Assigning Insurance Policies Can Get Tricky

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Insurance disputes sometimes arise out of transactions.  Those of you who are involved in transactions, including transactions arising out of insolvencies, might be interested in a cautionary tale from a recent Illinois appellate court case addressing the assignment of insurance policies as part of an asset purchase agreement.  This drafting lesson may help avoid future litigation.

In The Premcor Refining Group Inc. v. ACE Insurance Company of Illinois, No. 5-18-0210, 2019 Ill. App. Unpub. LEXIS 1539 (Aug. 12, 2019), the purchaser of a refinery from a Chapter 11 debtor sought to obtain the benefits of all the insurance policies issued to the seller and its predecessors by various insurance companies to cover various environmental contamination lawsuits and proceedings.  The refinery was sold via an asset purchase agreement.  The question before the court was whether there was a valid assignment of all the insurance policies from seller to purchaser.

The court concluded that there was no valid assignment of all in the insurance policies in the asset purchase agreement, just the potential assignment of only those policies listed on a particular schedule.  The case was remanded to allow the purchaser to amend its complaint to address only those insurance policies scheduled.

The asset purchase agreement, in the section describing the assets purchased, provided that the purchaser would acquire, among other things, all right, title and interest of the seller in “all proceeds payable under any insurance policy covering the Purchased Assets by reason of any and all occurrences occurring prior to the Closings Date.”  In the section entitled Insurance, the agreement provided that any rights that the seller may have against their insurers with respect to the Purchased Assets shall at closing be assigned to the purchaser.

The court held that neither provision constituted a valid assignment of the rights of the seller under the relevant insurance policies.  The court pointed out that these sections of the asset purchase agreement did not mention liability insurance rights, but evidenced a promise to convey to the purchaser any proceeds from pending claims covering the purchased assets. The court opined that where a purported assignment does not specifically identify an insurance policy, and does not mention liability coverage at all, the subject of the assignment is not described with sufficient particularity to be a valid assignment of all the assignor’s rights under all of its past liability insurance policies.

The court referenced another case where an assignment was found valid by using language that clearly referenced the subject of the assigned liability policies.  In that case, Illinois Tool Works, Inc. v. Commerce & Industry Insurance Co., 2011 Ill. App. (1st) 093084 (Dec. 12, 2011), the purchase agreement sufficiently stated what was assigned:

“The benefits, including all rights to defense and indemnity coverage, under any and all policies of liability insurance issued to [Seller] prior to the closing Date . . . with respect to insurance coverage for accidents, occurrences, claims, suits, actions or proceedings arising from the operations, activities, or conduct of the [Seller’s] Business prior to the Closing Date; provided, however, that such benefits shall transfer to [Buyer] to the extent liabilities for such accidents, occurrences, claims, suits, actions, or proceedings are threatened against, transferred to, or otherwise imposed upon [Buyer].”

To avoid litigation over assignment of insurance policies in a corporate transaction requires that if the intent is to assign existing insurance coverage from seller to buyer, the assignment clauses in the purchase agreement must be crystal clear that the policies—not just the proceeds from the polices—are being assigned.  And to make it crystal clear specificity is necessary as to the policies (on a schedule) and what those policies are being assigned to cover should be made clear.

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