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Digital EditionCourt Rules Former Parent Can’t Release Ex-Subsidiary’s Insurance Rights
Denying an insurer’s summary motion to dismiss, a New Jersey court ruled that a policyholder was entitled to insurance coverage of a major environmental cleanup, finding that it was not bound by a former parent’s settlement and release of coverage in connection with the cleanup of a different site.
The decision has significant implications for insurance coverage disputes involving former subsidiaries and the authority of named insureds to release claims. The decision stems from Radiac Abrasives Inc.’s claim for coverage of a pollution cleanup in New Jersey that could cost as much as $30 million.
“The court correctly relied upon both the express terms of the settlement agreements, which mandated that only entities under the current control of the signatory could be bound, and prevailing New Jersey law holding that policyholders have independent rights to the insurance policies that cannot be settled away by others without their consent,” stated Cort Malone of Anderson Kill, who represented Radiac.
“The decision upholds favorable law protecting policyholders who are not parties to a settlement by maintaining their independent right to pursue coverage.”
Radiac’s predecessor company was founded in 1973 and acquired in 1975 by M&R Industries. In 1985, Radiac was acquired by American Optical Corp., and had purchased all shares previously held by M&R. However, from 1973 to 2006, Radiac, M&R and American Optical were all owned and controlled by Maurice Cuniffe, the ruling states.
In 1998, M&R filed suit against Pacific Employers Insurance Co. (PEIC) and other insurers over coverage of environmental contamination at a manufacturing site. In 2001, M&R and PEIC entered into a settlement agreement that broadly defined parties to the agreement as all “predecessors, successors, past, present, and future assigns, transferees, parents, holding companies, subsidiaries, sister or other companies.”
The settlement also stated that M&R companies “fully, completely and forever release and discharge” the insurers from any and all liability and claims arising from environmental contamination.
Radiac argued that the companies had a common shareholder, but that in 2001, M&R did not control Radiac.
The Superior Court of New Jersey, Essex County agreed, finding that under the terms of that agreement, Radiac was not bound by the release of claims as one of the defined “M&R companies.”
Secondly, the court ruled that M&R Industries, as a former parent company and named insured under the PEIC policy, did not have the authority to unilaterally release the insurance coverage rights of Radiac Abrasives, its former subsidiary, without Radiac’s consent.
“A former subsidiary’s rights cannot be released by its former parent company absent express authority to do so,” the ruling reads.
As a separate named insured under the policy, Radiac’s rights could not be waived by M&R Industries, despite M&R having previously owned Radiac. The court found that once Radiac was spun off and no longer under M&R’s control, M&R lost the ability to make decisions impacting Radiac’s interests under the shared insurance policy.
Implications of the Decision
The decision suggests that former subsidiaries may retain their insurance coverage rights even after being spun off or sold, unless those rights are specifically released with their consent.
The court distinguished this situation from cases where a policyholder who is “first in time” can exhaust policy limits through a settlement, even if it leaves no remaining coverage for other policyholders. Here, the issue was M&R’s authority to release Radiac’s coverage rights as a separate entity, not just the exhaustion of shared policy limits, the court held.
The court also rejected a similar motion by St. Paul Fire Insurance Co. relating to a 2000 settlement agreement with M&R. The court also held that M&R did not have the right to release Radiac’s coverage rights with St. Paul.
Radiac Abrasives Inc. v. Hartford Accident & Indemnity Co., et als., Superior Court of New Jersey, Essex County, Aug. 26, 2024, Docket No: ESX-L-005483-20 &
