Disclaimer Letter Only Effective to Defendant Addressee Even Though Other Insureds Were Located at Same Address

Maughn v. RLI Ins. Co.
--- N.Y.S.2d ----, 2009 WL 4985691
N.Y.A.D. 2 Dept.,2009.

In this Second Department case, the insurance carrier issued a disclaimer letter to the defendant real estate management company. In addition to the management company, the underlying complaint named several other related entities all existing at the same address. The disclaimer letter however, was not specifically addressed to these other defendants. It was unclear whether these entities were referred to in the body of the disclaimer letter or not. The defendants brought a declaratory judgment action and sought summary judgment based on Matter of Eveready Ins. Co. v. Dabach, 176 A.D.2d 879, 575 N.Y.S.2d 347). The trial court granted summary judgment to all the defendants including the management company addressee. On appeal the Second Department reversed the judgment in favor of the management company but affirmed as to the other defendants.

The Court found that the disclaimer letter that was addressed to the management company and sent to the attention of the building manager, within three weeks of receiving notice of the accident, established that the notice provided to it was untimely (see DeFreitas v. TIG Ins. Co., 16 A.D.3d 451, 791 N.Y.S.2d 626; Yarar v. Children's Museum of Manhattan, 4 A.D.3d 420, 421, 772 N.Y.S.2d 85; cf. 875 Forest Ave. Corp. v. Aetna Cas. & Sur. Co., 30 N.Y.2d 726, 332 N.Y.S.2d 896, 283 N.E.2d 768).

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.

Execution of Non-Waiver Agreement Did Not Protect Carrier From Insurance Law § 3420[d]

Mayer's Cider Mill, Inc. v. Preferred Mut. Ins. Co., --- N.Y.S.2d ----, 2009 WL 1565160, (4th Dept., 2009).

The above case involved a 12 year old injured 1999, while working at a cider mill. It was unclear whether the infant was an employee or an independent contractor. This was an important distinction as the mill’s general liability policy contained an employee exclusion. The mill gave prompt notice to its insurance carrier and signed a “Non-Waiver Agreement” in 1999 pursuant to which the carrier indicated it would investigate the claim and reserved its right to disclaim coverage.

The infant waited until 2007 to file a complaint, claiming to be an independent contractor. The carrier issued a letter advising that it was still investigating the matter and reasserting the policy did not cover the Mill for injury to employees.

On appeal, the Court found that the carrier had “failed to provide the requisite written notice of disclaimer to plaintiff “as soon as [was] reasonably possible” (Insurance Law § 3420[d][2]; cf. Zappone v. Home Ins. Co., 55 N.Y.2d 131, 136-137). The Court noted that “it is incumbent upon the insurance company to conduct its own prompt investigation ( see id. at 1286-1287), and “the burden is on the insurer to demonstrate that its delay [in disclaiming coverage] was reasonably related to its completion of a thorough and diligent investigation” (Tully Constr. Co., Inc. v. TIG Ins. Co., 43 AD3d 1150, 1152-1153).

The court rejected the carrier’s claim that its investigation into the employment status remained ongoing as well as the defense that the claim was initially reported “for informational purposes only.” Presumably, the carrier also argued that the non-waiver agreement protected it from waiving a policy defense. The Court however, did not address or acknowledge such a defense in the decision. Rather, it merely found that the record neither supported the claim was for “informational purposes” or that the carrier was still investigating the claim. Accordingly, it found that any disclaimer by the carrier was untimely as a matter of law (see Wood, 45 AD3d at 1287).

While this decision involved an extreme delay in time, it raises the question how effective are non-waiver agreements? Recently, the Second Department similarly disregarded a non-waiver agreement in Quincy Mut. Fire Ins. Co. v. Uribe, 45 A.D.3d 661, 845 N.Y.S.2d 434 (2d Dept.,2007), where the agreement set forth a need for additional investigation, but the carrier then could not justify the need for further investigation.

The narrow effectiveness of non-waiver agreements was also demonstrated in Greater New York Sav. Bank v. Travelers Ins. Co., 173 A.D.2d 521, 570 N.Y.S.2d 122 (2d Dept.1991) where the Court held that notwithstanding the existence of a non-waiver agreement, material issues of fact existed with regard to the reasonableness of the carrier’s delay in denying coverage. It held the non-waiver agreement executed by the plaintiff “was not dispositive of the claim inasmuch as it merely allowed [the carrier] to ascertain the actual value of the property, to determine the amount of the loss, and to investigate the cause of the fire, without waiving its rights under the policy. It did not permit [the carrier] to unreasonably delay the exercise of those rights, to the detriment of the insured (see, Allstate Ins. Co. v. Gross, 27 N.Y.2d 263, 269, 317 N.Y.S.2d 309, 265 N.E.2d 736).

