Erie Supreme Court Fumbles Coverage Decision - Reversal Seemingly Imminent

McCabe v. St. Paul Fire and Marine Ins. Co.
--- N.Y.S.2d ----, 2009 WL 2516860
(N.Y.Sup., August 19, 2009).
Supreme Court, Erie County, New York.

This Erie County Supreme Court case provides an interesting discussion on the applicability of Insurance Law 3420(a) and 3420(d)to a malpractice claims-made policy, but, after laboring to break into the open field, the court fumbles at the goal line, setting itself up for a reversal by the Fourth Department.

The case arose out of a fire that destroyed the plaintiffs’ home. They retained attorney David E. Fretz (“Fretz”) to handle their claim under their homeowners policy. Due to severe depression Fretz allowed the plaintiffs’ claim to lapse. Plaintiff wrote Fretz a letter in January 2007 complaining of his failure to return calls, noting the closure of their case due to his negligence. The letter stated that plaintiffs intended to notify the Attorney Grievance Committee and that “[w]ith or without you we are going forward”. An issue in the case was whether this constituted a "claim" within the policy period.

Thereafter in March 2007 plaintiffs commenced a legal malpractice action against Fretz, after their attorney made several unsuccessful attempts to communicate with Fretz or convince him to provide notice to his carrier or provide his carrier’s contact information. Fretz also failed to report the claim to his malpractice carrier St. Paul Fire and Marine Insurance Company (St.Paul), which held a $1 million claims-made policy. This lead to a default judgment against him for $700,000.

Plaintiffs obtained a court order directing Fretz to provide his insurance information. On June 22, 2007, after plaintiffs provided St. Paul with notice of the claim, advising St. Paul that the claim had been first presented to Fretz on January 2, 2007, without enclosing a copy of the January 2, 2007 letter.

St. Paul accepted on faith that the January 2007 letter constituted a "claim" under the policy, and disclaimed on the alternative ground that the claim was not reported to St. Paul within the time period allowed under the policy. Several months after St. Paul had answered the DJ complaint, St. Paul issued a supplemental disclaimer that the January 2007 letter did not constitute a “claim” within the policy period. Although never explained, St. Paul presumably argued the letter did not request monetary damages, but merely asserted the intent to file a grievance complaint.

The court acknowledged that timely notice of the claim was not provided to St. Paul under the terms of the policy, and that the disclaimer would have to be upheld unless plaintiffs could establish that notice was timely pursuant to Insurance Law 3424(a), which provides in pertinent part that insurance policies “insuring against liability for injury to person...[must] contain[]… [a] provision that notice given… on behalf of the injured person…shall be deemed notice to the insurer.

Section 3420(a) also provides that late notice provisions in such policies “shall not invalidate any claim made by…an injured person…if it shall be shown not to have been reasonably possible to give such notice within the prescribed time and that notice was given as soon as was reasonably possible thereafter.”

St. Paul argued that 3420(a) had no applicability to the case since it only applied to policies that covered “injury to persons” and thus did not apply to malpractice actions. Although the St. Paul policy excluded claims “[a]rising out of bodily injury ‘or property damage’, it did cover claims for damages that “arise out of error, omission, negligent act or personal injury', in the rendering or failure to render legal services'….”

St. Paul cited to several cases for the proposition that malpractice insurance policies are not subject to the provisions of Insurance Law § 3420(d). Plaintiffs countered that the scope of § 3420(d) was narrower than § 3420(a), and cited to the Fourth Department's decision in Romano v. St. Paul Fire and Marine Ins. Co. (65 A.D.2d 941 [4th Dept 1978], for the proposition that § 3420(a) applied to malpractice insurance.

The court agreed with plaintiffs recognizing that the policy was subject to § 3420(a), since it clearly covered claims of “personal injury,” notwithstanding its exclusion for claims of “bodily injury.” The court correctly noted that in the parlance of insurance coverage “personal injury”, as opposed to "bodily injury", refers to false arrest or imprisonment, malicious prosecution, wrongful eviction, defamation, slander or invasion of privacy. Thus, even though plaintiff’s claim against Fretz was not for “personal injury”, Fretz’s policy provided such coverage and thus, was subject to § 3420(a).

Having determined § 3420(a) was applicable, the court was able to conclude as a matter of law that the plaintiffs had provided timely notice after a lengthy recitation of the efforts undertaken by plaintiffs to give notice.

All that was left for the court to do was determine whether St. Paul’s purported disclaimer based on the absence of a claim during the policy period was valid. Here, the court’s analysis suffers a complete break down.

Notwithstanding spilling a large amount of ink on the issues up to this point, the court’s pen and analysis suddenly goes silent. While St. Paul presumably argued that it should not have been foreclosed from adding a second basis to disclaim since § 3420(d) does not apply to malpractice insurance policies, the court fails to even allude to such an argument and simply ignores that § 3420(d) was not applicable. In the absence of § 3420(d), the only way St. Paul could have lost the right to supplement its disclaimer was through either a finding of common law waiver (intention relinquishment of a known right) or through estoppel. Neither of these is addressed by the court.

The court also ignored St. Paul’s reliance on the well settled doctrine that waiver cannot create insurance coverage that never existed. This seems pretty straight forward. If there was no claim during the policy period, coverage would never have been triggered in the first instance. If the policy never covered the claim, then waiver could not have created such coverage. Instead of addressing either of these arguments, the court incredibly, merely concluded its decision with the statement “St. Paul's belated attempt to supplement its disclaimer…cannot avail for obvious reasons, both procedural and substantive.”

I would ask that if anyone out in the blogosphere can discern what these “obvious reasons” are, to please leave a comment to enlighten the rest of us.