The Doctrine of 'Unavailability'

A frequently disputed issue in cases involving insurance coverage for what many courts refer to as “continuous injuries,” is which party ' the policyholder or its insurers ' should bear the portion of loss allocable to periods where the policyholder purchased insurance from now-insolvent carriers.

Pro Rata Allocation

For nearly 30 years, courts have addressed the issue of allocation in cases involving insurance coverage for what those courts have referred to as long-term, progressive or “continuous” injuries. This allocation issue often arises in asbestos or other toxic tort cases, for which multiple insurance policies over multiple policy periods have been held to be “triggered.” In resolving the allocation issue, courts have tended to focus on two very different approaches: 1) the so-called “all sums” or “joint and several” approach advocated by policyholders, whereby the policyholder may choose, at its discretion, which policy is required to respond to the full liability “subject [ ] to the provisions in the policy that govern the allocation of liability when more than one policy covers an injury” (Keene Corp. v. Insurance Co. of N. Am., 667 F.2d 1034, 1049-50 (D.C. Cir. 1981)), and 2) the pro rata, time-on-the-risk approach whereby (assuming, of course, that no other coverage defenses apply) “[e]ach insurer is liable for that period of time it was on the risk compared to the entire period during which damages occurred” (Insurance Company of North America v. Forty-Eight Insulations, Inc., 633 F.2d 1212, 1224-25 (6th Cir. 1980)).

In adopting pro rata, time-on-the-risk allocation, courts have emphasized policy language that limits the insurance provided by a policy to bodily or property damage that takes place during the policy period. “Each insurer is held liable for only those damages which occurred during its policy period; no insurer is held liable for damages outside its policy period.” Northern States Power Co. v. Fid. & Cas. Co. of N.Y., 523 N.W.2d 657, 662 (Minn. 1994). Pro rata, time-on-the-risk allocation has thus been described as “proration to the insured” because each insurer can only be responsible for the pro rata share of loss that occurs during periods when it provided coverage, and the policyholder is assigned responsibility for the portions of time where injuries occurred but the policyholder has no insurance. See S.M. Seaman & J.R. Schulze, “Allocation of Losses in Complex Insurance Coverage Claims” at 4.3[c], at 4-20 (2d ed. 2008) (“One important feature of a pro rata allocation is that courts ' generally require the policyholder to participate in the allocation ' for those periods of no insurance, self-insurance, or insufficient insurance.”) As a result, insurers can only be held responsible for the risks they agreed to assume “during the policy period,” and policyholders are held responsible for any risks that they retained.

A Limited Exception

A handful of courts have adopted a narrow exception to the “proration to the insured” approach, which limits proration to the insured when insurance coverage for the particular type of risk at issue was not available at the time for purchase in the marketplace by any policyholder, e.g., where coverage was supposedly “unavailable.” (It is worth noting that many courts have rejected the “availability” doctrine as inconsistent with the risk transfer principles that underlie pro rata allocation. See, e.g., Sybron Transition Corp. v. Sec. Ins. of Hartford, 258 F.3d 595, 600 (7th Cir. 2001) (“[t]he whole idea of a time-on-the-risk calculation is that any given insurer's share reflects the ratio of its coverage (and thus premiums it collected) to the total risk. The full risk is not affected by whether insurance is available later”); Boston Gas Co. v. Century Indem. Co., 910 N.E.2d 290, 315 (Mass. 2009) (rejecting any “availability” exception where “[i]n effect, because the policyholder could not buy insurance, it is treated as though it did by passing those uninsurable losses to insured periods”); MidAmerican Energy Co. v. Certain Underwriters at Lloyd's London, No. CL 107142, 2011 WL 2011374, at *3-4 (D. Iowa Apr. 13, 2011) (“an 'unavailability' exception disproportionately allocate[s] damage to insurers for periods of time when no coverage was agreed to or bargained for”).

