Insurers beware, you may be forced to provide coverage for personal injury claims if you wait too long to disclaim coverage of an insured. Insurance Law § 3420(d)(2) requires a liability insurer to give the insured or the injured person written notice of disclaimer of a personal injury claim “as soon as is reasonably possible.” So what exactly does “as soon as is reasonably possible” mean? The First Department recently spoke on the issue, and their answer may catch some insurers off guard. This Advisory will explain when insurers need to disclaim and serve as a reminder for those in the Second Department of the consequences that a delay in disclaiming coverage can have.
The First Department recently overruled its prior precedent and adopted the Second Department’s rule, holding that an insurer (including excess insurers) may not delay the issuance of a disclaimer on the grounds that the insurer knows to be valid while investigating other possible grounds for disclaiming. This ruling, handed down January 17, 2012 in George Campbell Painting v. National Union Fire Insurance Company of Pittsburgh, PA, 937 N.Y.S.2d 164 (1st Dept. 2012), expressly overruled the First Department’s prior precedent that had permitted the insurer to disclaim promptly after it completed its
investigation, even if it learned of the insured’s late notice prior to a complete investigation
(DiGuglielmo v. Travelers Prop. Cas., 6 A.D.3d 344, 776 N.Y.S.2d 542, lv. denied 3 N.Y.3d 608, 786
N.Y.S.2d 811 (2004)).
So what does this mean for insurers going forward? For those in the First Department this is a major shift from the prior rule, and for those in the Second Department, this serves as an important reminder of the consequences that may befall an insurer if they unreasonably delay disclaiming coverage of an insured.
The Second Department never adopted the rule behind DiGuglielmo, but rather adhered to the notion that when the ground for the disclaimer is obvious on the face of the claim, a delay in disclaiming coverage is unreasonable as a matter of law. This rule, which has now been adopted by the First Department, comes from the 2001 case City of New York v. Northern Insurance Company of New York, 284 A.D.2d 291, 725 N.Y.S.2d 374 (2d Dept.2001), where the Appellate Division found the two month delay in responding to the City’s claim was unreasonable as a matter of law, because it was clear on the face of the City’s claim that the notice was late. The insurer justified its delay in disclaiming coverage on the ground that it had to investigate whether the City was an additional insured. However, the court found this excuse insufficient, as such investigation was unrelated to the reason for the disclaimer and the disclaimer could have been asserted at any time.
The rule, stated in its simplest form, precludes an insurer from delaying issuance of a disclaimer on a ground that the insurer knows to be valid while investigating other possible grounds for disclaiming. For primary and excess insurers alike, this means that once it is evident that there is a basis to disclaim coverage, whether it is late notice or some other ground, the insurer must notify the insured immediately. Importantly, this requirement does not preclude the insurer from continuing its investigation and thereafter supplementing its disclaimer with additional grounds, it simply mandates that once a ground for disclaimer is known, the insurer must notify the insured as soon as possible.
Failure to adhere to this rule will likely lead the court to deny the coverage disclaimer. The consequences of such denial will likely be the requirement of the insurer to bear the responsibility of providing coverage. This was the result in Northern Insurance Company of New York, where the court found that Northern was obligated to defend, and if necessary, indemnify the City and to reimburse the City for all past defense costs in the underlying personal injury action. For Northern, this all could have been avoided had they disclaimed coverage upon receiving the claim, as the notice from the City was not received for close to 16 months after the occurrence of the underlying accident, which was well outside the permissible time to notify the insurer.
Accordingly, it is imperative that insurers disclaim coverage immediately once grounds for such disclaimer are evident. Remember, this requirement is applicable to both primary and excess insurers. And lastly, hesitation can lead to monetary consequences and liability for the insurer. It is our goal that our clients avoid these potential pitfalls. Please feel free to contact the firm with any further questions.