In <em><a href="http://blog.wcmlaw.com/wp-content/uploads/2018/05/Keyspan-COA-Opinion-4.pdf">Keyspan Gas East Corporation, v. Munich Reinsurance American, Inc., & Century Indemnity Company et al</a></em>, the New York Court of Appeals recently rejected the “unavailability of insurance” exception in long-tail coverage disputes - i.e., where the injury is gradual and continuous and spans years in which insurance coverage was in place, as well as years in which no coverage was purchased. We addressed <a href="http://blog.wcmlaw.com/2016/09/insurer-not-obligated-to-cover-loss-for-time-when-policies-are-not-available-in-marketplace-ny/">the lower court's decision</a> from the Second Department in a prior post, on September 16, 2016. The Court of Appeals hereby affirms that decision.
The Court of Appeals explained the courts generally use two methods to allocate liability in long-tail coverage cases – “All Sums” or “Pro Rata.” In all sums allocation, the insured can collect its total liability up to the policy limit of any policy in effect during the periods that the damage occurred. In pro rata allocation, the insurer’s liability is limited to losses during the policy period, “in other words, each insurance policy is allocated a ‘pro rata’ share of the total loss representing the portion of the loss that occurred during the policy period.” Within pro rata jurisdictions, there is a split regarding whether the policyholder should bear the risk for periods when insurance was unavailable. <em>Keyspan</em> marks the first instance of the Court of Appeals addressing this issue in New York.
The dispute arose around the turn of the 20<sup>th</sup> Century, when Keyspan’s predecessor, (LILCO) built and operated several gas plants in Long Island. Long after those plants stopped operating, the New York Department of Environmental Conservation found evidence that those plants caused significant environmental damage in the surrounding areas. Because the damage occurred gradually, it was impossible to point to a specific occurrence during a specific insurance policy period.
Keyspan commenced a declaratory judgment action seeking a determination of liability owed under multiple insurance policies, including the policies Century issued. Century had issued a total of eight liability policies covering property damages between 1953 and 1969. The parties did not dispute that the environmental damage that occurred in any specific year was “unidentifiable and indivisible” from the damage as a whole. Keyspan did not dispute that it bore the risk for periods of time when insurance was available to, but not purchased by, LILCO. Because applicable coverage was unavailable for many of the years in which the harm occurred (as such policies did not exist), Keyspan argued that it should not be considered self-insured during those years, and Century should cover a share of those costs.
After decades of litigation, Century moved for partial summary judgment in 2014. The Supreme Court granted the motion in part, but held that because the harm could not be attributed to a specific time frame, that Century would have to indemnify Keyspan for the years that it provided coverage and for the years where applicable insurance coverage was unavailable. Century appealed, and the First Department held that Century did “not have to indemnify Keyspan for losses that [were] attributable to time periods when liability insurance was otherwise unavailable in the marketplace.” The First Department, recognizing that this was an issue of first impression in New York, certified the question to the Court of Appeals to decide whether their order was properly made.
The Court of Appeals discussed the split in pro rata jurisdictions about whether the policyholder should bear the risk for periods when insurance was unavailable. Some jurisdictions apply an “unavailability rule,” which functions as an exception to the general rule that the policyholder is considered self-insured for periods when they are without insurance coverage. In those jurisdictions, each insurance policy is allocated a ‘pro rata’ share of the total loss representing based upon the portion of the loss that occurred during its policy period and periods when such coverage was unavailable. According to the Court of Appeals, jurisdictions that have adopted the unavailability rule had “done so by relying heavily on public policy concerns and a desire to maximize resources available to claimants against a policyholder.”
In New York, there is no set rule to determine when to apply “all sum” or “pro rata” allocation. The Court explained under its prior precedent, the method of allocation was determined “foremost . . . by the relevant insurance policy.” In the Court’s prior cases, it analyzed policy language similar to that in the applicable Century policies, which limited the insurer’s liability to losses and occurrences happening “during the policy period.” There, the Court held that “pro rata allocation – rather than all sums allocation – was more consistent with such policy language because ‘the policies provide indemnification for liability incurred as a result of an accident or occurrence during the policy period, not outside that period.’” (quoting <em>Consolidated Edison Co. of N.Y. v Allstate Ins. Co.</em>, 98 NY2d 208, 224 (2002)).
According to the Court, it followed from the <em>Consolidated Edison</em> holding that the unavailability rule was inconsistent with the “during the policy period” limitation language that formed the foundation for the pro rata approach. To assign risk to an insurer for years outside the policy period would ignore not only the contract language, but also the pro rata approach. In addition, applying the unavailability rule would effectively provide coverage for years in which no premiums were paid. Moreover, while jurisdictions that applied the “unavailability rule” focused on public policy, the Court noted that foreseeability is a critical aspect of the insurance industry’s ability to spread risk.
The Court concluded that here, applying the “unavailability rule” would require ignoring Century’s policy language. This would be inconsistent with New York’s emphasis on policy language. Because the rule could not be reconciled with the pro rata approach, the Court refused to apply the unavailability rule. Thanks to Evan King for his contribution to this post. Please email <a href="mailto:BGibbons@wcmlaw.com">Brian Gibbons</a> with any questions.