The seminal case on “availability” is Stonewall Ins. Co. v. Asbestos Claims Management Corp. See Stonewall Ins. Co. v. Asbestos Claims Mgmt. Corp., 73 F.3d 1178 (2d Cir. 1995), modified on other grounds, 85 F.3d 49 (2d Cir. 1996). In Stonewall, the District Court adopted pro rata allocation with proration to the insured. See Stonewall Ins. Co. v. National Gypsum Co., 1992 WL 163180 at *2 (S.D.N.Y. 1992). The Second Circuit upheld the District Court's “proration-to-the-insured” because it “oblige[s] a manufacturer to accept a proportionate share of risk that it elected to assume, either by declining to purchase available insurance or by purchasing what turned out to be an insufficient amount of insurance.” Stonewall, 73 F.3d at 1204. The Second Circuit “modified” the District Court's approach, however, and held that proration to the insured should not be applied to years after 1985 because, according to the court, “asbestos liability insurance ceased to be available” after 1985. Id. at 1203-04. In other words, because the court found that no one in the market could have purchased insurance coverage for that type of risk, the allocation period would not be extended after that time even if the injuries took place after 1985. See also Owens-Illinois, Inc. v. United Ins. Co., 650 A.2d 974, 995 (N.J. 1994) (when periods of no insurance reflect a decision by an actor to assume or retain a risk, as opposed to periods when coverage for a risk is not available, to expect the risk-bearer to share in the allocation is reasonable).

In the Olin case, the Second Circuit examined the scope of the “availability” doctrine set forth in Stonewall. See Olin Corp. v. Insurance Co. of N. Am., 221 F.3d 307 (2d Cir. 2000). The court held that the relevant inquiry for “availability” was whether there was “opportunity for [the policyholder] to obtain some form of generally available insurance for this sort of risk. Otherwise the decision to 'go bare' was not made by [the policyholder]; it was imposed on [the policyholder] by the marketplace.” Id. at 325.

Olin rejected the argument that “availability” requires a fact-based inquiry into the individual policyholder's particular facts and circumstances. In Olin, the policyholder argued that “availability alone does not determine whether” it was self-insured, rather, it believed the court should examine “whether it elected not to purchase [ ] insurance” for the risk at issue. Id. at 326. The Second Circuit disagreed, stating that despite using the term “elected” in Stonewall, “the touchstone of our analysis was availability, not election.” Id. (emphasis in original.) The court thus “agree[d] ' that [ ] findings as to 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. (“The inquiry as to whether there is insurance generally available, as opposed to the inquiry [as to] whether a person or entity 'elected' to purchase it, is objective and therefore more amenable to determination by a court than is the question of whether, subjectively, a knowing election was made”). See also NSP, 523 N.W.2d at 663 (rejecting a “fact-dependent” inquiry for allocation purposes).

More recently, the Minnesota Supreme Court adopted the availability doctrine as set forth in Stonewall. In Wooddale, the Minnesota Supreme Court held that loss for a continuing injury should be allocated pro rata by time on the risk, and that the total allocated period “must include any times during which damages occurred” but the policyholder had no insurance unless “coverage [for the type of risk at issue] was not available to the insured.” Wooddale Builders, Inc. v. Maryland Cas. Co., 722 N.W.2d 283, 297-98 (Minn. 2006). Subsequently, the Court of Appeals of Minnesota rejected a policyholder's argument that availability requires a factual analysis into the policyholder's individual circumstances to determine if coverage was “available,” and held that “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.” St. Paul Mercury Ins. Co. v. Northern States Power Co., No. A07-1775, 2009 WL 2596074 (Minn. Ct. App. Aug. 25, 2009) at *8.

Now-Insolvent Insurers

Even those courts that have adopted the Stonewall “unavailability” doctrine in pro rata allocation cases have not extended “unavailability” to include periods where the policyholder purchased coverage from now-insolvent insurers. Courts have thus held that “unavailability” does not apply when risk could have been, and was, transferred by the policyholder, but the policyholder may now have difficulty collecting from the party to which it elected to transfer that risk. As one court explained, “[i]t was [the policyholder] that chose to place its insurance with [ ] companies which are now insolvent ' There is no possible justification for shifting the economic consequences of [the policyholder's] decision to the remaining insurers.” Stonewall Ins. Co. v. National Gypsum Co., 1992 WL 163180 at *2 (S.D.N.Y. 1992).

