Choice-of-law provisions can make a big difference in the outcome of a coverage dispute. The Second Circuit’s ruling against the City of San Diego has again demonstrated why. The City’s policy contained a New York choice-of-law provision, and the City notified the carrier of a claim 58 days after receiving it. The carrier denied coverage for late notice under New York’s stringent common law, which permits denial without a showing of prejudice. And the Second Circuit affirmed the denial, holding that the New York Legislature’s statutory amendment requiring the carrier to show prejudice did not apply because the policy had not been “issued” in New York. Accordingly, a policyholder with a New York choice of law provision in its policy could still be subject to New York’s late notice laws, which potentially permit carriers to deny coverage if notice is received more than a month after a claim has been made.

Detailed Discussion

The City of San Diego gave notice of a claim to its carrier 58 days after it received it. The U.S. Court of Appeals, Second Circuit, upheld the carrier's late notice denial, finding that (1) a New York law requiring the carrier to prove prejudice did not apply and (2) 58 days was not “as soon as practicable” as a matter of law.

The City purchased a pollution and remediation legal liability insurance policy from Indian Harbor Insurance Company in 2009. The policy contained a New York choice of law provision and required the City to notify Indian Harbor “as soon as practicable” of any liability claims.

Just before the policy was issued, the New York Legislature amended Section 3420(a)(5) of the state’s Insurance Law. The provision barred liability insurers from denying claims by reason of late notice unless the insurer suffered prejudice for all policies issued or delivered in New York after Jan. 17, 2009. Prior to the change, New York common law did not require the insurer to demonstrate prejudice before denying coverage based on a policy’s timely notice provision.

The City sought coverage for three pollution-related claims, including a claim filed by Centex Homes. Indian Harbor denied coverage based on what it characterized as late notice by the City, pointing to the 58 days it took to notify the insurer about the Centex claim.

In a declaratory judgment action, the City argued that Indian Harbor failed to assert it suffered any prejudice as required by Section 3420(a)(5), adding that the notification provided was not late as a matter of law. A federal district court judge disagreed and the Second Circuit affirmed summary judgment for the insurer.

The Second Circuit held Section 3420(a)(5) did not apply because the policy was not “issued” in New York as required under the provision. The City argued that the policy was issued in the state because it was signed by Indian Harbor’s president, Dennis Kane, whose office was located in New York. The Second Circuit rejected the City’s argument, holding that Mr. Kane’s electronic signature was actually affixed in the carrier’s Pennsylvania office, which is where the policy had been issued.

“But Kane’s signature was a pre-existing electronic signature, and it was affixed to the Policy in Exton, Pennsylvania, without his being present there,” the court wrote. “The Policy was created and mailed from the Pennsylvania office and all transmittal paperwork bore the Pennsylvania office’s letterhead. The City has proffered no evidence to show that the Policy was issued, or even signed, in New York.”

The Second Circuit also rejected the City’s argument that the amendment to Section 3420(a)(5) codified public policy and changed New York common law, which did not require the carrier to demonstrate prejudice from the late notice.

Finally, the panel held that the 58 days that elapsed before the City informed the insurer about the Centex claim was unreasonable as a matter of law. “Under New York law, delays of one or two months are routinely held unreasonable,” the court wrote, affirming summary judgment for the insurer. “The City has adduced no evidence to demonstrate that its 58-day delay was unreasonable,” the unanimous panel added, and the “purpose of these notification requirements . . . is to permit the insurance company to investigate promptly.”

To read the order in Indian Harbor Insurance Company v. City of San Diego, click here.