Is it Fair to Require an Insurer to Pay for Periods for which it Received no Premium?
Some events causing pollution damage can occur over many decades, even more than a century. Existence of coverage for risks of loss by pollution did not exist, was unavailable to certain industries or was not purchased by the defendant. When the injury happens continuously over a long period of time who pays, and in what proportion, is often the subject of many lawsuits and appeals.
In March of 2018 the Court of Appeals of New York (its highest court) was asked to resolve a dispute of first impression in the state of New York as to how to apportion the risks of loss in Keyspan Gas East Corporation v. Munich Reinsurance America, Inc., Century Indemnity Company et al., 2018 NY Slip Op 02116, No. 20, Court of Appeals of New York (March 27, 2018).
The court was asked whether under the “pro rata time-on-the-risk” method of allocation, defendant Century Indemnity Company is liable to its insured, plaintiff KeySpan Gas East Corporation, for years outside of its policy periods when there was no applicable insurance coverage available on the market.
The claims resulted from environmental contamination caused by manufactured gas plants (MGPs) owned and operated by KeySpan’s predecessor, Long Island Lighting Company (LILCO), in Rockaway Park and Hempstead, New York. Gas production at the sites began in the late 1880s and early 1900s. After operations ceased decades later, the New York Department of Environmental Conservation (DEC) determined that there had been long-term, gradual environmental damage at both sites due to contaminants, such as tar, seeping into the ground and leeching into groundwater. The DEC required KeySpan to undertake costly remediation efforts, which were apparently concluded at the Hempstead and Rockaway Park sites in 2002 and 2012, respectively.
Between 1953 and 1969, Century issued eight excess liability insurance policies to LILCO covering property damage. It was stipulated that the damage at the sites occurred gradually and continuously before, during, and after the Century policy periods. It is also uncontroverted that the environmental contamination that occurred in any given year is unidentifiable and indivisible from the total resulting damages.
Long-tail claims present unique difficulties. In such cases, the injury-producing harm is gradual and continuous and typically spans multiple insurance policy periods or implicates years during which insurance coverage was in place, as well as years for which no coverage was purchased.
In general, two primary methods of allocation are used by the courts across the country to apportion liability across multiple policy periods: all sums and proration.
- All sums allocation permits the insured to collect its total liability under any policy in effect during the periods that the damage occurred, up to the policy limits.
- Pro rata allocation, assuming complete coverage, an insurer’s liability is limited to sums incurred by the insured during the policy period; in other words, each insurance policy is allocated a pro rata share of the total loss representing the portion of the loss that occurred during the policy period.
Pro rata shares are often, although not exclusively, calculated based on an insurer’s “time on the risk,” a fractional amount corresponding to the duration of the coverage provided by each insurer in relation to the total.
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.
Where policy language indicates allocation by the pro rata method and gaps in coverage exist, the question arises as to which party — the insurer or the policyholder — bears the risk for periods of time in which no applicable coverage was in place.
When using a pro rata time-on-the-risk allocation, a number of jurisdictions have declined to place the policyholder “on the risk” if insurance was unavailable. These jurisdictions recognize the “unavailability rule” or, stated differently, an “unavailability exception” to the general rule that a policyholder is self-insured and on the risk for periods of time when insurance coverage was not obtained. Under this approach, a policyholder bears the risk for periods of time when it elected not to purchase available insurance, but not for those years when insurance was unavailable. Application of this rule serves to reduce the number of years included in the overall proration calculation, thereby increasing the shares of liability attributable to an insurer for each year in which a policy was in effect.
Other courts have rejected the unavailability rule. These courts have held that a policyholder is on the risk for periods of non-coverage, regardless of whether the lack of insurance coverage was attributable to a voluntary decision to self-insure or to an inability to obtain. The applicability of the unavailability rule is a matter of first impression in New York.
KeySpan argues, however, that it should be responsible only for those years in which insurance was available in the marketplace. Thus, KeySpan — supported by various amici — urges us to adopt the unavailability rule and hold that, in a pro rata time-on-the-risk allocation, liability should not be allocated to the policyholder for years in which insurance was unobtainable, either because it had not yet been offered by insurers or because the industry had adopted a pollution exclusion.
While the insurance policies at issue do not speak directly to allocation in the context of long-tail claims, each of the policies contain language (with minor variances) limiting the insurer’s liability to losses and occurrences happening “during the policy period.
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. Such an approach could, once a policy is triggered, 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.
KeySpan’s claim would effectively provide insurance coverage to it for years in which no premiums were paid. Moreover, such a rule would contravene the reasonable expectations of the average insured, who would not expect to receive coverage without regard to the number of years for which it purchased applicable insurance.
The whole idea of a time-on-the-risk calculation is that any given insurer’s share reflects the ratio of its coverage (and thus the premiums it collected) to the total risk. The spreading of industry risk through insurance is accomplished through the setting and payment of premiums for insurance, consistent with the parties’ forward-looking assessment of what that risk might entail, and that, in the absence of a contract requiring such action, spreading risk should not by itself serve as a legal basis for providing free insurance to an insured. The policyholder is the one who allegedly caused the injury and, therefore, who ultimately will be financially responsible should insurance prove insufficient. Notwithstanding competing public policy concerns, an appellate court may not make or vary the contract of insurance to accomplish its notions of abstract justice or moral obligation.
Therefore, in New York, the unavailability rule cannot be reconciled with the pro rata approach. The Court of Appeal, therefore, rejected the application of the unavailability rule for time-on-the-risk pro rata allocation and required the insured to pay for those periods when it was uninsured or when insurance was unavailable.
Public policy – a notion of abstract justice or moral obligations – adopted by a court is fraught with danger of doing injustice while claiming to act in good faith to provide justice to all. In New York, and those states that agree with its decision, an insurer is only obligated to pay its pro rata share of a continuing loss based upon the periods of time it insured the risk of loss bears to the total time the loss occurred. No insurer should be required to indemnify an insured for damages that resulted before its policy came into effect or for a period when it did not insure the risk.
© 2018 – Barry Zalma
This article, and all of the blog posts on this site, digest and summarize cases published by courts of the various states and the United States. The court decisions have been modified from the actual language of the court decisions, were condensed for ease of reading, and convey the opinions of the author regarding each case.
Barry Zalma, Esq., CFE, now limits his practice to service as an insurance consultant specializing in insurance coverage, insurance claims handling, insurance bad faith and insurance fraud almost equally for insurers and policyholders. He also serves as an arbitrator or mediator for insurance related disputes. He practiced law in California for more than 44 years as an insurance coverage and claims handling lawyer and more than 50 years in the insurance business. He is available at http://www.zalma.com and email@example.com.
Mr. Zalma is the first recipient of the first annual Claims Magazine/ACE Legend Award.
Mr. Zalma’s books available as Kindle books or paperbacks at Amazon.com can be reached at http://zalma.com/zalma-books/
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