Third Circuit: Changes in Exposure Provision Bars Coverage for Pre-Merger Liabilities  

In a win for Wiley’s client, the United States Court of Appeals for the Third Circuit, applying Pennsylvania law, affirmed judgment on the pleadings in favor of a group of insurers on the ground that a Changes in Exposure Provision excluded coverage for an acquired company’s wrongful acts committed before the acquisition. PNC Bank N.A., v. AXIS Ins. Co., et al., 2025 WL 880013 (3d Cir. Mar. 21, 2025). Wiley’s coverage of the trial court ruling is available here.

The insured bank was named as a defendant in a lawsuit stemming from liabilities it assumed through the acquisition of another bank. This lawsuit led to a judgment against the insured. The insured sought coverage for the judgment and defense costs under its coverage program in place at the time of the acquisition. Although the acquisition occurred eleven hours after the policy period began, the liabilities predated both the acquisition and the coverage period. The carriers denied coverage, including on the ground that a Changes in Exposure Provision in the primary policy applied. The insured sued for declaratory judgment, and the parties attempted to resolve the dispute via cross-motions for judgment on the pleadings. The insured appealed after the court ruled in favor of the insurers.

The Changes in Exposure Provision stated that “[i]f, during the Policy Period . . . (ii) the Company acquires any organization or entity by merger into or consolidation with the Company, then coverage shall apply . . . but only with respect to Wrongful Act(s) committed, attempted, or allegedly committed or attempted, at the time of or after such event.” The insured did not dispute “the general notion that the Changes in Exposure Provision excludes insurance coverage for an acquired company’s wrongful acts committed before acquisition.” Rather, the insured argued that there were two reasons why the Changes in Exposure Provision did not apply.

First, the insured contended that, because it had incurred the judgment and defended the lawsuit itself, the insured itself—not the acquired bank—was the entity at issue for purposes of the Changes in Exposure Provision. The court rejected this argument because it “ignores the plain language of the second clause of the Changes in Exposure Provision and that clause’s interaction with the defined term ‘Company.’” The court ruled that the policy “contemplated that sequence of events” where the insured acquired and merged with another bank, thus making the provision applicable.

Second, the insured argued that the acquired bank’s prior wrongful acts were covered because the relevant coverage section in the policy defines an “Insured” to include “predecessors in business,” and that this “coverage term” prevails over the Changes in Exposure Provision, which is a “general term” that is applicable to all sections of the policy. The court rejected this argument because it did not find any conflict between the Changes in Exposure Provision and the definition of “Insured.” The court noted that the insured’s interpretation of the policy would lead to an “absurd result” because the insured “could unilaterally expand the scope of carefully negotiated coverage terms by acquiring an entity saddled with liability risks and making the Insurers pay for those risks.”

Because the Changes in Exposure Provision functioned as a complete bar to coverage, the court did not address the trial court’s separate ruling in favor of the insurers regarding an Interrelated Claims Provision. The appellate court did not reach the other grounds that the trial court had determined also barred coverage, finding the Changes in Exposure Provision dispositive.