Two recent decisions addressing allocation of long-tail liabilities demonstrate that resolution of the issue under New York law depends upon the policy language at issue. Judge-made rules on “equity” and “fairness” do not control. As the New York Court of Appeals held on March 27, 2018, in Keyspan Gas East Corp. v. Munich Reinsurance America, Inc., 2018 WL 1472635 (2018), under New York law, “the method of allocation is covered for most by the particular language of the relevant insurance policy.” Both Keyspan and the April 2, 2018 decision in Hopeman Brothers, Inc. v. Continental Casualty Co., No. 16-cv-00187 (E.D. Va. Apr. 2, 2018), by the United States District Court for the Eastern District of Virginia, illustrate the importance of reviewing insurance policies – both before purchase, to ensure that they contain optimal language for coverage; and after claims arise, to ensure that the policyholder receives the benefit of insurance coverage under “legacy” and all other potentially applicable policies.
In Keyspan, the policyholder sought to enforce its insurance coverage for environmental contamination at two manufactured gas plants operated by a predecessor company under eight excess liability insurance policies on the risk between 1953 and 1969. The policyholder did not dispute that “environmental contamination at the sites occurred gradually and continuously before, during, and after the policy periods at issue.” The policyholder also did not dispute that pro rata, time on the risk allocation was applicable under New York law and the relevant policy language, but argued that it should be held responsible for a pro rata share only in those years in which it had been able to purchase insurance in the marketplace. With the addition of pollution exclusions to CGL insurance policies beginning in the early 1970s, Keyspan argued, under the “unavailability exception,” that it should not be assigned a share of loss for those periods because it could not find in the marketplace coverage for liability to environmental cleanup and contamination.
The New York Court of Appeals disagreed, finding in reliance on Consolidated Edison Co. of N.Y. v. Allstate Insurance Co., 98 N.Y.2d 208, 222 (2002), 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.” As the Appellate Division in Keyspan earlier had recognized, “none of the policies expressly addressed how to allocate liability in a situation where the underlying damage is long-term, continuous, and indivisible.” Notwithstanding that inherent ambiguity, the New York Court of Appeals followed a plain meaning interpretation in concluding that the “unavailability exception cannot be reconciled” with the reading of the policy language at issue that supported application of pro rata allocation. The Court of Appeals concluded that no language in the policies “justified” application of the “unavailability exception.”
The Court of Appeals further identified the environmental contamination at issue as a “continuous harm” in which “the contamination cannot be attributable to each policy period.” As the lower court also had concluded in addressing coverage for the environmental contamination at issue, it was assumed that the amount of damage “occurring in any particular year is always the same as in every other year.” Thus, relying on its reading of the policy language at issue in Keyspan and the assumption about environmental damage, the court rejected “application of the unavailability rule for time on the risk pro rata allocation,” affirming the underlying order by the New York Appellate Division (at 143 A.D.3d 86 (N.Y. App. Div. 2016)).
The Virginia court in Hopeman reached a different result under New York law, applying “all sums” allocation given the New York Court of Appeals’ caution that the policy language governs. As in Keyspan, Hopeman involved coverage for long-tail liabilities (in that case, for more than 123,000 asbestos bodily injury claims) under policies on the risk from 1971 through 1977. The court held that it was bound by Matter of Viking Pump, 33 N.Y.S.3d 118 (N.Y. 2016), because, in Hopeman, as in Viking Pump, the policies all contained “non-cumulation clauses” which require application of all sums allocation. The court in Hopeman rejected the insurers’ argument that pro rata allocation should apply in reliance on previous insurance settlements that had applied that method of allocation. Noting that the settlements were irrelevant to the contract-interpretation issues arising under insurance policies, the court relied, instead, on its reading of “the plain language” of the policies, and specifically their non-cumulation clauses, following the New York Court of Appeals’ “binding guidance” in Viking Pump. The court therefore found, “as a matter of New York contract law, [that] the policies are unambiguous on the allocation issue and that summary judgment is warranted” for the policyholder. The court also adopted the Viking Pump holding requiring vertical exhaustion of all policies in a policy year, rejecting the insurers’ arguments for application of “horizontal exhaustion,” which would have prevented the policyholder from being able to access its insurance until the underlying policies in all triggered policy years had been exhausted. The court concluded that that result found no support in the policy language.
In conjunction, these cases support the following takeaways:
- Contract language governs under New York law. New York does not adopt a strict pro rata allocation rule as some courts have done; instead, policyholders are well-advised to review the policy language in their “legacy” CGL policies to ascertain whether it supports application of all sums allocation.
- Policyholders also should analyze policy language when purchasing CGL (and other) insurance policies going forward. This advice is well-taken with regard to CGL policy language that applies to the allocation issue – as well as the policy language in other types of insurance. For example, policyholders are well-advised to review the policy language in non-standard coverages like cyber insurance and D&O insurance.
- In challenging insurers’ denials of coverage for environmental damage and other long-tail claims, policyholders should consider disputing the Keyspan courts’ assumptions about environmental contamination as “continuous harms.” Instead, policyholders could work to develop a factual record that supports a pro-coverage reading of the policy language. For example, in Keyspan, the parties did not dispute that the property damage in question was “gradual.” The New York Court of Appeals in Keyspan referred to the “assumption” in environmental coverage cases that damage cannot be proven and, thus, “the amount of pollution” in each year “is always the same.” Policyholders should consider using expert evidence to dispute this assumption. For example, other environmental coverage cases have relied on expert evidence developed by the policyholder in limiting the assignment of pro rata shares of liability to years in which the alleged environmental property damage had continued to migrate. In appropriate cases, policyholders also should develop a factual record showing that property damage is not “always the same” in each year and failed to continue to spread or cause damage.
- Policyholders should consider retaining evidence they did not voluntarily “self-insure,” allowing for development of a factual record to that effect in appropriate coverage cases.
Coverage counsel experienced in handling coverage cases seeking to enforce coverage for complex long-tail claims can help ensure that policyholders maximize their recovery.