On July 23, 2008, New York Governor David Patterson signed into law a bill that reverses New York’s long-standing “no-prejudice” rule. The new legislation, as set forth in Senate Bill 8610 and Assembly Bill 11541 (the Legislation) prohibits liability insurers issuing or delivering policies in New York from denying a claim based on late notice unless the insurer can show that it was prejudiced by the untimely notice, subject to limitations and exceptions as discussed below. The Legislation also allows a claimant to bring a declaratory judgment action directly against an alleged tortfeasor’s insurer without waiting for a judgment in the underlying tort action, under limited circumstances.
The New York Legislature had passed a similar bill in June of 2007 only to have it vetoed by then Governor Elliot Spitzer, whose primary objection at the time was to the abrupt manner in which the 2007 bill was submitted and passed by the Legislature rather than to its reversal of New York’s no-prejudice rule. This time it was signed into law by the current Governor, David Patterson, who had requested that the bill be introduced.
Late Notice and the New Prejudice Requirement
The new Legislation effectively overturns New York’s long-standing common law that had allowed insurers to deny coverage of a claim based on an insured’s late notice of that claim without a showing that the insurer had been prejudiced by the late notice, at least as to authorized insurers issuing policies subject to New York Insurance Law form requirements. The Legislation amends Insurance Law Section 3420(a) to add a section requiring inclusion in policies of a provision stating that the failure to give notice within the time prescribed in the policy shall not invalidate a claim made by the insured, an injured party or any other claimant unless the untimely notice has prejudiced the insurer. Insurance Law 3420(a)(5). The statute specifies that this new form requirement applies to policies that are issued or delivered in New York and that provide coverage for liability for personal injury or property damage.
The Legislation further provides that the burden of establishing prejudice will rest with the insurer if the delayed notice is within two years of the time required under the policy. However, if the delay in providing notice is greater than two years, the burden shifts to the insured (or claimant in a direct action) to prove that the insurer was not prejudiced by the delay. Section 3420(c)(2)(A). In insurers’ favor is that the Legislation also establishes an “irrebuttable presumption” of prejudice where notice is provided to the insurer after the insured’s liability is determined by a court or by arbitration, or after the insured has settled the claim. Section 3420(c)(2)(B). Finally, in an effort to provide guidance as to the meaning and application of the prejudice requirement, the Legislation states that an insurer’s rights shall not be deemed prejudiced unless the failure to give timely notice “materially impairs the ability of the insurer to investigate or defend the claim.” Section 3420(c)(2)(C). Thus, other types of prejudice will likely be held not to be sufficient to support an insurer’s denial of a claim based on late notice, such as the prejudice sustained by an insurer when it renews a policy at a lower premium than it would have charged if it had been timely advised of the existence of claims prior to the renewal.
Exemption for Claims-Made Policies
Despite the Legislation’s sweeping language, insurers can take comfort in the fact that it expressly exempts from the prejudice requirement claims-made policies, which the Legislation states may still “provide that the claim shall be made during the policy period, any renewal thereof, or any extended reporting period...” Section 3420(a)(5). Although the Legislation’s carve-out for claims-made policies should also extend to claims-made-and-reported policies, including the latter’s requirement that claims be reported during the policy period, the current wording does not expressly state that.
If strictly applied, the terms “claims-made policies” and “claims-made-and-reported policies” refer to different policy forms. A claims-made policy requires that the claim be made against the insured during the policy period in order to qualify for coverage, subject to the other terms, conditions and exclusions of the policy. A claims-made-and-reported policy, on the other hand, requires that a claim both be made against the insured and reported to the insurer during the policy period (or the applicable extended reporting period) in order to qualify for coverage. However, the term “claims-made policy” is often considered to refer to a broad category of policies that encompasses within it “claims-made-and-reported” policies. Many courts view claims-made-and-reported policies as a type of claims-made policy and refer to both generally as claims-made policies. See, e.g., Gomez v. Feder, Connick & Goldstein, 260 A.D.2d 348 (2d Dept. 1999) (holding that the insured’s “failure to report the claim” to its carrier “within the policy period of the claims-made policy or within the…extended-reporting period” caused his claim to fall outside the scope of the claims-made policy”); see also S. N.J. Rail Group, LLC v. Lumbermens Mut. Cas. Co., 2007 U.S. Dist. LEXIS 58510, at ** 37-38 (S.D.N.Y. 2007) (noting that the policy at issue was a “claims-made-and-reported” policy, and holding that “there is no coverage under a claims-made policy where the insured fails to notify the insurer of a claim by the end of the policy period (or extended reporting period, if any.)”) (citing Checkrite Ltd. v. Illinois Nat. Ins. Co., 95 F. Supp. 2d 180, 192 (S.D.N.Y. 2000)); Kleyman v. Cont’l Cas. Co., 2007 U.S. Dist. LEXIS 247, at *2 (E.D.N.Y. 2007) (stating that a “claims-made policy” requires the insured to “both receive notice of a claim made against him and provide notice of the claim to the insurance company during the policy period.”) (emphasis in original). Some users of the term “claims-made” also apply it to the act of an insured reporting a claim to its insurer, and not just to when a claim is made against the insured. If in fact claims-made-and-reported policies are subject to the new Legislation, one would expect the carve out from the prejudice requirement to be applied also to them, as to hold otherwise would destroy their fundamental nature, for which the requirement that a claim be both made against the insured during the policy period and reported to the insurer during the policy period or extended reporting period is an essential term of the insuring agreement and a basis on which premium is priced.
