FILED: NEW YORK COUNTY CLERK 09/24/ :42 PM INDEX NO /1997 NYSCEF DOC. NO. 337 RECEIVED NYSCEF: 09/24/2014

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1 FILED: NEW YORK COUNTY CLERK 09/24/ :42 PM INDEX NO /1997 NYSCEF DOC. NO. 337 RECEIVED NYSCEF: 09/24/2014 SUPREME COURT OF THE STATE OF NEW YORK COUNTY OF NEW YORK KEYSPAN GAS EAST CORPORATION, Plaintiff, -against- MUNICH REINSURANCE AMERICA, INC., et al., Defendants. ) ) ) ) ) ) ) ) ) ) ) ) ) Index No /97 E (Scarpulla, J.) IAS Part 39 PLAINTIFF KEYSPAN GAS EAST CORPORATION S PRETRIAL MEMORANDUM William F. Greaney Jay T. Smith Michael Lechliter COVINGTON & BURLING LLP 1201 Pennsylvania Avenue NW Washington, DC (202) jsmith@cov.com Mark P. Gimbel COVINGTON & BURLING LLP The New York Times Building 620 Eighth Avenue New York, NY (212) mgimbel@cov.com Attorneys for KeySpan Gas East Corporation

2 TABLE OF CONTENTS I. FACTUAL BACKGROUND... 2 A. KeySpan Gas East Corporation... 2 B. Century and its Policies... 2 C. The Rockaway Park and Patchogue Sites... 3 D. The DEC Claims... 4 E. Notice to Century... 5 F. KeySpan s Damages... 5 II. THE KEY ISSUES TO BE RESOLVED BY THE JURY... 6 A. Trigger... 6 B. Accidental Damage... 8 C. Notice and Waiver Notice Waiver D. Damages E. Allocation Damage Outside the Policy Periods Availability of Insurance i

3 TABLE OF AUTHORITIES Cases Agway, Inc. v. Travelers Indem. Co., No. 93 CV 557, 1993 WL (N.D.N.Y. Dec. 6, 1993)...17 Allstate Ins. Co. v. Zuk, 78 N.Y.2d 41 (1991)...10 Alsens Am. Portland Cement Works v. Degnon Contracting Co., 222 N.Y. 34 (1917)...15 Auto. Ins. Co. of Hartford v. Cook, 7 N.Y.3d 131 (2006)...10 Belt Painting Co. v. TIG Ins. Co., 100 N.Y.2d 377 (2003)...17 Century Indem. Co. v. Brooklyn Union Gas Co., 58 A.D.3d 573 (1st Dep t 2009)...12, 13 Century Indem. Co. v. KeySpan Corp., No /01, 2007 WL (N.Y. Sup. Ct. 2007), aff d sub nom. Century Indem. Co. v. Brooklyn Union Gas Co., 58 A.D.3d 573 (1st Dep t 2009)...13 Chem. Leaman Tank Lines, Inc. v. Aetna Cas. & Sur. Co., 177 F.3d 210 (3d Cir. 1999)...24 Cicero v. Great Am. Ins. Co., 53 A.D.3d 460 (1st Dep t 2008)...14 City of Johnstown v. Bankers Standard Ins. Co., 877 F.2d 1146 (2d Cir. 1989)...9, 10 Consol. Edison Co. of N.Y., Inc. v. Allstate Ins. Co., 98 N.Y.2d 208 (2002)...17, 18, 19, 20 Cont l Cas. Co. v. Rapid-Am. Corp., 80 N.Y.2d 640 (1993)...6, 8, 10, 17 CPC Int l, Inc. v. Hartford Accident & Indem. Co., 720 A.2d 408 (N.J. App. Div. 1998)...10 Don Clark, Inc. v. U.S. Fid. & Guar. Co., 145 Misc.2d 218 (N.Y. Sup. Ct. 1989)...13 ii

4 Fulton Boiler Works, Inc. v. Am. Motorists Ins. Co., 828 F. Supp. 2d 481 (N.D.N.Y. 2011)...22 Fundamental Portfolio Advisors, Inc. v. Tocqueville Asset Mgmt., L.P., 7 N.Y.3d 96 (2006)...15 Gen. Elec. Co. v. Lines, No. SUCV BLS1, 2010 WL (Mass. Super. Ct. Mar. 16, 2010)...22, 23, 25 Gen. Motors Acceptance Corp. v. Clifton-Fine Cent. Sch. Dist., 85 N.Y.2d 232 (1995)...15 Hadden v. Consol. Edison Co. of N.Y., 45 N.Y.2d 466 (1978)...15 Hatco Corp. v. W.R. Grace & Co. Conn., 801 F. Supp (D.N.J. 1992)...11 Isadore Rosen & Sons, Inc. v. Sec. Mut. Ins. Co. of N.Y., 31 N.Y.2d 342 (1972)...15 KeySpan Gas East Corp. v. Munich Reinsurance Am., Inc., 23 N.Y.3d 583 (2014)...15 Kirchner v. Fireman s Fund Ins. Co., No. 90 Civ. 5367, 1991 WL (S.D.N.Y. Sept. 4, 1991)...17 Lavanant v. Gen. Accident Ins. Co. of Am., 79 N.Y.2d 623 (1992)...8 Long Island Lighting Co. v. Aetna Cas. & Sur. Co., No /97, 2000 N.Y. Misc. LEXIS 678 (N.Y. Sup. Ct. Oct. 20, 2000)...7 Martin v. City of Cohoes, 37 N.Y.2d 162 (1975)...20 McGroarty v. Great Am. Ins. Co., 36 N.Y.2d 358 (1975)...9 McGroarty v. Great Am. Ins. Co., 43 A.D.2d 368 (2d Dep t 1974)...9 Messersmith v. Am. Fid. Co., 232 N.Y. 161 (1921)...9 Nat l Union Fire Ins. Co. of Pittsburgh v. Xerox Corp., 792 N.Y.S.2d 772 (N.Y. Sup. Ct. 2004), aff'd, 25 A.D.3d 309 (1st Dep t 2006)...24 iii

