Despite Custom in the Industy, Insured Who Gives Notice of an Occurrence to his Broker Does so at his Peril

American Safety Indem. Co. v. 612 Realty LLC,
Slip Copy, 2009 WL 2407822 (N.Y.Sup., J. Marcy Friedman 2009)

This declaratory judgment action dealt with the question whether an assured who provides first notice of occurrence and/or suit papers to his broker has fulfilled his obligation to provide the carrier with timely notice of the claim. In American Safety, the commercial umbrella carrier moved for summary judgment on its disclaimer for the insured’s failure to provide timely notice of the underlying action.

The infant plaintiff was first diagnosed with lead poisoning on August 27, 2003. The complaint was filed on or about September 25, 2003. The verified bill of particulars plead $40 million in damages. In opposition to the motion, the insured’s argued that its managing agent provided notice to their broker “with the expectation that he would ‘take whatever steps [were] necessary’.” The American Safety court however, held that “this assertion is insufficient to raise a triable issue of fact” based on Security Mut. Ins. Co., 31 N.Y.2d at 442 n 3. The court further commented:

Notwithstanding that it is a “common practice” for insureds to notify their brokers rather than their carriers of claims, an insured who notifies only its insurance broker does so at its own peril, as “the policy requirement that the notice must be provided to the carrier trumps any informal arrangement or practice” between the insured and its broker. (Gershow Recycling Corp. v. Transcontinental Ins. Co., 22 AD3d 460, 462 [2nd Dept 2005].)

Incredibly, I currently have a case with the identical facts. It even involves a lead case with the same insurance carrier. Can we depend on stare decisis? We shall find out.

First Department Suggests It is an Insurance Carrier's Obligation to Notify Potential Claimants of its Change of Address

American Transit Ins. Co. v. Brown
--- N.Y.S.2d ----, 2009 WL 3199800
N.Y.A.D. 1 Dept.,2009.

ANDRIAS, J.P., CATTERSON, RENWICK, DeGRASSE, FREEDMAN, JJ.

In a stunning decision, the First Department seems to have held that it is the insurance carrier’s burden to notify potential claimants of a change in its address, not the claimant’s burden to verify the carrier’s current location. The decision contains a stinging dissent from Justices Catterson and Andrias.

This declaratory judgment action arose out of an automobile accident between Arthur Brown (“Brown”) and Albertano Batista (“Batista”) in November 2002. Batista’s insurance carrier, American Transit Insurance Company (“ATIC”) sent a written acknowledgement of Brown’s property damage claim in January 2003 which it subsequently settled (date not supplied).

In November 2005 Brown commenced a personal injury action against Batista. Brown forwarded the summons and complaint to ATIC in January 2006, using the address on ATIC’s acknowledgement letter from three years before. Unbeknownst to Brown, ATIC had moved its offices in November 2003. Upon Batista's failure to appear in the action, Brown obtained a default judgment for $81,830 and served a copy of the unsatisfied judgment with notice of entry upon ATIC at its current offices. ATIC promptly issued a letter of disclaimer and commenced this declaratory judgment action on the ground that neither Batista nor Brown gave it timely notice of the underlying lawsuit as required by the policy. The Supreme Court denied the parties' motions for summary judgment to allow for further discovery.

On appeal, the majority acknowledged that the failure to satisfy a notice requirement “may allow an insurer to disclaim its duty to provide coverage” (see American Tr. Ins. Co. v. Sartor, 3 NY3d 71, 76 [2004]), but also observed that “a failure to satisfy an insurance policy's notice requirement does not vitiate coverage where there is a valid excuse (cf. Matter of Allcity Ins. Co. [Jimenez], 78 N.Y.2d 1054, 1055 [1991]).

Brown claimed a valid excuse, arguing that ATIC had never notified him of its change of address. The Court was not swayed by the fact that the carrier’s new address was printed on the check forwarded to Brown's counsel in settlement of the property damage matter and that ATIC had taken all normal and customary actions to announce and document its current address.

Judge Catterson in dissent, flatly denied that there is a legal obligation for a defendant's insurer to notify a potential plaintiff or plaintiff's counsel of the insurer's change of address. In addition, he harshly criticized the majority’s justification for Brown’s failure to notify ATIC of the pending litigation. He noted that it had been years since ATIC had settled the property damage case with Brown. Moreover, ATIC had sent a mass mailing announcing its change of address at the time of the move, notified the State Insurance Department and the post office of its change of address, and had changed its address on its web site and all phone listings. His withering dissent concludes by stating that “the majority is willing to accept an attorney's lack of diligence in failing to spend three-tenths of a second to verify an address on the Internet as a valid excuse for the failure to satisfy an insurer's notice requirement.”

This reporter wonders whether this case will have the effect of watering down the concept of due diligence in other scenarios. Hopefully, ATIC will take advance of the split decision to appeal the case to the Court of Appeals. I will of course, report on any further developments.

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.

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.