New York S Highest Court Set to Address

A national insurance law newsletterAlert  October 12, 2004

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NEW YORK’S HIGHEST COURT SET TO ADDRESS

PREJUDICE REQUIREMENT FOR LATE NOTICE

By Daniel W. Gerber and Matthew S. Lerner

Recently, the New York Court of Appeals granted leave to appeal in two separate cases involving the issue of insurer prejudice. On June 29, 2004, the Court of Appeals granted leave to appeal in Argo Corp. v. Greater New York Mut. Ins. Co., 1 AD3d 264, 767 NYS2d 577 (1st Dep't 2003), appeal granted, 3 NY3d 602, __ NYS2d __ (2004), which involved whether an insurer must demonstrate prejudice for late notice of lawsuit where the insurer did not previously receive a first notice of incident. Thereafter, on September 21, 2004, the Court of Appeals granted leave to appeal in Rekemeyer v. State Farm Mut. Auto Ins. Co., 7 AD3d 955, 777 NYS2d 551 (3d Dep't 2004), appeal granted, __ NY2d __, __ NYS2d __, Adv. Sh. No. 3-13, 659 (Sept. 21, 2004), which contained an argument concerning the prejudice rule within the context of a late notice of claim for underinsured motorist coverage. Although the Court of Appeals does not certify specific issues, a conservative reading of both Appellate Division opinions reflects that the Court will address the insurer prejudice issue.

Under current NewYork law, the timely notice requirement of an insurance policy is a condition precedent to coverage, and an unreasonable and unexcused delay in providing notice constitutes grounds for denying coverage. The notice condition is so critical and such a fundamental requirement that the carrier need not even show prejudice. See, e.g., Commercial Union Ins. Co. v. Int'l Flav. & Frag., Inc., 822 F.2d 267 (2nd Cir. 1987); Sec. Mut. Ins. Co. v. AckerFitzsimons Corp., 31 NY2d 436 (1972). The Acker Court also held that whether a delay is excusable depends on whether the delay isreasonable, and the burden of showing reasonableness is on the insured. The test for determining if the notice provision of a liability policy has been triggered in the first instance is whether circumstances the insured knew at the time would have suggested to a reasonable person the possibility of a claim.

While the current state of New York law is that an insurer need not affirmatively prove prejudice as a result of a delayed first notice of incident to disclaim coverage, an insured’s failure to forward suit papers, by contrast, must result in prejudice to the insurer before the insurer can rely on thatdelay to disclaim. See Brandon v. Nationwide Mut Ins. Co., 97 NY2d 491, 743 NYS2d 53 (2002). In Brandon, the New York Court of Appeals distinguished the “notice of claim” condition in an insurance policy with the related obligation to forward suit papers to the insurer. Acknowledging that the “timely notice of claim” condition does not require the insurer to show that it was prejudiced, New York’s highest court determined that the factors which underlie the “no prejudice exception” do not exist with respect to the insured’s obligation to forward suit papers. The Court held that insurers may not “evade their obligations, without showing prejudice.” As such, the Court also held that “insurers relying on the late notice of legal action defense should be required to demonstrate prejudice.” In so holding, the Court “place[d] the burden of proving prejudice on the insurer because it has the relevant information about its own claims-handling procedures and because the alternative approach would saddle the policyholder with the task of proving a negative.”

That holding may not be all that important. Perhaps more importantly, however, the Brandon Court observed in a footnote that New York is “one of a minority of states that still maintains a no-prejudice exception” relative to the late notice of claim condition. In that footnote, the Court of Appeals observed that the “no prejudice” rule was at one time the majority rule. It then went on to note that the Supreme Court of Tennessee had recently adopted a prejudice requirement in a case involving a late notice of claim for uninsured motorist coverage and that in doing so, the Tennessee High Court had observed that the number of jurisdictions which still follow the traditional view has “dwindled dramatically.” The Court of Appeals in that footnote also observed that over the past 20 years only New York and Colorado affirmatively “continued to strictly adhere to the traditional approach” and that even Colorado recently adopted the rule requiring insurers to demonstrate prejudice.

The Court of Appeals by granting leave to appeal in Argo Corp. and Rekemeyer appears to have signaled that it is ready to decide the insurer prejudice rule within the notice of claim context, thereby reexamining AckerFitzsimons Corp., supra. InArgo Corp., the First Department granted the insurer's summary judgment motion based on the insured's failure to give it timely notice of lawsuit. The insurer demonstrated that the New York Secretary of State was served with a Summons and Complaint in the underlying action, and the Secretary of State forwarded a copy of that pleading to an address at which the insured admittedly received notice of a default judgment one year after the state had sent the Summons and Complaint. In opposition to the summary judgment motion, the insured failed to demonstrate that the signature on the Secretary of State's mailing of the Summons and Complaint was not a signature from one of it former or current employees. Notably, the First Department expressly distinguished Argo Corp. from the Court of Appeals' holding in Matter of Brandon, 97 NY2d 491, 743 NYS2d 53, supra, stating that this was not a case in which the insurer first received notice of claim and then late notice of lawsuit. (For a copy of the briefs in Argo click here)

The First Department holding in Argo Corp. hints at the no prejudice rule by distinguishing Matter of Brandon, perhaps impliedly noting that the insurer does not benefit from early investigation of the claim and setting appropriate reserves where it receives no notice of claim and a late notice of lawsuit.

