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Whether an existing company is a substantial continuation of a previous company, thereby assuming the assets and liabilities of that previous company, is actually a legal question which we can not answer. However, there are several court cases you may want to review to better understand the issue of successor liability: Gould v. A&M Battery and Tire Service, 950 F. Supp. 653 (1997); Stearns & Foster Bedding Company v. Franklin Holding Corporation, 947 F. Supp. 790 (1996); Welco Industries v. Applied Cos., 617 N.E.2d 1129 (1993); and Foster v. Cone-Blanchard Machine Company, 597 N.W.2d 506 (1998). A brief description of the Foster case is applicable here since it was decided by the Michigan supreme court.

In the Foster case, the court examined the scope of successor liability with reference to a claim for bodily injury. The plaintiff was injured while operating a screw machine; she claimed a design defect with no emergency shut off or other safety devices. Cone-Blanchard had purchased the company that originally made the machine and was named as the defendant based on successor liability. The state court noted that if the acquisition is accomplished by merger, with all the shares of stock serving as consideration, the successor generally assumes all liabilities of the predecessor; if the acquisition is accomplished by the exchange of cash for assets, the successor is not liable for its predecessor's liabilities unless one of five exceptions applies. These five exceptions are: the express or implied assumption of liability; where the transaction amounts to a consolidation or merger; where the transaction is fraudulent; where some elements of a purchase in good faith are lacking or without consideration, and the creditors of the transferor are not provided for; or where the transferee corporation is a mere continuation or reincarnation of the old corporation.

The acquisition of the predecessor company was by cash in this instance, and the “mere continuation” exception was the main point of contention. The supreme court said that “a prima facie case of continuity of enterprise exists where the plaintiff establishes the following: a continuity of management, personnel, physical location, assets, and general business operations; the predecessor company ceases its ordinary business operations and liquidates as soon as legally and practically possible; the purchasing corporation assumes those liabilities and obligations of the seller company ordinarily necessary for the uninterrupted continuation of the normal business operations of the seller; and, the purchaser holds itself out to the world as the effective continuation of the seller.” The fact that the predecessor company in this case had negotiated a $500,000 settlement with the plaintiff meant that that company had not ceased operations and liquidated itself; the company was available as a viable source of recourse. That fact was deemed by the court as fatal to the idea of successor liability.

So, when it comes to your insured's liability as successor to the machine tool company, it depends on the circumstances of the acquisition, and on whether a continuity of enterprise can be established. If the insured is held liable as a successor company, will the CGL form apply? A review of the standard CGL form shows no exclusion that would prevent coverage. As long as the bodily injury or property damage occurs during the policy period, the insured's general liability policy will respond to a claim, even if the offending product was made 20 years ago by a predecessor company. Of course, there are other things to consider. For example, the insurer may have put an endorsement on the CGL form to exclude coverage for pre-existing products, or there may be some discontinued products liability specialty policy in effect to handle such claims. But, generally speaking, the CGL form would be there to ease your insured's concerns over this issue.