For example, in Benjamin Moore, the Supreme Court of New Jersey held that under pro rata allocation:

insurers are allocated losses based on their undertakings, the insured is required to pay its 'aliquot' share of both defense and indemnification on account of years in which it is uninsured or self-insured, and the insured also is responsible for years in which coverage is exhausted or its insurer bankrupt. Benjamin Moore & Co. v. Aetna Cas. & Surety Co., 843 A.2d 1094, 1102 (N.J. 2004) (emphasis added).

The court further pointed out that while the pro rata allocation methodology favors policyholders in many respects, policyholders necessarily remain responsible for their insurance purchasing decisions. They are, therefore, responsible for any injury allocable to years in which the insurers from whom they purchased insurance ultimately cannot pay the claim:

While the court has “consistently reaffirmed our allegiance to Owens-Illinois ' our scheme is not totally one-sided. Policyholders who chose to 'go bare' or underinsure must sustain the burden of those choices. Likewise, policyholders are required to underwrite the risk of insurer insolvency or bankruptcy.” Id. at 1104. (emphasis added).

Two New York courts reached the same conclusion following the Stonewall “unavailability” doctrine. In Keasbey, the court adopted pro rata, time-on-the-risk allocation and held that insurers should “only be responsible for their time-on-the-risk, which is all that [the policyholder] bargained and paid premiums for.” Continental Cas. Co. v. Employers Ins. Co. of Wausau, 865 N.Y.S.2d 855, 864 (N.Y. Sup. Ct. 2008) (“Keasbey“). The court rejected the policyholder's argument that insurers should be held responsible for insolvent periods:

[insurers] should not be forced to pick up coverage for periods where [the policyholder] chose to obtain an insurance policy with an insurance company that became defunct ' [insurers] should not be forced to become a guarantor for the insolvent insurance company. Thus, where exposure includes periods for which [the policyholder] was covered by [ ] the insolvent insurer, or was uninsured, those periods have to be included in allocating and charged to [the policyholder]. Id. (citations omitted) (emphasis added).

See also United States Fidelity & Guaranty Co. v. Treadwell Corp., 58 F. Supp. 2d 77, 96-97, 104 (S.D.N.Y. 1999) (under New York law and pro rata, time-on-the-risk allocation, “if one of the insurers is insolvent, the insured is saddled with that insurer's share of the liability”).

Similarly, in Foster Wheeler, the New York court rejected the “collectability” argument, holding that periods covered “by a bankrupt insurer” must be included in a pro rata, time-on-the-risk allocation of indemnity costs “regardless of whether or not the insurance proceeds from those policies will ever be collected by [the policyholder].” Foster Wheeler L.L.C. v. Affiliated FM Ins. Co., No. 600777/01 (N.Y. Sup. March 16, 2010).

Likewise, in AAA Disposal Systems, the Appellate Court of Illinois held that the policyholder bears responsibility for choosing the company it will purchase insurance from. Therefore, if the insurer fails, the policyholder must bear responsibility for that failure, including in connection with pro rata allocation. The policyholder cannot shift the responsibility for that choice to some other insurer in some other period. The “risk of an insurance carrier becoming insolvent is placed on the insured rather than on another carrier that was a stranger to the selection process.” AAA Disposal Systems, Inc. v. Aetna Cas. & Surety Co., 821 N.E.2d 1278, 1290 (Ill. App. Ct. 2005).

