The New York Court of Appeals ruled last week that if an insurance policy provides for pro rata allocation to determine the insurance coverage responsibility for environmental contamination spanning multiple policy periods, the policyholder bears the risk of loss for periods where pollution coverage was unavailable for purchase. Keyspan Gas East Corp. v. Munich Reinsurance America, Inc., No. 20 (Slip Op. Mar. 27, 2018).

In Keyspan, the policyholder had operated manufactured gas plants for decades beginning in the late 1800s and early 1900s.  The policyholder purchased insurance for many years, including several from Century Indemnity Company between 1953 and 1969.  However, there were a number of periods without coverage: years before insurance was available in the marketplace, after it became unavailable due to the pollution exclusion, and during which coverage could have been purchased but the policyholder chose to self-insure.

Because environmental contamination occurred continuously and gradually over the course of the operations, the court examined the specific language of the policy to determine how coverage would be allocated and determined that a pro rata allocation formula was appropriate. In the pro rata context, the court assesses how to allocate each insurance company’s proportionate share based on the policy limits and how long each insurer provided coverage to the policyholder (i.e., its “time on the risk”).  (This is in contrast to “all sums” allocation, in which a single insurer can be liable for an entire loss up to its policy limits).

In an issue of first impression for the New York Court of Appeals, the court considered who in a pro rata allocation should be allocated the risk of years in which coverage was unavailable for purchase: the policyholder or the insurer. Several jurisdictions have adopted the “unavailability rule” (or “unavailability exception”), which allocates the risk of unavailable insurance to the insurers rather than the policyholder.  However, the New York Court of Appeals declined to adopt the rule, reasoning that it would be inconsistent with the policy language at issue, concluding that the insurer had limited its liability to a particular policy period and accepted premiums with that level of risk in mind.

Although a disappointing result for policyholders, they can take heart that the decision was based on the particular language of the policies at issue, and different policy language may lead to a more favorable outcome. That was true in a New York Court of Appeals ruling in 2016, where the court held that the “all sums” allocation method typically favored by policyholders, and not pro rata allocation, was appropriate because of specific language in the policies. In the Matter of Viking Pump, Inc., 27 N.Y.3d 244 (2016).