New York Holds Insured Bears Burden of Proving "Accident" or "Occurrence" Caused Damage and Adopts Pro Rata Allocation Method for Continuous Harm
April, 2002
Disagreeing with the Second Circuit’s reading of New York law, New York’s Court of Appeals holds that the insured bears the burden of proving that damage for which it seeks indemnification resulted from an “accident” or “occurrence” so as to fall within the scope of policy coverage. New York’s highest court has also ruled, as a matter of first impression, that in cases involving multiple successive insurers and continuous harm, each policy is responsible for a pro rata portion rather than the entire loss. Consolidated Edison Co. of New York, Inc. v. Allstate Ins. Co., et al., 2002 WL 827174 (N.Y.).
Facts
For approximately 60 years (1873 - 1933) Consolidated Edison’s corporate predecessors owned and operated a manufactured gas plant in Tarrytown, New York. The site was later sold to Anchor Motor Freight, Inc. In 1995, Anchor notified Con Edison that, during an investigation it was conducting pursuant to Department of Environmental Conservation (“DEC”) requirements, it discovered contamination at the site. Anchor alleged that the manufactured gas plant caused the contamination and demanded that Con Edison participate in the investigation and remediation.
After its own investigation, Con Edison entered into an agreement with the DEC to clean up the site, and commenced this declaratory judgment action against 24 insurers that had issued it general liability policies between 1938 and 1986, demanding defense and indemnification for environmental damages arising from the contamination caused by the Tarrytown plant. The subject policies were issued in layers, and provided for a self-insured retention in the amount of $100,000 per year from 1938 to 1961, and $500,000 per year from 1961 to 1986. Con Edison’s total coverage in excess of the retention ranged between $2 million and $49.5 million during each of the relevant years.
Defendant Travelers Indemnity Company, which provided coverage for liability in excess of $20 million from 1964 to 1970, moved for dismissal on the ground that, as to it, the claims was nonjusticiable. Travelers argued that where there is both continuous, progressive property damage and successive insurance, liability should be allocated pro rata among the insurers. Applying a pro rate allocation to damage estimates most favorable to Con Edison, Travelers contended that its excess insurance policies would not be reached in any given policy year. Nineteen other defendants cross-moved to dismiss the complaint against them on the same ground. Con Edison argued against pro rata allocation, asserting that it should be permitted to allocate all liability to any defendant for any one year it elects within the coverage period.
Supreme Court dismissed the action against Travelers and 13 other insurers based on nonjusticiability, and dismissed the action as against certain policies issued by several other insurers on the same ground. The trial court ruled that for purposes of deciding the motion to dismiss only, it would prorate the damages and dismiss all policies that would not reached by that method. The court took the highest projection of damages by Con Edison’s expert ($51 million), divided by the number of years named in the complaint (50), and determined that policies attaching at levels above $1.1 million were nonjusticiable because they would not be reached even if Con Edison prevailed at trial. Con Edison appealed from that order.
In the meantime, all remaining defendants except Home, Lloyd’s and St. Paul settled, and the case proceeded to trial as to those defendants. At trial, Con Edison contended that because the coverage language requiring an “accident’ or “occurrence” operated to exclude coverage for intended damage, the burden of proving the damage was intended should be assigned to the insurers. The trial court disagreed, stating that “the policy holder has the burden of proof to establish an accident did in fact occur, that is that the damage was not an intentional act.”
The jury found that there was property damage at the site during the years that the three defendants’ policies were in effect, but that the property damage was not the result of an “accident” or “occurrence,” and thus there was no coverage. Con Edison appealed, arguing that the court erred in assigning it the burden of establishing that the property damage was the result of an “accident” or “occurrence.”
The Appellate Division affirmed both the allocation and burden of proof rulings. This appeal followed.
Analysis
Burden of Proof
Noting that each of the subject policies (issued by Home, Lloyd’s and St. Paul) speaks of damages caused by or arising from either an “accident” or an “occurrence” and that “[n]one of the policies contains an exclusion for intended or expected harm”, the Court of Appeals rejected as “unpersuasive” Con Ed’s position (espoused by the Second Circuit in Stonewall Ins. Co. v. Asbestos Claims Mgmt. Corp., 73 F.3d 1178 (2d Cir. 1995)) that the “the practical effect of those coverage terms is to create an exclusion for intended harm” such that the burden of proof should be on the insurers. The Court of Appeals explained:
In our view, the contention that the requirement of an “accident” or “occurrence” itself operates as an exclusion is unpersuasive. Any language providing coverage for certain events of necessity implicitly excludes other events....the requirement of a fortuitous loss is a necessary element of insurance policies based on either an “accident” or an “occurrence.” The insured has the initial burden of proving that the damage was the result of an “accident” or “occurrence” to establish coverage where it would not otherwise exist...[o]nce coverage is established, the insurer bears the burden of proving that an exclusion applies.
Allocation
The Court of Appeals next considered whether the trial court properly prorated the estimated prospective damages for purposes of the insurers’ motions to dismiss. The Court first observed that where, as here, an alleged continuous harm spans many years and thus implicates several successive insurance policies, courts have split as to whether each policy is liable for the entire loss (“joint and several/all sums” approach), or whether each policy is responsible for only a portion of the loss (“pro rata” allocation) and that the issue was one of first impression for the Court. The Court then focused on the policy language before it, specifically the terms “all sums” and “during the policy period” appearing in the following policy provisions:
1. Coverage To indemnify the insured for all sums which the insured shall be obligated to pay by reason of the liability...
3. Policy Period: This policy applies only to “occurrences” as defined herein, happening during the policy period.
Definitions
4. Occurrence: The term “occurrence” wherever used herein, shall mean an event, or continuous or repeated exposure to conditions, which causes injury, damage or destruction during the policy period. All such exposure to or events resulting from substantially the same general conditions during the policy period shall be deemed one occurrence.
Con Edison argued that it should be permitted to collect its total liability –“all sums”— under any policy in effect during the 50 years that the property damage occurred, up to that policy’s limit, and then the indemnifying insurer could seek contribution from the other insurers that also provided coverage during the relevant period. The insurers argued that a straightforward reading of the phrase “during the policy period” limits an individual insurer’s liability to “all sums” incurred by the insured “during the policy period”, requiring liability to be spread among the policies.
The Court adopted the pro rata allocation method and rejected Con Edison’s joint and several/all sums approach, which it found “inconsistent with the unambiguous language of the policies before us.” The Court explained:
Pro rata allocation under these facts, while not explicitly mandated by the policies, is consistent with the language of the policies. Most fundamentally, the policies provide indemnification for liability incurred as a result of an accident or occurrence during the policy period, not outside that period....Con Edison’s singular focus on “all sums” would read this important qualification out of the policies. Proration of liability among the insurers acknowledges the fact that there is uncertainty as to what actually transpired during any particular policy period.
The Court concluded that the trial court did not err in applying pro rata allocation by time on the risk and dismissing claims against policies that would not be reached under Con Edison’s highest estimate of damages.
Practice Pointer:
lthough the Court of Appeals held that the trial court did not err in applying the time on the risk method of pro rata allocation, it expressly recognized that this conclusion “does not foreclose pro rata allocation among insurers by other methods either in determining justiciability or at the damages stage of a trial.” As the Court itself declared, “[c]learly this is not the last word on proration.”
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