Most recently, in H.B. Fuller, the U.S. District Court for the District of Minnesota confirmed that insolvency does not equate to “unavailability” in a pro rata allocation. See H.B. Fuller Co. v. U.S. Fire Ins. Co., No. 09-02827, 2011 WL 2884711 (D. Minn. Aug. 18, 2011). In H.B. Fuller, the policyholder purchased liability insurance from various insurers between 1976 and 1985 for which it sought coverage for underlying asbestos-related claims. Id. at *2. Every insurer from which Fuller purchased first-layer excess coverage between 1980 and 1984 subsequently became insolvent. Fuller thus sought a determination that “no liability or costs be allocated to it for the time period where it purchased coverage from now insolvent insurers (1980-1984)” and that the allocation period “should exclude the four policy years with insolvent carriers.” Id. Fuller argued that under the doctrine of “unavailability” adopted by the Minnesota Supreme Court in Wooddale, 722 N.W.2d at 297-298, the court should exclude from the allocation any periods where coverage is not available to Fuller, except those that Fuller voluntarily elected to self-insure.

The Fuller court rejected the policyholder's interpretation of the “unavailability” doctrine, holding that “insurance was 'available' to Fuller” in periods where the policyholder purchased coverage from now-insolvent carriers, and, therefore, that “liability should be allocated to Fuller for the insolvent insurers' policy periods.” 2011 WL 2884711 at *8. The court rejected Fuller's argument that it could only be responsible for periods that it “voluntarily elected” to self-insure, and found that “[r]ead as a whole, Wooddale and its predecessors focus on the question of availability in the market.” Id. at *7. The court relied on cases from other jurisdictions that have adopted the Stonewall doctrine and rejected that concept for periods of insolvency, including Benjamin Moore, Olin, and AAA Disposal, and likened insolvent periods to underinsured periods for which policyholders unquestionably bear responsibility in a pro rata allocation: Just as “[u]nderinsuring is akin to 'involuntarily' self-insuring, in that the insured predicted how much insurance it would need but was incorrect: the insured voluntarily chose to insure, but did so inadequately,” periods of insolvent coverage represent an “involuntary” self-insured period for which the policyholder bears responsibility. Id.

The Fuller court also found that adopting the policyholder's proposed interpretation of “unavailability” would improperly require the solvent insurers to “'move over' to cover the insolvent insurers' liability,” whereas “[n]o case suggests that an insurer should be required to 'move over' to a policy period to act as a guarantor of another insurer who has become insolvent, when no policy language so provides.” Id. at *7-8. The court stated that for purposes of determining insurers' liability, “[the relevant comparison is whether an insurer agreed to cover a particular liability, be it after reaching a certain threshold [of underlying coverage], or for a certain period of time.” Id. Finally, the court rejected the policyholder's argument that public policy would require insurers, and not policyholders, to bear the risk of another carrier's insolvency, finding that “forc[ing] insurers to underwrite an insured's other purchasing decisions, becoming a guarantor of all companies ' is not supported by considerations of public policy.” Id. at *8. In short, the court relied on the risk-transfer principle that is at the foundation of pro rata, time-on-the-risk allocation, and, like other courts that have examined the issue, concluded that the “unavailability” doctrine does not require insurers to cover risks that the policyholder had transferred to others and which those insurers never agreed to assume.

Conclusion

Under a pro rata, time-on-the-risk allocation, insurers can only be responsible for the portion of loss that they agreed to assume ' that which takes place “during the policy period.” Pursuant to the Stonewall doctrine of “unavailability,” some courts will exclude from a pro rata allocation those periods where coverage for a particular type of risk was “unavailable.” But even courts adopting the “unavailability” exception to pro rata allocation have made clear that “unavailability” does not mean “uncollectability.” As a result, the Stonewall doctrine does not extend to exclude those periods of now-insolvent coverage from pro rata allocation, because those are circumstances where risk was available to be transferred, and the policyholder indeed transferred that risk. Finding otherwise would be contrary to applicable case law on this issue, as well as the terms of the policies themselves.

Leslie Davis is counsel with Crowell & Moring LLP in Washington, DC. She litigates complex coverage cases for insurers and can be reached at [email protected].

