Nearly every liability policy has a provision that requires the policyholder to notify the insurer promptly of any accident or incident that might become a claim and of any lawsuit or other claim filed against the policyholder by a claimant. And many of these notice provisions are couched in language that the courts have construed as being conditions precedent to coverage. Through public policy pronouncements by the courts or statutory enactment, in many states an insurance company cannot disclaim coverage because of late notice unless the insurance company can demonstrate that it has been prejudiced by the late notice.
In New York, prior to the amendments to Insurance Law Section 3420 late in the 2008 Legislative Session, an insurance company did not have to show prejudice and could disclaim coverage where the policyholder was late in providing notice of a claim. Subsequent to the effective date of the 2008 amendment, that was no longer the case and the insurance company had to show prejudice. This has made the date the policy was issued critical for determining how courts will address late notice defenses by insurance companies in New York.
In a recent case, a New York intermediate appeals court reversed a motion court’s grant of summary judgment to a policyholder and ruled that the insurance company could disclaim coverage for late notice of the actual lawsuit filed against the policyholder even though the insurance company had notice of the accident that resulted in the lawsuit. Kraemer Bldg. Corp. v. Scottsdale Ins. Co., No. 521572 (N.Y. App. Div. 3d Dep’t Feb. 18, 2016). In this case, a commercial general liability policy was issued to a construction firm before the amendment to Section 3420. An accident occurred on a job site in 2009 and a subcontractor was injured. Notice of the occurrence was given to the insurance company as well as notice that the subcontractor had retained counsel. An action was brought in 2011, but the policyholder never received notice and the insurance company did not know about the lawsuit until it was informed by the claimant’s counsel in 2012. The carrier disclaimed coverage because of late notice of the lawsuit.
In finding for the insurance company, the appellate court noted that the policy required prompt notice of both the occurrence and any ensuing legal action and that the notice provision was a condition precedent to coverage. Because the policy was in force before the amendment to Section 3420 occurred, there was no need to show prejudice even though the insurance company had notice of the occurrence. The court rejected the argument that notice of the occurrence is sufficient because failure to give notice of the lawsuit prevented the carrier from taking action early on in the lawsuit to protect the insured, become involved in settlement discussions and set a proper reserve. Here, the policyholder defaulted because it never received notice of the suit (it’s agent for service of process no longer existed) and the insurance company had no opportunity to avoid the default.
Putting an appeal to the New York Court of Appeals aside (which would only come on the grant of a motion for leave to appeal given the unanimous decision), the lesson here is that there are many liability policies written prior to the amendment to Section 3420 leaving open the possibility of a viable defense of late notice in the proper factual circumstances.