5 N.Y. Ins. Dep t v. Generali Ins. Co., 44 A.D.3d 469 (1st Dep t 2007)...20, 21, 22, 23 N.Y. State Superfund Coal., Inc. v. N.Y. State Dep't of Envtl. Conservation, 75 N.Y.2d 88 (1989)...5 Pub. Serv. Mut. Ins. Co. v. Goldfarb, 53 N.Y.2d 392 (1981)...9 Reynolds Metal Co. v. Aetna Cas. & Sur. Co., 259 A.D.2d 195 (3d Dep t 1999)...13 State v. N.Y. Cent. Mut. Fire Ins. Co., 147 A.D.2d 77 (3d Dep t 1989)...17 Stonewall Ins. Co. v Asbestos Claims Mgt. Corp., 73 F.3d 1178 (2d Cir. 1995)...21, 22, 25 Travelers Indem. Co. v. Fischbach, LLC, No /04, 2011 WL (N.Y. Sup. Ct. Apr. 8, 2011)...22, 24 Uniroyal, Inc. v. Am. Re-Ins. Co., 2005 WL (N.J. App. Div. Sept. 13, 2005)...22, 24 Statutes and Regulations Insurance Law Insurance Law NYCRR NYCRR NYCRR NYCRR Other Authorities N.Y. Pattern Jury Instructions 4: Allison E. Butler, Appleman on Insurance Law & Practice Archive 145.3[B][2][b] (2013)...7 iv

6 Plaintiff KeySpan Gas East Corporation ( KeySpan ) respectfully submits this pretrial memorandum in advance of the October 14, 2014 trial of KeySpan s claims for insurance coverage for losses it has incurred as a result of certain claims brought by the New York State Department of Environmental Conservation ( DEC ). Those claims were brought in 1995 to compel KeySpan to pay for the investigation and cleanup of environmental damage at two former manufactured gas plant ( MGP ) sites that were owned or operated by KeySpan s predecessor-in-interest, Long Island Lighting Company ( LILCO ): the Rockaway Park and Patchogue MGP sites. KeySpan contends that Century is liable to indemnify KeySpan for its liability, and to reimburse KeySpan for its defense costs associated with the DEC claims. This memorandum focuses on the issues to be resolved at trial, in which Century will be the only remaining insurer defendant. 1 There are seven primary issues that will need to be resolved by the jury: The first issue relates to trigger. KeySpan will show that damage to third-party property, including previously clean soil and groundwater, occurred during each year of the Century policies, which have effective annual periods from 1953 to The second issue concerns whether the property damage that took place during the policy period was accidental from the standpoint of KeySpan: KeySpan will show that it did not intend to cause the latent environmental damage for which it is being held liable today. The third and fourth issues relate to notice of an occurrence. KeySpan will show: (1) that it provided timely notice of an occurrence with respect to the Rockaway Park and Patchogue sites; and (2) that even if notice was untimely, Century has waived the defense. 1 On September 17, 2014, during Court-ordered mediation, KeySpan reached an agreement settling its claims against Munich Reinsurance America, Inc., which was the only other defendant in the October 14 trial.

7 The fifth issue relates to damages. KeySpan will show that the amounts it seeks to recover from Century were incurred, at least in part, to investigate or remediate actual or threatened damage to third-party property. The sixth and seventh issues relate to allocation. The jury will need to determine whether (1) damage occurred prior to and after Century s policy periods; and, if so, (2) whether coverage for third-party property damage was commercially available during such periods, such that LILCO or its predecessors assumed the risk of damage during such periods by choosing not to purchase coverage. This memorandum will begin by presenting background facts regarding KeySpan, Century s policies, the MGP sites at issue, and KeySpan s damages to date. It will then discuss the law under which the jury must decide the contested factual issues summarized above. I. FACTUAL BACKGROUND A. KeySpan Gas East Corporation KeySpan is a New York public utility that along with its predecessors has provided service to ratepayers on Long Island for over a century. Like all utilities in New York, KeySpan is closely regulated by the New York Public Service Commission ( PSC ). Today, and historically, the premiums paid by KeySpan for insurance coverage are a cost ultimately borne by its ratepayers, as are costs of the environmental cleanups at the MGP sites at issue in this case. Any recoveries from Century in this matter will likewise go to the ratepayers. In fact, consistent with specific regulatory mandates, KeySpan is obligated to pursue its insurers and seek reimbursements that will go to its ratepayers. There is no dispute that KeySpan has succeeded to the rights of LILCO under the insurance policies at issue in this litigation, as well as LILCO s liability for the environmental cleanups at the sites in question. B. Century and its Policies Century is the runoff entity created approximately 20 years ago to assume the legacy asbestos, environmental, and other long-tail liabilities of the Insurance Company of North 2

