Late Notice Legislation Submitted in New York
The ghost of Eliot Spitzer has been sighted roaming the state capitol in Albany!
In 2007, the New York legislature hurriedly approved legislation that would have done away with New York’s traditional rule that the breach of a condition to coverage waves a policyholder’s right to recovery even if the insured’s untimely notice has not materially prejudiced the insurer. After some hesitation, Governor Spitzer vetoed the legislation, declaring in his veto statement that the issue was too important to be decided in such an abrupt manner.
Spitzer has since departed the scene but his successor, David Patterson, last week submitted a proposal to the legislature that largely embodies the proposals in the legislation that Spitzer vetoed. If enacted into law, this new bill would (1) allow third-party claimants to bring declaratory judgment actions against insurers in cases where an insurer has denied coverage on the basis of late notice; and (2) for the first time imposes a requirement of prejudice in order to avoid coverage on the basis of late notice.
The legislation has two principal parts:
The first part would amend Insurance Law Section 3420(a) to allow third-party claimants to bring claims for declaratory relief to determine the availability of coverage for their claim against policyholders. It appears from the legislation that this right is limited to disputes involving the unavailability of coverage due to late notice. It remains to be seen whether or how courts would allow third-party claimants to bring such actions in cases that involve multiple coverage issues, including late notice. Furthermore, the bill creates a safe harbor that eliminates the right of third-party claimants to bring such actions if, within 60 days of the denial on the grounds of late notice, the insurer itself brings a declaratory judgment action (thereby causing the insurer to subject itself to a claim for attorney’s fees under Mighty Midgets if it loses!)
The second part of the bill deals with the issue of late notice. New York is among the dwindling number of states that have not required notice. Indeed, despite expectations to the contrary, the New York Court of Appeals upheld this traditional view of notice requirements as recently as 2005. As proposed, this bill would amend Insurance Law Section 3420 to include a requirement of prejudice. Furthermore, it will be the insurer’s burden to prove prejudice for any delay up to two years. Thereafter, however, the burden shifts to the insured, injured person or other claimant. Furthermore, there will be an irrebuttable presumption of prejudice if the insured’s liability has been determined or it has settled the case in the interim.
The explanatory memorandum accompanying this legislation states that the bill would prevent insurers from denying coverage based on a technicality and “eliminates the extreme hardship placed on those who paid for their premiums timely only to find in a time of need that their policy is not available.” The legislation expressly states, however, that it does not apply to the “claims made” and reporting provisions in “claims made” policies.
Of particular note is the fact that this new legislation would have prospective effect only. Section 8 of the bill states that it only applies to policies issued six months after the date that the bill becomes law. Accordingly, there will remain a vast body of pre-2008 policies, including “long-tail” claims concerning asbestos, pollution and other mass tort injuries, that will be governed by traditional common law requirements pertaining to prejudice.
Although nothing is certain in Albany these days, it does appear likely that this bill will be signed into law, thus bringing to a close New York’s role as the last large commercial lines state to follow traditional late notice rules. In doing so, however, New York is taking the intermediate approach that has been pioneered by states such as Wisconsin. Thus, rather than simply adopting the “notice prejudice” standard that has been followed in most states, New York is treating certain types of cases as qualitatively different. Thus, the burden of proof with respect to prejudice, which is often the most difficult aspect of such cases, is placed on the policyholder where notice is more than two years old. Furthermore, prejudice is presumed as a matter of law in certain cases, as where the insured has settled or has received a judgment.
Unfortunately, the legislation is vague with respect to certain important aspects of such cases. For instance, current general liability forms contain three separate events that trigger an insured’s notice obligations: (1) accident or occurrence; (2) the insured’s receipt of a claim; and (3) the insured’s receipt of a lawsuit. However, although the legislation appears to apply to all three requirements, it fails to address the problems that may arise where an insured gives timely notice of an accident but is late with respect to the notice of a claim or suit or the reverse.
Such problems were addressed by the Court of Appeals three years ago in Argo Corp.. v. Greater New York Mut. Ins. Co., 4 N.Y.3d 332, 827 N.E.2d 762 (2005). In that case, the Court of Appeals had ruled that the notice of suit requirement was more significant than notice of an accident as it allowed insurers to “take an active, early role in the litigation process and in any settlement discussions and to set reserves.” As a result, the court ruled in Argo that late notice of a suit created a rebuttable presumption of prejudice that the insured must overcome. In Argo, the insured had failed to give notice of the accident and the suit. In its companion opinion in Rekemeyer v. State Farm Mut. Auto Ins. Co., however, the insured had given timely notice of the accident but was late with respect to the suit. As a result, the court had held that the insurer was required to prove prejudice as a result of the delay.
In contrast to this more nuanced approach, it appears that the proposed legislation would require that the issue of prejudice be considered in the overall context of the claim such that prejudice would be more likely to exist if the insured had failed to give notice of the original accident and less likely to exist if the insurer had had the opportunity to investigate the accident but did not receive timely notice of the suit.
It appears that this legislation would also resolve any question with respect to whether notice of a claim must be received from the policyholder. Plainly, actual notice from any source is sufficient under the legislation.
Finally, we note the inequity that this legislation fails to address in Insurance Law Section 3420(d). Under current New York law, an insurer may be estopped to raise coverage defenses for claims for bodily injury under policies issued in New York if it waits more than a reasonable period of time to deny coverage. Despite the harsh effect of Section 3420(d), it did not seem inequitable to place this requirement on insurers when policyholders were held to a similarly strict standard with respect to their notice obligations. Insofar as a much looser standard now applies with respect to the notice obligations of insurers, it would have seemed fair to similarly loosen the estoppel provisions of Section 3420(d) so that an insurer would only be precluded from raising coverage defenses insofar as its delay had prejudiced the policyholder. Unfortunately, although it is believed that there was some discussion of this issue, it was not included in the final proposed legislation.
