NY and NJ Courts Split on Whether Policyholders Should Share in Allocation When Insurance Is Not Available

NY and NJ Courts Split on Whether Policyholders Should Share in Allocation When Insurance Is Not Available
Riker Danzig Environmental UPDATE October 2016

In our August 10th blog entry, we reported on the New Jersey Appellate Division’s recent decision that policyholders do not share in the insurance allocation of long-tail environmental losses for periods when insurance was not reasonably available in the marketplace.  Continental ins. Co. v. Honeywell International, Inc., Docket Nos. A-1071-13T1, A-1100-13T1 (NJ App. Div. July 20, 2016).  In early September, the New York Appellate Division took the opposite position on this matter of first impression under New York law by finding that a policyholder, and not its insurers, should bear the cost in an insurance allocation for years in which the policyholder did not obtain coverage, even when such coverage was not available. Keyspan Gas East Corp. v. Munich Reinsurance America, Inc., et al. Case No. 604715/97 (NY App. Div. Sept. 1, 2016).  This is not the first time that courts of these neighboring states have differed on coverage matters.  These determinations highlight the importance that jurisdiction can play in the outcome of insurance coverage cases. 

Please see our earlier blog post for a discussion of the New Jersey court’s ruling that relied on New Jersey Supreme Court precedent for assigning responsibility in a pro rata insurance allocation.  This article will focus on the New York decision.  In Keyspan, the insured sought coverage for costs associated with the investigation and remediation of contamination emanating from two former manufactured gas plants in Queens and Hempstead, New York.  The insured’s claim for indemnification included not only a 16-year period that certain general liability insurance policies were in effect, but also periods of time, both before 1953 and after 1969, when insurance that would cover this risk could not be purchased in the marketplace.  Century Indemnity Company, the only insurer remaining in the case, argued that it should not be responsible to indemnify the insured for property damage that did not occur “during the policy period,” contending that damage that occurred during the period that insurance was not available should be allocated to the insured.  While the trial court disagreed and allocated to the carrier damages that occurred during the periods when insurance was not available, the Appellate Division reversed that decision on appeal.

The Appellate Division noted that while this was a matter of first impression for New York, courts in other jurisdictions have come to a different conclusion on how these periods should be assigned in a pro rata allocation.  The Appellate Division distinguished its finding from those courts that have found in favor of the insured by placing significant emphasis on the particular language of the policies.  Here, the court determined that since the insurance policies only provide coverage for damages occurring “during the policy period,” it would not be fair to allocate damages to the insurer for other periods when insurance was not available in the marketplace.  Doing so would expose Century to risks beyond those contemplated when the policies were purchased and would thus provide free insurance to the insured.  The court reasoned that the insured and not the carrier should bear the burden of its actions affecting the environment.

Given the starkly different positions taken by the appellate courts in New Jersey and New York on this and other coverage issues, parties negotiating choice of law provisions in insurance policies and those seeking to litigate coverage should closely consider which jurisdiction’s law should apply.