8 America ( INA ), the oldest insurance company in America, and its subsidiary the Indemnity Insurance Company of North America. Century s predecessors sold excess general liability policies to LILCO continuously during the period 1953 through 1969, and during that time, INA was one of the country s leading underwriters of gas utility risks. Century s predecessors were experts at risk assessment and loss control programs for gas utilities. Century s underwriters and loss control personnel carefully evaluated the risks posed by gas utilities by, among other acts, inspecting such utilities before issuing insurance and reinspecting gas utility risks annually. The policies sold to LILCO obligate Century to indemnify KeySpan for liability for damage to third-party property that happened during the policy periods, even if the damage was not discovered until decades later. The policies sit above self-insured retentions ( SIRs ) ranging from $25,000 to $100,000, and have substantial limits ranging from $500,000 to $25,000,000 per occurrence. Century and KeySpan have entered into two stipulations concerning the material terms, effective periods, and limits of the Century policies at issue in this trial. The stipulations will be introduced into evidence at trial. C. The Rockaway Park and Patchogue Sites The Rockaway Park site is located on the Rockaway Peninsula in Queens just south of Jamaica Bay. MGP operations began around 1880 on a small portion of the site that existed at that time. The plant subsequently went through several expansions, the most of significant of which occurred in the 1920s. Those expansions were accomplished in connection with land expansions of the peninsula into Jamaica Bay, and portions of the bay were filled to create land for additional MGP operations. A substantial portion of the land that is being remediated today did not exist until Gas manufacture at the site continued until 1958, and gas distribution continued at the site until the mid-1970s. The manufactured gas plant was largely demolished in the late 1950s. A large gas distribution holder remained on the site until

9 The Patchogue site is located in Brookhaven, New York, near the headwaters of the Patchogue Creek (or River). Gas production began at the site in 1904 and continued until at least After gas manufacture ceased at the site, equipment including various above-ground storage tanks and a hortonsphere remained at the site for purposes of gas distribution until approximately LILCO sold the site in 1976, before KeySpan repurchased it in 2006 to permit environmental investigation and remediation. Although tar and other byproducts of the gas manufacturing processes at Rockaway Park and Patchogue were valuable commodities used for paving roads and other useful purposes, and efforts were made to recover them for resale; certain byproducts, including tar, accidentally leaked and spilled onto and into soil during and after plant operations. That tar migrated in the subsurface over time, and was exposed to rainwater and groundwater while in the subsurface. When the tar came into contact with water in the subsurface, various constituents which years later were defined as hazardous under modern environmental laws began to dissolve and spread in an ongoing process, causing damage to third party soil and to groundwater. This ongoing process, called a release under environmental laws, is addressed by the current DEC enforcement actions and is the basis for KeySpan s liability today. D. The DEC Claims In August 1995, the DEC asserted environmental claims against LILCO, demanding that LILCO investigate, and if necessary, remediate the Rockaway Park and Patchogue sites. In March 1999, KeySpan and the DEC entered into a consent order with respect to Rockaway Park, requiring KeySpan to investigate and, if necessary, remediate the site. Consent orders with respect to Patchogue were entered into in September 1999 and February The DEC s claims against KeySpan are based on New York s Superfund Law, under which KeySpan can be held strictly, jointly and severally liable for environmental contamination 4

10 even if its actions during the time it owned and operated the plants were completely legal, and even if it was not negligent. Prior to 1995, it was unclear whether the DEC had any authority to order the cleanup of MGP sites under the Superfund Law, because the law grants the DEC remedial authority only where hazardous wastes pose a significant threat to human health or the environment. N.Y. State Superfund Coal., Inc. v. N.Y. State Dep't of Envtl. Conservation, 75 N.Y.2d 88, 93 (1989) (emphasis in original). Under the tests and definitions employed prior to January 1995, most MGP residuals did not constitute hazardous waste, with the result that MGPs generally fell outside of the DEC s remedial authority under the statute. E. Notice to Century In November and early December 1994, approximately nine months before the DEC brought claims against LILCO, LILCO gave Century notice of occurrences at the Rockaway Park and Patchogue sites that might lead to claims implicating their policies. The notices explained that no claims had yet been filed against LILCO with respect to the sites and that, as of that time, it was impossible to ascertain the amount of liability, if any, that LILCO could face with respect to the sites in the event claims were brought. After the DEC asserted claims against LILCO concerning these sites in August 1995, LILCO gave notice of those claims to Century. Although Century disputes whether LILCO gave timely notice of occurrences in 1994, it has never disputed the timeliness of the notice of claims provided by LILCO in F. KeySpan s Damages Since the DEC initiated its enforcement actions in 1995, LILCO and its successor KeySpan have incurred substantial costs investigating and remediating the sites under DEC oversight. Through March 2014, KeySpan has incurred approximately $81 million as to Rockaway and $2.5 million as to Patchogue figures which exclude the significant post- 5

11 judgment interest to which KeySpan is entitled under the CPLR in the event of a favorable judgment. 2 KeySpan will continue to incur significant costs at each of these sites going forward. II. THE KEY ISSUES TO BE RESOLVED BY THE JURY A. Trigger For purposes of this trial, it is KeySpan s burden to show that it is being held liable for injury to property that took place during the Century policy periods. 3 To meet that burden, KeySpan need only show that property damage, in the form of contamination to soil or groundwater, took place during each policy period. New York law generally follows the injury-in-fact approach to trigger, under which policies are triggered whenever any damage occurs during the policy period, whether discovered or not. Cont l Cas. Co. v. Rapid-Am. Corp., 80 N.Y.2d 640, 651 (1993); see Long Island Lighting Co. v. Aetna Cas. & Sur. Co., No /97, 2000 N.Y. Misc. LEXIS 678, *26 *27 (N.Y. Sup. Ct. Oct. 20, 2000). The injury-in-fact trigger implicates all of the policy periods during which the insured proves some injury or damage. 23 Allison E. Butler, Appleman on Insurance Law & Practice Archive 145.3[B][2][b] (2013). This rule is consistent with Century s policies, which require nothing more than injury to [third-party] property during the policy periods. Thus, coverage is triggered so long as 2 KeySpan has placed on its exhibit list detailed summaries of voluminous evidence that summarize its claimed costs by type, vendor, date, and amount, as well as the underlying invoices themselves. Century has objected to every one of these documents, including the actual invoices, on the following grounds: Best evidence; completeness, hearsay, and relevance, unfair prejudice, confusion, or delay. KeySpan believes these objections are improper, wasteful and unfounded, and we are in the process of meeting and conferring on the issue. 3 KeySpan expressly preserves for appeal its position that certain of Century s policies, by their unambiguous terms, plainly do not require damage to take place during the policy period. 6

