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
10/17/2014 Keyspan
Gas E. Corp. v Munich Reins. Am., Inc (2014 NY Slip Op 24306)
http://www.courts.state.ny.us/reporter/3dseries/2014/2014_24306.htm
5/9
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.
10/17/2014 Keyspan
Gas E. Corp. v Munich Reins. Am., Inc (2014 NY Slip Op 24306)
http://www.courts.state.ny.us/reporter/3dseries/2014/2014_24306.htm
6/9
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
10/17/2014 Keyspan
Gas E. Corp. v Munich Reins. Am., Inc (2014 NY Slip Op 24306)
http://www.courts.state.ny.us/reporter/3dseries/2014/2014_24306.htm
7/9
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
10/17/2014 Keyspan
Gas E. Corp. v Munich Reins. Am., Inc (2014 NY Slip Op 24306)
http://www.courts.state.ny.us/reporter/3dseries/2014/2014_24306.htm
8/9
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.
Metropolitan Engineering, Consulting & Forensics (MECF)
Providing Competent, Expert and Objective Investigative Engineering and
Consulting Services
P.O. Box 520
Tenafly, NJ 07670-0520
Tel.: (973) 897-8162
Fax: (973) 810-0440
E-mail: metroforensics@gmail.com
Web pages: https://sites.google.com/site/metropolitanforensics/
https://sites.google.com/site/metropolitanenvironmental/
We are happy to announce the launch of our
twitter account. Please make sure to follow us at @MetropForensics or
@metroforensics1
Metropolitan appreciates your business.
Feel free to recommend our services to your friends and colleagues.
To unsubscribe from future technical blogs
and announcements, please reply to this email with the word “unsubscribe” in
the subject line.