Allocating Costs to Policyholders for Periods of No Insurance

Last month, we discussed the fact that the “unavailability exception” originated with Owens-Illinois, Inc. v. United Insurance Co., 650 A.2d 974 (N.J. 1994), one of the first state supreme court decisions to adopt pro rata allocation. In Olin Corp. v. Insurance Company of North America, 221 F.3d 307 (2d Cir. 2000), an environmental coverage case, the policyholder argued that coverage became “unavailable” after the point at which it could no longer obtain comprehensive general liability insurance without a pollution exclusion, and further, that it did not subjectively “elect” to be self-insured during those periods. According to the court, however, the evidence demonstrated that a “new type of insurance” became available “to fill the void created by the unavailability of CGL policies without pollution exclusion clauses” during the periods at issue, i.e. , claims-made environmental impairment liability (EIL) insurance, and the policyhlder failed to purchase it. The discussion continues herein.

Court Rejects Policyholder's Argument

Based on that evidence, the court rejected the policyholder's arguments, and held the unavailability exception inapplicable to preclude allocation to the policyholder for the uninsured periods. The court determined, in essence, that neither the type of available insurance, nor the policyholder's reasons for failing to obtain it, were relevant to the inquiry; rather, “the general availability of insurance that would have covered the risk at issue here and Olin's failure to obtain it were all that was necessary to allocate the uninsured years to Olin. There was no need to analyze whether Olin subjectively elected to forego insurance and self-insure.” Id. at 326.

More recently, a policyholder tested the scope of the unavailability exception under Minnesota law. That state's Supreme Court, in adopting the exception, stated: “Allocating damages to the insured for periods during which it elected to be self-insured, but not allocating damages for periods during which [the coverage at issue] was not available to the insured, results in holding the insured responsible for only those risks that it elected to assume. [citing Stonewall Insurance Co. v. Asbestos Claims Management Corp., 73 F.3d 1178 (2d Cir. 1995)]. ' We therefore conclude that the total period over which liability is allocated must include any times during which damages occurred but Wooddale was voluntarily self-insured.” Wooddale Builders, Inc. v. Maryland Casualty Co., 722 N.W.2d 283, 297 (Minn. 2006).

Thereafter, in a subsequent Minnesota case, St. Paul Mercury Insurance Co. v. Northern States Power Co., 2009 WL 2596074 (Minn. App. Aug. 25, 2009), a policyholder argued that insurance for environmental damage was “unavailable” under its pre-1962 “accident”-based policies on the theory that such policies arguably do not provide coverage for gradual pollution. The St. Paul Mercury court rejected the proffered argument; and, like Olin more than a decade ago, explained that the only “unavailability” of insurance which will preclude allocation to the policyholder for uninsured periods is the unavailability in the insurance market of coverage for the subject risk. 2009 WL 2596074 at *8 (Minn. App. Aug. 25, 2009) (“the issue under Wooddale is not whether the policies actually provided coverage based on the specific facts of the claim but, rather, whether the coverage for the particular risk was generally available in the marketplace”).

Market Availability

Conversely, the most recent decisions to apply the unavailability exception did so in the specific context of market availability. R.T. Vanderbilt Co., Inc. v. Hartford Accident & Indemnity Co., 2014 WL 1647135 at *6-*7 (policyholder would not be considered self-insured for period during which evidence demonstrated that it “was unable to realistically acquire indemnity coverage”); cf. Nomet Management Corp. v. Virginia Surety Co., Inc., 2012 WL 10007753 (N.Y. Sup. April 2, 2012) (defendant insurer's liability was limited to its time on the risk where evidence established that coverage was available from at least one other insurance company during period after defendant's policy expired). Thus, assuming the unavailability exception has a place in pro rata allocation at all, its application to date has at least been limited consistent with the rationale that prompted the Owens-Illinois court to adopt it as an exercise in judicial policymaking.

Basic principles of contract law support the prevailing view that property damage or bodily injury held to have taken place over time should be allocated to insurers pursuant to their contractual language, and to the policyholder with respect to risks it did not transfer by contract, regardless of the reason that no risk transfer took place. Given that the unavailability exception remains viable in certain jurisdictions at present, the courts in those jurisdictions which have limited the exception to situations where no coverage for the subject risk was available for purchase in the insurance market, and rejected the attempts of policyholders to expand it beyond that context, have taken a sensible approach.

As the case law on allocation continues to evolve, insurers litigating these disputes should continue to resist attempts by policyholders to shift responsibility for uninsured periods to other insurers on the ground of insurance being “unavailable,” and continue to advocate for allocation methodologies consistent with the fundamental principles of contract law.

Elaine A. Panagakos is Counsel in Crowell & Moring LLP's Insurance and Reinsurance Group.