A frequently disputed issue in cases involving insurance coverage for what many courts refer to as “continuous injuries,” is which party ' the policyholder or its insurers ' should bear the portion of loss allocable to periods where the policyholder purchased insurance from now-insolvent carriers.

Pro Rata Allocation

For nearly 30 years, courts have addressed the issue of allocation in cases involving insurance coverage for what those courts have referred to as long-term, progressive or “continuous” injuries. This allocation issue often arises in asbestos or other toxic tort cases, for which multiple insurance policies over multiple policy periods have been held to be “triggered.” In resolving the allocation issue, courts have tended to focus on two very different approaches: 1) the so-called “all sums” or “joint and several” approach advocated by policyholders, whereby the policyholder may choose, at its discretion, which policy is required to respond to the full liability “subject [ ] to the provisions in the policy that govern the allocation of liability when more than one policy covers an injury” ( Keene Corp. v. Insurance Co. of N. Am. , 667 F.2d 1034, 1049-50 (D.C. Cir. 1981)), and 2) the pro rata, time-on-the-risk approach whereby (assuming, of course, that no other coverage defenses apply) “[e]ach insurer is liable for that period of time it was on the risk compared to the entire period during which damages occurred” ( Insurance Company of North America v. Forty-Eight Insulations, Inc. , 633 F.2d 1212, 1224-25 (6th Cir. 1980)).

In adopting pro rata, time-on-the-risk allocation, courts have emphasized policy language that limits the insurance provided by a policy to bodily or property damage that takes place during the policy period. “Each insurer is held liable for only those damages which occurred during its policy period; no insurer is held liable for damages outside its policy period.” Northern States Power Co. v. Fid. & Cas. Co. of N.Y. , 523 N.W.2d 657, 662 (Minn. 1994). Pro rata, time-on-the-risk allocation has thus been described as “proration to the insured” because each insurer can only be responsible for the pro rata share of loss that occurs during periods when it provided coverage, and the policyholder is assigned responsibility for the portions of time where injuries occurred but the policyholder has no insurance. See S.M. Seaman & J.R. Schulze, “Allocation of Losses in Complex Insurance Coverage Claims” at 4.3[c], at 4-20 (2d ed. 2008) (“One important feature of a pro rata allocation is that courts ' generally require the policyholder to participate in the allocation ' for those periods of no insurance, self-insurance, or insufficient insurance.”) As a result, insurers can only be held responsible for the risks they agreed to assume “during the policy period,” and policyholders are held responsible for any risks that they retained.

A Limited Exception

A handful of courts have adopted a narrow exception to the “proration to the insured” approach, which limits proration to the insured when insurance coverage for the particular type of risk at issue was not available at the time for purchase in the marketplace by any policyholder, e.g., where coverage was supposedly “unavailable.” (It is worth noting that many courts have rejected the “availability” doctrine as inconsistent with the risk transfer principles that underlie pro rata allocation. See, e.g., Sybron Transition Corp. v. Sec. Ins. of Hartford , 258 F.3d 595, 600 (7th Cir. 2001) (“[t]he whole idea of a time-on-the-risk calculation is that any given insurer's share reflects the ratio of its coverage (and thus premiums it collected) to the total risk. The full risk is not affected by whether insurance is available later”); Boston Gas Co. v. Century Indem. Co. , 910 N.E.2d 290, 315 (Mass. 2009) (rejecting any “availability” exception where “[i]n effect, because the policyholder could not buy insurance, it is treated as though it did by passing those uninsurable losses to insured periods”); MidAmerican Energy Co. v. Certain Underwriters at Lloyd's London, No. CL 107142, 2011 WL 2011374, at *3-4 (D. Iowa Apr. 13, 2011) (“an 'unavailability' exception disproportionately allocate[s] damage to insurers for periods of time when no coverage was agreed to or bargained for”).