One explanation for the limitation of the statute’s carve out to “claims-made” policies without reference to “claims-made-and-reported policies” may be that policy form requirements generally apply only to authorized insurers, and New York Insurance regulations restrict the ability of authorized insurers to write claims-made-and-reported policies. New York Insurance Regulation 121 dictates the limited circumstances under which claims-made policies may be issued by insurers authorized to do business in New York, and the Office of General Counsel of the New York Insurance Department has confirmed that issuance by authorized insurers of claims-made-and-reported policies violates this Regulation. 11 N.Y. Comp. Codes R. & Regs. (NYCRR) § 73.0 et seq. (2008); OGC Opinion No. 2003-228 (stating that “[c]laims-made and reported policies…would violate Regulation 121.”); see also Paterno v. Curiale, 88 N.Y.2d 328, 331 (1996). The proscriptions promulgated under Regulation 121 with respect to claims-made policies and other policy form requirements under New York’s insurance law do not, however, generally govern insurance policies underwritten by insurers not authorized to conduct business in New York, which are procured through excess lines brokers. See Regulation 41 (11 NYCRR § 27 et seq); see also Segal Co. v. Certain Underwriters at Lloyds, London, 798 N.Y.S.2d 30, 33 (1st Dep’t 2005) (affirming that “[p]olicies procured from unauthorized insurers by licensed excess line brokers are exempt from the provisions of Regulation 121” and stating that “[w]hile as a general rule New York State Insurance Law prohibits the sale in New York of insurance underwritten by insurers not authorized to conduct business in New York...it permits excess line brokers to procure insurance from unauthorized insurers...if they have been unable ‘after diligent effort’ to procure the full amount of required insurance from authorized insurers.”). Such unauthorized insurers can, therefore, issue through licensed excess lines brokers claims-made-and-reported policies in New York.
The argument can be made that the new Legislation, if strictly applied, is limited to policies issued by authorized insurers, which would explain why there is no reference to a carve out for claims-made-and-reported policies as they can not be issued by such insurers. By extension, as policy form requirements do not generally govern policies issued by unauthorized insurers, the new provisions mandating a prejudice requirement would not apply to policies issued by unauthorized insurers for use in the surplus market.
A counter-position is that the new Legislation requiring that an insurer demonstrate it was prejudiced by late notice of claim constitutes a new statement of New York public policy, and not merely a form requirement, and thus encompasses policies issued by unauthorized insurers. Coverage issued by unauthorized insurers that is against New York public policy is not enforceable. Pursuant to Regulation 41, “[n]o excess line broker shall procure coverage from an unauthorized insurer if such coverage is prohibited by law, including if such coverage... (4) is determined by any Appellate Division of the New York State Supreme Court or the New York State Court of Appeals to be against public policy in this State ... or (5) has been otherwise proscribed by law.” 11 NYCRR § 27.11(a). Indeed, should courts deem this new prejudice requirement to be a statement of current New York public policy, it potentially could be adopted as the new common law of New York and applied to policies issued outside of New York that include New York choice of law provisions, even though the new Legislation is expressly limited to liability policies issued or delivered in New York.
Until such issues are resolved by the courts, there may be two standards in New York for late notice, one requiring prejudice as to late notice under policies issued or delivered in New York by authorized insurers, and the other represented by the existing common law, under which prejudice is not required, governing those policies not subject to the new Legislation including policies issued outside of the state but incorporating New York choice of law provisions. In that event, it is likely that claims-made-and-reported policies, as well as claims-made policies, will be found to be exempted from the new prejudice requirement.
