New York Court Of Appeals rejects the "Unavailability Rule" under pro-rata allocation
KeySpan Gas East Corp. v Munich Reinsurance America, Inc. et al.
In the context of environmental property damage claims, proper allocation among insurers on the risk during the period of time such property damage is alleged to have taken place – which can span decades - is often a hotly contested topic. Significant in any such debate is the question of whether an insured must participate in the allocation as well. In KeySpan Gas East Corp. v. Munich Reinsurance America, Inc. et al., the New York Court of Appeals answered “yes”, finding, as a matter of first impression, that under “pro rata time-on-the-risk” allocation, policyholders bear the risk for years during which they did not have liability coverage, even if coverage for environmental liabilities was unavailable.
The dispute in KeySpan arose from environmental contamination caused by manufactured gas plants owned and operated by KeySpan’s predecessor. It was undisputed that the environmental contamination occurred gradually and continuously before, during, and after the relevant policy periods.
Before New York’s highest court, Keyspan argued that its insurer’s pro rata share should not be reduced by factoring in the years in which liability insurance for pollution claims was unavailable in the marketplace, either because it had not yet been offered by insurers or because the industry had adopted a pollution exclusion. Under this so-called “unavailability rule” advocated by KeySpan, a policyholder bears the risk for periods of time when it elected not to purchase available insurance, but not for years when such insurance was unavailable. Application of the unavailability rule reduces the number of years included in the overall pro rata calculation, thereby increasing the share of liability attributable to an insurer for each year it was on the risk.
The Court of Appeals rejected KeySpan’s argument and agreed with the insurer “that the unavailability rule is inconsistent with the contract language that provides the foundation for the pro rata approach – namely the ‘during the policy period’ limitation – and that to allocate risk to the insurer for years outside the policy period would be to ignore the very premise underlying pro rata allocation.” The court found that application of the unavailability rule could “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.” Thus, the court stated that, under the pro rata allocation methodology, “it would be incongruous to include harm attributable to years of non-coverage within the policy periods.”
Moreover, the court held that applying the unavailability rule under pro rata allocation would effectively provide coverage for years in which no premiums were paid by the insured and would also contravene the reasonable expectations of the average insured.
It is also of note that in reaching its decision, the Court of Appeals reaffirmed its long-standing position, as set forth in Consolidated Edison Co. of N.Y. v. Allstate Ins. Co. 98 N.Y.2d 208 (2002) and Matter of Viking Pump, Inc., 27 N.Y.3d 244 (2016), that New York has 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.”
By rejecting the unavailability rule, the Court of Appeals of New York joined with jurisdictions including Massachusetts, Illinois, and the United States Court of Appeals for the Seventh Circuit in focusing its analysis specifically on the insurance policy language at issue, an approach it found to be more consistent with the principles of policy interpretation that are the hallmark of New York law than the reliance on public policy concerns espoused by the jurisdictions that have adopted the unavailability rule. Focusing on policy language, the Court of Appeals concluded that a policyholder must participate in the allocation of long-tail property damage claims for all periods in which it did not maintain insurance, even if by reason of unavailability of coverage.