Court Applies Pro Rata “Time on the Risk” Method to Allocate Loss From Environmental Damage Among Liability Insurance Policies
One of the challenges facing potentially responsible parties and their insurers is the development of an equitable allocation of responsibility for defense costs, cleanup costs and other indemnification costs associated with environmental contamination from several potentially responsible parties.
Many of Metropolitan’s clients ask our remediation experts to evaluate the appropriateness and cost of remediation decisions, estimate future liabilities, and apportion costs among potentially responsible parties. Our experts rely on forensic methods developed in-house and/or widely used in practice, hands-on practical experience and knowledge of rigorous financial and engineering models to conduct such cost evaluations and cost apportionments. Metropolitan scientists have been supporting clients in developing technically sound apportionment strategies and obtaining appropriate evidence for more than 30 years. This work has resulted in successful, quantitative apportionment of chemical inputs to CERCLA, RCRA and state sites as determined by the courts.
· The common questions posed to us by the clients include:
· What is the source of the contamination?
· What are the characteristics of each source?
· Who is responsible for each source?
· What is my cost?
Metropolitan staff has been involved in numerous cases where liability and cost allocation are evaluated using strict review of the National Contingency Plan (NCP). These cases arise from environmental cleanup and restoration project disputes under the Comprehensive Environmental Response, Compensation and Liability Act (CERCLA), and also include natural resource damage (NRD) claims for restoration n costs. Projects have included commingled groundwater contaminant plumes, large river and urban bay projects with multiple contributing parties, waste landfills, mines, and other contaminated sites. This work has involved investigation of potentially responsible parties, historical site reconstruction, financial analyses, database development, and environmental forensics.
ALLOCATION APPROACHES
After we determine the age of the release or the start of the contamination, we have to come up with a method of determining the allocation of the various costs. There are a number of allocation methods available.
· Waste Mass-based allocation method;
· Waste Volume-based allocation method;
· Area-of –impacts allocation method;
· Weighted Site Attributes model
Many times we encounter situations where a contamination cannot be attributed to a PRP. One of the ways to deal with these unaccounted shares is to increase each known PRP's share to cover the total costs of the unaccounted shares. The increase is proportional to each PRP's known relative contribution developed by any of the previous methods.
PRO RATA SHARE ALLOCATION
This is a method that applies mostly to insurance contribution allocations based on the number of years a certain policy is on the risk. It has been used for many years in insurance contribution cases.
On October 14, 2014, Justice Scarpulla of the New York County Commercial Division issued a decision in Keyspan Gas East Corp. v. Munich Reinsurance America, Inc., 2014 NY Slip Op. 24306, applying a pro rata “time on the risk” allocation to determine damages in an insurance coverage matter arising from an environmental clean-up at two former manufactured gas plant sites located in Hempstead and Rockaway Park New York.
Where environmental damages occur over a period of years, triggering coverage under multiple insurance policies, allocating the losses has proved “a nettlesome problem.” As Justice Scarpulla explained, courts faced with this dilemma have allocated the loss among the carriers and the insured on a pro rata basis based on their respective “time on the risk”:
A pro rata“time on the risk” allocation requires costs to be allocated according to the number of years that the insurer was on the risk by multiplying the total loss by a fraction that has as its denominator the entire number of years of the claimant’s injury, and as its numerator the number of years within that period when the policy was in effect. Proration of liability among the insurers acknowledges the fact that there is uncertainty as to what actually transpired during any particular policy period.
For years where an insured has no insurance coverage, the insured generally bears its own pro rata share of the loss. Proration to the insured is appropriate for the years where the insured elected not to purchase insurance or purchased insufficient insurance. For those years, the insured is treated as self-insured and bears responsibility for its pro rata share of damages. Proration to the insured is inappropriate, however, for those years where insurance was unavailable in the marketplace.
In Keyspan, the court found issues of fact precluding summary judgment as to (1) the time period over which the damage occurred, and (2) when insurance coverage was available. The Court did find that Keyspan should be required to bear losses incurred during the period 1971 to 1982 when New York law precluded insurance coverage for “liability arising out of pollution.” The policy reason underlying the rule was “to prohibit commercial or industrial enterprises from buying insurance to protect themselves against liabilities arising out of their pollution of the environment.” Justice Scarpulla concluded: “Given the Legislature’s clear intent that companies such as Keyspan bear the full burden of their own actions affecting the environment, I decline to exclude the period between 1971 and 1982 from the allocation period when pollution insurance was prohibited.”
