The method of allocating damages for environmental property damage that occurs over a long period of time (known as a long-tail claim) presents complex timing issues and potentially impacts insurers’ liability under a commercial general liability ("CGL") policy. Perhaps the most important of these issues is determining when the property damage occurred and whether and to what extent any contemporaneous insurance may apply. In ruling on this issue, the majority of jurisdictions have adopted the pro rata, time-on-the-risk method to allocate damages. Under this method, damages are allocated evenly among the years when the damage occurred and assigned to insurers in proportion to the amount of time that an insurer's policies were in effect in relation to the total period in which the damage occurred.

A common issue that arises, however, stems from a policyholder’s lack of coverage within the long-tail period because insurance coverage was unavailable in the marketplace. Notably, jurisdictions disagree over whether insurers are responsible to indemnify policyholders for damages that occurred during such periods. In Keyspan Gas E. Corp. v. Munich Reins. Am., Inc., 37 N.Y.S.3d 85 (N.Y. App. Div. 2016), the Supreme Court of New York, Appellate Division, heard the issue as a matter of first impression and held that an insurer did not have to indemnify a policyholder for losses attributable to time periods when liability insurance was unavailable.

Keyspan involved long-term environmental damage caused by pollution from two manufactured gas plants ("MGP") owned by Keyspan Gas East Corporation (“Keyspan”). Keyspan, N.Y.S.3d at 87. Collectively, the MGPs were responsible for environmental damage occurring from 1903 through 2012. Id. Upon discovering the damage, the New York Department of Environmental Conservation ("NYDEC") brought claims against Keyspan, requiring Keyspan to assume the costs of the investigation and clean-up. Id. Keyspan filed claims with its insurer, Century Indemnity Company ("Century"), in accordance with a CGL that was in effect during a consecutive sixteen-year period when the pollution occurred. Id. at 88. Century, however, denied that it had a duty to indemnify Keyspan for any damages that did not occur "during the policy period." Id.

Keyspan subsequently brought a declaratory judgment against Century seeking indemnification for the full costs of the environmental clean-up. Keyspan, 37 N.Y.S.3d at 88. On Century's motion for summary judgment, the trial court found Century liable for the periods of time when insurance was unavailable in the marketplace. Id. Century appealed, arguing that under a pro rata allocation of risk, Keyspan should be solely responsible for the losses that occurred when coverage was unavailable. Id. Keyspan argued instead that Century should assume the risk for losses occurring both before and after Century’s sixteen-year period of coverage, including when no coverage was available in the marketplace. Id. The Supreme Court of New York, Appellate Division, sided with Century and reversed. Id.

The court began its analysis by considering the existing New York law applicable to long tail claims and allocation methods. Keyspan, 37 N.Y.S.3d at 89. In particular, the court reviewed the New York Court of Appeals’ decisions in Consolidated Edison Co. of N.Y. v. Allstate Ins. Co. (Con Edison), 746 N.Y.S.2d (N.Y. 2002), and Matter of Viking Pump. Inc., 27 N.Y.3d 244 (N.Y. 2016). Id. In Con Edison, the court found that time-on-the-risk under a pro rata allocation method was proper when the policy language provided coverage for accidents occurring "during the policy period." Id. (citing Con Edison, 98 N.Y.S.2d at 224). The court in Viking Pump, however, held that a pro rata allocation was not the proper method when the policy contained anti-stacking or non-cumulation provisions. Id. (citing Viking Pump, N.Y.3d at 261). Although these decisions provided guidance to the court, they did not answer the question of whether the risk attendant to the unavailability of insurance in the marketplace was allocable to the insurers or to policyholders. Id. at 90. The court did note, however, that courts applying New York law commonly apply the time-on-the-risk approach under the pro rata method. Id.

Since this was a matter of first impression, the court analyzed how other jurisdictions ruled on the issue. Keyspan, 37 N.Y.S.3d at 90-91. The court noted that some jurisdictions recognize that the general justification for proration to the insured under time-on-the-risk—encouraging the purchase of insurance to spread risk—does not hold when no insurance is available to purchase; a so-called “unavailability exception.” Id. at 91. Conversely, the court noted that other jurisdictions rule against the unavailability exception because it provides coverage outside of the terms provided by the policy and is akin to providing free insurance coverage to policyholders. Id.

The court next turned to the language of the Century policies. Keyspan, 37 N.Y.S.3d at 92. Notably, the Century policies did not expressly provide how to allocate damages. Id. The court, however, determined that time-on-the-risk approach under a pro rata allocation method was appropriate because the Century policies only provided coverage for "occurrences" and "property damage" that took place "during the policy period." Id. (emphasis added). Moreover, the Century policies did not contain any anti-stacking or non-cumulation provisions, thus, Viking Pump did not apply. Id. Furthermore, the court rejected the unavailability exception, finding that the unavailability exception did not apply because the Century policies provided no express language to justify finding any coverage outside of those periods. Id. at 93. Thus, the Court found that Keyspan was responsible, under a pro rata time-on-the-risk allocation, for periods where insurance was unavailable in the marketplace. Id.

The Keyspan decision is certainly favorable to insurers, both because it requires an insured to be responsible, under a pro rata allocation, for periods where insurance was not available in the marketplace, and because it distinguishes Viking Pump. Assuming that it is not overturned, the decision should, going forward, impact coverage actions involving long-tail claims under New York law. Insurers and insureds alike should be mindful of its impact.

Thank you to the New Jersey Insurance Coverage Group and legal intern Derek Prevete for their contributions.