Timely Notice and Timely Disclaimer in New York State

Two recent New York court decisions highlight the need for insurers to provide a written disclaimer of coverage to its insured “as soon as is reasonably possible” after it has actual or constructive knowledge of grounds for a disclaimer of liability.

Waiver of the Timely Notice Defense
In Long Island Lighting Co. v. Allianz Underwriters Insurance Co., 2013 WL 1197750 (N.Y. App. Div. 1st Dep’t Mar. 26, 2013), reversing in part a trial court decision, a New York appellate court ruled that excess insurer were not entitled to summary judgment on a late notice defense because issues of fact remained as to whether the insurers waived the defense by failing to issue a timely disclaimer. Long Island Lighting Co. v. Allianz Underwriters Insurance Co., 2013 WL 1197750 (N.Y. App. Div. 1st Dep’t Mar. 26, 2013). Long Island Lighting Company (“LILCO”) sought coverage from its insurers for environmental damage claims at several sites. The insurers issued a reservation of rights which, among other things, preserved the right to deny coverage on the basis of late notice. In the subsequent coverage litigation, the insurers moved for summary judgment, arguing that they had no duty to defend or indemnify the claims due to LILCO’s failure to provide timely notice of claims. The trial court denied the insurers’ motion as to all sites except one (the Bay Shore site), finding that factual issues existed as to when LILCO’s duty to give notice arose. With respect to the Bay Shore site, the court granted the insurers’ summary judgment motion, finding that LILCO’s notice to its insurers was untimely as a matter of law. The trial court rejected LILCO’s argument that the insurers had waived their late notice defense by failing to disclaim coverage for the Bay Shore claims prior to the filing of their answers in the coverage action. The appellate court reversed this ruling, finding that the insurers violated New York Insurance Law §3420(d).

The appellate court acknowledged that LILCO violated the notice provisions of the insurers’ excess policies with respect to the Bay Shore claims. The court also noted that the insurers had reserved their right to disclaim coverage based on late notice. Nonetheless, the appellate court concluded that these facts did not preclude a finding that the insurers had waived the late notice defense by failing to issue a timely disclaimer pursuant to New York Insurance Law §3420(d). Noting that the insurers had requested additional information from LILCO in their reservation of rights, the court found that, based on the additional information provided, a jury could find that the insurers, at the time of the reservation of rights letter, “possessed sufficient knowledge to require that they meet the obligation to issue a written notice of disclaimer on the ground of late notice.”

The appellate court ruling serves as a reminder that under New York law, a reservation of rights may not insulate an insurer from a finding of waiver as to certain defenses.

Timely Disclaimer by Insurers
In Narragansett Bay Ins. Co. v. Cardacino the Supreme Court, Nassau County, denied an insurer’s motion for summary judgment in which it argued that it had no duty to defend or indemnify defendant insured Cardacino in an underlying personal injury action.  The plaintiff insurer, Narragansett Bay, claimed in the first instance that the insured’s claim for defense and indemnity arising out of a carpenter’s injuries, sustained while working at the insured’s purported residence, did not fall within the grant of coverage under the policy.   Even assuming coverage, the plaintiff took the position that coverage would nonetheless be excluded under either of two exclusions – a Business Exclusion and an Off Premises Exclusion.  The court disagreed with the plaintiff’s primary contention – that coverage did not exist in the first instance – and therefore concluded that the actual declination of coverage was predicated on the noted policy exclusions.  As such, the plaintiff’s declination required compliance with New York Insurance Law §3420(d), which provides that written notice of such a disclaimer of liability or denial of coverage must be made to the insured “as soon as is reasonably possible.”

This ruling points out a key distinction for courts when assessing compliance with §3420(d): whether the policy at issue contemplates coverage of the claim in the first instance, or if it falls within the coverage terms but can be denied based on a policy exclusion.  A declination of liability insurance coverage predicated upon the grounds that an insurance policy does not contemplate coverage in the first instance does not require that an insurer comply with §3420(d) of New York Insurance Law. “A disclaimer is unnecessary when a claim does not fall within the coverage terms of an insurance policy.” Markevics v. Liberty Mutual Insurance Company, 97 NY2d 646, citing Worcester Ins. Co. v. Bettenhauser, 95 NY2d 185. “Conversely, a timely disclaimer pursuant to New York Insurance Law §3420(d) is required when a claim falls within the coverage terms but is denied based on a policy exclusion.” Id.  “Disclaimer pursuant to section 3420(d) is unnecessary when a claim falls outside the scope of the policy’s coverage portion. Under those circumstances, the insurance policy does not contemplate coverage in the first instance, and requiring payment of a claim upon failure to timely disclaim would create coverage where it never existed. By contrast, a disclaimer pursuant to section 3420 (d) is necessary when denial of coverage is based on a policy exclusion without which the claim would be covered. Failure to comply with §3420 (d) precludes denial of coverage based on a policy exclusion.” Worcester, supra. The Court of Appeals in Zappone v. Home Insurance Company, 55 NY2d 131, stated that the principal that the failure to disclaim coverage does not create coverage which the policy was not written to provide, applies to liability policies as well as professional indemnity insurance and that the Legislature “did not intend to require notice when there never was any insurance in effect.”

In Narragansett, the defendant established that it provided notice on two separate occasions: July 16, 2012 and November 30, 2012.  In turn, the plaintiff issued its disclaimer letter with citation to the Business Exclusion and the Off Premises Exclusion on January 30, 2013.  Accordingly, as the disclaimer was predicated upon either of the  exclusions, the Court inquired as to whether the plaintiff issued a timely disclaimer in accordance with New York Insurance Law §3420(d)(2), that is, “as soon as is reasonably possible.” An insurer cannot deny coverage if it delays unreasonably in issuing its denial, even if the insured has itself delayed unreasonably in notifying the insurer of the occurrence. New York Univ. v. First Fin. Ins. Co., 322 F.3d 750, 753 n. 3 (2d Cir. 2003). Under New York Insurance Law §3420(d)(2) , “it is not necessary for an insured to show prejudice caused by an insurer’s unreasonable delay in disclaiming liability or denying coverage.” Commercial Union Ins. Co. v. International Flavors & Fragrances, Inc., 822 F.2d 267, 274 n. 5 (2d Cir. 1987) (citation omitted). In addition, “[i]t is settled law that [§3420(d)(2)] applies whether the policy is primary or excess.” Zappone v. Home Ins. Co., 55 N.Y.2d 131, 135, 432 N.E.2d 783, 447 N.Y.S.2d 911 (1982).  There is no “fixed yardstick against which to measure the reasonableness, or unreasonableness, of an insurer’s delay …” First Fin. Ins. Co. v. Jetco Contr. Corp., 1 N.Y.3d 64, 70, 801 N.E.2d 835, 769 N.Y.S.2d 459 (2003). Courts have held that the “as soon as is reasonably possible” analysis will be “a question of fact, dependent on all of the circumstances of a case that make it reasonable, or unreasonable, for an insurer to investigate coverage.” Id.

Here, the court determined lapse between the defendant’s first notice letters of July 16 and November 30, 2012, and the plaintiff’s declination of coverage on January 13, 2013 (which was either 198 days or 61 days after receipt of notice of the claim)  was an unreasonable delay under §3420(d).