In a case of first impression, a New York intermediate appellate court has held that the policyholder, rather than existing insurers, must be allocated environmental cleanup costs for periods of time when environmental cleanup insurance was not available in the marketplace. The decision reverses the denial of the insurer’s partial motion for summary judgment.

The case involved insurance coverage for long-term environmental property damage. Keyspan Gas East Corp. v. Munich Reins. Am., Inc., No. 16626, 2016 N.Y. App. Div. LEXIS 5824  (1st Dep’t, Sept. 1, 2016). The insurer only covered 16 years of the alleged continuous environmental damages. The issue before the court was the proper allocation of the risk of loss from the continuing harm during periods of time when liability insurance was unavailable. The policyholder argued, and the motion court agreed, that under the applicable pro rata allocation analysis, the insurer was required to assume the allocated risk for losses occurring during periods when liability insurance was not available in the marketplace.

In reversing, the appellate court agreed that pro rata allocation was appropriate, but held that the insurer did not have to indemnify the insured for losses attributable to periods of time when liability insurance was unavailable in the marketplace. The court found that the language of the insurance policies limited coverage to accidents or occurrences during the policy period and, therefore, even though the policies covered “all sums,” a pro rata allocation based on the insurer’s time on the risk was consistent with the policy language.  The court held that because there was no anti-stacking language, the exception to pro rata allocation did not apply.

While, the court noted, pro rata allocation often includes apportionment of some part of the risk to the policyholder in periods where there was no insurance purchased, the courts have split on apportionment for risks incurred during times when insurance coverage was unavailable in the marketplace. Here, the court found that the policy language restricting coverage to the policy period did not allow for coverage outside of the period when insurance was unavailable in the marketplace. The court stated that the policyholder’s interpretation would expose the insurer to risks beyond those contemplated by the parties. Nor did the court find any ambiguity in the policies.

The court’s bottom line was that there was no legal basis for providing what would amount to free insurance to the policyholder. Given the recent New York Court of Appeals’ decisions on allocation issues, it will be interesting to see if the policyholder moves at the Appellate Division or the Court of Appeals to review this unanimous decision and whether either court will grant the application for Court of Appeals review.