NEW JERSEY ALSO USES THE PRO RATA METHOD
Owens-Illinois is the seminal case in New Jersey setting forth the methodology for proportional allocation of indemnity and defense costs among multiple insurers in "long-tail" environmental exposure litigation. Spaulding Composites Co. v. Aetna Cas. & Sur. Co., 176 N.J. 25, 39 (2003), cert. denied sub nom. Liberty Mut. Ins. Co. v. Caldwell Trucking PRP Grp., 540 U.S. 1142, 124 S. Ct. 1061, 157 L. Ed. 2d 953 (2004).
The insurance policies in Owens-Illinois contained standard clauses providing liability coverage for bodily injury that "occur[ed]" within the policy period. Owens-Illinois, supra, 138 N.J. at 447. The Court explained that, where injuries were sustained over long periods of time, questions arise as to when and how liability insurance coverage of the allegedly responsible parties is triggered and as to how losses should be fairly allocated among the range of triggered policies. Spaulding Composites, supra, 176 N.J. at 32. The Court observed that rigid enforcement of the policy terms as governed by traditional principles of insurance law could not capture the time of an occurrence in the context of such toxic-tort litigation. Owens-Illinois, supra, 138 N.J. at 457-59. It concluded that "[m]ass-exposure toxic-tort cases have simply exceeded the capacity of conventional models of judicial response." Id. at 459.
The Court reviewed a number of options to resolve the question of determining the "occurrence" of an injury that does not manifest for many years. It ultimately adopted a "continuous-trigger" theory by which an injury would trigger coverage continuously from the date of the claimant's first exposure to asbestos onward as a single "occurrence" for each year. Id. at 478-79. The Court then adopted a pro-rata allocation methodology, distributing the insured's losses for the triggered time period in percentage shares commensurate with the "degree of risk transferred or retained in each of the years of repeated exposure to injurious conditions." Id. at 475. The resulting allocation among insurance policies would thus be "related to both the time on the risk and the degree of risk assumed." Id. at 479. The insured would share in the allocation for periods where it voluntarily retained the risk rather than contracting for available insurance. Ibid. Policy limits and exclusions would remain applicable, and the resulting allocation would conform to the particulars of the policies at issue. Id. at 476.
The Court "recognize[d] the difficulties of apportioning costs with any scientific certainty," but accepted that a "rough measure" of each insurer's proportionate allocation of losses might be the best that could be achieved. Id. at 476-77. The Court never independently addressed allocation of defense costs as opposed to indemnification for claims that the insured would have to pay to the injured person, though the undeniable implication of Owens-Illinois is that defense costs are also allocable, subject to policy terms, in the same manner as indemnity expenditures.
In Carter-Wallace, supra, 154 N.J. at 325-27, the Court confirmed the application of the continuous-trigger theory and pro-rata methodology in allocating liability among both primary and excess policies. It rejected an argument made by the second-level excess insurer in that case that the insured party must exhaust all primary and first-level excess policies in the entire coverage block before accessing any second-level excess coverage. Id. at 324.
The Court also rejected the insured's contention that the entire universe of losses should be collapsed to a single year so as to access immediately the coverage from all insurers for that one year. Id. at 325. Neither of these arguments was faithful to the holding of Owens-Illinois that ongoing injuries should be treated as a single occurrence within each year. Consequently, the Court adopted an approach requiring that losses first be allocated "horizontally" among the range of years in the coverage block, but that policies be exhausted "vertically" within each year, such that each successive layer of insurance within a given year would be accessed as the one below was exhausted. Id. at 327-28. The Court added:
Our jurisprudence in this area has not been marked by rigid mathematical formulas, and we do not advocate any such inflexibility now. Rather, our focus remains on "[a] fair method of allocation . . . that is related to both the time on the risk and the degree of risk assumed." [Owens-Illinois, supra, 138 N.J.] at 479. Nevertheless, we anticipate that the principles of Owens-Illinois, as clarified by our decision today, represent the presumptive rule for resolving the allocation issue among primary and excess insurers in continuous trigger liability cases unless exceptional circumstances dictate application of a different standard.
[Carter-Wallace, supra, 154 N.J. at 327-28.]
Decided on October 14, 2014
Supreme Court, New York County
Keyspan Gas East Corporation, Plaintiff, against Munich Reinsurance America, Inc., et al., Defendants.
604715/1997
Saliann Scarpulla, J.
