According to a New York appellate court, insurers may still disclaim coverage years after underlying litigation commenced, if the insurer’s delay in doing so did not prejudice the insured.  In 206-208 Main Street Associates, Inc. v. Arch Insurance Company, No. 107126/10, 2013 WL 1831452 (N.Y. App. Div. May 2, 2013), the New York Supreme Court, Appellate Division, applying New York law, reversed a trial court’s finding as a matter of law that an insurer was equitably estopped from disclaiming coverage under a commercial general insurance policy more than two years after the insurer had begun providing a defense to the insured in underlying litigation.  The Appellate Division accordingly remanded the case to be decided by the trier of fact.

A property owner, 206–208 Main Street Associates, Inc. d/b/a 8930 Sutphin Blvd., LLC (“Sutphin”), hired construction company H&H Builders Inc. (“H&H”) to construct a three-story building with an underground parking garage on Sutphin’s property.   Id. at *1.  At the time, H&H purchased a commercial general insurance policy from Arch Insurance Company (“Arch”) and, pursuant to an agreement with Sutphin, requested that Sutphin be named as an additional insured in the policy.  Id.  In 2007, an adjacent building collapsed and others sustained damage as a result of excavation work that H&H was conducting on Sutphin’s property.  Id.

A number of plaintiffs, including Sutphin, subsequently sued H&H in four separate actions.  Id.  H&H tendered those claims to Arch, which assumed H&H’s defense in all four cases.  Id.  Just over two years after the commencement of the actions, Arch for the first time sent to H&H a letter reserving its right to disclaim coverage based on an earth movement exclusion in the policy.  Id. at *2.  But Arch, while providing H&H and opportunity to assume its own defense, nonetheless agreed to continue providing a defense.  Id.

Sutphin subsequently brought a declaratory judgment action against both H&H and Arch, seeking a declaration that Arch had a duty to defend and indemnify Sutphin in the underlying actions.  Id.  H&H cross-claimed against Arch, asserting that it too was entitled to coverage.  Id.  Without reaching whether the earth movement exclusion applied, the trial court found “that, ‘after two years of assuming a defense,’ Arch was equitably estopped from disclaiming coverage.”  Id.

The Appellate Division reversed the trial court’s determination.  Id. at *3.  The court found that although, under New York law, “an insurer can be equitably estopped from issuing a disclaimer if at the time it disclaims it has controlled the defense of its insured,” this rule only applies where the disclaimer caused prejudice.  Id.   The Appellate Division noted that New York courts had only applied estoppel in cases where, at the time the insurer disclaimed coverage, “the underling litigation against the insured had reached a point where the course of the litigation has been fully charted.”  Id.  Because, by Sutphin’s and H&H’s own admission, Arch’s disclaimer was issued while the case was still in an “early phase,” the court found that Sutphin and H&H had failed to “establish that they were prejudiced as a matter of law.”  Id. at *4. 

The court also noted that there was no other ground for finding prejudice based on Arch’s having controlled the defense before its reservation of rights.  Id.  Although New York courts had previously applied estoppel in cases where the insurer used information obtained during its control of the defense to form the basis for its denial of coverage, the Appellate Division found that Sutphin and H&H had provided no evidence that Arch had “somehow manipulated the defense” to H&H’s prejudice.  Id.  Based on these findings, the court remanded the case to the trier of fact.  Id. at *5.

The Appellate Division’s decision in 206-208 Main Street Associates shows that insurers, in New York at least, will not necessarily be prevented from disclaiming coverage after underlying litigation has commenced.   Rather, it demonstrates that courts’ primary consideration will be whether a delayed reservation of rights prejudiced the insured, and not the timing of its issuance.