A medical device company acquired a facility that had used ethylene oxide gas to sterilize medical devices and instruments. The buyer purchased a pollution liability policy for claims made after the acquisition of the facility. The court held no coverage because the ethylene oxide gas was first used before the purchase of the business.
M&A Stories
March 15, 2022
Introduction:
In a recent case, a medical device company purchased a facility that used ethylene oxide gas for sterilizing medical devices. After the acquisition, the buyer obtained a pollution liability policy to protect against potential claims. However, the court ruled that the policy did not cover health claims made by nearby residents, as the pollution started before the business purchase.
The Deal:
The seller of the medical devices and instruments used ethylene oxide gas for sterilization, a common practice in the industry. The business assets were sold to the buyer on September 29, 2008. To mitigate pollution risks, the buyer purchased a pollution liability policy that provided coverage for pollution conditions starting after the acquisition date.
The Lawsuit:
In 2019, residents near the buyer’s sterilization facility filed lawsuits in a Chicago state court, claiming injuries caused by emissions of ethylene oxide gas from the facility. The buyer sought defense and indemnification from its insurer, but the insurer declined coverage, leading to a legal dispute.
The Dispute:
The insurer argued that the pollution claims started before the policy’s commencement date (the closing date), and therefore, there was no coverage. The policy stated that coverage applied only if the pollution “first commenced, in its entirety” after the closing date.
The Outcome:
The court considered all ethylene oxide gas releases, both before and after the closing date, and concluded that there was no coverage. Since the pollution did not “first commence, in its entirety” after the closing date, as required by the policy, the claims were not covered.
The Buyer’s Argument:
The buyer contended that emissions occurred both before and after the closing date, so the policy should be in force. However, the court ruled in favor of the insurer, stating that the policy’s clear and unambiguous terms must be enforced as written.
Important Note:
The buyer had the option to purchase a “full retro” policy, which would have protected them against pollution conditions occurring before the closing date. However, they chose not to do so, and the court upheld the terms of the policy, stating that the buyer received the coverage they paid for.
This case is referred to as Illinois Union Insurance Company v. Medline Industries, Inc., No. 2-21-0175, Appellate Court of Illinois, Second District, (Opinion filed March 4, 2022)
Conclusion:
This case highlights the importance of understanding the coverage and terms of a pollution liability policy. It is essential for businesses involved with toxic materials to carefully assess their insurance options, considering the type of policy, coverage dates, and potential risks they may face.
By John McCauley: I write about recent legal problems of buyers and sellers of small businesses.
Email: jmccauley@mk-law.com
Profile: http://www.martindale.com/John-B-McCauley/176725-lawyer.htm
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Check out my book: Buying Assets of a Small Business: Problems Taken From Recent Legal Battles
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