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I.
INTRODUCTION
With the expansion of legal remedies against corporations for the actions of purchased companies has come the increased attempt to gain insurance coverage for the actions by the predecessor corporations. Although the insurance agreement is universally considered a contract, and interpreted as a contract, there has been a significant movement by courts to impose additional coverage responsibilities for insurers of predecessor corporations, when the successor corporation is sued.
Courts in many states have determined that an insurance policy issued to a predecessor corporation provides coverage to a successor corporation when the successor corporation is sued based upon actions by the predecessor company. This has created a number of problems unique to this situation. Some courts have recognized these problems and attempted to resolve them, while others have not. This article focuses on the circumstances under which courts have found insurance coverage for successor corporations. It will also address certain legal issues that have received little or no discussion by the courts, but which affect insurance and successor liability.
II.
SUCCESSORS GENERALLY NOT LIABLE FOR ACTS OF PREDECESSORS
In general, a company that purchases another company is not responsible for the liabilities of the purchased company, but there are several exceptions to this rule.
Based upon judicial decisions in almost every state, a successor is responsible for the liabilities of its predecessor under any of the following circumstances: an express assignment of liability; an express or de facto merger; a determination that the successor is a mere continuation or reincarnation of the predecessor; or a fraudulent attempt to avoid liability.1 When two companies merge in conformance with state statutes, then by statute, the successor company will also be liable for debts of the predecessor.2
Some courts also recognize successor liability in the products liability context, known as "the product line exception."3 A minority of states has adopted this rule. The product line exception is applied when the successor corporation purchases substantially all of the assets of the predecessor corporation, the products liability arises from the predecessor's product line, the predecessor company ceases to exist so that there is no remedy against the predecessor, and the successor uses the goodwill of the predecessor. There are variations on the required elements depending upon the jurisdiction....