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April 23, 2018 Practice Points

Court Rejects the “Unavailability Exception” to Pro Rata Allocation

A unanimous New York Court of Appeals recently held that under pro rata allocation, insurers are not liable for the portion of continuous environmental damage that occurs outside their policy periods, even during years when liability coverage for such damage was commercially unavailable

by Catherine Cockerham and Alexandra Galdos

In a closely watched case, a unanimous New York Court of Appeals recently held that under pro rata allocation, insurers are not liable for the portion of continuous environmental damage that occurs outside their policy periods, even during years when liability coverage for such damage was commercially unavailable. See Keyspan Gas E. Corp. v. Munich Reins. Am.Inc., No. 20, 2018 WL 1472635 (N.Y. Mar. 27, 2018).

In Keyspan, the policyholder had operated manufactured gas plants at two sites beginning in the late 1800s and early 1900s. The plants caused indivisible and continuous environmental damage to the soil and groundwater at the two sites over the course of several decades. After the policyholder’s successor was required to undertake costly remediation efforts at the sites, it filed a declaratory judgment action seeking coverage for its cleanup costs under a number of insurance policies, including eight excess liability policies issued by Century Indemnity Company (Century) between 1953 and 1969.

Century and the policyholder disputed who, under pro-rata-time-on-the risk allocation, was responsible for the contamination that occurred during periods of time in which no applicable insurance was in place. The policyholder conceded that it bore the risks for those years when it voluntarily self-insured, but argued that it was not liable for clean-up costs attributable to years during which insurance was unobtainable, either because it was not yet offered in the marketplace or because the insurance industry had adopted a pollution exclusion. Application of this so-called “unavailability exception” has the effect of reducing the number of years included in the overall pro rata calculation, thus increasing an insurer’s share of liability for each year it was on the risk.

On appeal, the New York Court of Appeals unanimously rejected application of the unavailability exception, affirming the Appellate Division’s decision that policyholders bear the risk for years during which coverage was commercially unavailable.

The Court of Appeals first explained that it had previously interpreted policy language substantively identical to the language in the at-issue policies, which limited the insurer’s liability to losses and occurrences taking place “during the policy period,” as supporting pro rata allocation. Id. at *4 (citing Consolidated Edison Co. of N.Y. v. Allstate Ins. Co., 98 N.Y.2d 208, 224 (2002). The court contrasted Consolidated Edison with its recent ruling in Matter of Viking Pump, Inc., 27 N.Y.3d 244 (2016), in which it applied “all sums” allocation to policies containing “non-cumulation” clauses.

The court then explained that the unavailability exception is inconsistent with the policy language that “provides the foundation for the pro rata approach—namely, the ‘during the policy period’ limitation—and that to allocate risk to the insurer for years outside the policy period would be to ignore the very premise underlying pro rata allocation.” Keyspan, 2018 WL 1472635, at *4 (emphasis added). Moreover, the court held that applying an unavailability exception to policy language that directs pro rata allocation “would effectively provide insurance coverage to policyholders for years in which no premiums were paid and in which insurers made the calculated choice not to assume or accept premiums for the risk in question.” Id. The unavailability exception also contravenes the reasonable expectations of the average insured, “who would not expect to receive coverage without regard to the number of years for which it purchased applicable insurance.” Id.

The Court of Appeals also observed that the courts that have adopted an unavailability exception “have done so by relying heavily on public policy concerns and a desire to maximize resources available to claimants against the policyholder.” Id. (citations omitted). In contrast, the approach of those jurisdictions that have rejected an unavailability exception, including Massachusetts, Illinois, and the U.S. Court of Appeals for the Seventh Circuit, have focused their analysis on the policy language, rather than public policy concerns, which “is more consistent with New York law.” Id. Indeed, New York courts “may not make or vary the contract of insurance to accomplish its notions of abstract justice or moral obligation.” Id. at *5 (citation omitted). In conclusion, the Court reiterated that that the unavailability exception is contrary to New York law because “the very essence of pro rata allocation is that the insurance policy language limits indemnification to losses and occurrences during the policy period.” Id.

The Court of Appeal’s decision is a significant victory for insurers in New York faced with claims involving continuous environmental pollution, asbestos injury and other “long-tail” claims implicating multiple policy periods. The decision properly respects insurers’ calculated choices about the risks they will assume, and confirms that under New York law, the method of allocation is governed by the policy language, rather than so-called “equity” concerns.

Catherine Cockerham and Alexandra Galdos are with Steptoe & Johnson LLP, Washington, DC.

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