Courts differ on the issue of allocation to the insured for periods in which coverage was unavailable
Claims involving multi-year losses under occurrence-based policies often raise questions as to whether an insured must participate in allocation for periods in which the insured was without coverage. Those seeking to maximize coverage often argue in favor of the “unavailability” rule, which states that periods in which coverage for the subject loss was unavailable in the marketplace cannot be allocated to the insured.
A number of recent decisions have trended against application of the unavailability rule. See Allstate Ins. Co. v. Rochkind, 2019 WL 1440647 (D. Md. Mar. 31, 2019); Keyspan Gas E. Corp. v. Munich Reinsurance Am., Inc., 96 N.E.3d 209 (N.Y. 2018). New Jersey’s highest court stands in contrast to those decisions, reaffirming in a June 2018 holding that the rule continues to apply in New Jersey. Continental Ins. Co. v. Honeywell Internat’l, Inc., 234 N.J. 23 (2018); see also Wooddale Builders, Inc. v. Maryland Casualty Co., 722 N.W.2d 283, 297 (Minn. 2006). Further developments are to come, as Connecticut’s highest court is currently considering, on a petition for certification granted on October 18, 2017, whether the unavailability rule should be applied to avoid allocation to an insured for defense and indemnity costs arising from asbestos disease claims. R.T. Vanderbilt Co., Inc. v. Hartford Accident & Indem. Co., 327 Conn. 923, 171 A.3d 63 (2017).
Last month, in Rochkind, the United States District Court for the District of Maryland made short work of the unavailability argument raised by the insured, who was seeking coverage for a lead paint bodily injury claim. Noting that “an insurance company cannot be held liable for periods of risk it never contracted to cover,” the court stated that Maryland has never adopted the unavailability rule, and that even if it had, the insured had failed to show that insurance for the lead exposure risk at issue was unavailable after 1999, as it claimed. Rochkind, 2019 WL 1440647, at *1, 17 (quoting Pennsylvania National Mutual Casualty Ins. Co. v. Roberts, 668 F.3d 106, 109 (4th Cir. 2012).
New York’s highest court also rejected an insured’s argument for application of the unavailability rule, in the Keyspan decision. That case concerned a claim for multi-year environmental contamination losses caused by operations at three manufactured gas plants that Long Island Lighting Company (a predecessor of Keyspan) had owned and operated since the late 1800s. Keyspan presented expert opinions that pollution property damage coverage was not available to utilities prior to 1925, or after October 1970. The trial court accepted Keyspan’s argument and held Keyspan was not liable for the portion of the loss that took place in the years where liability insurance was unavailable. The Appellate Division reversed, and the New York Court of Appeals affirmed the intermediate appellate court’s decision.
In so doing, the New York Court of Appeals observed that the policies at issue contained provisions “limiting the insurer’s liability to losses and occurrences happening ‘during the policy period.’” As such, “the unavailability rule is inconsistent with [such] contract language.” In addition, that language provides the foundation of the pro rata allocation approach New York had previously adopted, and “to allocate to the insurer for years outside the policy period would be to ignore the very premise underlying pro rata allocation,” by “impos[ing] liability in perpetuity…on an insurer who issued insurance coverage for only a limited number of years.” The court also rejected the public-policy focused approach taken by the few states which adopted the unavailability rule, citing precedent that “this court may not make or vary the contract of insurance to accomplish its notions of abstract justice or moral obligation.”
Only three months after Keyspan was decided, the New Jersey Supreme Court took the opposite approach and reaffirmed its adoption of the unavailability rule, in the context of multiple asbestos bodily injury claims. Honeywell, 188 A.3d at 304. The trial court had applied New Jersey law, and under that state’s law, found that relevant liability insurance ceased to be available in the market as of 1987, such that for allocation purposes, the coverage block should end at 1987 for pre-1987 initial exposure claims. The Appellate Division affirmed the trial court’s decision on these issues.
Then, the New Jersey Supreme Court held that New Jersey continued to apply the unavailability rule, and rejected the insurers’ attempt to limit that rule with the argument that Honeywell should be assigned liability for periods after 1987 based on Honeywell’s “assumption of the risk”. The insurers argued that because Honeywell had chosen to continue its operations with the knowledge that no insurance was available for asbestos bodily injury claims, it had assumed the risk of operating without insurance, such that the coverage block should extend past 1987 to include all years in which Honeywell had manufactured asbestos-containing products.
In rejecting the insurers’ argument, the court stated that the insurers’ “novel equitable exception [to the unavailability rule] would retroactively deprive parties of paid-for insurance coverage due to their post-coverage-period conduct.” It observed that the policy objectives underlying New Jersey’s allocation law – those of “maximizing insurance resources, encouraging the spreading of risk throughout the insurance industry, promoting the purchase of insurance when available, and of simple justice” – were served by applying the unavailability rule in the case before it, to end the coverage block at 1987.
While several states have declined to apply the unavailability rule in recent years, at least one - New Jersey - has reaffirmed its commitment to it. A decision on this issue is presently pending from Connecticut’s highest court. This split makes choice of law a key determination in long-tail claim situations, as a coverage block – and each insurer’s relative share of same – can be significantly impacted by whether or not the unavailability rule is applied.