In this insurance coverage action, plaintiff Keyspan Gas East Corporation ("Keyspan") seeks, inter alia, a declaration that defendant Century Indemnity Company ("Century") is obligated to indemnify it for costs of environmental clean-up at two former
manufactured gas plant sites located in Hempstead and Rockaway Park. Between 1953 and
1969, Century issued eight excess liability insurance policies to Keyspan's predecessor-ininterest,
Long Island Lighting Company, which are the insurance polices at issue on this
motion.[FN1]
Century now moves for partial summary judgment seeking a declaration that: (1)
Century is not responsible for any portion of the property damage at the Hempstead and
Rockaway Park sites that occurred outside the policy periods; and (2) any covered costs
are to be allocated pro rata over the entire period during which property damage at each
site occurred, which Century asserts is 1905 to 2001 for the Hempstead site and 1882 to
2012 for the Rockaway Park site.
Century contends that a pro rata time on the risk allocation should apply because
neither party can produce evidence as to how much property damage occurred within a
given policy period. Century argues that, under this method, the total cost for each site
should be allocated over the entire period during which property damage occurred, and
Century should then only be liable for the pro rata share for the years that its policies were
[*2]in effect, 1953 to 1969.
In support of its argument that property damage occurred at the Hempstead site
between 1905 to 2001, and at the Rockaway Park site between 1882 to 2012, Century
submits an affidavit from its expert Robert Firriolo, in which he states that soil
contamination began within two years of the start of operations at Hempstead and
Rockaway Park. As operations began at Hempstead in 1903 and at Rockaway Park in
1880, Century claims that property damage began to occur in 1905 and 1882, respectively.
Century asserts that property damage was ongoing at Hempstead until 2001, based
on Keyspan's expert report from Dr. Robert Powell, in which he stated that the
groundwater plumes at Hempstead became stable in 2002. As to the Rockaway Park site,
Century claims that property damage was ongoing until 2012, based on Dr. Powell's
opinion that tar migration would continue into Jamaica Bay until remedial barrier walls were
built, which had not yet occurred in 2012.
Lastly, Century argues that the Court should not truncate the allocation period to the
years when insurance was available in the marketplace because it would then be
responsible for indemnifying Keyspan for damage that occurred outside the policy
periods. Century claims that, in a previous ruling, this court already declined to truncate the
allocation period, and that any truncated allocation period would frustrate the Legislature's
intent in enacting Insurance Law § 46 in 1971, which prohibited the issuance of pollution
insurance between 1971 and 1986.[FN2]
In opposition, Keyspan argues that the Court should allocate costs to the periods of
time when insurance for environmental risks was available in the marketplace. Keyspan
[*3]argues that the New York state courts have adopted the "availability of insurance"
allocation method set forth in Stonewall Ins. Co. v. Asbestos Claims Mgt. Corp., 73 F.3d
1178, 1202 (2d Cir. 1995), and that this allocation method is consistent with the New York
Court of Appeals decision in Consolidated Edison Co. of NY, Inc. v. Allstate Insurance
Co., 98 NY2d 208 (2002) ("Con Edison").
Keyspan further argues that, as the insurer, Century bears the burden of
demonstrating when environmental insurance was available in the marketplace, and a
disputed issue of fact exists as to when such insurance was available. Finally, Keyspan
argues that Century's motion should be denied because an issue of fact exists as to when
property damage occurred at each site. Keyspan emphasizes that the insurance policies
cover third-party property damage only, and thus, an issue of fact exists as to when thirdparty
property damage occurred.
Discussion
Where an injury such as environmental damage occurs over a number of years and
triggers multiple sequential insurers and policies, courts have determined damages based
upon pro rata allocation. "Because in these types of cases it is virtually impossible to
allocate to each policy the liability for injuries occurring only within its policy period, the
courts are left with the nettlesome problem of how to allocate damages among the
policies." 15 Couch on Insurance § 220.25.
A pro rata "time on the risk" allocation requires costs to be allocated according to the
number of years that the insurer was on the risk "by multiplying the total loss by a fraction
that has as its denominator the entire number of years of the claimant's injury, and as its
numerator the number of years within that period when the policy was in effect." Certain
Underwriters at Lloyd's, London, et al., 36 AD3d 17, 21 (1st Dep't 2006) (quoting
Stonewall, 73 F.3d at 1202) (internal quotations omitted). "Proration of liability among the
insurers acknowledges the fact that there is uncertainty as to what actually transpired during
any particular policy period." Con Edison, 98 NY2d at 224.
For years where an insured has no insurance coverage, the insured generally bears its
own pro rata share of the loss. 15 Couch on Insurance § 220.31. Proration to the insured is
appropriate for the years where the "insured elected not to purchase insurance or
purchased insufficient insurance." Stonewall, 74 F.3d at 1203. For those years, the insured
is treated as self-insured and bears responsibility for its pro rata share of damages.
