Commercial Division Blog
Court Applies Pro Rata "Time on the Risk" Method to Allocate Loss From Environmental Damage Among Liability Insurance Policies
On October 14, 2014, Justice Scarpulla of the New York County Commercial Division issued a decision in Keyspan Gas East Corp. v. Munich Reinsurance America, Inc., 2014 NY Slip Op. 24306, applying a pro rata "time on the risk" allocation to determine damages in an insurance coverage matter arising from an environmental clean-up at two former manufactured gas plant sites located in Hempstead and Rockaway Park New York.
Where environmental damages occur over a period of years, triggering coverage under multiple insurance policies, allocating the losses has proved "a nettlesome problem." As Justice Scarpulla explained, courts faced with this dilemma have allocated the loss among the carriers and the insured on a pro rata basis based on their respective "time on the risk":
A pro rata "time on the risk" allocation requires costs to be allocated according to the number of years that the insurer was on the risk by multiplying the total loss by a fraction that has as its denominator the entire number of years of the claimant's injury, and as its numerator the number of years within that period when the policy was in effect. Proration of liability among the insurers acknowledges the fact that there is uncertainty as to what actually transpired during any particular policy period.
For years where an insured has no insurance coverage, the insured generally bears its own pro rata share of the loss. Proration to the insured is appropriate for the years where the insured elected not to purchase insurance or purchased insufficient insurance. For those years, the insured is treated as self-insured and bears responsibility for its pro rata share of damages. Proration to the insured is inappropriate, however, for those years where insurance was unavailable in the marketplace.
In Keyspan, the court found issues of fact precluding summary judgment as to (1) the time period over which the damage occurred, and (2) when insurance coverage was available. The Court did find that Keyspan should be required to bear losses incurred during the period 1971 to 1982 when New York law precluded insurance coverage for "liability arising out of pollution." The policy reason underlying the rule was "to prohibit commercial or industrial enterprises from buying insurance to protect themselves against liabilities arising out of their pollution of the environment." Justice Scarpulla concluded: "Given the Legislature's clear intent that companies such as Keyspan bear the full burden of their own actions affecting the environment, I decline to exclude the period between 1971 and 1982 from the allocation period when pollution insurance was prohibited."