Source: https://www.insurancejournal.com, March 29, 2018
By: Elizabeth Blosfield
The New York Court of Appeals has ruled that KeySpan Gas East Corporation is responsible for costs to clean up environmental contamination caused by manufactured gas plants owned by its predecessor during years when there was no pollution property damage liability insurance coverage available in the market. The court rejected KeySpan’s proposition to instead hold its insurer Century Indemnity Company liable for the cleanup costs.
“Long-tail claims present unique difficulties,” Judge Stein wrote in the New York Court of Appeals opinion document, adding that for long-tail claims, the injury-producing harm is gradual, continuous and typically spans multiple insurance policy periods. In this case, the harm involved years when insurance coverage was in place in addition to years when no coverage was purchased.
“In these situations, courts across the country have been tasked with determining the appropriate distribution of liability among various insurers and between the insurers and the policyholder,” Stein wrote.
This case, Keyspan Gas East Corporation v. Munich Reinsurance America, Inc., Century Indemnity Company et al., comes after the New York Department of Environmental Conservation (DEC) found long-term, gradual environmental damage at two manufactured gas plants in Rockaway Park and Hempstead owned and operated by KeySpan’s predecessor, Long Island Lighting Company (LILCO), decades after gas production began in the late 1880s and early 1900s. At both sites, the DEC found contaminants, such as tar, had seeped into the ground and leeched into the groundwater.
Between 1953 and 1969, Century issued eight excess liability insurance policies to LILCO covering property damage. According to the Court of Appeals opinion, environmental contamination at the sites occurred before, during and after the Century policy periods and was unidentifiable and indivisible from the total resulting damages.
The DEC required KeySpan to go through remediation efforts at the Hempstead and Rockaway Park sites, which were concluded respectively in 2002 and 2012, according to the Court of Appeals opinion.
KeySpan eventually brought this action, seeking a declaration of coverage and determination of liability owed under a number of insurance policies, including the policies issued by Century. In 2014, Century moved for partial summary judgment, contending that it was not responsible for property damage at the Rockaway Park and Hempstead sites that occurred outside of its policy periods. It also stated that any covered costs should be allocated pro rata over the entire period when property damage at each site occurred.
Typically, courts use two primary methods of allocation for liability across multiple policy periods: all sums and proration. All sums allocation allows the insured to collect its total liability under any policy in effect during the periods that the damage occurred, up to the policy limits. Under pro rata allocation, on the other hand, an insurer’s liability is limited to sums incurred during the policy period. 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, the Court of Appeals opinion explained.
“Pro rata shares are often, although not exclusively, calculated based on an insurer’s ‘time on the risk,’ a fractional amount corresponding to the duration of the coverage provided by each insurer in relation to the total loss,” Stein wrote in the opinion. “In New York, we have not adopted a strict pro rata or all sums allocation rule. Rather, the method of allocation is governed foremost by the particular language of the relevant insurance policy.”
While KeySpan did not argue against pro rata time-on-the-risk allocation controlled under the relevant policies, it disputed the idea that Century’s pro rata share should not be reduced by factoring in years when pollution property damage liability insurance was unavailable.
According to KeySpan, Century’s expert had stated this coverage was not available to utilities until approximately 1925, and a “sudden and accidental pollution exclusion” was later adopted by the insurance industry sometime around October 1970, according to the Court of Appeals opinion.
The Supreme Court initially granted Century’s motion in part, holding that liability should be allocated to KeySpan for the years it elected to self-insure and that the legislature mandated a pollution exclusion in liability policies. However, the court denied the motion regarding years when the relevant insurance coverage was unavailable in the marketplace.
After Century appealed, the Appellate Division reversed the Supreme Court’s order, holding that under the insurance policies, Century does not have to cover KeySpan for losses related to the time periods when liability insurance was unavailable in the market.
KeySpan did not dispute its responsibility for the risk during years when property damage insurance was available but not purchased by LILCO. However, KeySpan argued it should only be responsible for years when insurance was available in the marketplace, stating that liability should not be allocated to the policyholder for years when insurance was unobtainable either because it had not yet been offered by insurers or because the industry had adopted a pollution exclusion.
In response, Century argued the unavailability rule is inconsistent with the policy language that mandates pro rata allocation.
Under the unavailability rule, a policyholder bears the risk for periods of time when it elected not to purchase available insurance, but not for years when insurance was unavailable. Some courts have rejected the unavailability rule, holding that a policyholder is responsible for risk during periods of non-coverage, regardless of whether the lack of insurance coverage is due to a voluntary decision to self-insure or to an inability to obtain coverage, the opinion document explained.
Century contended that placing liability on an insurer for damages due to occurrences outside the policy period would breach the underlying premise of pro rata allocation, an idea with which the Court of Appeals agreed.
“Indeed, such an approach could, once a policy is triggered, impose liability in perpetuity (or retroactively to periods prior to coverage) on an insurer who issued insurance coverage for only a limited number of years, thereby eviscerating much of the distinction between pro rata and all sums allocation,” Stein wrote in the opinion.
In this case, the Court of Appeals sided with the Appellate Division’s previous ruling that spreading industry risk through insurance is accomplished by setting and paying premiums consistent with a forward-looking assessment of risk.
“[i]n the absence of a contract requiring such action, spreading risk should not by itself serve as a legal basis for providing free insurance to an insured,” the Appellate Division had previously ruled.
With this in mind, the Court of Appeals decided that the unavailability rule cannot be reconciled with the pro rata approach and rejected application of the rule for time-on-the-risk pro rata allocation. In doing this, it affirmed the Appellate Division’s order, with costs.