12 KeySpan shows any contamination during the policy periods to groundwater or third-party soil that was previously clean of MGP contaminants, or an increase in the amount of such contamination. KeySpan will easily be able to make this showing, because it is undisputed that during Century s policy periods there was an ongoing process in which tar in the subsurface continued to migrate and contaminate soil, and chemical constituents of tar continued to dissolve into and contaminate clean percolating groundwater. This damage included increases during the policy periods in the mass and concentrations in groundwater of specific chemical compounds that are targeted for cleanup or abatement at the sites. Despite the plain language of the policies that require nothing more than injury to property, Century has asked the court to read into its policies an implied exclusion that does not exist. Specifically, Century claims without any support in the policy language that its policies cannot be triggered absent an increase in the geographical footprint of contamination during the policy period. Century invented this trigger theory out of whole cloth, as such a requirement is absent from the policies and has never been adopted by the courts. There is no basis to read such an exclusion from coverage into the Century policy period and transform Century s promise to indemnify KeySpan for any liability that arose out of property damage taking place during the policy period into some lesser promise to only pay for liability as a result of an increase in the footprint of damage during the policy period. Indeed, New York law explicitly precludes such an interpretive approach. Lavanant v. Gen. Accident Ins. Co. of Am., 79 N.Y.2d 623, (1992) ( We decline General Accident s invitation to rewrite the contract to add [limitations to the definition of bodily injury ]. General Accident could itself have specified such limitations in drafting its policy, but it did not do so. ). 7

13 B. Accidental Damage Century has asserted that KeySpan cannot recover under the policies because any property damage resulting from MGP operations allegedly was not accidental. Century faces a formidable burden establishing a factual basis for this defense under New York case law, which bars coverage only if it is shown that the policyholder not only engaged in an intentional act (such as disposing of tar byproducts) that led to damage, but also subjectively intended to cause the specific damage (such as contamination of groundwater) for which it is being held liable. See, e.g., Rapid-American, 80 N.Y.2d at 649 ( We have read [expected or intended clauses] narrowly, barring recovery only when the insured intended the damages.... [D]amage can be unintended even though the act leading to the damage was intentional. ). As recently expressed by the Southern District in its charge to the jury in the Olin litigation, Case No. 84 Civ (S.D.N.Y.): The issue is not whether Olin expected or intended some type of contamination or pollution to happen at its plants. The question is whether Olin expected or intended the specific damage that led to Olin's liability at each site. 4 Thus, KeySpan is entitled to coverage unless the jury finds that KeySpan expected or intended the specific damage that led to its liability at the Rockaway Park and Patchogue sites. Contrary to prior suggestions by Century, it is not enough to show that KeySpan s damages arose out of intentional acts. See, e.g., McGroarty v. Great Am. Ins. Co., 36 N.Y.2d 358, (1975) (situation constitutes an accident if the resulting damage was unintended); Pub. Serv. Mut. Ins. Co. v. Goldfarb, 53 N.Y.2d 392, 399 (1981) ( [o]ne who intentionally 4 An excerpt from the Olin jury charge is attached hereto as Exhibit A. 8

14 injures another may not be indemnified for any civil liability thus incurred, but one whose intentional act causes an unintended injury may be so indemnified ); Messersmith v. Am. Fid. Co., 232 N.Y. 161, 165 (1921) ( Injuries are accidental or the opposite[,] for the purpose of [insurance,] according to the quality of the results rather than the quality of the causes. ); City of Johnstown v. Bankers Standard Ins. Co., 877 F.2d 1146, 1150 (2d Cir. 1989) (holding under New York law that recovery is barred only if the insured intended the damages, or if it can be said that the damages were, in a broader sense, intended... because the insured knew that the damages would flow directly and immediately from its intentional act (citations omitted)). Negligently driving through a stop sign is a volitional act, for example, but nobody would argue that the driver intended a resulting collision with another car and thus is not entitled to coverage. Nor is it sufficient for Century to demonstrate that a risk of harm was foreseeable to KeySpan, because that is simply another way of saying that the insured was negligent which is the very thing the policy expressly insures him against. McGroarty, 43 A.D.2d 368, 377 (2d Dep t 1974) ( It is no answer to say that an insured forfeits his right to coverage for his failure to foresee the consequences of an act. ). As the Court of Appeals has held repeatedly, a policyholder may engage in behavior that involves a calculated risk without expecting than an accident will occur in fact, people often seek insurance for just such circumstances. Rapid- American, 80 N.Y.2d at 649 (citing Allstate Ins. Co. v. Zuk, 78 N.Y.2d 41, 46 (1991) (same)). Moreover, as the policy language which focuses on whether the damage for which the insured has been held liable was accidental confirms, it is not enough that KeySpan supposedly intended some damage of a different type or different scope. KeySpan must have intended the specific damage for which it is being held liable today. See, e.g., City of Johnstown, 877 F.2d at 1152 (holding that the relevant question is whether the environmental damage... alleged in the 9

