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We’ve discussed various issues concerning the allocation of asbestos or hazardous waste claims by insurers or cedents in situations where losses occur in multiple policy periods over time. (See here, here, & here.) Issues relating to allocation of such claims have, for many years, arisen in both insurance coverage cases and reinsurance litigation and arbitration, and they still do.
Earlier this year in Keyspan Gas East Corp. v. Munich Reins. Am., Inc., ___ N.Y.3d ___, N.Y. Slip Op. 2116 (March 27, 2018), New York State’s highest court held that, where applicable policy language contemplates a pro-rata time-on-the-risk allocation of loss, the damages or liability should be allocated over the entire period during which it occurred, including periods during which insurance was not available in the market because of exclusions or other reasons. While the outcomes it will generate are more favorable to insurers than policyholders, the Keyspan decision is sound and consistent with prior New York Court of Appeals cases on allocation and insurance generally. Given New York’s highest court’s historically excellent reputation for resolving insurance and reinsurance issues in an objectively fair and commercially reasonable manner, we suspect that Keyspan may prove to be an influential decision that other states will consider carefully when they are faced with questions concerning what should or should not be counted as part of the time-on-the-risk.
Time-on-the Risk Allocation: Contextual Background
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Hazardous waste and asbestos claims are unique because the “injury producing harm is gradual and continuous and typically spans multiple insurance policy periods….” Keyspan, 2018 N.Y. Slip Op. 2116, at *4. Typically the “environmental contamination” or asbestos injury “that occurred in any given year is unidentifiable and indivisible from the total resulting damages.” See 2018 N.Y. Slip Op. at 2.
Allocating a multi-policy-period loss in different ways can have very significant financial consequences to reinsurers and cedents, and insurers and their insureds. The amount of loss allocated to a given policy determines the applicability of deductibles, the exhaustion (or non-exhaustion) of limits, and the amount the insured is entitled to collect from the insurer under each policy. It factors into whether reinsurance retentions have been met or whether reinsurance contract limits have been exceeded. It can even determine whether certain insurers (e.g. excess or umbrella carriers) or reinsurers are responsible for any of the loss. Continue Reading »
