Last week the Northern District of Illinois held in Magnetek, Inc. v. Travelers Indem. Co., 2019 WL 3037080 (N.D. Ill. July 11, 2019), that Travelers had a duty to defend Magnetek, Inc. under insurance policies issued to Magnetek’s predecessor, Fruit of the Loom (“FOTL”). A copy of the Magnetek decision can be found here.

In the early 1970s, FOTL owned a company called Universal Manufacturing Corporation (“UMC”), which purchased polychlorinated biphenyls from Monsanto. Because of environmental hazards, UMC agreed to enter into a “Special Undertaking” in which it agreed to “defend, indemnify, and hold harmless Monsanto” against all claims arising out of or in connection with the polychlorinated biphenyls. Because of this “Special Undertaking,” FOTL purchased from Travelers several general liability insurance policies for itself and its subsidiaries, including UMC, which was a named insured on several of the policies. In 1986, FOTL sold UMC to Magnetek.

In 2016, several lawsuits were filed against Monsanto alleging damages caused by the polychlorinated biphenyls. Monsanto demanded that Magnetek defend, indemnify, and hold it harmless pursuant to the “Special Undertaking.” Magnetek then tendered notice of Monsanto’s demand to Travelers and requested that Travelers defend and indemnify Magnetek under the applicable policies. Travelers refused and Magnetek filed suit seeking a declaration that Travelers was required to defend and indemnify Magnetek in the underlying Monsanto actions. Magnetek moved for partial summary judgment on the duty to defend.

Travelers argued that its obligations under the policies were released in a 2004 settlement and release agreement between Travelers and FOTL, under which the policies were to be deemed exhausted. Because UMC was a named insured on the policies at issue in the settlement agreement, the court held that FOTL did not have the authority to release UMC’s policy rights because, at the time of the settlement in 2004, FOTL no longer owned or controlled UMC. The court recognized that generally a parent can agree to release claims and deem a policy exhausted on behalf of its subsidiaries. However, the court held that because UMC was no longer FOTL’s subsidiary in 2004, absent a provision in the sale documents reserving that right to FOTL, FOTL lacked the authority to release UMC’s rights.

The court also held that FOTL could not agree that the policies were deemed exhausted on behalf of UMC because an insured cannot extinguish the contract rights of an additional insured by agreement. The court noted that if the policies were in fact exhausted by FOTL then UMC may have no further right, but that would have to be a consequence of the contractual limitations of the policies, not FOTL’s 2004 agreement. Consequently, Travelers was required to defend Magnetek in the Monsanto litigation.

The Magnetek decision is important because it illustrates the significant adverse impact that a broad policy release might have on the availability of insurance for related parties and additional insureds.  And, by highlighting that a full policy release extinguishes not only the rights of the named insured but also any additional insureds, the decision underscores the importance for such third parties to monitor events that might impact the insurance on which they rely and, where appropriate, take affirmative steps to secure an agreement to receive advanced notice of any action that might adversely affect the right to collect insurance proceeds.