In a 161-page decision, the Appellate Court of Connecticut ruled Monday as a matter of first impression that state law permits an “unavailability of insurance” rule. Under the rule, defense and indemnity costs are not prorated to the policyholder for periods in which insurance coverage for a certain risk was unavailable.

R.T. Vanderbilt Co., Inc. v. Hartford Accident and Indem. Co., et al., arose from thousands of underlying lawsuits asserting injury from exposure to industrial talc mined and sold by Vanderbilt that allegedly contained asbestos. Vanderbilt brought the action against approximately thirty insurers, seeking declaratory judgment determining their respective obligations under various primary and secondary insurance policies issued to Vanderbilt between 1948 and 2008. The trial court divided the trial into four phases, and the case reached the appellate court on interlocutory appeal following the conclusion of the first two phases.

Concurring with the trial court that the unavailability rule applied, the appellate panel reasoned that it is more efficient and reasonable to require insurers, rather than policyholders, to bear the risk that a new long-tail injury, unanticipated at the time of contracting, will arise and the insurance market for that risk dry up, leaving a backlog of dormant claims with an incomplete chain of coverage. The court found, among other things, that the rule maximizes resources available to respond to claims and promotes public safety, by creating incentives for insurers and policyholders to continuously identify and investigate previously unknown risks associated with various lines of business.

The Connecticut appellate court’s decision may expand insurers’ coverage obligations under the state’s pro rata allocation formula. The court, however, left the door open to challenging the unavailability rule in certain instances, seeming to limit its application to cases in which the “policyholder has been diligent in its efforts to maintain a continuous stream of coverage.”

In light of the significant financial stakes at play, the Connecticut Supreme Court is likely to have the ultimate say on the unavailability rule and other issues addressed by the appeal – a likelihood not lost on the appellate court as reflected in the length of its decision. If the Supreme Court adopts the appeals court’s position, we may see further litigation to define what constitutes “diligent” efforts to maintain coverage such that the rule applies.

However the Connecticut Supreme Court rules will, of course, be of little import for “all sums” jurisdictions, like Wisconsin, where defense and indemnity costs are generally allocated solely among the insurers.