15 CERCLA complaint was accidental ); Olin Charge at Ex. 2 ( The question is whether Olin expected or intended the specific damage that led to Olin's liability at each site. ); Auto. Ins. Co. of Hartford v. Cook, 7 N.Y.3d 131, 138 (2006) (insured that shot and killed intruder was entitled to coverage even if he intended to injure the intruder so long as the death was caused accidentally or negligently); CPC Int l, Inc. v. Hartford Accident & Indem. Co., 720 A.2d 408, 419 (N.J. App. Div. 1998) (question is whether the policyholder intended to cause injury that was qualitatively comparable in terms of severity and type with the environmental injury that is being remediated ). As KeySpan will demonstrate at trial, the damage for which it is subject to retroactive liability under modern environmental statutes was not within the comprehension of plant operators when the MGPs were in operation decades ago. The operators of the MGPs could not have intended, and did not intend, to cause the damage for which KeySpan is held liable today. The latent, long-term, low-level environmental contamination that is driving the cleanup demands for these sites was not recognized as a health hazard until very recently. It was not until after the late 1970s, spurred in part by the Love Canal incident, and the enactment of modern environmental statutes such as Superfund, that medical, scientific and public knowledge evolved and a consensus developed that the presence of trace amounts of chemical contaminants in groundwater, even at a parts per billion level, was an unacceptable, long term, public health risk, regardless of whether there was any tangible evidence of harm. Although Century will argue that it was known back in the period of MGP operations that tar could have adverse impacts on surface waters, and could be damaging if it found its way into a well, there is simply no evidence that the mere presence of tar on land, and especially one s own property, was viewed as causing damage to the environment. See, e.g., Hatco Corp. v. W.R. Grace & Co. 10

16 Conn., 801 F. Supp. 1334, 1376 (D.N.J. 1992) (violations of surface water and air pollution standards did not establish that damage to groundwater was intentional, especially considering lack of regulation of groundwater and soil contamination at the time of [the insured s] acts ). C. Notice and Waiver 1. Notice As noted above, Century does not dispute that it received timely notice of the DEC s claims as to the Rockaway Park and Patchogue sites. Century does contend, however, that prior to receiving a claim from the DEC, LILCO failed to provide timely notice to Century of an accident or occurrence, because LILCO purportedly knew before 1994 that a claim by the DEC which would impact the Century policies was reasonably likely as to the Rockaway Park and Patchogue sites. Century previously moved for summary judgment that notice was late as to each site on this basis, and its motion was denied. The Century policies require the insured to give notice to Century as soon as practicable after the insured learns of an occurrence that appears reasonably likely to involve liability on the part of Century. As one would expect given the amorphous as soon as practicable and reasonably likely language selected by Century, the late notice inquiry is a fact intensive one that depends on the totality of the circumstances. 5 The parties agree that the test is objective, 6 in that it focuses on what a reasonable policyholder would have concluded, 5 See, e.g., N.Y. Pattern Jury Instructions 4:77 cmt. ( A policy provision for... notice... as soon as practicable is held to mean notice within a reasonable time under all the circumstances. (citations omitted)). 6 While KeySpan does not agree with the precise standard set forth by Century in its motions in limine for determining when notice was required, we do agree that the inquiry is an objective one, as Century contends in its Motion in Limine to Exclude or Limit Certain Evidence or Argument Concerning Whether LILCO Timely Noticed Its Claims. 11

17 based on the information then available to LILCO, about the likelihood of a third-party claim that would impact an excess policy. KeySpan will show at trial that LILCO gave notice at or before the time that a reasonable policyholder should have known that a third party claim against it was reasonably likely, and would be likely to involve liability on the part of Century, after taking into account all relevant factors. See, e.g., Century Indem. Co. v. Brooklyn Union Gas Co., 58 A.D.3d 573, 574 (1st Dep t 2009) (an insured is required to provide notice under excess insurance policies like those at issue in this case only when an occurrence is reasonably likely to implicate the excess coverage ). In deciding whether notice was late under this objective standard, the jury will need to consider all the circumstances, which include whether a reasonable policyholder would have perceived: (1) that an accident or occurrence had taken place; (2) that the accident or occurrence had resulted in damage to third party property during the period covered by the policy in question; 7 (3) that a liability claim by the regulators was likely (not merely possible) as a result of the accident or occurrence; 8 (4) that any results of prior environmental investigations known to the policyholder were definitive as to the extent of the contamination and the degree of 7 The Century excess policies are third-party liability policies. They only cover liability arising out of damage to third-party property. See, e.g., Don Clark, Inc. v. U.S. Fid. & Guar. Co., 145 Misc. 2d 218, 220 (N.Y. Sup. Ct. 1989) (liability insurer s coverage obligations could not be triggered until leaking petroleum damaged property not owned by the insured). Thus, a reasonable policyholder would not be aware of an occurrence likely to implicate a liability insurer before being aware of damage to third-party property. 8 Brooklyn Union, 58 A.D.3d at 574 (affirming denial of late notice summary judgment motion and discussing relevant factors in an MGP notice case, including the fact that there was regulatory agency involvement that did not mandate any significant action ). 12

