No Coverage for Loss Before Retroactive Date
Failure to Buy Full Retroactive Coverage is Expensive

Barry Zalma
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Read the full article at https://www.linkedin.com/pulse/coverage-loss-before-retroactive-date-barry-zalma-esq-cfe and at https://zalma.com/blog plus more than 4100 posts.
Failure to Buy Full Retroactive Coverage is Expensive

Medline Industries, Inc. (Medline), appealed an order of the circuit court of Lake County granting judgment on the pleadings in favor of plaintiff and counter defendant, Illinois Union Insurance Company (Illinois Union). Medline also appealed the dismissal with prejudice of its second amended counterclaim. In Illinois Union Insurance Company v. Medline Industries, Inc.; Kathleen Koch; Chandra Sefton; Patty Bennett; Dawn Rex, on Behalf of Her Minor Son, Samuel Dolcimascolo; and Dennis Brebner, Medline Industries, Inc., No. 2-21-0175, Court of Appeals of Illinois, Second District, 2022 IL App (2d) 210175 (March 4, 2022) the Court of Appeals resolved the dispute.
Background

In 2019, defendants (collectively the underlying plaintiffs) sued Medline in Cook County for injuries allegedly caused by emissions of ethylene oxide gas (EtO) from Medline's medical instruments sterilization facility in Waukegan (the Waukegan facility). Medline tendered those lawsuits to its insurer, Illinois Union, for defense. Illinois Union declined to defend or indemnify Medline.

Illinois Union contended that it did not owe a duty to either defend or indemnify Medline in the underlying lawsuits.
The Insurance Policy

At the Waukegan facility, Medline sterilizes medical instruments. In this process, Medline emits EtO, which is a carcinogenic and mutagenic gas. Medline purchased a claims-made premises pollution liability insurance policy (the policy) from Illinois Union. The "retroactive date" of the policy was September 29, 2008, which is also when Medline acquired the Waukegan facility. The "retroactive date" in such a policy specifies the date of the earliest occurrence to be covered, regardless of when the claim is made. This is in contrast to "full retroactive" coverage, which places no limitations on coverage for past occurrences and would cover occurrences predating Medline's acquisition of the facility.

The policy defined "pollution condition" dispersal of wastes, on, in, into, or upon land and structures thereupon, the atmosphere, surface water, or groundwater." Section IA further provided that coverage applied only to "pollution conditions" that "first commence, in their entirety, on or after the retroactive date *** and prior to the expiration of the 'policy period.'" Section IIIA of the policy provided that Illinois Union had the duty to defend Medline against a claim to which "this insurance applies."
The Coverage Dispute

Illinois Union denied coverage on the basis that the underlying complaints alleged that the Waukegan facility (whether owned by Medline or its predecessors) released EtO since 1994. Thus, Illinois Union interprets the underlying complaints as alleging that the emissions first commenced prior to the retroactive date of the policy.
The Underlying Lawsuits

Eighteen of the lawsuits were filed against Medline in 2019 in the circuit court of Cook County. The nineteenth suit, a class action, was filed in 2020 in federal district court. Each of the complaints made similar allegations including the following: "Medline and its predecessors have used, and Medline continues to use, EtO in industrial medical device sterilization since approximately 1994 ***." "Medline's predecessors consistently released over 4000 pounds of EtO between 1996 and 2001, including approximately 17, 000 pounds between 1999 and 2001."

The specific acts or omissions allegedly committed by Medline were:

emitting dangerous volumes of EtO into the air from the Waukegan facility,

disregarding safe methods to adequately control EtO emissions,

failing to warn or advise those who live or work in the community that they were being exposed to EtO,

failing to adequately record test results of high levels of EtO,

ignoring test results of high levels of EtO,

underreporting EtO levels, and

subjecting those who live or work near the Waukegan facility to increased cancer risks.

The underlying complaints did not allege specific dates or times when the EtO emissions occurred.
Illinois Union's Motion for Judgment on the

Illinois Union filed a motion for judgment on the pleadings. For coverage to exist, Illinois Union argued, the alleged emissions of EtO must first commence, in their entirety, on or after the retroactive date of September 29, 2008. Illinois Union contended that, because the underlying complaints alleged that the Waukegan facility had released EtO since 1994, there was no potential for coverage.

