Schiff Hardin Insurance Alert

New York Appellate Court Rewrites the Rules on Disclaiming Coverage

On January 17, 2012, the New York Appellate Division, First Department held that New York Insurance Law § 3420(d) "precludes an insurer from delaying issuance of a disclaimer on a ground that the insurer knows to be valid — here, late notice of the claim — while investigating other possible grounds for disclaiming." How long was too long to delay disclaiming? Four months.

The Background

New York has a longstanding statutory requirement that an insurer provide its insured written notice that it is disclaiming a personal injury claim "as soon as is reasonably possible."¹ An insurer's failure to do so can bar it from later disclaiming coverage. Often, however, an insurer has more than one reason for disclaiming coverage. One reason may be apparent immediately (for example, late notice) while another reason may require an investigation (for example, lack of coverage).

Because of this timing disparity, in 2004 the First Department held that insurers may wait to "disclaim on timeliness grounds" until after "conducting a prompt, reasonable investigation into other possible grounds for disclaimer."² Now, in 2012, that court overruled its 2004 decision, citing "fidelity to the plain language [of § 3420(d)] chosen by the Legislature," rulings from the state's highest court, and "policy considerations embodied in the law."

The New Rule

George Campbell Painting v. National Union Fire Ins. Co.³ held that § 3420 (d) "mandates" that an insurer issue a disclaimer "not 'as soon as is reasonable'" but 'as soon as is reasonably possible.'" (emphasis in original). In Campbell, the insurer waited four months to disclaim coverage for late notice of a claim by the policyholder while it investigated whether the claimant was an additional insured under the policy. The four-month wait during the investigation barred the insurance company from denying coverage on the basis of late notice because it did not issue this disclaimer "as soon as [was] reasonably possible." That is, the insurer knew what it needed to know to support a late notice disclaimer before it investigated other possible bases for denying coverage. Justice Friedman did not mince words in declaring that the insurer "had no right to delay disclaiming on the late-notice ground while it continued to investigate whether plaintiffs were, in fact, additional insureds."

What It Means and Who Is Affected

Both insurers and policyholders should know that Campbell changes the rules about disclaimers in the Appellate Division, First Department.⁴ Campbell may require insurers to rethink how they handle coverage demands. Where there is one known basis for denying a claim, and several other possible bases, insurers should disclaim as soon as possible on the known ground, reserve rights and later issue disclaimers on any other grounds, if warranted. For policyholders, an insurer's failure to disclaim promptly on timeliness grounds may "restore" coverage that otherwise would have been lost.