18 remediation needed; 9 (5) that any projections of remediation costs were non-speculative, reliable estimates of actual costs that were reasonably likely to implicate the limits of the excess policy; 10 (6) that, after taking into account the spread of liability over many years of coverage in effect when damage occurred, the projected actual remediation costs would exceed many years of SIRs and eventually implicate the excess policies; 11 and (7) that the relevant historical excess policies were available to the policyholder and had provisions such that the policyholder could have determined the policies would be implicated. 12 At trial, KeySpan will demonstrate that notice was timely for myriad reasons including the fact that, in the pre-notice period: It was not certain that the DEC even had regulatory authority over MGP sites; LILCO had not yet investigated the Rockaway Park or Patchogue sites, much less concluded that groundwater contamination had occurred at either site; LILCO lacked information on the timing of any contamination and whether relevant damage occurred during the policy periods, an issue Century contests even now, with the benefit of two decades of additional information; 9 Id. (discussing relative factors in an MGP notice case, including whether consultant reports were definitive as to the extent of the contamination, the degree of remediation needed or the actual rather than the generalized projected remediation costs ). 10 Id.; Reynolds Metal Co. v. Aetna Cas. & Sur. Co., 259 A.D.2d 195, (3d Dep t 1999) (reversing finding of late notice, in part on ground that there was no evidence that policyholder had actual estimates for clean-up costs showing excess policies likely would be reached). 11 Century Indem. Co. v. KeySpan Corp., No /01, 2007 WL , at *9 (N.Y. Sup. Ct. May 7, 2007) ( Whether the cleanup costs should be prorated over successive policy years makes it difficult for an insured to glean, with a reasonable possibility, that its excess policies will be reached. Even if the cleanup costs are known, calculating pro rata allocation depends heavily on facts that would indicate the full extent of the property damage, and the number of years and policies over which costs must be prorated. ), aff d sub nom. Brooklyn Union, 58 A.D.3d Cicero v. Great Am. Ins. Co., 53 A.D.3d 460, 461 (1st Dep t 2008) (notice to excess carrier given four years after accident was timely, as a matter of law, because notice was given by injured parties shortly after they learned of the excess coverage ). 13

19 LILCO had not conducted feasibility studies at either site and accordingly lacked any reliable cost estimates for remediating either site, should remediation prove necessary; Even if speculative estimates could suffice (and the law is clear they cannot), it was not reasonably likely in the pre-notice period that Century s excess policies would be implicated, particularly given the substantial uncertainty that prevailed as to the existence and terms of the Century policies, the timing of any contamination, and how any liability would be allocated over time. In sum, KeySpan will be able to show that LILCO s notices of occurrence provided nine months before the DEC made any claims were timely, as they were well before LILCO had knowledge of the extent of any contamination at either site or whether remediation would be ordered. 2. Waiver Even if the jury were to find that notice was late, KeySpan would be entitled to prevail if the jury found that Century waived the defense. The Court of Appeals recently made clear that the common law standard of waiver applies in this case, KeySpan Gas East Corp. v. Munich Reinsurance Am., Inc., 23 N.Y.3d 583 (2014), and the common law holds that a party may manifest an intent to waive by affirmative conduct or by a failure to act so as to evidence an intent not to claim a purported advantage. See, e.g., Fundamental Portfolio Advisors, Inc. v. Tocqueville Asset Mgmt., L.P., 7 N.Y.3d 96, 104 (2006). Contrary to Century s assertions, the Court of Appeals did not reverse decades of precedent and hold that waiver could not be evidenced by a failure to act. The Court held only that the First Department had erroneously relied on Insurance Law 3420(d), a statute that only applies to insurance cases involving death and bodily injury claims, instead of the common law. Id. The Court of Appeals explicitly noted that KeySpan had never relied on Section 3420(d) and instead asserts a common law waiver defense. Id. Century s position, that a failure to act is irrelevant under the common law standard of waiver, is in fact foreclosed by nearly a century of controlling Court of Appeals precedent. As 14

20 the Court of Appeals explained long ago in 1917, common law waiver may be proved by various species of proofs and evidence, by declarations, by acts and by non-feasance, permitting differing inferences and which do not directly, unmistakably or unequivocally establish it. Then it is for the jury to determine from the facts as proved or found by them whether or not the intention existed. Alsens Am. Portland Cement Works v. Degnon Contracting Co., 222 N.Y. 34, 37 (1917) (emphasis added). Since that time, the Court of Appeals has repeatedly reaffirmed that a jury may infer waiver based on circumstantial proof of an party s acts or failure to act. See, e.g., Gen. Motors Acceptance Corp. v. Clifton-Fine Cent. Sch. Dist., 85 N.Y.2d 232, 236 (1995) ( Waiver may be established by affirmative conduct or by failure to act so as to evince an intent not to claim a purported advantage. ) (citing Hadden v. Consol. Edison Co. of N.Y., 45 N.Y.2d 466, 469 (1978) (waiver may be established by conduct or failure to act )); Isadore Rosen & Sons, Inc. v. Sec. Mut. Ins. Co. of N.Y., 31 N.Y.2d 342, (1972) (finding a triable issue of waiver where an insurer s undue delay conflicted with its common law duty of good faith and fair dealing). Century admits that it did not disclaim coverage on grounds of late notice until 2000 when it filed its motion for summary judgment on late notice grounds in this coverage action. That denial was nearly six years after KeySpan first gave it notice of the occurrence at the Rockaway Park and Patchogue sites. Century, like all insurers doing business in New York and issuing policies to New York insureds, had to promptly investigate KeySpan s claims and promptly disclaim coverage if it was going to do so. Indeed, under New York s Unfair Insurance Practices Act and Regulations, which are applicable to KeySpan s claims, Century was obligated to promptly investigate KeySpan s claims upon receiving notice, to promptly respond to requests from KeySpan, and, 15

