A New Jersey federal court has held that, following a statutory merger under New Jersey law, the surviving entity acquired the target entity’s rights under its directors and officers liability insurance policy by operation of law and was entitled to reimbursement for post-merger defense costs incurred in defending the target entity’s directors in shareholder class actions.  BCB Bancorp, Inc. v. Progressive Cas. Ins. Co., 2017 WL 4155235 (D. N.J. Sept. 18, 2017).

This coverage dispute arose out of the statutory merger of two banks pursuant to the New Jersey Business Corporation Act (“NJBCA”).  Following the merger, shareholders of the target entity filed class actions against the merging entities and their directors and officers.  The target entity provided notice of the lawsuits pursuant to its directors and officers insurance policy.  The policy’s “other insurance” provision provided that the policy was excess of any indemnification any insured is entitled to from any other entity.  The insurer ultimately denied coverage on the basis that, by operation of the policy’s “other insurance” provision, any post-merger coverage applied in excess of the surviving entity’s indemnification obligation pursuant to the merger agreement.  The banks initiated this coverage action, seeking a declaration that the surviving entity is entitled to reimbursement for post-merger costs incurred in defending the target entity’s directors and officers.  The insurer argued that it had no coverage obligations to the surviving entity because it is not an insured under the policy and that the policy’s “other insurance” provisions barred reimbursement for post-merger defense costs.

On cross-motions for summary judgment, the court ruled in favor of the banks, holding that, by operation of a statutory merger pursuant to the NJBCA, the surviving corporation steps into the shoes of the merged entity and therefore acquires all of the target entity’s rights and liabilities, including all rights under the target entity’s insurance policies.  In other words, by consummation of the merger, the surviving entity was effectively the insured under the policy and therefore was entitled to reimbursement for post-merger defense costs.

The court rejected the insurer’s argument that the policy’s anti-assignment provision precluded this effect, concluding that an insurance policy must contain specific exclusionary language to prevent a transfer of rights to the surviving entity following a statutory merger and that the policy’s general anti-assignment provision did not suffice.  In so holding, the court was careful to distinguish between statutory mergers and asset purchases where, unlike in a statutory merger, the general rule is that the successor entity does not retain the assets and liabilities of the selling company.

Finally, the court rejected the insurer’s argument that the “other insurance” provision applied based on similar logic.  The court concluded that, by operation of the merger, the surviving entity had assumed all of the target entity’s liabilities and that one such liability was the target entity’s obligation to indemnify its officers and directors.  Therefore, as the policy provided coverage to the target entity for such indemnification obligations, the surviving entity was entitled to the same rights under the policy following the merger.