Feb 6, 2013

Court keeps insurers' late notice defense alive despite 2008 law

U.S. District Judge Denise Cote held in mid-January that Value Waterproofing Inc.'s delay in notifying Atlantic Casualty Insurance Co. about the roof collapse was serious enough to bar coverage for an underlying lawsuit blaming its repair work in Atlantic Casualty Insurance Company v. Value Waterproofing Inc., 2013 WL 152854 (S.D.N.Y., 2013). In its decision, the Southern District Court of New York held that a commercial general liability insurer had no duty to defend or indemnify its insured where the insured had failed to provide timely notification of a claim. This appears to be the first decision to address New York Insurance Law Section 3420(a)(5), which provides that an insurer cannot deny coverage on late notice grounds unless it demonstrates direct prejudice. 

Atlantic Casualty Insurance Co. issued a commercial general liability policy to Value Waterproofing Inc. In early February 2010, Value was hired by Kansas Fried Chicken to repair its roof. Later that month, a major snow storm hit New York, leaving approximately 20 inches of snow on KFCs roof. KFCs roof collapsed. KFC immediately informed Value and its own insurance carrier, Greenwich Insurance Co., of the collapse. Value, however, failed to notify Atlantic. Atlantic was first made aware of the loss some six months later by letter from Greenwich, which was seeking to subrogate against Value on behalf of KFC. Atlantic sent a claims investigator to the property who observed that the damaged portion of the building already had been demolished.  Atlantic requested information relating to the damage and repair work from Greenwich, but its request was ignored. Upon revisiting the property, Atlantic discovered that the entire second floor had been demolished pursuant to an NYC Department of Buildings order. Atlantic denied coverage for the loss, and filed suit seeking a declaration that it had no duty to defend or indemnify Value in connection with the subrogation action because it was unable to investigate the underlying loss due to late notice. Atlantic prevailed. The court emphasized the significance of notification provisions in allowing insurers to both investigate losses and maintain adequate loss reserves. By delaying notification for more than six months, the insured had "materially impaired" Atlantics ability to "ascertain potential causes of the collapse, information which would be highly relevant to an investigation and defense of [Values] claim." It was prudent for Atlantic to investigate the underlying loss as soon as it was placed on notice, even though the delay had caused it prejudice. An insurer that receives late notification of a claim, however, should not automatically assume it will be entitled to rely upon the insureds untimely notice as a ground for a denial. It is advisable that an insurer seeks to protect its position by undertaking inquiries as best it can, pending determination of its coverage obligation.

In 2008, the New York Legislature amended New York Insurance Law to require the insurer, in cases in which notice is given to the insurer within two years of the occurrence, to show that it was prejudiced by the untimely notice. [See: An Act to Amend the Civil Practice Law and Rules and the Insurance Law, in Relation to Liability Insurance Policies 8, 2008 N.Y. Sess. Laws 388 (McKinney 2008)]. Previously, New York courts had applied the "no-prejudice" rule under which an insurer had only to prove late notice and prejudice would be presumed. The amendment to the New York Insurance Law applies to insurance policies that were issued or delivered after Jan. 17, 2009. The parties agreed that N.Y. Insurance Law Section 3420(a)(5)'s prejudice requirement applies to the policy.