Which Workers’ Compensation Policy Applies  When Two Entities Merge?

April 2020

By: Jeffrey F. Clement

In Ill. Ins. Guar. Fund v. Priority Transp., 2019 IL App (1st) 181454, the Appellate Court of Illinois, First District, was asked to determine a workers’ compensation insurance coverage issue in the instance where two corporate entities entered into a legal merger.  The issue came to a head because the workers’ compensation carrier for the original corporation because insolvent.  Therefore, the question became whether benefits should be provided under the Illinois Insurance Guarantee Fund (Fund) or by the workers’ compensation carrier of the surviving entity in the merger.   

The case involved two workers’ compensation policies.  The first was issued by Fremont Casualty Insurance Company to the original corporation (hereinafter “the Fremont policy”).  During the term of the Fremont policy, an employee of the original corporation sustained injuries during the course and scope of employment.  Also during the term of the Fremont policy, the original corporation merged into a different surviving corporation.  At the same time, the surviving corporation had its own workers’ compensation policy issued by Ace Insurance Company (hereinafter the “Ace policy”).  Benefits were initially provided to the employee under the Fremont policy until it was involuntarily liquidated by the State of Illinois.  Thereafter, the Fund started providing benefits to the employee. 

The Fund then filed suit in the circuit court against the surviving corporation and Ace alleging, because of the merger, benefits should be provided to the employee under the Ace policy.  The circuit court ruled in favor of the Fund.

On appeal, the Appellate Court noted the history and purpose of the Fund, which was created by Illinois statute to protect holders of insurance policies whose insurers become insolvent or when expected coverage ceases to exist.  When a claimant is receiving benefits and his or her insurer becomes insolvent, the Fund steps into the shoes of the insurer to maintain the position of the claimant.  However, the Fund was intended by the legislature to be a “source of last resort” and can only be accessed when a claimant has exhausted all rights under any other insurance policy applicable to the claim. 

The surviving corporation argued it was not the employer of the injured employee at the time of his accident.  The surviving corporation relied on the employee’s pay stubs, tax forms, and testimony of the employee showing he was an employee of the original corporation.  However, the Appellate Court relied on the legal effect of the merger between the original corporation and the surviving corporation.  Per Illinois statute, when two corporations merge, the result is a single corporation, the one designated by the merger documents and the surviving corporation. Illinois law also provides the surviving corporation is responsible for all the liabilities and obligations of the corporations so merged.   As a result, the court held the injured worker became an employee of the surviving corporation by operation of law. 

The court then turned to the Ace policy.  After finding that the injured worker was an employee of the surviving corporation during the policy period, and the surviving corporation was the named insured under the Ace policy, the court held the Ace policy provided coverage for the injured worker’s claim.  The court made this finding despite multiple “Other Insured Extension” pages listing several entities the surviving corporation had acquired but not the original corporation. 

Additionally, the insurer argued there was no evidence any premium was collected under the Ace policy to cover the original corporation’s employees.  The court agreed that a premium is an indispensable part of an insurance policy and the amount of the premium is commensurate with the amount of risk the insurer undertakes to cover the insured.  However, in ultimately rejecting this argument, the court relied heavily on the fact the merger occurred before the employee was injured and, by operation of law, the injured worker became an employee of the surviving corporation.  Additionally, there was testimony from a representative of the surviving corporation that he believed any new employees hired by the surviving corporation after the merger would “be automatically covered” by the Ace policy.  The court concluded that an insurer should contemplate “fluctuations of employment” of a named insured during the policy period, which is why an insurer generally requires an initial premium and an audit following the policy period to determine if any additional premium should be required.

This decision reiterates that the Fund is only to be utilized as a source of last resort and only after all other policies are exhausted.  In protecting the Fund, the court paid little heed to the fact the Ace policy was issued after the merger but made no reference to providing coverage to employees of the original corporation.  Indeed, the court conceded there was no evidence a premium was collected to cover injuries of the original corporation.  Yet, we believe a significant factor in this decision is the merger occurred before the employee was injured.  Had the injury occurred before the merger, there may have been a different result.