Pennsylvania federal court holds that the buyer group’s errors & omissions liability insurer had no duty defend either the buyer or the purchased seller’s company.
M&A Stories
April 13, 2023
Introduction
When buying a business, a critical decision for buyers is whether to acquire the assets or the company itself. This blog post examines a case that highlights the importance of this choice.
The deal
In 2017, the buyer purchased a company specializing in storage tank inspections.
The lawsuit
Following a fuel delivery in 2018, an explosion occurred at a gas station, leading to fatalities and injuries. The estate of the station owner and an employee filed a lawsuit against the buyer and the seller. They claimed that the seller’s employees failed to identify maintenance issues during an inspection in 2015, resulting in the explosion.
The buyer’s insurance carrier denied coverage for the lawsuit. The buyer group sued the insurer, seeking defense coverage.
The court ruled in favor of the insurer, stating that the policy only covered wrongful acts committed after a specific retroactive date in 2016. As the alleged actions causing the explosion happened in 2015, the policy did not provide coverage.
See Crum & Forster Specialty Insurance Company v. Detect Tank Services, LLC, Civil Action No. 22-542, United States District Court, E.D. Pennsylvania (March 21, 2023).
Comment
While the buyer may not be liable for the explosion, they will incur significant legal expenses. The purchased company may bear responsibility.
Mitigating Liability: To reduce potential liability, the buyer could have opted for an asset purchase instead of acquiring the company’s stock. Creating a subsidiary corporation or limited liability company could protect the buyer’s assets.
Successor Liability Doctrine: The effectiveness of these measures depends on the state’s successor liability doctrine. In most states, an asset buyer would only be liable if the seller received buyer equity.
Insurance Coverage Consideration: Even with an asset purchase, the buyer would still face legal expenses. Obtaining insurance coverage with a retroactive date back to the 2015 inspection could mitigate this risk, but the cost is uncertain.
By John McCauley: I write about recent legal problems of buyers and sellers of small businesses.
Email: jmccauley@mk-law.com
Profile: http://www.martindale.com/John-B-McCauley/176725-lawyer.htm
Telephone: 714 273-6291
Podcasts https://www.buzzsprout.com/2142689/12339043
Check out my books: Buying Assets of a Small Business: Problems Taken From Recent Legal Battles and Selling Assets of a Small Business: Problems Taken From Recent Legal Battles
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