In a highly anticipated decision of first impression, the New York Court of Appeals has held that policyholders facing long-tail liability claims must bear the risk of uninsured periods of time, even when insurance was not available in the marketplace. In KeySpan Gas East Corp. v. Munich Reinsurance America, Inc.,1 KeySpan’s predecessor had operated two manufactured gas plants that caused long-term, gradual environmental damage due to contaminants seeping into the ground. The New York Department of Environmental Conservation required KeySpan to perform costly site remediation, and KeySpan sought coverage under liability policies issued by Century Indemnity Company from 1953 to 1969. It was undisputed that the contamination began as early as the 1880s, and continued until the sites were cleaned up in 2002 and 2012.

Century moved for partial summary judgment, arguing that it was not responsible for any portion of property damage occurring outside its policy periods and that any covered costs must be allocated pro-rata over the entire contamination period. The Court of Appeals has had several occasions to consider the appropriate allocation methodology in New York where there are allegations of continuous harm that cannot be scientifically placed into any specific policy period.

In Consolidated Edison Co. of N.Y. v. Allstate Ins. Co.,2 the court rejected an “all sums” or “joint and several” approach, which would have permitted the insured to allocate its total liability to any chosen policy in effect during the contamination period, up to the limit. The court refused to ignore the insuring clause that, in that case, covered “occurrences happening during the policy period.” Pro-rata allocation across all policies, based on time on the risk, was held to be more consistent with the policy language, as it “acknowledges the fact that there is uncertainty as to what actually transpired during any particular policy period.” This same reasoning has been applied to insuring clauses requiring that bodily injury or property damage (rather than the accident or occurrence) take place during the policy period.

New York courts have since applied the pro-rata scheme to allocate uninsured periods of time to the insured where the insured could have, but chose not to, obtain insurance. However, until this decision, there was no guidance from the New York state courts as to whether the insured must bear the burden of uninsured periods of time where insurance was not available in the marketplace. Two Second Circuit Court of Appeals cases had predicted New York would adopt a so-called “unavailability” exception, relying on other jurisdictions in the absence of New York precedent.3 The Court of Appeals has now definitively rejected such an exception, based on a close reading of the policy language.

KeySpan conceded that pro-rata allocation was appropriate based on the policy language4 and that it should be allocated the years it opted not to purchase insurance, but argued that it should only be responsible for years in which insurance was actually available in the marketplace. According to KeySpan, coverage for environmental contamination was first available to utilities in 1925, and that a “sudden and accidental pollution exclusion” was later generally adopted by the insurance industry in 1970. Therefore, it argued, the allocation should not take into account any time before 1925 or after 1970, despite the fact that contamination took place during those years. Accepting KeySpan’s argument would have served to reduce the number of years included in the overall calculation, thereby increasing the amount of responsibility allocated to Century.

The Court of Appeals acknowledged that courts are “divided with regard to whether a policyholder should be held responsible for those periods of time when the relevant coverage was not offered for sale on the market.” The First Department had rejected KeySpan’s argument, but recognizing this to be a matter of first impression in New York, sought confirmation from the Court of Appeals that its order was properly made. The Court of Appeals agreed with the First Department that imposing liability on an insurer for property damage outside the policy period would contravene the very purpose of pro-rata allocation. Instead, the policyholder must be responsible for the uninsured periods of time, even if it could not have obtained insurance. The court stated:

In the context of continuous harms, where the contamination attributable to each policy period cannot be proven and we draw from the contract language to distribute harm pro rata across the policy periods, it would be incongruous to include harm attributable to years of non-coverage within the policy periods.

Further, application of the unavailability rule to an insurance policy 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.

While the Court of Appeals considered the public policy concerns in favor of an “unavailability exception” to pro-rata allocation, it concluded that they were outweighed by New York’s strict adherence to the policy language. It refused to take into consideration the desire to spread risk to insurers, who might be in a better financial position to pay for environmental contamination, holding that this “should not, by itself serve as a legal basis for providing free insurance to an insured.” From an equitable standpoint, the risk of uninsured periods where no insurance was available could be placed on either party. However, as is the policyholder, not the insurer, that created the risk of loss, the court found there was no basis in the policy language to shift the risk to “an underwriter unlucky enough to insure an early slice …”

Rather than comparing the financial ability to pay, New York courts must look to the terms of the insurance contract at issue. Where no coverage was given, and no premium received, the risk of liability is appropriately placed on the policyholder who allegedly caused the injury or damage in the first place. This decision is a significant victory for insurers in New York, as it correctly relies on the language of the insurance contract itself, which limits coverage to property damage during the policy period.