Insurance Doesn’t Protect Entity From Claims Against Merger Partner

A claims-made insurance policy normally protects the insured organization against claims brought during the term of the policy against the insured company for “wrongful acts” by the insured company and its subsidiaries.

That principle would appear to cover claims brought during the December 31, 2008 through December 31, 2009 policy period against PNC Bank, a subsidiary of PNC Financial Services Group. The wrongdoing was allegedly done by National City Corporation, acquired by PNC Bank on December 31, 2008 and then merged into PNC Bank. PNC suffered a judgment for $106 million resulting from the claims.

But not so fast, the insurers said.  They pointed to a Changes in Exposure Provision in the policy.  It provides that if, during the policy period, the insured acquires any organization or entity by merger into or consolidation with the insured, then coverage shall apply to such organizations or entity and the insureds of such organization or entity, but only with respect to wrongful acts “committed, attempted, or allegedly committed or attempted, at the time of or after such event.”

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A federal District Court in Pennsylvania held, and the Third Circuit Court of Appeals has affirmed, that the Changes in Exposure Provision’s “unambiguous text” applies because PNC Financial Services Group “acquired National City during the policy period and merged it into PNC Bank…. National City’s Wrongful Acts committed before that acquisition for which PNC Bank became liable are excluded from insurance coverage.”  (PNC Bank N.A. v. Axis Insurance Company, 3^rd Cir. Ct. of Apps., No. 24-1670, 3/21/25.)

YOU NEED TO KNOW

While this case does not involve nonprofit organizations, its principle is an important one to remember for mergers of nonprofits.  Prior wrongful acts of the merging partner may not be covered by the existing insurance of the surviving entity.  That is one of the reasons why we are so reluctant to do a formal merger of organizations unless the surviving entity is fully aware of  -- and protected from -- the potential liabilities of the merging entity. (See Ready Reference Page: “Mergers and Acquisitions Can Take Many Forms”). If the parties do undertake a full merger, they will want to keep the insurance of the merging party alive even after the transaction to protect against just the type of situation that arose here.