3rd Circuit Upholds Insurance Exclusions for Pre-Acquisition Wrongful Acts

The U.S. Court of Appeals for the 3rd Circuit's ruling in PNC Bank, N.A. v. AXIS Ins. Co. clarifies that courts will strictly enforce insurance policy exclusions related to prior wrongful acts of newly acquired companies. Insurance policies often exclude coverage for liabilities arising from wrongful acts committed before acquisition, making thorough due diligence essential for acquiring companies. This ruling highlights the necessity for acquiring entities to evaluate litigation exposure and review related insurance coverage carefully during mergers and acquisitions (M&A), especially as these transactions become more rapid and frequent in current market strategies.

In the PNC Bank case, a significant judgment emerged from fiduciary claims against a recently acquired bank for acts preceding the acquisition. The acquiring bank's insurer denied coverage based on policy exclusions for wrongful acts before the acquisition date, leading to litigation over coverage obligations. The court rejected arguments that the exclusion only applies to surprise acquisitions and that definitions of 'insured' should override the exclusion clauses.

The decision underscores that insurance policy language explicitly excluding coverage for acquired companies' prior wrongful acts will be enforced by courts without relaxation or reinterpretation. For insurance professionals and corporate risk managers, this ruling signals the critical need to analyze existing policies and to address potential coverage gaps before finalizing M&A deals.

In practice, acquiring firms should engage litigation counsel to model potential exposure and to interpret coverage implications, incorporating regulatory and compliance considerations. Adequate planning includes assessing both the acquiring company’s and the target company’s insurance portfolios to mitigate risks associated with inherited liabilities.

The ruling affects the insurance industry's approach to underwriting and claims related to mergers involving absorption of historical liabilities. It also influences corporate strategies on risk management, emphasizing comprehensive exposure evaluation as a core component of M&A due diligence. As M&A activities accelerate, aligning insurance coverage with acquisition risks remains a priority for maintaining sound corporate governance and financial stability.