In a case of first impression under New York law, the New York Court of Appeals recently ruled that, where pro rata allocation is the appropriate form of cost sharing among insurers, insurers are not responsible for coverage for those years during which no pollution liability coverage was available to be purchased. This ruling will have a significant impact on policyholders by decreasing the insurers' proportionate share of financial responsibility and increasing the share imposed on the insured.
Historically, insurance coverage for property damage, including property damage allegedly caused by pollution, was not commercially available until the 1930s. Moreover, commercial general liability policies began to prohibit all coverage for pollution beginning in 1986. In insurance coverage disputes involving long-term environmental cleanup costs, an insurer will frequently argue that it should only be allocated a "pro rata" (i.e., proportional) share of the policyholder's pollution liabilities based on the particular years the insurer issued coverage divided by the total number of years during which the pollution occurred. An insurer may further argue that the policyholder should be considered self-insured for years in which it did not have coverage and, accordingly, such self-insured years should be incorporated into the formula to calculate each parties' proportionate share of the loss. Policyholders, on the other hand, argue that their insurer's proportionate share of liability should not take into account years in which no pollution coverage was available to the policyholder in the market. This eliminates most self-insured years from the allocation formula and, thereby, increases the insurers' proportionate share of liability.
Background and Ruling
Whether an allocation formula incorporates years in which coverage was unavailable can have enormous ramifications for each party's costs. As a general example, assume that Company X is found liable for a pollution claim that lasted 40 years. Assume further that Insurer A was on the risk for years 1-10 of the exposure, Insurer B was on the risk for years 11-20 of the exposure, and pollution coverage was unavailable in the marketplace for years 21-40 of the exposure. Under a pro-rata allocation formula that includes years where the relevant coverage was unavailable, Insurer A and Insurer B each would be responsible for a quarter of Company X's liability (because each insured ten years out of a 40-year allocation period) and Company X would be responsible for half of its liability (because it was self-insured for 20 years out of the 40-year period). However, under the "unavailability rule," (i.e., where the pro-rata allocation formula does not include years in which the relevant coverage was unavailable), the policyholder's full liability for the entire loss is allocated to a condensed period of 20 years during which coverage was available for purchase. Therefore, under this "unavailability rule" allocation theory, Insurer A and Insurer B each would be responsible for one half of Company X's liability (because each insured ten years out of the 20-year allocation period) and Company X would have no liability. (For an additional example, see Stonewall Ins. Co. v. Asbestos Claims Management Corp., 73 F.3d 1178, 1204 (2d Cir. 1995)).
In Keyspan Gas East Corp. v. Munich Reinsurance American, Inc., 2018 WL 1472635 (N.Y. Ct. App.), the New York Court of Appeals directly addressed whether the "unavailability rule" applies in a pro-rata allocation formula under New York law. In its opening brief, the insurer argued that the plain language of its policies – namely, the provision that coverage applies only "during the policy period" – is incompatible with the "unavailability rule" and that such a scheme would inequitably benefit the policyholder. The policyholder retorted, relying on prior New York Court of Appeals precedent, that pro rata allocation is a "legal fiction," which is not based on any policy language. Because pro rata allocation is not based on any specific policy language, the policyholder concluded that the insurer—and not the policyholder—should be financially responsible for pollution liability arising from damage occurring during a period when pollution liability insurance coverage was not commercially available. The policyholder (and various amici) encouraged the Court to follow other jurisdictions in adopting the "unavailability rule" on the basis of other language present in the policies, canons of interpretation related to insurance policies, and public policy considerations.
On March 27, the Court issued its opinion. The Court agreed with the insurer, rejecting the "unavailability rule" because imposing "liability on an insurer for damages resulting from occurrences outside the policy period would contravene the very premise underlying pro rata allocation." Keyspan Gas East Corp. v. Munich Reinsurance Co., 2018 WL 1472635, at *4. The Court stated that its decision was rooted in the policy language, specifically pointing to the policy's promise to insure losses and occurrences which happen "during the policy period." This language, the Court found, is generally incompatible with the "unavailability rule," which necessarily transfers to the insurer certain liability that arose outside the relevant policy period. (However, as described below, a policy's use of "during the policy period" is not always determinative of the applicable allocation method and the policyholder's argument for "all-sums" allocation in this case was not before the Court on this appeal.) The Court stated that other jurisdictions that have incorporated the "unavailability rule" into their pro rata allocation schemes largely have done so on public policy grounds, seeking to maximize resources available to long-tail claimants. Because New York law requires that the policy language dictate the scope of coverage (as opposed to public policy or "notions of abstract justice or moral obligation"), the Court refused to incorporate the "unavailability rule" into the pro-rata allocation formula. Id. at *5 (internal citations omitted).
As a foundational issue, policyholders should carefully consider whether to concede that pro rata allocation is the appropriate method of allocation. Under an alternative method of allocation, generally called the "all sums" method, the policyholder elects one or more policies in any triggered period to be responsible, up to their limits, for the full amount of damage arising from pollution liability. The New York Court of Appeals recently approved the use of "all sums" allocation where an insurance policy contains a "non-cumulation" clause, finding that such a clause is inconsistent with pro rata allocation because it "plainly contemplate[s] that multiple successive insurance policies can indemnify the insured for the same loss or occurrence." In re Viking Pump, Inc., 27 N.Y.3d 244, 259 (2016). The Viking Pump Court made this ruling despite the fact that the policies at issue contained a provision limiting coverage to occurrences "during the policy period." Id. at 251-52. A non-cumulation clause generally reads like this:
If collectible insurance under any other policy(ies) of the company is available to the insured, covering a loss also covered hereunder (other than underlying insurance of which the insurance afforded by this policy is in excess), the company's total liability shall in no event exceed the greater or greatest limit of liability applicable to such loss under this or any other such policy(ies).
What else can an insured do to best protect its interests in a potential insurance coverage dispute? Here are several recommendations:
- Locate all of your potentially responsive policies.
- Provide notice to all insurance carriers as soon as you become aware of a potential pollution event.
- Review your policies. For instance, it is important to determine whether your policy provides coverage for property damage; whether it contains a pollution exclusion; and whether it includes a "non-cumulation" clause as discussed above.
- Consult insurance coverage counsel to assist you with review of your policies and to advocate for the best possible financial outcome for you.