Many companies acquire other businesses to grow or expand theirproduct lines. In some cases, those acquisitions also come withenvironmental hazards and potential lawsuits. Does an insurancecompany have a duty to defend a former insured in cases claimingthat individuals were injured by exposure to toxic substances eventhough the exposure may have occurred before the insured owned thecompany? According to a recent case decided by the Appellate Courtof Illinois, the answer is yes. [Ill. Tool Works Inc. v.Travelers Cas. & Sur. Co., 2015 IL App (1st) 132350 (Ill.App. Ct. 1st Dist. 2015)]

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Illinois Tool, which manufactures and distributes tools,equipment and finishing systems, was insured by Travelers Casualty& Surety Company and Century Indemnity Company from 1971through 1987. In 1993, as part of its expansion plans, IllinoisTool purchased a company that made welding products.

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Several individuals filed multiple toxic tort cases claimingthat they were injured as a result of exposure to asbestos,benzene, manganese and other harmful materials. Illinois Tool wasnamed individually, as a successor-in-interest to the weldingcompany it acquired, or as both, depending on the suit. The companyturned to its former insurance carriers to defend the suits, butthe insurers declined, claiming that the policies had expired.

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Illinois Tool sued its insurers for coverage under 10 policiesissued to insure the company for claims resulting from bodilyinjury from 1971 to 1987. All the policies also required theinsurers to defend Illinois Tool in any suit brought against it forbodily injury even if the allegations of the suit were false orgroundless. The insurers argued that they couldn’t be liablebecause the last policy they issued expired in 1987, and IllinoisTool didn’t enter the welding product market until 1993.

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The trial court found in favor of Illinois Tool and the insurersappealed the decision.

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Yellow arrow says Appeals

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Category of claim controls

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The Illinois Appellate Court reviewed the relevant state law andsaid that because the duty to defend is broader than the duty toindemnify, an insurer’s refusal to defend an insured is justifiedonly if it’s clear from the face of the underlying complaint thatthe allegations fail to state facts that bring the cause within orpotentially within coverage. When the underlying complaint statesclaims within or potentially within the policy’s coverage, theinsurer has a duty to defend—even if the allegations are“groundless, false or fraudulent.”

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The court noted that Illinois Tool was unlikely to actually befound liable in the underlying suits; however, the question waswhether the alleged facts in the toxic tort cases, if true, wouldpotentially bring the claims within coverage. Under that standard,the court said, it’s clear that the insurers generally have a dutyto defend.

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The court also explained that the insurers’ duty to defend inthis case depends on the category of the underlying suit. The courtdivided the claims into the following four categories, based on theallegations in the complaints.

  • Direct liability with exposure dates during a policyperiod. In this category, the court held, the insurersclearly have a duty to defend the cases, even if the allegationsare, in fact, groundless. The complaint, on its face, presents aclaim potentially within the insurance policy’s coverage.Therefore, the insurers have the burden of defending Illinois Tooland raising the affirmative defense that the company was not in thebusiness of manufacturing or distributing welding products before1993 to prove that the company should not be liable for anyinjuries.
  • Direct liability with unstated injury or exposuredates. In this category, the insurers also have a duty todefend under Illinois law. The court found that the “bareallegations of the underlying complaints” leave open thepossibility that the injuries occurred during the policy periods,which would trigger coverage. The court explained that theinsurers’ duty to defend this category of cases remains until the“factual ambiguities in the underlying complaints” are resolved infavor of the insurers.
  • Pure successor-in-interest claims. In thisgroup of cases, the underlying complaint claims that Illinois Toolis liable for the conduct of another company that was acquiredafter the policies expired. Illinois Tool conceded that it was notentitled to a defense in this category of cases, and the courtagreed.
  • A combination of direct liability andsuccessor-in-interest claims. In these cases, becausethere is a possibility that Illinois Tool could be found liable fordirect injuries and the loss could be covered, the insurers have aduty to defend. Under Illinois law, the court pointed out, becausethe insurers are required to provide a defense for the directclaims against Illinois Tool they’re also required to provide adefense for the claims based on successor liability.

Lawsuit form with pens

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As this case points out, the duty to defend is “litigationinsurance” that protects an insured from the expense of defendingsuits brought against it. Illinois Tool probably should not havebeen named as a defendant in many of the underlying toxic tortcases. But the company was insured against being wrongly sued andthe insurers are responsible for defending Illinois Tool, howevergroundless the claims.

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When you review your policies with your insurer or broker, besure you understand the coverage you have and the limits, if any,on your carrier’s duty to defend you as well as the law of thestate that governs the insurance contract.

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Rosalie Donlon

Rosalie Donlon is the editor in chief of ALM's insurance and tax publications, including NU Property & Casualty magazine and NU PropertyCasualty360.com. You can contact her at [email protected].