New York’s Highest Court Reverses Lower Court Ruling That Imposed Erroneous Timeliness Requirement For Disclaimers of Coverage
On June 10, 2014, the New York Court of Appeals (the state’s highest court) issued a unanimous decision in KeySpan Gas East Corp. v. Munich Reinsurance America, Inc. (No. 110, June 10, 2014), reversing a lower court decision which had erroneously imposed on insurers a duty to disclaim coverage for property damage claims as soon as possible or risk waiving their coverage defenses. White and Williams represented one of the insurance company defendants in the action.
The case involved an action against three excess insurers for insurance coverage for underlying environmental claims arising from Manufactured Gas Plant sites. Upon receiving notice of the underlying claims, the three insurers reserved their rights to deny coverage on various grounds, including late notice of an occurrence, pending an investigation. The insurers ultimately denied coverage on the basis of late notice several years later based on information developed in discovery in the litigation. The policyholder/plaintiff KeySpan argued that the insurers had unreasonably delayed in issuing their disclaimers and that there was a triable issue of fact on whether such a delay amounted to a waiver of the late notice defense.
Both the trial court and the Appellate Division (the intermediate appellate court) agreed with the insurers that KeySpan’s notice of an occurrence was late as a matter of law, but the Appellate Division held that there was a triable issue of fact as to whether the insurers had waived their rights to deny coverage by failing to disclaim “as soon as reasonably possible” after obtaining sufficient information to do so. The insurers appealed to the Court of Appeals and argued that they had no duty to disclaim “as soon as reasonably possible” and that the Appellate Division had erroneously adopted that standard from a state statute (Insurance Law § 3420(d)) that governs disclaimers only in certain cases involving death or bodily injury claims. The insurers argued that KeySpan’s waiver argument should be determined under the long-established common law standard, which defines waiver as “the intentional relinquishment of a known right.”
In its decision, the Court of Appeals unanimously agreed with the insurers’ arguments. The Court held that the Appellate Division erred when it adopted a standard that required insurers to disclaim “as soon as reasonably possible,” because this standard applies only to certain death or bodily injury claims under Insurance Law § 3420(d) and not to the property damage claims at issue. The Court noted that it was not the place of the judiciary to extend the statutory standard beyond what the legislature intended. The Court also held that several other lower court decisions that had appeared to apply the statutory standard to non-bodily injury claims were wrongly decided and should not be followed. The Court held that KeySpan’s waiver argument should be determined based on the traditional common law standard for waiver, which will require KeySpan to prove that each of the insurers “clearly manifested an intent to abandon their late notice defense.” (Slip Op. at 8.) (The Court also noted that estoppel may be used to preclude an insurer from relying on its coverage defenses, but KeySpan had conceded that it was not prejudiced by the alleged delay and, therefore, it did not pursue an estoppel argument.) The Court of Appeals remanded the case to the Appellate Division for a determination of whether there is sufficient evidence in the record to warrant a trial on KeySpan’s waiver argument under the traditional and more exacting common law standard.
The ruling in KeySpan was a significant victory for insurers because it rejected an unnecessarily stringent standard for timely disclaimers of coverage that is unsuited for complex property damage cases. The decision also confirmed that, outside the specific body of claims governed by Insurance Law § 3420(d), insurers will not be held to have waived their coverage defenses merely through an alleged delay in disclaiming. Waiver will not be found unless it is shown that the insurer clearly intended to relinquish its defenses.