Policyholders Bear the Risk When Insurance Was Unavailable on the Market

Alexis P. Joachim | Phelps Dunbar | April 26, 2018

On March 27, 2018, in a matter of first impression, the New York Court of Appeals ruled that under a “pro rata time-on-the-risk” allocation method, a policyholder bears the risk of uninsured years.  In KeySpan Gas East Corp. v. Munich Reinsurance America, Inc., et al., the court was faced with determining whether in a long-tail environmental claim and under a “pro rata time on the risk allocation” an insurer is liable to its insured for years outside its policy periods when no applicable coverage was available on the market.  2018 WL 1472635.

The insurer’s expert opined that pollution coverage was not available to utility companies until 1925 and that a “sudden and accidental pollution exclusion” was adopted by the insurance industry after the 1970s.  Thus, KeySpan argued that allocation should not take into account those years prior to the availability of pollution coverage or after the unavailability of pollution coverage.

The court therefore was faced with how to allocate time on the risk to “gap years” or years in which no coverage existed.  The court recognized that courts in other jurisdictions generally require the policyholder to participate in the allocation for periods of non-coverage, but are “divided with regard to whether a policyholder should be held responsible for those periods of time when the relevant coverage was not offered for sale on the market.”

Some jurisdictions do not put the policyholder “on the risk” if insurance was unavailable – i.e. “the unavailability rule.”  Other courts have rejected this rule and held that the policyholder is on the risk for periods of non-coverage, regardless of whether the absence of coverage was voluntary or due to the inability to obtain coverage.

The court held that the unavailability rule was inconsistent with the policy language that requires the application of the pro rata approach – i.e. “during the policy period” limitation.  The court explained that allowing an insurer to be responsible for risks outside the policy period provides the policyholder with coverage for years where no premiums were paid and is beyond the reasonable expectation of the average insured, who would expect to receive coverage for risks during the policy period and nothing more.

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