Lack of Mutuality
Another issue presented by the Legislation is the lack of mutuality in its requirement of a showing of prejudice based on late notice. While the Legislation prohibits an insurer from denying coverage on late notice grounds unless the untimely notice “materially impairs” the insurer’s ability to investigate or defend the claim, the Legislation does not confer an equivalent benefit to insurers whose disclaimers may not be timely, but whose delay in issuing them did not prejudice the insured. The Legislation does not amend the provision of New York Insurance Law Section 3420(d), which requires insurers of liability policies issued or delivered in New York to provide written notice of their disclaimer or denial of coverage “as soon as is reasonably possible” with respect death or bodily injury claims resulting from an accident occurring within the state. Insurers who do not comply with that “as soon as is reasonably possible” requirement may be estopped from relying on policy exclusions or breaches of policy condi-tions to deny coverage, even if the insured is not prejudiced by the late disclaimer.
Declaratory Judgment Actions and Direct Actions
The Legislation also amends Section 3001 of the New York Civil Practice Law and Rules, governing declaratory judgment actions, to permit a party who has brought a claim for personal injury or wrongful death (not property damage) to file suit directly against the alleged tortfeasor’s insurer for declaratory relief where that insurer has denied coverage of the claim based on late notice. The revision to the declaratory judgment rules incorporates by reference new provisions of Insurance Law Section 3420, which requires subject policies to include a provision that, with respect to a claim arising out of death or personal injury, if the insurer disclaims coverage based on late notice, a direct action may be brought against the insurer by “the injured person or other claimant.” By referring to “other claimant,” the mandatory new provision potentially brings within the scope of this expanded right of direct action co-defendants with cross-claims as well as those with derivative claims.
The amendment, however, limits the main-tenance of such direct actions to those in which “the sole question is the insurer’s disclaimer or denial based on the failure to provide timely notice.” It is unclear how, as a practical matter, courts will apply the new law to situations where a claimant’s dispute concerns a number of coverage issues, of which only one is a denial based on late notice. If strictly applied, a claimant would not be able to litigate other coverage issues, such as a denial based on the assertion that a claim is not within the scope of the insuring agreement or falls within an exclusion, until after it obtains an unsatisfied judgment in favor of the claimant. Thus, while the issue of whether an insurer is prejudiced from a late notice will, in many instances, involve a discrete and separate set of facts, the limitation of direct actions to the “sole” question of late notice could result in multiple coverage litigations involving the same claim.
However, the claimant’s right of direct action does not apply if, within 60 days of the issuance of a disclaimer based upon late notice, either the insured or the insurer initiated a declaratory judgment action and named the claimant as a party. Thus, the Legislation effectively not only provides a right of direct action by claimants against insurers, but also encourages actions by insurers against claimants.
Previously, New York law permitted a tort claimant to file a direct action against an insurer only if a judgment against an insured remained unsatisfied for 30 days, and did not require an insurer to bring an action against a claimant as well as its insured when seeking a declaration as to the coverage of a claim afforded by a policy.
Insurer’s Duty to Confirm Coverage to Claimants
The Legislation also establishes a process by which a claimant in a personal injury or wrongful death action can obtain confirmation from a primary insurer of a tortfeasor’s insurance before the claimant institutes a lawsuit. The Legislation requires that an insurer provide, within 60 days of receiving a written request from a claimant, confirmation that the insured had a liability policy and specification of its coverage limits. If the claimant fails to provide sufficient information for the insurer to identify the policy, the Legislation requires the insurer request the additional information needed within 45 days of receiving the claimant’s request, and to make the necessary disclosure within 45 days of receiving the supplemental information from the claimant. This provision of the Legislation applies solely to liability policies covering bodily injury or wrongful death claims where the policy is either (i) a personal lines policy other than an excess or umbrella policy, or (ii) used to satisfy a financial responsibility requirement imposed by law.
Significantly, the Legislation will not apply retroactively to policies issued prior to its effective date. Section 8 of the Legislation states that it shall become effective 180 days after it is signed into law, and will only apply to policies issued after that 180-day period. Accordingly, the Legislation takes effect on January 19, 2009. Thus, all policies issued before that date will be governed by the prior common law of New York that did not require an insurer to demonstrate prejudice to deny coverage based on late notice of claim, and by the prior statutory law, which limited claimants’ right of direct action against insurers to situations in which the claimant had previously obtained a judgment against an insured that had remained unsatisfied for more than 30 days.
The January 19, 2009 effective date also makes it unlikely that there will be any court decisions until well into 2009 as to the scope of application of the Legislation. Therefore, it may be some time before it is clear whether the new prejudice requirement will be adopted as a new statement of the public policy of the State of New York, and incorporated into the common law of New York applicable to policies beyond those expressly within the scope of the Legislation.