It should be emphasized that non-waiver agreements and reservations of rights letters do provide carriers with much needed protection and rights. Indeed, in Federated Dept. Stores, Inc. v. Twin City Fire Ins. Co., 28 A.D.3d 32, 807 N.Y.S.2d 62 (1st Dept. 2006) the Court held that a reservation of rights prevented the insured from claiming detrimental reliance on the carrier’s defending the case, even where the insurer later disclaimed on a basis different from the ground originally asserted in the reservation of rights (see Village of Waterford v. Reliance Ins. Co., 226 A.D.2d 887, 640 N.Y.S.2d 671 [1996]). The key lesson to be learned here, is that non-waiver agreements and reservations of rights letters, will only protect a carrier to the extent they do not sit on their rights and/or fail to act in a timely manner.

11 Month Delay In Giving Notice Vitiated Coverage to Insured and Injured Party

Sputnik Restaurant Corp. v. United Nat. Ins. Co.
878 N.Y.S.2d 428, (2d Dept., May 5, 2009).

In this recently decided case, the Court reviewed the principals behind the requirement that both the insured and injured parties provide timely notice to insurance carriers. It emphasizes that the late notice defense is very much alive and well in New York. While much of the case merely rehashed well-settled principles, it is good to review them from time to time.

The Court noted: “‘[w]here an insurance policy requires that notice of an occurrence be given promptly, notice must be given within a reasonable time in view of all of the facts and circumstances'” (Zeldin v. Interboro Mut. Indem. Ins. Co., 44 A.D.3d 652, 652, 843 N.Y.S.2d 366, quoting Eagle Ins. Co. v. Zuckerman, 301 A.D.2d 493, 495, 753 N.Y.S.2d 128; see Argo Corp. v. Greater N.Y. Mut. Ins. Co., 4 N.Y.3d 332, 339, 794 N.Y.S.2d 704, 827 N.E.2d 762.

The requirement that an insured provide timely notice “operates as a condition precedent to coverage” (see Security Mut. Ins. Co. of N.Y. v. Acker-Fitzsimons Corp., 31 N.Y.2d 436, 440, 340 N.Y.S.2d 902, 293 N.E.2d 76; Quality Inves., Ltd. v. Lloyd's London, England, 11 A.D.3d 443, 782 N.Y.S.2d 761). Absent a valid excuse for a delay in furnishing notice, failure to satisfy the notice requirement vitiates coverage (see Great Canal Realty Corp. v. Seneca Ins. Co., Inc., 5 N.Y.3d 742, 743, 800 N.Y.S.2d 521, 833 N.E.2d 1196; Eagle Ins., 301 A.D.2d at 495.

“ ‘Where an insurance policy requires that notice of an occurrence be given promptly, notice must be given within a reasonable time in view of all of the facts and circumstances' ” (Zeldin, 44 A.D.3d at 652 quoting Eagle Ins., 301 A.D.2d at 495, see Argo Corp., 4 N.Y.3d at 339; White v. City of New York, 81 N.Y.2d 955, 957, 598 N.Y.S.2d 759, 615 N.E.2d 216). Absent a valid excuse for a delay in furnishing notice, failure to satisfy the notice requirement vitiates coverage (see Great Canal, 5 N.Y.3d at 743; Eagle Ins., 301 A.D.2d at 495).

Here, the defendant United National Insurance Co. (hereinafter United) established its prima facie entitlement to judgment as a matter of law by demonstrating that it was not notified of the accident until approximately 11 months had elapsed. Once United established its prima facie entitlement to judgment, the burden shifted to the plaintiffs to raise a triable issue of fact as to whether there existed a reasonable excuse for their delay in notifying United (see Argentina v. Otsego Mut. Fire Ins. Co., 86 N.Y.2d 748, 750, 631 N.Y.S.2d 125, 655 N.E.2d 166).

Moreover, the Court held that the injured party has an independent right to give notice to an insurer, even though it is not to be charged vicariously with an insured's delay (see Insurance Law § 3420[a]; Maldonado v. C.L.-M.I. Props., Inc., 39 A.D.3d 822, 823, 835 N.Y.S.2d 335; Seneca Ins. Co. v. W.S. Distrib., Inc., 40 A.D.3d at 1070, 838 N.Y.S.2d 99; Becker v. Colonial Coop. Ins. Co., 24 A.D.3d 702, 704, 806 N.Y.S.2d 720). The Court found that the injured defendants, failed to notify United of right claims in a timely manner.

Demanding Additional Insured Coverage and Insurance Law 3420(d)

JT Magen v. Hartford Fire Ins. Co., --- N.Y.S.2d ----, 2009 WL 1326359 (1st Dept., 2009).