Proration to the insured is inappropriate, however, for those years where insurance
was unavailable in the marketplace. Id.; Nomet Management Corp. v. Virginia Surety
Company, 2012 WL 10007753 (Sup. Ct. New York County 2012) ("In determining
allocation, the court must also inquire whether during periods of no insurance, there was
appropriate insurance available in the marketplace).
Century argues that a pro rata allocation over the period where insurance is available
will require it to indemnify Keyspan for property damage outside the policy periods. Pro
rata allocation, however, is not intended to hold an insurer liable for [*4]damages not
within the coverage of the policies, but instead to allocate damages to insurance policies
based on the "time on the risk and degree of risk assumed." Stonewall, 73 F.3d at 1203.
For those periods of time where no insurance was purchased, courts pro-rate liability to
the insured as if it has assumed the risk "either by declining to purchase available insurance
or by purchasing . . . an insufficient amount of insurance" which is determined by an
objective test of whether insurance was available in the marketplace. Id.; Olin Corp. v.
Insurance Co. of North America, 221 F.3d 307, 325 (2d Cir. 2000).
Further, Century's argument that it is only liable under the policies for property
damage that occurs within the policy periods is misplaced. Six of the insurance policies
require Century to indemnify Keyspan for any damages that result from an occurrence that
happens within the policy period, even if those damages occur outside the policy period.
Stonewall, 73 F.3d at 1203 (noting that "insurers' reliance on language limiting their
coverage to injury which occurs during the policy period' ignores their obligation to
indemnify for subsequent damages attributable to injury occurring during the relevant
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policy").[FN3] Where policy language requires an insurer to indemnify the insured for
damages resulting from an occurrence happening within the policy period, the insurer may
be held liable up to the limits of its policies. Olin Corp. v. American Home Assurance Co.,
704 F.3d 89, 101 (2d Cir. 2012).
Finally, a pro rata allocation that considers the availability of insurance is consistent
with the language of the policies, and the New York Court of Appeals decision in Con
Edison. In Con Edison, the Court of Appeals affirmed the trial court's use of pro rata
"time on the risk" allocation, but recognized that courts may differ as to how it treats
"periods of no insurance, [and] periods where no insurance is available." 98 NY2d at 225;
Certain Underwriters, 36 AD3d at 21 n. 1.
Here, it is undisputed that the parties cannot parse out the exact amount of property
damage which occurred within each policy period. Thus, it is impossible to determine
whether all, some, or none of the damage occurred during the period when the sites at
issue were insured by Century. In such circumstances, where property damage is
indivisible, pro rata allocation is the rational, equitable method to determine how to allocate
damages among multiple triggered insurance policies. I therefore grant Century's motion
for partial summary judgment only to the extent that I will apply a pro rata time on the risk
allocation to determine Century's indemnification obligations with respect to the
Hempstead and Rockaway Park sites, as set forth in more detail below.
Calculating the Pro Rata Time on the Risk Allocation
There is no dispute as to the number of years over which Century insured the
Rockaway Park and Hempstead sites (the numerator of the time on the risk pro rata
allocation). There are, however, issues of fact as to certain dates required to calculate the
denominator of the pro rata time on the risk allocation equation. First, the parties dispute
the time period over which property damage occurred at the Hempstead and Rockaway
Park. Although Century submitted evidence to show when property damage occurred at
each site, its evidence was insufficient to prove the time period over which property
damage occurred as a matter of law.
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The parties also dispute when insurance coverage was available. Keyspan submitted
an affidavit from Century's expert, James Robertson, who opined that property damage
liability insurance was readily available after 1925. According to Century, Keyspan has
produced an expert report on the availability of insurance, but that report was not
submitted on this motion
In any event, I find that the period between 1971 and 1982 must be included in the
denominator of the pro rata time on the risk allocation for the Hempstead and Rockaway
Park sites, even though no insurance coverage was available to Keyspan and its
predecessors during that time period. During that period of time, a "pollution exclusion
was required in all liability policies." Cont'l Cas. Co. v. Rapid-Am. Corp., 80 NY2d 640,
652 (1993).
In 1971, the Legislature amended Insurance Law § 46 to provide that property
damage liability insurance policies "expressly exclude . . . liability arising out of pollution or
contamination caused by the discharge, dispersal, release or escape of any pollutants,
irritants or contaminants into or upon land, the atmosphere or any water course or body of
water unless such discharge, dispersal, release or escape is sudden and accidental."