In Rekemeyer, the plaintiff waited close to 23 months after the accident from which she claimed to experience serious injuries to inform State Farm that she intended on filing a supplementary underinsurance motorist ("SUM") coverage claim. The plaintiff's notice also came almost six months after her attorney had learned from the underlying tortfeasor that he was underinsured. The Appellate Division, Third Department, granted State Farm summary judgment in the plaintiff's declaratory judgment action, holding that the plaintiff had failed to provide timely notice of her intent to file a SUM coverage claim. The Court noted that the plaintiff's underlying action for $1 million was, in and of itself, enough to demonstrate that the plaintiff knew soon after the accident that she experienced serious injuries. The Court also noted the plaintiff's allegations concerning serious injuries in her Bill of Particulars in the underlying tort action. Additionally, the Court noted the plaintiff provided no excuse for why she waited six months after learning that the underlying tortfeasor was underinsured to notify State Farm of her intent to receive SUM coverage. The plaintiff had argued that State Farm had to demonstrate prejudice before disclaimer on the late notice, but the Third Department did not explicitly pass on the issue.

The briefing scheduling has been set in both appeals; however, the Court Clerk's office has yet to schedule the oral arguments. In Reckemeyer Appellant has until November 22, 2004 to file, and the respondent has 45 days thereafter. The time for briefing in Argo expires October 25, 2004 at the latest. The oral arguments will likely occur in Spring 2005. The Court of Appeals is incredibly receptive to amicus curiae brief submission where the briefs offer considerations on which the parties have not addressed.

For more information regarding Reckemyer or Argo, please feel free to contact Daniel W. Gerber: (716.566.5425) or Matthew S. Lerner: (518.935.4230).

APPELLATE DIVISION, FIRST DEPARTMENT FINDS NEW YORK INSURANCE LAW §3420(d) NOT APPLICABLE TO DISPUTES BETWEEN CARRIERS

By Chandran B. Iyer

Realm National Insurance Company v. Hermitage Insurance Company

8 AD3d 110, 778 NYS2d 492 (1st Dept., June 15, 2004)

In 1999, the Appellate Division, Fourth Department held in Tops Markets, Inc. v. Maryland Cas., 267 AD2d 999, 700 NYS2d 325 (4th Dept. 1999) that §3420(d), which requires that carriers disclaim coverage in writing as soon as reasonably possible, has a very narrow scope and a limited reach. Specifically, the Fourth Department held that §3420(d) was not meant to protect insurers from one another and, therefore, this statutory provision was inapplicable to a request for contribution and/or equitable subrogation between coinsurers. Until now, Tops Markets stood alone for the principle that §3420(d) does not apply to a dispute between insurers. However, in June 2004, the Appellate Division, First Department, the most populous Appellate Division department in New York, acknowledged the Tops Markets holding in Realm National Insurance Company v. Hermitage Insurance Company, 8 AD3d 110, 778 NYS2d 492 (1st Dept. 2004). This decision is important because the rule is now viable in two out of the four appellate departments in New York, including the department controlling New York County.

In Realm National Insurance Company, plaintiff workers’ compensation carrier sued to compel defendant general liability carrier to contribute to the defense and indemnification of the parties’ insured in an underlying action seeking common-law and contractual indemnification from the insured for liability incurred to the insured’s employee by reason of personal injuries sustained by him in the course of his employment. The defendant’s general liability policy specifically excluded coverage for bodily injury to an employee of the insured arising out of or in the course of employment, and coverage for “any obligation [of the insured] to share damages with or repay someone else who must pay damages because of the [employee’s] injury.” In view of these exclusions, the defendant disclaimed coverage. In response, the plaintiff commenced the instant action challenging this disclaimer on the basis of, among other things, §3420(d). In holding that the liability insurer’s disclaimer was proper, the First Department cited to Tops Markets and held that the disclaimer was not rendered ineffective by defendant's quotation of only part of the relevant exclusion since the claim of ineffectiveness is being raised not by the insured but by a coinsurer seeking contribution. In other words, the court held that requirements of §3420(d) are not applicable in a dispute between insurers.

Goldberg Segalla LLP is a Best Practices law firm with offices in Buffalo, Rochester, Albany, White Plains and New York. We counsel and represent individuals and businesses in specialized areas of civil litigation, contractual and extra-contractual disputes and regulatory matters before state and federal agencies. Our Insurance Coverage Team consists of the following attorneys:

Richard J. Cohen, Partner Thomas F. Segalla, Partner

Kevin T. Merriman, Partner Daniel W. Gerber, Partner

Christopher J. Belter, Partner

Joseph L. Mooney, Partner

Sarah J. Delaney

Chandran B. Iyer

Matthew S. Lerner

Kimberlee L. Danieu

Newsletter Editor

Kevin T. Merriman

Contributing Authors

Thomas F. Segalla

Daniel W. Gerber

Sarah J. Delaney

Chandran B. Iyer

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