On September 30, 2020, the court granted Illinois Union's motion for judgment on the pleadings. The court found that Illinois Union had no duty to defend and, therefore, no duty to indemnify Medline regarding the underlying lawsuits.
Analysis and Construction of Insurance Policies

The court's primary objective in construing an insurance policy is to ascertain and give effect to the parties' intent. In a declaratory judgment action, where the issue is whether the insurer has a duty to defend, courts ordinarily first look to the allegations in the underlying complaint and compare those allegations with the relevant provisions of the insurance policy.
Comparison of the Underlying Complaints to the Policy Language

The parties disagree on whether the court may look beyond the eight corners of the underlying complaints and the insurance policy. As noted, courts generally first look to the allegations in the underlying complaint and compare those allegations with the relevant provisions of the insurance policy. The underlying complaints allege that the Waukegan facility emitted EtO since 1994. Specifically, the underlying complaints allege that "Medline and its predecessors have used, and Medline continues to use, EtO in industrial medical device sterilization since approximately 1994." Additionally, the underlying complaints allege that "Medline's predecessors consistently released over 4000 pounds of EtO between 1996 and 2001, including approximately 17, 000 pounds between 1999 and 2001." Thus, the underlying complaints allege that the earliest emissions occurred prior to the policy's retroactive date of September 29, 2008.

Even if the underlying complaints clarify that the emissions were intermittent, the court still concluded that they are alleged to have commenced before the retroactive date of September 29, 2008.
Construction of the Policy Definition of "Pollution Condition "

To avoid the bar of the retroactive date and effectively convert the policy into one affording full retroactive coverage, Medline argues that each separate release of EtO is a new "pollution condition." Thus, Medline reasons that pollution conditions occurring after the retroactive date are covered under the policy. The complaints clearly allege that, "[s]ince 2008, Medline has used and continues to use EtO for medical device sterilization at the Waukegan facility."

The policy provides coverage for pollution conditions that "first commence, in their entirety, on or after the retroactive date." The words "first commence" and "in their entirety" should not be ignored and the court of appeal refused to ignore it.

The underlying plaintiffs alleged that the emissions of EtO from the Waukegan facility began in 1994 and continued at least to when the underlying lawsuits were filed in 2019 and 2020. Thus, the underlying complaints did not allege that the "pollution condition," as defined in the policy, commenced, in its entirety, after the retroactive date.

Medline asked the court to stop reading the policy after the definition of "pollution condition." However, section IA further provides that coverage applies only to "pollution conditions" that "first commence, in their entirety, on or after the retroactive date."

"Entirety" is the aggregating language. As discussed, "entirety" in this context means the totality of the emissions from the Waukegan facility. Illinois Union argued that Medline asked the court to "cast aside" the policy language and to invoke the "reasonable expectations doctrine," which Illinois does not recognize.

The court of appeal noted that the policy language is unambiguous and Medline does not argue to the contrary. There was simply nothing in the record to indicate that Medline's expectations were not met. According to the asset purchase agreement between Medline and its predecessor, Medline knew that its predecessor released EtO from the Waukegan facility. Thus, Medline knew that its own risk predated its purchase of the facility.

The court of appeal noted that Medline could have purchased a "full retro" policy that would have protected it against pollution conditions commencing prior to the retroactive date but it chose not to do so. Now, faced with multiple lawsuits alleging pollution conditions prior to the retroactive date, Medline sought to convert its policy into one with full retroactive coverage. It is well established that, where terms of a contract are clear and unambiguous, they must be enforced as written, and courts cannot rewrite a contract to provide a better bargain to suit one of the parties.

The trial court properly granted Illinois Union's motion for judgment on the pleadings and properly dismissed with prejudice Medline's second amended counterclaim.
ZALMA OPINION

Medline either took a calculated risk in seeking insurance with a retroactive date that only covered the date it purchased the facility rather than seeking full retroactive coverage that the court believed was available. Knowing that the entity they purchased was issuing pollutants before the purchase date, if full retroactive coverage was available, Medline should have purchased it. However, to do so, it would have been required, in good faith, to advise the insurer of the previous acts of pollution. If it did so the chance of any insurer taking the risk would have been slim to none. The litigation tried to get the policy purchased to do what the coverage they needed was not purchased and was probably not available.

© 2022 – Barry Zalma

Barry Zalma, Esq., CFE, now limits his practice to service as an insurance consultant specializing in insurance coverage, insurance claims handling, insurance bad faith and insurance fraud almost equally for insurers and policyholders.

He practiced law in California for more than 44 years as an insurance coverage and claims handling lawyer and more than 54 years in the insurance business.

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