Former Parent Cannot Cut Off Former Subsidiaries’ Coverage Via Settlement – Travelers Ordered to Defend

The United States District Court for the Northern District of Illinois, in an opinion written by Judge Gettleman, applying Illinois law, held that Travelers Indemnity Company and Travelers Casualty and Surety Company (together “Travelers”) must defend Magnetek, Inc. (“Magnetek”), the successor to policies issued by Travelers for claims related to Monsanto’s sale of PCBs.

In the late 1960s and early 1970s, Northwest Industries Inc. (“NWI”) (later known as Fruit of the Loom (“FOTL”)) owned a company called Universal Manufacturing Corporation (“UMC”).  UMC used PCBs in its products.  It purchased its PCBs from Monsanto Company (“Monsanto”).  In 1972 Monsanto urged UMC to enter into a “Special Undertaking” in which UMC agreed to “defend, indemnify, and hold harmless Monsanto … against any and all liabilities, claims, damages … arising out of or in connection with the receipt, purchase, possession … of any such PCBs … .”  Because of the Special Undertaking, FOTL, UMC’s parent, purchased from Travelers several general liability policies for itself and its subsidiaries, including UMC.  UMC was named on eight separate policies between October 1, 1969 and November 1, 1978.  In January 1986, FOTL sold UMC to Magnetek pursuant to a Stock Purchase Agreement (“SPA”).  At the same time, those parties entered into a separate “Environmental Agreement” related to separate environmental matters, particularly with respect to environmental clean-up obligations at UMC’s facilities.

In the early 1990s, FOTL submitted to Travelers certain “Velsicol Environmental Damage Claims” requesting that Travelers defend and indemnify FOTL with respect to those claims.  Velsicol was a subsidiary of FOTL and an additional named insured with separate limits of liability under each of the Travelers policies.  After multiple disputes and lawsuits, the parties entered into a 1999 settlement agreement and a 2004 settlement agreement by which they attempted to settle “all claims including, without limitation, Environmental Contamination Claims, Asbestos Bodily Injury claims, the policies and the rights and duties of the parties thereunder as well as matters that were or might have been raised in the Illinoi[sic] action.”

Meanwhile, several claimants filed lawsuits against Monsanto’s successors and affiliates (“New Monsanto”) alleging bodily injury and property damage caused by pollution from PCB’s that Monsanto manufactured.  New and old Monsanto demanded Magnetek, as successor to UMC, defend, indemnify and hold harmless Old Monsanto to the full extent required by the Special Undertaking and tendered the defense of several listed lawsuits.  Magnetek tendered notice of the Monsanto demand to Travelers and requested that Travelers defend and indemnify Magnetek under the applicable Travelers’ policies.  Travelers denied and Magnetek filed suit seeking a declaration regarding defense and indemnity.  Magnetek also sued Monsanto in New Jersey seeking a declaration that it has no duty to defend nor indemnify Monsanto in the underlying suits brought against Monsanto.  Monsanto then sued Magnetek in Missouri seeking a declaration that Magnetek owes it a duty to defend and indemnify.

The parties filed cross-motions for summary judgment on Travelers’ duty to defend.  In its motion for summary judgment, Magnetek also sought a declaration that Travelers has a duty to defend Magnetek in the Monsanto Litigation – the New Jersey and Missouri cases.

Travelers argued that it has no duty to defend the underlying actions against Monsanto because Magnetek is not named in those suits and Monsanto is not a named insured under any of the policies.  Travelers argued that what Magnetek is seeking is not a defense, but rather reimbursement for anything it might ultimately be responsible for under the Special Undertaking.

The Travelers policies include a contract liability provision that provides:

The Travelers agrees to pay on behalf of the Insured all sums under which the Insured shall become legally obligated to pay by reasons of liability imposed by law upon Insured or assumed by the Insured under any contract, for damages because of bodily injury, malpractice injury, advertising injury or property damage, caused by or arising out of any occurrence.

In addition, the Travelers policies provide that Travelers will defend any suit alleging such injury or damage and seeking damages payable under the terms of the policy.  Even though the district court stated that “[i]t is not entirely clear that [Magnetek] is asking the court to decide that Travelers must defend Monsanto in the underlying actions,” it found that the contractual liability section of the policy provides for defense of claims for which the insured is contractually liable.

Travelers also argued that by filing the New Jersey action and starting the Monsanto Litigation, Magnetek violated the “duty to cooperate” under the policies and therefore assumed an obligation to defend at its own expense.  However, the District Court found that Travelers failed to demonstrate that it had been prejudiced in any way by Magnetek’s filing of the New Jersey action since Travelers had already rejected any responsibility under the policies.

Finally, Travelers argued that all its obligations under the policies were released in the 2004 settlement, and under the terms of that agreement, all the policies were deemed exhausted.  Although the 2004 settlement was entered due to the claims of Velsicol, an additional insured with its own separate policy limits under each policy in question, for the purposes of the 2004 settlement, FOTL was defined as FOTL Inc., and included a large number of related entities including “any Person insured by any of the Policies.”  Because UMC was a named insured, Travelers argues that any rights UMC may have had under the policies were fully and finally released in the 2004 settlement.  The District Court found, however, that at the time of the execution of the 2004 settlement, FOTL no longer owned or controlled UMC, one of the named insureds, having sold it in 1986.  Travelers argued that a parent can agree to exhaust a policy to the detriment of a former subsidiary, but the District Court disagreed.  According to the district court, absent authority in the SPA or Environmental Agreement, FOTL had no authority to release UMC’s rights under the policies.

Based on the foregoing and additional analysis related to the issue of fact surrounding the application of two of Travelers’ affirmative defenses, the District Court held that Travelers has a duty to defend Magnetek in the Monsanto Litigation.  The District Court also held that Magnetek is entitled to control its own defense because a conflict exists since there is a “nontrivial probability” of an excess judgment in the Monsanto Litigation.  Magnetek, Inc. v. The Travelers Indem. Co., 17 C 3173 (N.D. Ill. July 11, 2019).