A New York federal judge ruled that an insurer waived its right to deny coverage because it failed to send a timely coverage letter to the insured as required under state law.

The case began when a 13-year-old was hired for after school work at the Staten Island Jewish Community Center (the JCC). The boy reported to his mother that an assistant executive director physically and sexually abused the young employees. The executive was arrested, pleaded guilty to three counts of forcible touching, and was sentenced to six years’ probation.

When the executive was arrested and charged in 2006, the JCC notified Trumbull Insurance Company, from which it had purchased a Non Profit Directors and Officers Liability Insurance Policy. However, Trumbull did not acknowledge receipt of the faxed notification for 190 days. Nevertheless, when the boy’s mother filed suit against the JCC two years later, the organization again notified Trumbull and sought coverage under its policy.

This time, Trumbull waited 105 days to reply, and when doing so, denied coverage. The JCC responded to Trumbull’s denial by filing its own suit, seeking a declaration that Trumbull was obligated to defend and indemnify it in the underlying lawsuit.

The policy’s core clause read: “The Company shall pay on behalf of an Insured all Claims, Expenses and Damages that the Insured becomes legally obligated to pay for any Claim(s) first made against the Insured for a Wrongful Act(s) which arise solely out of the discharge of an Individual Insured’s duties on behalf of the Entity.”

U.S. District Court Judge Eric N. Vitaliano found that the language was unambiguous and could only be interpreted so that the underlying lawsuit fell within the scope of coverage. Despite the parties’ debate over whether the executive’s actions occurred in the “discharge of [his] duties,” the court said they clearly did. “[T]he wrongful act does not define the duty: it merely must occur in the course of the insured’s performance of whatever his employment duties are.”

The executive’s wrongful acts “arose solely out of” the discharge of his duties for the JCC, as they occurred during an employment break activity that the abuser required the boys to play during their work day, under his supervision and control, the court explained. The executive “had the ability to force these children to play the game and to suffer the cruel punishment he meted out solely because he held a position of authority over them as their JCC employment supervisor,” the court said.

Once the court determined the underlying suit fell within the parameters of the policy, it turned to New York Insurance Law section 3420(d), which requires that “an insurer shall disclaim liability or deny coverage for…bodily injury arising out of…any other type of accident…it shall give written notice as soon as reasonably possible.”

From the point of view of the JCC, the executive’s actions were an accident, the judge determined. Nothing in the record indicated that the organization knew about or had any reason “to expect or foresee” the abuse until after it happened, making it “unexpected, unusual and unforeseen” from the JCC’s standpoint. Further, the suit involved claims of “bodily injury,” including physical abuse and the emotional distress alleged by the victim.

Therefore, the insurer’s 105-day delay to respond to the JCC after being notified of the underlying suit was unreasonable as a matter of law, the judge concluded. “Trumbull provides no excuse or explanation for this delay,” the court wrote. “The JCC had notified Trumbull of the charges against [the executive] nearly two years before it finally submitted what the insurer had advised would be a ripe claim. The insurer cannot now honestly argue that it needed an additional three and a half months after receiving notification” of the lawsuit to disclaim coverage.

To read the decision in Jewish Community Center of Staten Island v. Trumbull Ins. Co., click here.

Why it matters: Policyholders should be pleased with the decision, which puts insurers in the state of New York on notice that disclaimer of coverage must be timely or it will be waived. Citing other courts that found a 41-day delay in response to an insured was unreasonable, the court found that Trumbull’s 105-day delay – on the heels of more than two years’ advance notice of the executive’s criminal acts – was unreasonable as a matter of law.