In Jt. Magen, the First Department revisited the issue which it first addressed in Bovis Lend Lease LMB, Inc. v. Royal Surplus Lines Ins. Co. (27 AD3d 84 [2005]), to wit, whether a letter sent from one insurance company to another on behalf of a mutual insured(s)triggers the recipient carrier's duty to disclaim within a reasonable period of time pursuant to New York Insurance Law 3420(d)?

As the reader may be familiar, 3420(d) is a unique provision of New York law that will preclude a carrier from relying upon a policy exclusion if the carrier fails to issue a disclaimer within a reasonable period of time after obtaining sufficient basis to disclaim. While there is no exact period of time, carriers are expected to respond within thirty (30) days or less to avoid problems.

The Court in JT Magen, reminded us that 3420(d) has no application to an insurance carrier's demand to another carrier to defend its own insured or for contribution. See Tops Mkts. v. Maryland Cas., 267 A.D.2d 999, 1000 [1999]; Thomson v. Power Auth of State of New York, 217 A.D.2d 495 [1995]). As a result of this rule, the defendant in JT Magen, the Hartford, claimed that the letter sent by JT Magen's carrier's on its behalf did not trigger 3420(d) since the statute did not apply to demands made by insurance companys. Also, as noted by the dissent, it is well settled that notice given by a third party is not effective to satisfy the notice requirement in an insurance policy.

The First Department rejected the Hartford's argument, citing Bovis supra as well as Bovis Lend Lease LMB Inc. v. Garito Contr., Inc., 38 AD3d 260 [2007], in which it had held that a letter sent by an insurance carrier on behalf of their insured would trigger 3420(d) with respect to the mutual insured's request for coverage.

However, the court also held that with respect to the claims of one insurance carrier against another carrier, 3420(d) would not preclude the recipient from relying on an exclusion it had failed to provide a timely disclaimer with respect to.

Policy Issued for Delivery in New York?

Recently, I was faced with the prospect of a plaintiff excess insurance company seeking to amend its complaint to rely on the employee exclusion provision in the policy. They had neither relied on it in the disclaimer nor pleaded it in the complaint. The injured plaintiffs were not employees of my client, an additional insured on the policy, but rather were employees of the named insured. Notwithstanding, the Second Department has held that if the plaintiff is an employee of the named insured, there is no coverage under the policy for the additional insureds, notwithstanding the general rule that "separation of insureds" doctrine. Bassuk Bros., Inc. v. UTICA First Ins. Co., 1 A.D.3d 470 (2d Dep't 2003); but see, U.S. Underwriters Ins. Co. v. City Club Hotel, LLC, 2003 WL 2006621.

The principal issue was whether the amendment was futile given the plaintiff's failure to give notice of its reliance on this exclusion within a reasonable period of time pursuant to New York Insurance Law 3420(d). New York is distinct in the draconian penalty of waiver if insurance carriers fail to assert exclusions within a reasonable period of time, which is generally considered to be sixty days.

It was however unclear whether 3420(d) applied since by its own terms it only is applicable with respect to insurance policies "delivered or issued for delivery" in New York. The subject policy however, was issued by a Connecticut insurance company to a named insured with a principal place of business in New Jersey. Upon initial discussions with the court, the presiding judge opined that 3420(d) would not apply and thus, would not bar the amendment.

However, upon further research, I came to a different conclusion. While the policy at issue was not delivered in New York, the question remained whether it was issued for delivery in New York. The Court of Appeals addressed this issue in Preserver Insurance Co. v. Ryba, 10 N.Y.3d 635 where it stated that a policy is "issued for delivery" in New York if it "covers both insureds and risks located in this state." Preserver, 10 N.Y.3d at 642. Also see, Columbia Casualty Company, v. National Emergency Services, Inc., 282 A.D.2d 346 (1st Dep't 2001); American Ref-Fuel Company of Hempstead v. Employers Ins. Co. of Wausau, 265 A.D.2d 49 (2d Dep't 2000).

Although the plaintiff did not pursue the amendment, I was prepared to argue that the policy was in fact issued for delivery in New York because the named insured used a New York address when purchasing its underlying primary insurance policy. In addition, the named insured was revealed in the underwriting file to be working on jobs mainly in New York. When the carrier would have reviewed the named insured's loss history, it would have seen that the only two former claims had occurred in New York.

Presumably, the plaintiff would have countered that the policy itself does not list any New York based insured and did not specifically insure any New York locations. It also would have argued that most of the evidence of the insured's New York work was added to the underwriting file after the effective date of the policy. It is unclear how the court would have framed the issue...would it have looked at the totality of the evidence in deciding whether the policy was issued for delivery in New York, or would it have only looked at the evidence that was available to the carrier at the time the policy was issued? Also unclear is to what degree the carrier had a duty to inquire whether an insured worked in New York. Here, the insured's principal place of business was just outside New York City and accordingly, the carrier had reason to suspect that it would be insuring New York risk.