On March 27, 2018, New York’s highest court finally brought closure to an appeal of a 2014 decision denying an insurer’s motion for partial summary judgment in its coverage litigation with its policyholder.  The Court of Appeals’ decision in Keyspan Gas East Corp. v. Munich Reinsurance America, Inc. is available here.  In affirming the Appellate Division’s 2016 reversal of the motion court, this decision is destined to have wide-ranging implications on the insurance market.

As many of you reading this post will recall, in 2014, an insurer asked the New York Supreme Court (New York’s trial court) to allocate all covered costs pro rata over the entire lifespan of the alleged property damages in question and more importantly, to relieve the insurer of any and all liability for the amounts that fell outside of its policy periods.  The ensuing battle quickly focused on what the Court of Appeals referred to as the “unavailability rule” or “unavailability exception,” which some courts have used to artificially expand a policyholder’s existing insurance coverage to insure periods of time when insurance was simply unavailable in the market.  While some courts have adopted this rule largely on public policy grounds, others have rejected it.

The policyholder obviously argued that the Court of Appeals should adopt the “unavailability rule.” According to the policyholder, insurance simply was not available to it prior to approximately 1925 for the property damages at issue.  Likewise, after approximately October 1970, the insurance market ubiquitously adopted various forms of the “sudden and accidental pollution exclusion” thereby making it impossible for the policyholder to secure the necessary insurance.  For these reasons, the policyholder sought to exclude from any allocation of liability for its losses all years before approximately 1925 and after roughly October 1970, even though the property damages resulting from the policyholder’s operations extended far beyond both of these proposed cutoff dates.

The motion court faced a difficult question: expanding the period of time over which to allocate the policyholder’s losses pro rata to include years before and after the policyholder’s relevant insurance coverage could jeopardize the chances an injured party may actually recover; yet rejecting this expansion invariably would force the policyholder’s insurers to assume a substantial amount of risk they did not underwrite and for which they received zero premium.

Initially, the motion court sided with the policyholder, closing off allocation to the “unavailable” years.  Yet, on appeal, the Appellate Division reversed, holding that “under the insurance policies at issue, Century does not have to indemnify Keyspan for losses that are attributable to time periods when liability insurance was otherwise unavailable in the marketplace.”   On March 27, the Court of Appeals agreed, once again rejecting the “unavailability rule” in New York.

The Court of Appeals began its analysis by reflecting on its long-standing practice of interpreting all contracts according to their respective and actual terms and conditions.  It recognized that it has “not adopted a strict pro rata or all sums allocation rule” to insurance generally, but rather “the method of allocation is governed foremost by the particular language of the relevant insurance policy.” Citing Matter of Viking Pump, 27 NY3d 244, 257 (2016); Consolidated Edison Co. of N.Y. v. Allstate Ins. Co., 98 NY2d 208, 224 (2002).  That “method” here, under the particular language of the contracts at issue, was pro rata “time-on-the-risk” – on this, the parties and courts agreed.

The Court of Appeals then applied this same principle of contract interpretation to the “unavailable” years, holding the parties must allocate costs to these years because not doing so would be inherently at odds with the relevant policy language driving pro rata allocation – i.e. the carrier’s agreement to insure the policyholder for costs incurred “…during the policy period….”  Insurance did not exist in later years because the insurance market – including the insurer – made the “calculated choice” not to provide it, said the Court of Appeals.  For that reason and others, the policyholder never paid any premium to shift its risks to the insurer and therefore, forcing the insurer nonetheless to provide coverage flatly contradicted the basic premise of pro rata allocation set forth in the insurer’s policies.

So what does all of this mean for the insurance market?  Actual policy language obviously remains critically important in New York.  In fact, this is the Court of Appeal’s second decision in recent months turning on its interpretation of the actual policy language at issue to reject the use of a “blanket” rule of construction.  The Court of Appeals took a similar approach last December in Global Reinsurance Corp. of America v. Century Indemnity Co., where it rejected a “blanket ‘presumption’ or ‘rule of construction’” when interpreting the coverage provided by facultative reinsurance agreements.  See the December 15, 2017 blog post.

Furthermore, this decision is likely to have wide-ranging implications on how New York courts address similar long-tail exposure issues in other matters where the insured’s loss-causing operations extend well beyond its portfolio of available insurance – this includes in the many existing actions before the New York courts and those everyone can expect will be filed in years to come.  One should expect New York courts to follow similar reasoning outside of the property damage context, where policyholders are seeking coverage for bodily injury or other losses under policy language similarly limiting the insurer’s exposure to its pro rata share.

This decision marks yet another statement by the Court of Appeals that New York does not afford disputes involving insurance contracts any special treatment.  At least for now, a contract is a contract in New York, insurance or otherwise, and the courts will not invoke “… notions of abstract justice or moral obligation …” to depart from the parties’ original intent.