Many owners of contaminated properties cannot use their own liability insurance policies to cover remediation obligations because those policies were issued in or after 1985 or 1986 when the “absolute” pollution exclusion came into effect. That exclusion generally bars coverage for environmental cleanup obligations, and it has been held enforceable by the courts. However, although not frequently pursued, often these owners can utilize the policies issued to their predecessors to pay for these expenses. If those policies were issued before 1985 or 1986, the chances are that they contained a narrower pollution exclusion that courts in New Jersey and elsewhere have held to allow coverage.
The majority view holds that a party who has acquired a substantial portion of the assets of a business through an asset purchase may, by operation of law, utilize the liability insurance policies of the seller to address environmental liabilities that were present prior to the sale. Case law in New Jersey is in line with this view. Since the assignee assumes no greater rights in the policy than the original insured, and the only risks covered are those that the insurer would have been liable for if the claim had been made by the original insured anyway, courts have determined that there is no unfair prejudice inflicted on the insurance carrier by allowing such an assignment.
In determining whether a current owner can make a claim for coverage under its seller’s liability policies, the asset purchase agreement should be reviewed as a first step to determine if there was, in fact, an express assignment or other transfer of the right to recover under those policies to the buyer. The existence of such language will strengthen the arguments in favor of coverage and may also mean that the policies were either physically presented to the buyer, or that the name of the carrier, policy year and policy number were listed on a schedule of assets included in the sale documents. However, even if there is no express assignment or other transfer of the policies, there is case law holding that an assignment of the predecessor’s policies can occur by operation of law. By purchasing a substantial portion of the assets of the seller and bearing liability for environmental discharges which occurred prior to the buyer’s ownership, the buyer may still be afforded the benefits of the seller’s liability insurance coverage.
Of course, in the case of a stock sale or merger instead of an asset purchase transaction, there may be no need to have the purchase agreement recite an assignment of the seller’s policies because the purchaser steps in the shoes of the seller and, thus, automatically becomes the insured under the seller’s existing insurance policies.
No matter what kind of transaction results in a transfer of cleanup liability from a seller to a buyer, it is important that buyer’s counsel in negotiating such a transaction make sure that all insurance policies intended to be transferred from the seller to the buyer be properly identified and scheduled in the governing contract, and that complete copies of all liability policies be provided by the seller to the buyer. A complete policy is generally wanted because the “declarations” page, standing alone, would not contain the actual policy language proving entitlement to coverage and also because carriers will often deny coverage, at least initially, without being presented with the full policy.
In sum, in assessing the various options for funding a cleanup, the insurance of the predecessor owner of the property should not be forgotten, and may provide a basis for the payment of remediation costs.
Questions? Let Mitchell know.
Mitchell Kizner is a New Jersey focused attorney in Flaster Greenberg PC’s Litigation and Environmental Law departments. He represents clients in insurance, environmental, construction and other commercial matters as part of his active litigation and commercial law practice. He is also General Counsel to the firm. He can be reached at email@example.com or 856.382.2247.