Last month, we discussed the fact that the “unavailability exception” originated with Owens-Illinois, Inc. v. United Insurance Co. , 650 A.2d 974 (N.J. 1994), one of the first state supreme court decisions to adopt pro rata allocation. In Olin Corp. v. Insurance Company of North America, 221 F.3d 307 (2d Cir. 2000), an environmental coverage case, the policyholder argued that coverage became “unavailable” after the point at which it could no longer obtain comprehensive general liability insurance without a pollution exclusion, and further, that it did not subjectively “elect” to be self-insured during those periods. According to the court, however, the evidence demonstrated that a “new type of insurance” became available “to fill the void created by the unavailability of CGL policies without pollution exclusion clauses” during the periods at issue, i.e. , claims-made environmental impairment liability (EIL) insurance, and the policyhlder failed to purchase it. The discussion continues herein.

Court Rejects Policyholder's Argument

Based on that evidence, the court rejected the policyholder's arguments, and held the unavailability exception inapplicable to preclude allocation to the policyholder for the uninsured periods. The court determined, in essence, that neither the type of available insurance, nor the policyholder's reasons for failing to obtain it, were relevant to the inquiry; rather, “the general availability of insurance that would have covered the risk at issue here and Olin's failure to obtain it were all that was necessary to allocate the uninsured years to Olin. There was no need to analyze whether Olin subjectively elected to forego insurance and self-insure.” Id. at 326.

More recently, a policyholder tested the scope of the unavailability exception under Minnesota law. That state's Supreme Court, in adopting the exception, stated: “Allocating damages to the insured for periods during which it elected to be self-insured, but not allocating damages for periods during which [the coverage at issue] was not available to the insured, results in holding the insured responsible for only those risks that it elected to assume. [citing Stonewall Insurance Co. v. Asbestos Claims Management Corp., 73 F.3d 1178 (2d Cir. 1995)]. ' We therefore conclude that the total period over which liability is allocated must include any times during which damages occurred but Wooddale was voluntarily self-insured.” Wooddale Builders, Inc. v. Maryland Casualty Co. , 722 N.W.2d 283, 297 (Minn. 2006).

Thereafter, in a subsequent Minnesota case, St. Paul Mercury Insurance Co. v. Northern States Power Co., 2009 WL 2596074 (Minn. App. Aug. 25, 2009), a policyholder argued that insurance for environmental damage was “unavailable” under its pre-1962 “accident”-based policies on the theory that such policies arguably do not provide coverage for gradual pollution. The St. Paul Mercury court rejected the proffered argument; and, like Olin more than a decade ago, explained that the only “unavailability” of insurance which will preclude allocation to the policyholder for uninsured periods is the unavailability in the insurance market of coverage for the subject risk. 2009 WL 2596074 at *8 (Minn. App. Aug. 25, 2009) (“the issue under Wooddale is not whether the policies actually provided coverage based on the specific facts of the claim but, rather, whether the coverage for the particular risk was generally available in the marketplace”).

Market Availability

Conversely, the most recent decisions to apply the unavailability exception did so in the specific context of market availability. R.T. Vanderbilt Co., Inc. v. Hartford Accident & Indemnity Co., 2014 WL 1647135 at *6-*7 (policyholder would not be considered self-insured for period during which evidence demonstrated that it “was unable to realistically acquire indemnity coverage”); cf. Nomet Management Corp. v. Virginia Surety Co., Inc., 2012 WL 10007753 (N.Y. Sup. April 2, 2012) (defendant insurer's liability was limited to its time on the risk where evidence established that coverage was available from at least one other insurance company during period after defendant's policy expired). Thus, assuming the unavailability exception has a place in pro rata allocation at all, its application to date has at least been limited consistent with the rationale that prompted the Owens-Illinois court to adopt it as an exercise in judicial policymaking.

Basic principles of contract law support the prevailing view that property damage or bodily injury held to have taken place over time should be allocated to insurers pursuant to their contractual language, and to the policyholder with respect to risks it did not transfer by contract, regardless of the reason that no risk transfer took place. Given that the unavailability exception remains viable in certain jurisdictions at present, the courts in those jurisdictions which have limited the exception to situations where no coverage for the subject risk was available for purchase in the insurance market, and rejected the attempts of policyholders to expand it beyond that context, have taken a sensible approach.

As the case law on allocation continues to evolve, insurers litigating these disputes should continue to resist attempts by policyholders to shift responsibility for uninsured periods to other insurers on the ground of insurance being “unavailable,” and continue to advocate for allocation methodologies consistent with the fundamental principles of contract law.

Elaine A. Panagakos is Counsel in Crowell & Moring LLP's Insurance and Reinsurance Group.