A

The general rule is that the purchaser does not automatically assume the seller's liabilities. There are, of course, exceptions to the general rule, such as when an express agreement between the parties calls for assumption of the liabilities; or, if the sale is merely for the fraudulent purpose of the seller's escaping its liabilities.

There is another exception worth noting that has been put forward by certain courts: the product line exception.

The California Supreme Court in Ray v. Alad Corp., 560 P.2d 3 (1977) expounded the theory that the product liability of a manufacturer could fall on a successor corporation based on the product line exception. The court stated that justification for imposing liability upon a successor to a manufacturer rests upon: 1) the virtual destruction of a plaintiff's remedies against the original manufacturer caused by the successor's acquisition of the business, 2) the successor's ability to assume the original manufacturer's risk-spreading role, and 3) the fairness of requiring the successor to assume responsibility for defective products was a burden necessarily attached to the original manufacturer's good will that was acquired by the successor in the continued operation of the business.

In Ramirez v. Amsted Industries, Inc., 431 A.2d 811 (1981), the New Jersey Supreme Court agreed with the product line exception theory. The court decided that where a successor corporation acquires all or substantially all of the assets of another corporation for cash and continues essentially the same operation, the successor is liable for the product liability claims against the predecessor.

The state of Washington has also accepted this line of reasoning in Martin v. Abbot Laboratories, 689 P.2d 368 (1984).

The bottom line is that these courts seek to apply the product line exception when the injured plaintiff has no available remedy against the original manufacturer, and the successor has continued the manufacturing and marketing of the predecessor's product.

Your insured should know that the product line exception has not been universally accepted. Indeed, the Minnesota supreme court rejected the exception in Niccum v. Hydra Tool Corp., 438 N.W.2d 96 (1989), after noting that appellate courts in 16 states have also explicitly rejected the doctrine.

Your insured should also know how the current CGL form deals with successor liability. Under the “who is an insured” section of the CGL form, “any organization you newly acquire or form, other than a partnership or joint venture, and over which you maintain ownership or majority interest will qualify as a named insured if there is no other similar insurance available to that organization.” So, your insured will have coverage for the liability exposures of the company it is buying, if that company's coverage does indeed end at the time of the sale. However, there are limitations to this coverage.

The coverage is afforded “only until the 90th day after you acquire or form the organization or the end of the policy period, whichever is earlier.” And, “coverage A does not apply to bodily injury or property damage that occurred before you acquired or formed the organization.” So, the CGL form will provide liability coverage for your insured, but only for a maximum of ninety days after the sale. Within that time period, the insured and the insurer will have a chance to assess the liability exposures caused by the products of the newly acquired company and then decide how to address those exposures. Furthermore, BI and PD liability coverage does not exist under your insured's CGL form for the occurrences that happened prior to the acquisition of the other company. For example, if your insured buys the other company effective February 20, 1996, and a customer has been injured by that company's product on January 20, 1996, your insured should not look to its CGL form for coverage if it is sued for damages.

In summary, your insured is not automatically liable for the products made by the company being purchased; but, if your insured is sued due to those products, the CGL form will provide defense and coverage if necessary, subject to certain limitations.