21 after promptly investigating, to inform KeySpan in writing as soon as Century decided to disclaim coverage liability because of a supposed breach of a late notice provision. Insurance Law 2601; 11 NYCRR 216.0, 216.4, 216.5, While these facts do not lead to an automatic loss of the late notice defense, they do permit an inference of waiver by the jury under the common law standard. D. Damages KeySpan will present evidence at trial of the tens of millions of dollars it has spent to date to investigate and remediate the Rockaway Park and Patchogue sites. The Century policies provide that Century will indemnify KeySpan for its liability imposed as a result of a settlement or judgment, subject only to the policies limits of liability. KeySpan entered into settlement agreements with the State of New York for each of the sites. The jury will be asked to determine the total amount of costs KeySpan incurred as a result of those settlements. The jury will also be asked to determine the total amount of costs incurred by KeySpan in an effort to limit or reduce its ultimate liability, as these costs are recoverable as defense costs under the policies. Century may contend that certain costs incurred by KeySpan are not recoverable because they were incurred to remediate KeySpan s own property, citing an exclusion found in the Century policies for damage to property owned by the insured. To the extent that Century invokes this exclusion, it will bear the burden of establishing how much of KeySpan s indemnity costs, if any, are unrecoverable based on the owned property defense See, e.g., Consol. Edison Co. of N.Y., Inc. v. Allstate Ins. Co., 98 N.Y.2d 208, 218 (2002) ( Con Ed ) ( [I]t is for... the insurer to prove that an exclusion in the policy applies to defeat coverage. ); Belt Painting Corp. v. TIG Ins. Co., 100 N.Y.2d 377, 383 (2003) ( [T]o negate coverage by virtue of an exclusion, an insurer must establish that the exclusion is stated in clear (continued ) 16

22 This would be an exceedingly difficult burden for Century to meet under New York law, because the owned property exclusion does not apply to costs incurred by the policyholder to clean up its own property if the cleanup was designed, at least in part, to remediate, prevent, or abate further migration of contaminants from the policyholder s property into the surrounding environment, including the groundwater, which, as conceded by Century, is owned by the people of the State of New York, not KeySpan. See, e.g., State v. N.Y. Cent. Mut. Fire Ins. Co., 147 A.D.2d 77, 79 (3d Dep t 1989) (holding that the owned property exclusion did not apply where petroleum at the very least threatened to enter the groundwater); Kirchner v. Fireman s Fund Ins. Co., No. 90 Civ. 5367, 1991 WL , at *8 (S.D.N.Y. Sept. 4, 1991) (owned property exclusion does not apply to remedies designed to prevent damage to the public and third parties [e]ven if off-site migration had not yet occurred); Agway, Inc. v. Travelers Indem. Co., No. 93 CV 557, 1993 WL , at *8 (N.D.N.Y. Dec. 6, 1993) (same). E. Allocation Once the jury determines the amount of KeySpan s damages, the Court, in entering judgment on the verdict, must determine what portion of those damages to allocate to Century s policies. In order for the Court to assign those damages to any period other than the Century policy periods, however, Century must first obtain from the jury certain factual findings. First, Century must establish that property damage took place either before or after the Century policy periods. Second, Century must establish that insurance was commercially available in the marketplace to KeySpan during such periods, because as discussed below damages are and unmistakable language, is subject to no other reasonable interpretation, and applies in the particular case. (citing Rapid-American, 80 N.Y.2d at 652)). 17

23 properly allocated to the insured only for periods during which it elected to go without coverage (i.e., go bare ) and therefore assumed the risk of being uninsured -- not for periods where coverage was unavailable, either because it did not yet exist or was withdrawn from the market by insurers. 1. Damage Outside the Policy Periods As shown above, to trigger coverage under the policies, KeySpan s only burden is to show that third-party property damage took place during the policy periods. Century, however, contends that such damage also took place decades before and after its policy periods. 14 It is Century s burden to show, at each site, when such damage began and when such damage ended. Absent such a factual showing and a corresponding jury finding, the allocation period must be limited to the years during which the policyholder actually purchased coverage as asserted in its complaint. See, e.g., Con Ed, 98 N.Y.2d at (allocating the policyholder s liability on a horizontal pro rata basis only over the time period in which the policyholder had actually purchased coverage). Consistent with this rule, Justice Gammerman s prior ruling in this case applied an allocation period of 1953 to 1986 the years of provable coverage alleged in LILCO s original complaint. Dec. 30, 2003 Mem. Decision and Order (Gammerman, J.). 2. Availability of Insurance Assuming Century is able to show that damage took place decades prior to 1953 and after 1986, it must also show that insurance for the risk was available to LILCO during any such periods. This legal requirement which has been applied by every New York court to consider 14 Century s claim that damage took place at Rockaway Park after its policy periods is entirely inconsistent with Century s claim, in its motions in limine with respect to Dr. Powell s testimony, that that all property damage at Rockaway Park ceased before their policy periods even began. 18

24 the question since the Con Ed decision is not only law of the case, but derives from sound public policy, including the same equitable considerations that led to the Court of Appeals decision to apply pro-rata allocation in Con Ed. The Con Ed decision concerned a familiar situation in which environmental contamination resulted in a continuous harm [that] spans many years and thus implicates several successive insurance policies. 98 N.Y.2d at 221. Courts confronted with this scenario are often asked to adopt either a joint-and-several method under which each policy is liable for the entire loss, or a pro-rata method under which each [successive] policy is responsible only for a portion of the loss. Id. The Con Ed Court rejected joint and several allocation in favor of some form of pro rata allocation, although it recognized that pro rata allocation was not mandated by the policies. Id. at 224. Although Century has argued that Con Ed stands for the proposition that liability must be allocated over the entire period of damage regardless of insurance availability, the Court of Appeals did not adopt any such rule. To the contrary, although the Court explicitly recognized that the MGP plant at issue in Con Ed was operated from 1873 to 1933, it did not adopt an allocation period that began at the commencement of plant operations, when damage could first have occurred. Id. at 215 (emphasis added). Instead, it affirmed a pro-rata allocation period that started in 1936 three years after MGP operations ceased and ended in 1986, when the absolute pollution exclusion was adopted by the insurance industry. Id. at 215, If the decision leaves any doubt about whether availability may be considered, it is put to rest by the Court s explicit observation that additional questions could be raised if there were periods of no insurance, and that [c]learly this is not the last word on proration. Id. at

