Policyholders must pick up the tab for pollution claims in years when insurance was unavailable for those risks, the New York Court of Appeals ruled on March 27, 2018. In the closely-watched case KeySpan Gas East Corp. v. Munich Reinsurance Am., Inc., the first-impression ruling decisively decided the applicability of the “unavailability” rule in policies that mandate pro rata allocation in the context of continuous environmental contamination and other “long-tail” claims implicating many policy periods.
Under standard pro-rata allocation, the policyholder, rather than the insurer, bears the risk for those “orphan” years when it voluntarily elects not to purchase available insurance. In order to mitigate some of the potential harsh effects on an insured, an “unavailability” exception to that general rule was created whereby the policyholder does not bear the risk for periods of time when the relevant coverage was not offered for sale on the market (meaning the policyholder could not obtain the insurance even if it wanted to). Instead, applicable defense/indemnity costs are allocated among those insurers on the risk for the orphan years.
In Keyspan, National Grid subsidiary KeySpan Gas East Corp. had urged the court to apply the “unavailability” exception so its insurers would be responsible to cover more of the costs involved in remediating KeySpan’s long-term pollution damage that occurred gradually from 1903 to 2013. KeySpan had sought indemnification from one of its insurers, Chubb unit Century Indemnity Co., in accordance with a policy in effect from 1953 to 1969. KeySpan did not dispute that it bore the risks for those years when it was voluntarily self-insured, but argued Century should have to cover KeySpan’s costs attributable to years when no insurance covering pollution risks was available, namely for the years before 1953 and after 1986.
The trial court, in 2014, applied the “unavailability exception.” Century appealed and the Appellate Division reversed, holding that an insurer did not have to indemnify a policyholder for losses attributable to time periods when liability insurance was unavailable in the marketplace. KeySpan Gas E. Corp. v. Munich Reins. Am., Inc., 37 N.Y.S.3d 85 (N.Y. App. Div. 2016). KeySpan appealed, giving the Court of Appeals its first opportunity to rule on the applicability of the “unavailability rule,” wherein it unanimously affirmed the Appellate Division’s ruling.
In its Decision, the Court of Appeals placed strong emphasis on the language in the Century policies that mandated pro rata allocation in ruling that the unavailability rule “cannot be reconciled with” the pro rata approach. Insurance policies that mandate pro rata allocation, such as the policies in the KeySpan case, generally have language limiting the insurer’s liability to all sums incurred and occurrences happening “during the policy period.” Rejecting KeySpan’s argument that it would be inequitable to have a policyholder pick up the whole tab for years when it could not buy insurance even if it wanted to, the court reasoned that imposing liability on an insurer for damages resulting from occurrences outside the policy period would essentially rewrite the contract in pro rata policies. The court pointed out that the insured, not the insurer, is the one who allegedly caused the injury and who “ultimately will be financially responsible should insurance prove insufficient.”
KeySpan’s alternative argument that an “all sums” allocation should apply, based on the 2016 Viking Pump ruling, so the insured can collect its total liability, up to policy limits, under any policy in effect during the periods the damage occurred, fared no better. The court distinguished the policy language in the Century policies from the policy language in Viking Pump and held that, if the “unavailability rule” was applied to policies like Century’s, the distinction between pro rata and all sums allocation would be “eviscerated.”
Viking Pump would still be the decisive case for policies with “non-cumulation” clauses that support the imposition of “all sums” allocation and contemplate that multiple successive policies can indemnify the insured for the same loss or occurrence. However, KeySpan delivers a significant victory to insurers if the policy requires a pro rata allocation method.
The Keyspan decision rejecting the unavailability rule stands in direct contrast to the ruling of the Connecticut Appellate Court in the R.T. Vanderbilt Company, Inc. v. Hartford Accident and Indemnity Co., et al. 156 A.3d 539 (2017), in which that court, also in a matter of first impression, applied the unavailability rule in its decision in favor of R.T. Vanderbilt, couching its ruling in terms of the insured’s “reasonable expectations” regarding coverage. The Vanderbilt decision currently is on appeal to the Connecticut Supreme Court, where it will be interesting to see if the reasoning of the New York Court of Appeals has an impact on that court’s consideration of the applicability of the unavailability rule.