The seminal case on “availability” is Stonewall Ins. Co. v. Asbestos Claims Management Corp. See Stonewall Ins. Co. v. Asbestos Claims Mgmt. Corp. , 73 F.3d 1178 (2d Cir. 1995), modified on other grounds , 85 F.3d 49 (2d Cir. 1996). In Stonewall, the District Court adopted pro rata allocation with proration to the insured. See Stonewall Ins. Co. v. National Gypsum Co., 1992 WL 163180 at *2 (S.D.N.Y. 1992). The Second Circuit upheld the District Court's “proration-to-the-insured” because it “oblige[s] a manufacturer to accept a proportionate share of risk that it elected to assume, either by declining to purchase available insurance or by purchasing what turned out to be an insufficient amount of insurance.” Stonewall, 73 F.3d at 1204. The Second Circuit “modified” the District Court's approach, however, and held that proration to the insured should not be applied to years after 1985 because, according to the court, “asbestos liability insurance ceased to be available” after 1985. Id. at 1203-04. In other words, because the court found that no one in the market could have purchased insurance coverage for that type of risk, the allocation period would not be extended after that time even if the injuries took place after 1985. See also Owens-Illinois, Inc. v. United Ins. Co. , 650 A.2d 974, 995 (N.J. 1994) (when periods of no insurance reflect a decision by an actor to assume or retain a risk, as opposed to periods when coverage for a risk is not available, to expect the risk-bearer to share in the allocation is reasonable).

In the Olin case, the Second Circuit examined the scope of the “availability” doctrine set forth in Stonewall. See Olin Corp. v. Insurance Co. of N. Am. , 221 F.3d 307 (2d Cir. 2000). The court held that the relevant inquiry for “availability” was whether there was “opportunity for [the policyholder] to obtain some form of generally available insurance for this sort of risk. Otherwise the decision to 'go bare' was not made by [the policyholder]; it was imposed on [the policyholder] by the marketplace.” Id. at 325.

Olin rejected the argument that “availability” requires a fact-based inquiry into the individual policyholder's particular facts and circumstances. In Olin, the policyholder argued that “availability alone does not determine whether” it was self-insured, rather, it believed the court should examine “whether it elected not to purchase [ ] insurance” for the risk at issue. Id. at 326. The Second Circuit disagreed, stating that despite using the term “elected” in Stonewall, “the touchstone of our analysis was availability, not election.” Id. (emphasis in original.) The court thus “agree[d] ' that [ ] findings as to 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. (“The inquiry as to whether there is insurance generally available, as opposed to the inquiry [as to] whether a person or entity 'elected' to purchase it, is objective and therefore more amenable to determination by a court than is the question of whether, subjectively, a knowing election was made”). See also NSP, 523 N.W.2d at 663 (rejecting a “fact-dependent” inquiry for allocation purposes).

More recently, the Minnesota Supreme Court adopted the availability doctrine as set forth in Stonewall. In Wooddale , the Minnesota Supreme Court held that loss for a continuing injury should be allocated pro rata by time on the risk, and that the total allocated period “must include any times during which damages occurred” but the policyholder had no insurance unless “coverage [for the type of risk at issue] was not available to the insured.” Wooddale Builders, Inc. v. Maryland Cas. Co. , 722 N.W.2d 283, 297-98 (Minn. 2006). Subsequently, the Court of Appeals of Minnesota rejected a policyholder's argument that availability requires a factual analysis into the policyholder's individual circumstances to determine if coverage was “available,” and held that “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.” St. Paul Mercury Ins. Co. v. Northern States Power Co., No. A07-1775, 2009 WL 2596074 (Minn. Ct. App. Aug. 25, 2009) at *8.

Now-Insolvent Insurers

Even those courts that have adopted the Stonewall “unavailability” doctrine in pro rata allocation cases have not extended “unavailability” to include periods where the policyholder purchased coverage from now-insolvent insurers. Courts have thus held that “unavailability” does not apply when risk could have been, and was, transferred by the policyholder, but the policyholder may now have difficulty collecting from the party to which it elected to transfer that risk. As one court explained, “[i]t was [the policyholder] that chose to place its insurance with [ ] companies which are now insolvent ' There is no possible justification for shifting the economic consequences of [the policyholder's] decision to the remaining insurers.” Stonewall Ins. Co. v. National Gypsum Co., 1992 WL 163180 at *2 (S.D.N.Y. 1992).

