NY Appellate Court Unanimously Overrules Precedent Concerning Standard for Timeliness of Late Notice Coverage Disclaimers
In a decision issued on January 17, 2012, the Appellate Division, First Department, held that a New York statute “precludes an insurer from delaying issuance of a disclaimer on a ground that the insurer knows to be valid… [here, a late notice of the claim] while investigating other possible grounds for disclaiming.” This ruling overrules an earlier decision in which the court held that an insurer "is not required to disclaim on timeliness grounds before conducting a prompt, reasonable investigation into other possible ground for disclaimer." DiGuglielmo v. Travelers Prop. Cas., 6 AD3d 344 (1st Dep't 2004). Additionally, this decision conforms First Department law (covering New York and Bronx Counties) with that of the Second Department (covering the other three counties in New York City as well as Nassau and Suffolk Counties on Long Island and Westchester, Rockland, Putnam, Orange and Dutchess Counties).
In George Campbell Painting, et al. v. National Union Fire Ins. Co. of Pittsburgh, Pa., 2012 N.Y. Slip Op. 00254, the court concluded that its former holding was incompatible with precedent from the Court of Appeals and with Insurance Law §3420(d), which requires liability insurers to provide written notice of a disclaimer of a personal injury claim "as soon as reasonably possible." As a result of this decision, insurers may need to ensure that they disclaim coverage more quickly while reserving their rights to assert additional coverage defenses in subsequent notices after completing a reasonable investigation.
George Campbell Painting, et al. v. National Union Fire Ins. Co. of Pittsburgh, Pa.
In Campbell, the plaintiff was a general contractor engaged to perform renovation work on the Henry Hudson Bridge, which is owned by the Triborough Bridge and Tunnel Authority (the TBTA). James Conklin, an employee of the plaintiff's subcontractor, sued Campbell and the TBTA after sustaining work-related injuries. Prior to that lawsuit, Conklin’s employer obtained a primary liability insurance policy covering Campbell and the TBTA as additional insureds. An excess umbrella policy issued by National Union Fire Insurance Company of Pittsburgh, Pa. (National Union) provided that coverage would be available to anyone "included as an additional insured" in the underlying primary policy. Although Campbell and the TBTA tendered their defense to their primary insurer in January 2004, National Union did not learn of Conklin’s action until November 2005, when Campbell and the TBTA alerted National Union that "damages may substantially exceed" the limits of the underlying policy and requested that National Union participate in handling the suit.
National Union issued a letter dated December 23, 2005 requesting additional information and reserving all of its rights, including with respect to whether Campbell and the TBTA provided untimely notice under the National Union policy, which required that notice be provided "as soon as practicable" if a claim is made against an insured "that is reasonably likely to involve this policy." Campbell and the TBTA responded with a letter dated January 19, 2006 which enclosed an August 23, 2004 status report for the primary insurer that discussed Conklin's "severe injury." Rather than disclaiming coverage at this point, National Union issued three more requests for information, particularly a copy of the primary policy to help determine whether Campbell and the TBTA qualified as "additional insureds."
National Union issued a letter disclaiming coverage on late notice grounds on May 17, 2006. In its letter, National Union stated that the duty of Campbell and the TBTA to inform National Union of the Conklin action was triggered no later than their receipt of the August 23, 2004 status report and that their failure to provide notice until November 2005 constituted a breach of a condition precedent to coverage. After reaching a settlement with their other insurers, Campbell and the TBTA filed an action against National Union seeking a declaration as to the timeliness of its disclaimer and its pro rata share of the settlement.
In determining whether the Supreme Court had correctly held in favor of Campbell and the TBTA, the First Department examined Insurance Law §3420(d), which requires liability insurers to notify their policyholders of a coverage disclaimer in a claim for bodily injury or death "as soon as is reasonably possible." In National Union’s view, any delay in issuing its disclaimer was excused under DiGuglielmo because it was investigating a disclaimer based on the status of Campbell and the TBTA as “additional insureds” at that time.
While National Union's delay may have been permissible under DiGuglielmo, the First Department expressly overruled that case, noting that "the statute mandates that the disclaimer be issued not 'as soon as is reasonable,' but 'as soon as is reasonably possible.'" The court further reasoned that DiGuglielmo was irreconcilable with Allstate Ins. Co. v. Gross, 27 NY2d 263, 268 (1970), in which the Court of Appeals rejected an insurer’s argument that the Insurance Law required prompt notice once a decision to disclaim had been made but permitted delays in actually reaching that decision. Accordingly, the question became whether National Union had issued its disclaimer as soon as “reasonably possible.”
The First Department noted that measuring compliance with the “as soon as is reasonably possible” standard begins “when the insurer first acquired knowledge of the ground upon which it disclaimed.” The court determined that National Union had all the information it needed to disclaim based on late notice no later than January 19, 2006 (the date on which it was provided with a copy of the August 2004 status report). Indeed, "not a single document or piece of information" referenced in National Union's disclaimer on late notice grounds had come into National Union's possession after January 2006. Because National Union did not issue its disclaimer until May 2006 – four months later – the court concluded that the disclaimer did not satisfy §3420(d) and therefore was invalid. Having determined that National Union failed to assert its rights with respect to late notice, the court went on to calculate National Union’s pro rata share of the plaintiffs’ settlement with the other insurers.
In overturning DiGuglielmo, the First Department acknowledged that insurers may have structured their personal injury claims-handling procedures in recent years with that case in mind. Although some insurers may have to review certain aspects of their coverage disclaimer processes, the court noted that disclaiming on late notice grounds “as soon as is reasonably possible” does not necessarily prejudice an insurer’s ability to raise additional defenses that have been properly reserved following a reasonable investigation. Moreover, the court noted that promptness requirements for coverage denials may not impact denials based on a claimant’s status as an insured because the Court of Appeals has held in examining §3420(d) that “the words ‘denial of coverage’ did not intend to require notice when there never was any insurance in effect.” See Zappone v. Home Ins. Co., 55 NY2d 131, 138 (1982). Nevertheless, the court’s holding in Campbell should place insurers on alert as to a significant tool now available to policyholders in disputes involving the timing of an insurer’s coverage disclaimer.