Insurance Law § 46(14) (repealed 1982). The purpose of this statute was "to prohibit
commercial or industrial enterprises from buying insurance to protect themselves against
liabilities arising out of their pollution of the environment" which would help "assure that
corporate polluters bear the full burden of their own actions spoiling the environment, and
would preclude any insurance company from undermining any public policy by offering
this type of insurance protection." Governor's Memorandum, 1971 New York State
Legislative Annual, p. 353-354.
Given the Legislature's clear intent that companies such as Keyspan bear the full
burden of their own actions affecting the environment, I decline to exclude the period
between 1971 and 1982 from the allocation period when pollution insurance was
[*5]prohibited.[FN4]
Conclusion
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For the reasons set forth above, I find that the proper allocation formula for
determining potential damages requires the total costs for each site to be multiplied by "a
fraction that has as its denominator the number of years in which injury-in-fact [property
damage] was occurring and insurance was available, and as its numerator the number of
years within that period when the insurance was in effect." Stonewall, 73 F.3d at 1204. For
those periods where Keyspan did not purchase insurance when it was available in the
marketplace, Keyspan will be allocated its pro rata share accordingly. In addition, the
period allocated to Keyspan will include the years 1971 and 1982, and Keyspan shall be
considered self-insured and bear responsibility for the pro rata share of costs for that
period.
At trial, Century, as insurer, bears the burden of proving that insurance was generally
available in the marketplace, and Keyspan, as insured, bears the burden of proving that
insurance was not reasonably available to it. Uniroyal v. America Re-Insurance Co., 2005
WL 4934215 (N.J. Super. Ct. App. Div. Sept 13, 2005). The relevant inquiry is not
"limited to whether an insured was able to continue obtaining coverage for the particular
risk in the same policy type" but may take into account whether the insured could purchase
coverage of another policy type that would have provided similar coverage. Olin Corp.,
221 F.3d at 326.
After the above issues of fact are resolved, any costs as to the Hempstead and
Rockaway Park sites shall be allocated in a manner consistent with this decision.
In accordance with the foregoing, it is
ORDERED that defendant Century Indemnity Company's motion for partial summary
judgment on the issue of allocation for the Hempstead and Rockaway Park sites is granted
only to the extent that any costs are to be allocated pro rata over the entire period during
which property damage occurred at each site, with exclusions for the period of time when
insurance was unavailable prior to the policy periods 1953 to 1969, and for the period of
time when insurance was unavailable after 1986, with no exclusion for the period between
1971 and 1982; and it is further
ORDERED that a final judgment consistent with this opinion shall be entered after
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trial in this action.
This constitutes the decision and order of this Court.
Date:New York, New York
October , 2014
ENTER:
_________________________
Saliann Scarpulla, J.S.C.
Footnotes
Footnote 1:The eight excess liability insurance policies bear policy numbers XCP-1200,
XBC-1097, XBC-40530, XBC-41176, SRL-2220, XCP-1086, XCP-3001, and XCP-3860.
Familiarity with the language of the policies is assumed.
Footnote 2:Although Century is the only remaining defendant in this action, the complaint
originally asserted indemnification claims against other insurers under separate insurance
policies. In or around 2003, defendant Lexington Insurance Company ("Lexington") and
several other insurers moved for summary judgment dismissing the complaint, on the
grounds that its insurance policies would never be reached because they attached at limits
that exceeded any potential damages.
On December 24, 2003, Justice Ira Gammerman granted Lexington's motion for summary
judgment dismissing the complaint. In assessing whether any potential damages would
reach Lexington's policies, Judge Gammerman used a pro rata time on the risk allocation
by taking the highest cost scenario at the most expensive site — Hempstead at
$60,554,000 — and allocating the total cost over the time period 1953 to 1986, which
resulted in a pro rata allocation of $1,832,667 per year. Finding that Lexington's policies
would never be triggered because their attachment point exceeded the maximum potential
damage per year, $1,832,667, Judge Gammerman dismissed the complaint against
Lexington and other insurers who had policies attaching at higher limits.
Footnote 3:Of the eight policies, only two require property damage to occur within the
policy period (XBC-41176 and SRL-2220). The remaining policies require that an
occurrence happen within the policy period, and that Century must indemnify any damages
arising out of the occurrence.
Footnote 4:Contrary to Keyspan's claims, Judge Gammerman previously ruled on
December 24, 2003 that the allocation period must include the period between 1971 and
1982 based on the Legislature's intent to prohibit companies from purchasing pollution
coverage during those years.
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