation of a corporation’s loss experience, including lawsuit names, claims and the types of allegations contained in them, and payments for damages, settlements, and legal fees. Analyzing the seller’s insurance policies allows you to determine the extent to which they may pay for disclosed liabilities. By using the seller’s loss history, a buyer also can reasonably calculate the odds of additional claims and lawsuits occurring after closing that are attributable to the seller’s pre-closing activities. You can then make an informed decision about accepting responsibility for known or unknown liabilities attributable to the seller’s pre-sale operations. This can give the buyer an edge in purchase negotiations. A buyer with a high degree of confidence in the likelihood that the seller’s insurance policies will pay for both pre- and post-sale claims may choose to accept all of the seller’s liabilities in return for a significantly discounted sale price. Unfortunately, there is seldom enough time to do such a thorough analysis of the seller’s insurance position. In most cases, the preacquisition due diligence process lasts only long enough for the purchaser to ask the seller to disclose its pre-closing liabilities, and produce a list of insurance policies, usually current ones. The buyer still can obtain protection, however, by asking the seller to assign all rights the seller has in any insurance policies, known and unknown, which may pay for liabilities that arise after the transaction is consummated. A major benefit for the buyer of thoroughly analyzing the seller’s insurance is that it is much easier to find a court case interpreting the terms and conditions of an insurance policy than it is to discover a court case interpreting the buyer’s indemnity rights in a sale contract. By the time a buyer finishes wrangling with the seller over an indemnity claim, an insurance company already might have paid the buyer’s expenses. To make it even more attractive, insurance claim payments also may be without limitation and with no escrow requirements, especially for defense costs. Actually, what is good procedure for the buyer may also be good for the seller. The seller can also do its homework and collect on its old insurance policies before negotiating sale terms with the buyer. The seller also can estimate the chances that its old policies will cover reasonably anticipated future losses, or the seller can simply tally the total limits of its old policies. Either way, the value of the policies can be used by the seller to negotiate for elimination of indemnity promises or escrow accounts. Alternatively, it can seek an increase in the purchase price that is commensurate with the value of the total liability limits of the policies, if the seller is willing to share them with the buyer. Although you may not need to know the procedural details of making claims on policies obtained from the seller during an acquisition, you can maintain the economic advantages of having the insurance by taking the following steps: *Issuing a corporate policy requiring that every loss claim against the company be considered by your legal, risk, and claims managers as being potentially covered by insurance and insisting that they analyze every claim and lawsuit to determine whether they are covered, and *Ensuring that claims and lawsuits result in immediate written notice to every insurance company involved concerning the potential level of losses covered. Insurance companies often will negotiate “long-tail” insurance claims. They may be motivated to negotiate and settle claims because of long-standing business relationships with their policyholders and the desire to continue selling insurance to them. But it pays to tread carefully. Suing insurance companies to compel them to pay your legal defense costs and damages is expensive and usually unnecessary. Filing a lawsuit to have a court determine your coverage rights under a policy should be a last resort. Insurance coverage lawsuits typically last several years and are expensive. Control the insurance claim yourself by dealing with the insurance company directly, principal to principal. Another factor prompting insurers to negotiate is increasingly restrictive regulatory pressures on environmental claims. Insurers have come under pressure from the Securities and Exchange Commission and the National Association of Insurance Commissioners to disclose asbestos and environmental claims publicly and to fully fund reserves for such claims. Maintaining fully funded reserves has created a drag on the earnings of property and casualty insurers, causing them to negotiate and settle environmental insurance claims as business decisions rather than litigate coverage points on a case-by-case basis. As the result of such pressures, a group of environmental legal specialists has emerged to help policyholders shape and present claims to insurers. Their objective is to facilitate face-to-face meetings between decisionmaking representatives of the policyholder and the insurance company, because that process leads to settlements that are profitable for all parties involved. Locating out-of-date insurance policies is a science in itself. There are insurance consulting firms that specialize in policy-location services, and employing the services of one may be preferable to a do-it-yourself search that could prolong acquisition due diligence. In either case, this location checklist can be used: *During the due diligence process, ask the seller’s current or former in-house risk manager and outside brokerage firm if they have any insurance policies. Ask the same question of the seller’s current and former in-house and outside legal counsel. *If you already hold the seller’s current policies, ask the insurers that issued them about the possible existence of other, older policies issued to the same policyholder. *If you have the seller’s workers’ compensation insurance policies from the 1950s and 1960s, note that the insurers that issued them probably also issued general liability policies to the seller. So, ask them about the existence of such policies. *Examine court files involving the seller, particularly when the cases involved liability claims. Plaintiffs in most liability lawsuits, whether they proceed to judgment or not, usually raise the issue of the defendant’s insurance. *If the seller or a corporate predecessor has engaged in defense contracting work, it may have had to furnish evidence of insurance to the federal government. Check various federal government agencies for such proof of insurance. If the seller has contracts with state or municipal governments, it also might need appropriate insurance. *If the seller or a corporate predecessor shipped goods by rail, the railroad may have required that it be listed as an additionally named insured on the shippers’ policies. The railroad even may have asked for and received a certificate of insurance. It’s worth a try and it usually requires only a letter or telephone call. Expired CGL insurance policies may be located almost anywhere, and it may take considerable effort to find them. But, take the time to find them and then use all the resources at your command to turn them into assets. Long TailsDon’t overlook a target’s old or expired insurance policies during due diligence. The wise buyer,especially one that operates in a “dangerous”industry that generates lots of property and injuryliabilities, should ask for and retain all the backpolicies. The best find is the comprehensive generalliability policy. Even if it has run out, it still may pay claims for events or occurrences that took place while the policy was in force but took years to result in actual damages or injuries.Insurers call them “long-tail” claims, and they often are willing to settle rather than fight.