For more than 20 years, insurance companies, policyholders, and their counsel, in both New York and New Jersey, have shared a mutual understanding regarding at least one issue concerning the allocation of long-tail losses among multiple policy years. Based on two leading cases decided in the 1990s, the rule and practice has been that losses are not allocated to policyholders in periods when insurance was not available for purchase. As a matter of practice, this has most commonly come into play in disputes involving insurance coverage for asbestos and environmental liabilities, as coverage for both types of claims became unavailable generally around 1985-86.
That common understanding changed earlier this year, when both the New York Court of Appeals and the New Jersey Supreme Court heard appeals where this seemingly settled issue was raised anew. The New York court upended the established rule, without creating a new universal rule in its place, leaving exactly what coverage gets applied to what year in doubt. In New Jersey, the court affirmed and even extended the longstanding rule. In this article, we first briefly will summarize each ruling and how it fits into each state’s body of insurance coverage law. Then, we will offer analysis and suggestions for handling such cases in the future.
In Keyspan Gas E. Corp. v Munich Reins. Am., 31 N.Y.3d 51, 59-60 (N.Y. 2018), the Court of Appeals decided what was, for it, an issue of first impression: whether New York would adopt the “unavailability rule” which provides that a policyholder bears the risk for periods of time when it elected not to purchase available insurance, but not for those years when insurance was unavailable.
Previously, the guidance on New York law came from the Second Circuit, which decided that both Texas and New York would adopt the unavailability rule in Stonewall Ins. Co. v. Asbestos Claims Mgmt., 73 F.3d 1178, 1203 (2d Cir. 1995). In Keyspan, the Court of Appeals acknowledged the Stonewall decision as one of several courts that adopted the unavailability rule, but did not discuss its longstanding effect on New York law, including the certainty it gave to parties and practitioners, and gave it no apparent deference.
In rejecting StonewalI, however, the court did not announce a replacement rule. Instead, the court decided the issue based upon its reading of the policy language at issue in the Keyspan case, making clear that the rule it announced was for those policies, and to a degree, for policies with similar language. It held that under the policy language before it, the unavailability rule is inconsistent with a judicially created pro rata approach to allocation.
This language-based approach is consistent with the approach that New York’s highest court has taken with respect to insurance allocation issues. Most states have adopted some variation of either (1) the “all sums” allocation approach, which allows a policyholder to collect its total liability under any policy in effect during the periods that the damage occurred, up to the policy limits, or (2) the “pro rata” approach, which spreads the loss to all years in which damage took place. New York is all but unique in applying both methods, depending on the specific policy language in each case. In fact, the expectation that a state would adopt a single method was so commonly accepted, that from the time the Court of Appeals applied a pro rata method in Consol. Edison Co. of N.Y. v. Allstate Ins. Co., 98 N.Y.2d 208 (2002), until it finally applied an all sums method 14 years later in Matter of Viking Pump, 27 N.Y.3d 244 (2016), many parties incorrectly assumed that the pro rata method was of universal application under New York law.
In Viking Pump, however, the court clarified that in Consolidated Edison “we did not adopt a strict rule mandating either pro rata or all sums allocation because insurance contracts, like other agreements, should ‘be enforced as written,’ and ‘parties to an insurance arrangement may generally “contract as they wish and the courts will enforce their agreements without passing on the substance of them.”‘” Viking Pump, 27 N.Y.3d at 257. This approach also guided the court when it decided that the unavailability rule does not apply to the policies at issue in Keyspan.
In contrast, when the New Jersey Supreme Court addressed allocation and the application of the unavailability rule in Cont’l Ins. Co. v. Honeywell Int’l, 188 A.3d 297 (N.J. 2018), it was revisiting an issue that had previously been decided by that court. Honeywell primarily was a choice-of-law decision, in which the New Jersey court decided to apply New Jersey law over the potentially applicable Michigan law.
The New Jersey Supreme Court earlier had adopted its own variation of pro rata, which takes into account not just the number of years over which damage occurs, but also accounts proportionally for the amount of coverage purchased in each applicable year, applying the loss to available coverage without burdening the policyholder, in Owens-Illinois v. United Ins. Co., 138 N.J. 437 (1994). In that case, New Jersey also adopted the unavailability rule. In Honeywell, the certain excess insurance companies argued that the unavailability rule should not protect companies that continue to manufacture dangerous products after the insurance industry stops selling policies to cover such dangerous substances. In this case, the policyholder did not stop manufacturing the relevant product until 2001. The New Jersey Supreme Court refused to create this exception to the unavailability rule, and no losses were allocated after polices became impossible to purchase.
Strategies Going Forward
The fact that New York and New Jersey now have different approaches to the unavailability exception creates both problems and opportunities for those involved in coverage disputes. In addition, New York’s willingness to impose both all sums and pro rata allocation further complicates matters. Before filing an action, and even before one’s opponent might possibly file an action against your client, one should determine, whether New York and/or New Jersey law might apply, and if there is a chance that New York law applies, whether pro rata or all sums allocation is more likely to be imposed under New York law.
Honeywell sheds some light on the choice of law issue as applied in New Jersey. Here, the manufacturer of the relevant products was a company whose primary contacts were with Michigan, but whose successor was a New Jersey company following a corporate acquisition. The court acknowledged that the parties could not have anticipated the application of New Jersey law when the insurance policies were sold, but ruled that Michigan no longer had any ongoing interest in the dispute and applied New Jersey law.
Similar to New Jersey, New York has dropped the old lex loci “place of contracting” standard in favor of a more flexible governmental interests standard. In practice, this sometimes has meant the New York courts rely heavily on a policyholder’s principal place of business, Steadfast Ins. Co. v. Sentinel Real Estate Corp., 283 A.D.2d 44 (1st Dept. 2001), though this is not uniformly applied, as in Davis & Partners, LLC v. QBE Ins., 113 A.D.3d 544, 545 (1st Dep’t 2014), where multiple contacts in New York were deemed to outweigh the fact that the policyholder’s principal place of business was in New Jersey.
In most instances, one does well to remember that courts in any state are both more likely to apply their local law, and more comfortable doing so.
Once you determine that application of New York or New Jersey law is likely, the substantive allocation work begins. Under New Jersey law, as noted, a variant of pro rated allocation is used, which relies upon the amount of coverage purchased every year as a significant element. Calculating the allocation under this scheme can get complicated, especially if the parties do not agree on the full scope of all policies in all years. In some instances, where policies are hard to locate, it can be necessary to estimate the amount of coverage purchased in the missing policies in order to determine amounts allocated to policies in-hand.
Under New York law, one must get deep into the review of policy language to decide which allocation scheme should be applied. The key language is usually found in “Other Insurance” or “Non-Cumulation” sections, but can also be found in the basic Insuring Agreement clause, or definitions of Bodily Injury or Property Damage. If there is any ground to support “all sums,” policyholders almost certainly should argue for it, especially with the loss of universal application of an unavailability rule in pro rata cases. Counsel also should be aware that New York has not yet determined how to handle some common complicating factors, including insurance programs where the language of some policies suggest all sums, while others lean to pro rata.
Despite the contrasting approaches by New York and New Jersey, handling insurance allocation disputes in both requires both ample basic preparation and creative problem solving.
Mark Garbowski is a shareholder in Anderson Kill’s New York office and a member of the insurance recovery group. Robert M. Horkovich is managing shareholder of Anderson Kill P.C. and chair of the firm’s insurance recovery group.