For example, in Benjamin Moore, the Supreme Court of New Jersey held that under pro rata allocation:

insurers are allocated losses based on their undertakings, the insured is required to pay its 'aliquot' share of both defense and indemnification on account of years in which it is uninsured or self-insured, and the insured also is responsible for years in which coverage is exhausted or its insurer bankrupt. Benjamin Moore & Co. v. Aetna Cas. & Surety Co. , 843 A.2d 1094, 1102 (N.J. 2004) (emphasis added).

The court further pointed out that while the pro rata allocation methodology favors policyholders in many respects, policyholders necessarily remain responsible for their insurance purchasing decisions. They are, therefore, responsible for any injury allocable to years in which the insurers from whom they purchased insurance ultimately cannot pay the claim:

While the court has “consistently reaffirmed our allegiance to Owens-Illinois ' our scheme is not totally one-sided. Policyholders who chose to 'go bare' or underinsure must sustain the burden of those choices. Likewise, policyholders are required to underwrite the risk of insurer insolvency or bankruptcy.” Id. at 1104. (emphasis added).

Two New York courts reached the same conclusion following the Stonewall “unavailability” doctrine. In Keasbey , the court adopted pro rata, time-on-the-risk allocation and held that insurers should “only be responsible for their time-on-the-risk, which is all that [the policyholder] bargained and paid premiums for.” Continental Cas. Co. v. Employers Ins. Co. of Wausau , 865 N.Y.S.2d 855, 864 (N.Y. Sup. Ct. 2008) (“ Keasbey “). The court rejected the policyholder's argument that insurers should be held responsible for insolvent periods:

[insurers] should not be forced to pick up coverage for periods where [the policyholder] chose to obtain an insurance policy with an insurance company that became defunct ' [insurers] should not be forced to become a guarantor for the insolvent insurance company. Thus, where exposure includes periods for which [the policyholder] was covered by [ ] the insolvent insurer, or was uninsured, those periods have to be included in allocating and charged to [the policyholder]. Id. (citations omitted) (emphasis added).

See also United States Fidelity & Guaranty Co. v. Treadwell Corp. , 58 F. Supp. 2d 77, 96-97, 104 (S.D.N.Y. 1999) (under New York law and pro rata, time-on-the-risk allocation, “if one of the insurers is insolvent, the insured is saddled with that insurer's share of the liability”).

Similarly, in Foster Wheeler, the New York court rejected the “collectability” argument, holding that periods covered “by a bankrupt insurer” must be included in a pro rata, time-on-the-risk allocation of indemnity costs “regardless of whether or not the insurance proceeds from those policies will ever be collected by [the policyholder].” Foster Wheeler L.L.C. v. Affiliated FM Ins. Co., No. 600777/01 (N.Y. Sup. March 16, 2010).

Likewise, in AAA Disposal Systems, the Appellate Court of Illinois held that the policyholder bears responsibility for choosing the company it will purchase insurance from. Therefore, if the insurer fails, the policyholder must bear responsibility for that failure, including in connection with pro rata allocation. The policyholder cannot shift the responsibility for that choice to some other insurer in some other period. The “risk of an insurance carrier becoming insolvent is placed on the insured rather than on another carrier that was a stranger to the selection process.” AAA Disposal Systems, Inc. v. Aetna Cas. & Surety Co. , 821 N.E.2d 1278, 1290 (Ill. App. Ct. 2005).

