SDV Insights

The "Unavailability Exception" is Unavailable to Policyholders, According to New York Court of Appeals


The New York Court of Appeals recently upheld a prior appellate division decision finding that policyholders facing environmental claims spanning multiple years cannot force their insurers partially on the risk to provide coverage for years where the insurers did not issue policies, even though pollution insurance was unavailable in the marketplace.

In Keyspan Gas E. Corp. v. Munich Reins. Am., Keyspan Gas East Corporation (“Keyspan”) argued other insurers should cover the period when pollution property insurance was unavailable in the marketplace, according to their pro-rata share of coverage. 31 N.Y.3d 51 (2018). In a unanimous decision, the Court emphasized the Appellate Division’s prior ruling that stated, “spreading risk should not by itself serve as a legal basis for providing free insurance to an insured.”

Keyspan operated two manufactured gas plants beginning in the early 1900s. The two plants caused continuous environmental damage to the underground soil and groundwater. In a Comprehensive Environmental Response, Compensation, and Liability Act (“CERCLA,” commonly referred to as Superfund) action, the Environmental Protection Agency (“EPA”) ordered Keyspan to clean up the accumulated environmental pollution. Shortly after, Keyspan filed a declaratory judgement action to seek coverage for the associated clean-up costs from several insurance policies, including numerous excess liability policies issued by Century Indemnity Company (“Century”) in the mid-1900s.

Among the many issues in the litigation associated with this environmental action was how to apply a pro-rata allocation among multiple insurers, including years of contamination that occurred when there was no pollution liability insurance coverage available in the market. Keyspan accepted liability for the time frame in which it decided to voluntarily become self-insured, but argued that Century should be held liable for the years in which the pollution coverage was unavailable in the insurance marketplace. The insured referenced the “unavailability exception,” which increases an insurer’s share of liability in a pro rata calculation during the time frame where insurance was unavailable to the policyholder.

The trial court in Keyspan applied the “unavailability exception.” Century appealed, arguing that the unavailability exception is inconsistent with the policy language that directly mandates pro rata allocation. The Appellate Division agreed with Century, finding that insurers are not liable to indemnify insureds for occurrences that take place outside of the policy period in which liability insurance was unattainable in the marketplace.1

The New York Court of Appeals unanimously affirmed the Appellate Division’s holding and refused to implement the “unavailability exception.” Instead, the court explained that, under a standard pro-rata allocation, it is the responsibility of the insured to bear the risk for the years in which the insured voluntarily wishes to not purchase insurance that is available. Alternatively, some other courts have applied an “unavailability exception” to the general rule in an effort to alleviate the insured’s burden to bear the costs attributable to that period of time in which the applicable coverage was unavailable in the market.

The court was unable to find any provisions within the policy that could justify use of the exception, because “[u]navailability 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.”

This decision is unfortunate for policyholders; especially those policyholders with potential involvement in current or future Superfund sites. In the absence of an unavailability exception, policyholders must bear the weight of decades-old environmental liabilities, even when they didn’t have the option to insure themselves from such liabilities. Policyholders should be sure to review their records carefully if ever faced with one of these claims. Frequently, companies don’t retain actual copies of their policies. Without careful record keeping and review, a lost policy and no insurance because of unavailability can be confused. A solvable lost policy issue should not be conflated with an unavailability issue.

Notably, the Keyspan decision to overrule the “unavailability exception” directly contradicts the ruling by the Connecticut Appellate Court in R.T. Vanderbilt company, Inc. v. Hartford Accident and Indemnity Co.,in which the court, also interpreted the “unavailability exception,” but justified its application because of the insured’s “reasonable expectation” for coverage on the loss. The decision is currently on appeal to the Connecticut Supreme Court where it will be interesting to see if the New York Court of Appeals decision has an impact on the Supreme Court’s decision.

For more information please contact Willliam S. Bennett at wsb@sdvlaw.com or 951.365.3148.

*Warsame Y. Hassan is a Summer Associate at Saxe Doernberger & Vita, P.C.

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1 Keyspan Gas E. Corp. v. Munich Reins. Am., Inc., 37 N.Y.S.3d 85 (N.Y. App. Div. 2016).
2 156 A.3d 539 (Conn. App. Ct. 2017).






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