25 Since the ruling in Con Ed, every court to consider this issue under New York has held that the actual purchase or availability of insurance coverage is a relevant constraint on the proper allocation period. This includes Justice Gammerman, the trial judge in Con Ed, who held previously in this case that, if the parties wished to argue for an allocation period other than 1953 to 1986, they could do so at trial by offering proper evidence as to the availability of insurance during other periods. Dec. 30, 2003 Order, at 8 9. Justice Gammerman s prior opinion, holding that the period of allocation could not be extended absent evidence that coverage was actually available to the policyholder during other periods, is binding law of the case absent a showing of extraordinary circumstances, and it would be highly prejudicial to depart from it now, after KeySpan has prepared its case in reliance on the ruling. See, e.g., Martin v. City of Cohoes, 37 N.Y.2d 162, 165 (1975) ( [W]hen an issue is once judicially determined, that should be the end of the matter as far as Judges and courts of co-ordinate jurisdiction are concerned. ). Allocating periods of no insurance to KeySpan, without regard to whether or not insurance protection was available to be purchased in the marketplace, would also conflict with governing law, as interpreted by both the First Department majority and the dissent in New York Insurance Department v. Generali Insurance Co., 44 A.D.3d 469, (1st Dep t 2007). In Generali, both the majority and the dissent rejected the argument that Century makes here namely, that Con Ed requires costs to be spread over the entire period of damage. In Generali, the majority rejected the argument that, under Con Ed, damages that occur in part over uninsured periods must be allocated to those periods. Id. at 470. It expressly recognized that Con Ed required no such thing. Id. It went on to hold that, under the circumstances of that case, it was appropriate not to assign any damage to uninsured periods, regardless of whether coverage was available. Id. Thus, even though the court determined that 20

26 the total injury period was equal to 50.7 months, and the insured only maintained coverage for 15.7 months of that period, it nevertheless held that the total damage had to be allocated entirely among the insurers with no allocation to the insured. Id. at The dissent agreed that Con Ed did not decide the question of how to allocate over uninsured periods. The dissent disagreed, however, that costs should only be allocated to periods when the insured actually purchased coverage. Instead, the dissent would have allocated some costs to periods when coverage was not purchased, but only if coverage was available during those periods. The dissent based its preferred rule on the fact that when an insured elects not to purchase insurance that is available, it reflect[s] a decision by an actor to assume or retain a risk, as opposed to periods when coverage for a risk is not available.... Id. 472 (quoting Stonewall Ins. Co. v Asbestos Claims Mgmt. Corp., 73 F.3d 1178, 1203 (2d Cir. 1995) (emphasis added)). The dissent found it necessary to apply such a rule because otherwise a moral hazard would ensue whereby policyholders would be encouraged to forgo purchasing coverage for progressive injury and damage claims even when it was available. Generali, 44 A.D.3d at 473. Of course, no such moral hazard presents itself when coverage is unavailable in the marketplace. Accordingly, every member of the Generali panel rejected the argument Century makes here, that, under Con Ed, policies with during the policy period language require allocation over the full period of damage, without regard to whether coverage was purchased or was available to the policyholder. 15 See Generali, 44 A.D.3d at The only disagreement 15 See, e.g., Appellant s Br. in Generali, available at 2006 WL (Generali arguing, in an almost identical argument to the one Century makes here, that Con Ed requires damages to be spread over the entire period of injury because its policies limit coverage to injury that occurs during the policy period ). 21

27 was as to whether it was appropriate to allocate to the policyholder for periods when insurance was available, but the policyholder elected to go bare and not purchase coverage. A highlighted copy of the Generali decision is attached hereto as Exhibit B. Numerous other decisions applying New York law since Con Ed have likewise concluded that periods for which insurance is unavailable should not be allocated to the policyholder. See, e.g., Travelers Indem. Co. v. Fischbach, LLC, No /04, 2011 WL (N.Y. Sup. Ct. Apr. 8, 2011) (Gammerman, J.) ( courts have declined to impose proration on an insured for periods when coverage for a risk is not available, and declining to do so where it has not been established that coverage for [the risk] was available for the whole period of injury); Fulton Boiler Works, Inc. v. Am. Motorists Ins. Co., 828 F. Supp. 2d 481, 494 (N.D.N.Y. 2011) (no allocation of indemnity costs to years when coverage was unavailable); Uniroyal, Inc. v. Am. Re- Ins. Co., 2005 WL , at *23 *25 (N.J. App. Div. Sept. 13, 2005) (New York law) (the policyholder s liability would be prorated only among periods in which liability insurance was reasonably available to it); and Gen. Elec. Co. v. Lines, No. SUCV BLS1, 2010 WL (Mass. Super. Ct. Mar. 16, 2010) (New York law) (finding a question of fact as to whether coverage was unavailable prior to 1943 and from 1971 to 1984). The decision in General Electric is particularly on point. In that case, the court applied New York law to the question of how to allocate environmental liability at various sites. The policyholder took the position that its damages could not be allocated to periods prior to 1943 and after 1971, even though it was undisputed that damage took place both prior to and after those periods. Id. The court, like the First Department in Generali, recognized that the Court of Appeals had not resolved the issue and that persuasive authority from the Second Circuit, including Stonewall, supported applying some equitable limitation on the ability of insurers to 22