Most recently, in H.B. Fuller, the U.S. District Court for the District of Minnesota confirmed that insolvency does not equate to “unavailability” in a pro rata allocation. See H.B. Fuller Co. v. U.S. Fire Ins. Co., No. 09-02827, 2011 WL 2884711 (D. Minn. Aug. 18, 2011). In H.B. Fuller, the policyholder purchased liability insurance from various insurers between 1976 and 1985 for which it sought coverage for underlying asbestos-related claims. Id. at *2. Every insurer from which Fuller purchased first-layer excess coverage between 1980 and 1984 subsequently became insolvent. Fuller thus sought a determination that “no liability or costs be allocated to it for the time period where it purchased coverage from now insolvent insurers (1980-1984)” and that the allocation period “should exclude the four policy years with insolvent carriers.” Id. Fuller argued that under the doctrine of “unavailability” adopted by the Minnesota Supreme Court in Wooddale, 722 N.W.2d at 297-298, the court should exclude from the allocation any periods where coverage is not available to Fuller, except those that Fuller voluntarily elected to self-insure.

The Fuller court rejected the policyholder's interpretation of the “unavailability” doctrine, holding that “insurance was 'available' to Fuller” in periods where the policyholder purchased coverage from now-insolvent carriers, and, therefore, that “liability should be allocated to Fuller for the insolvent insurers' policy periods.” 2011 WL 2884711 at *8. The court rejected Fuller's argument that it could only be responsible for periods that it “voluntarily elected” to self-insure, and found that “[r]ead as a whole, Wooddale and its predecessors focus on the question of availability in the market.” Id. at *7. The court relied on cases from other jurisdictions that have adopted the Stonewall doctrine and rejected that concept for periods of insolvency, including Benjamin Moore, Olin, and AAA Disposal, and likened insolvent periods to underinsured periods for which policyholders unquestionably bear responsibility in a pro rata allocation: Just as “[u]nderinsuring is akin to 'involuntarily' self-insuring, in that the insured predicted how much insurance it would need but was incorrect: the insured voluntarily chose to insure, but did so inadequately,” periods of insolvent coverage represent an “involuntary” self-insured period for which the policyholder bears responsibility. Id.

The Fuller court also found that adopting the policyholder's proposed interpretation of “unavailability” would improperly require the solvent insurers to “'move over' to cover the insolvent insurers' liability,” whereas “[n]o case suggests that an insurer should be required to 'move over' to a policy period to act as a guarantor of another insurer who has become insolvent, when no policy language so provides.” Id. at *7-8. The court stated that for purposes of determining insurers' liability, “[the relevant comparison is whether an insurer agreed to cover a particular liability, be it after reaching a certain threshold [of underlying coverage], or for a certain period of time.” Id. Finally, the court rejected the policyholder's argument that public policy would require insurers, and not policyholders, to bear the risk of another carrier's insolvency, finding that “forc[ing] insurers to underwrite an insured's other purchasing decisions, becoming a guarantor of all companies ' is not supported by considerations of public policy.” Id. at *8. In short, the court relied on the risk-transfer principle that is at the foundation of pro rata, time-on-the-risk allocation, and, like other courts that have examined the issue, concluded that the “unavailability” doctrine does not require insurers to cover risks that the policyholder had transferred to others and which those insurers never agreed to assume.

Conclusion

Under a pro rata, time-on-the-risk allocation, insurers can only be responsible for the portion of loss that they agreed to assume ' that which takes place “during the policy period.” Pursuant to the Stonewall doctrine of “unavailability,” some courts will exclude from a pro rata allocation those periods where coverage for a particular type of risk was “unavailable.” But even courts adopting the “unavailability” exception to pro rata allocation have made clear that “unavailability” does not mean “uncollectability.” As a result, the Stonewall doctrine does not extend to exclude those periods of now-insolvent coverage from pro rata allocation, because those are circumstances where risk was available to be transferred, and the policyholder indeed transferred that risk. Finding otherwise would be contrary to applicable case law on this issue, as well as the terms of the policies themselves.

Leslie Davis is counsel with Crowell & Moring LLP in Washington, DC. She litigates complex coverage cases for insurers and can be reached at [email protected].