Commercial Division Blog

Posted: September 6, 2016 / Categories Commercial, Insurance

Where Loss From Environmental Damage Is Subject to Pro Rata Allocation, Insured Is Responsible For Periods When Insurance Was Unavailable

On September 1, 2016, the First Department issued a decision in Keyspan Gas East Corp. v. Munich Reinsurance America, Inc., 2016 NY Slip Op. 05945, holding that environmental losses allocable to time periods when no insurance was available in the marketplace is the responsibility of the insured.

Keyspan is an insurance coverage action arising "environmental property damage cause by pollution from manufactured gas plans [] owned by [Keyspan]." Justice Scarpulla of the New York County Commercial Division ruled that the losses, which occurred over a number of years, should be allocated among Keyspan's insurers on a pro rata "time on the risk" basis – i.e., "by multiplying the total loss by a fraction that has as its denominator the entire number of yeas of the claimant's injury, and as its numerator the number of years within that period when the policy was in effect." (See our post on the trial court's decision here). Justice Scarpulla held that time periods when no insurance was in place would be prorated to the insured to the extent the insured elected not to purchase insurance. However, she found that "[p]roration] to the insured in inappropriate . . . for those years where insurance was unavailable in the marketplace."

The First Department, in a decision authored by Justice Gische, reversed, holding that pro rata allocation to the insured was appropriate for all periods of non-coverage, even where no insurance was available in the marketplace. Justice Gische explained:

New York appellate courts, however, have not expressly ruled on the question presented here, which is: When the reason for the period of no insurance is that the insured could not have obtained insurance even if it had wanted to, is the risk attendant to the unavailability of insurance in the marketplace allocable to the existing, triggered insurance policies or to the insured?

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We find that the policy language supports a conclusion that the unavailability exception to proration to the insured does not apply. . . . Each policy, despite some minor variations, provides the insured with coverage for occurrences, accidents and continuous and repeated exposure to conditions that result in damage "during the policy period." While none of the policies expressly address how to allocate liability in a situation where the underlying damage is long-term, continuous and indivisible, the fact that the policies require Century to indemnify Keyspan for occurrences, accidents, etc., "during the policy period" is consistent with allocation for time on the risk. Unavailability is an exception to time on the risk, since it allocates responsibility for periods of time when no insurance was purchased and it is, therefore, inconsistent with policy language restricting coverage to the policy period. There is no other or additional contractual language in the policy justifying this exception. There are no express contract provisions requiring the insurer to cover damages outside of the policy period when insurance is otherwise unavailable in the marketplace.

(Citations omitted).