Three significant coverage cases were handed down today by the New York Court of Appeals, New York’s highest court. Accordingly, we bring you this Special Edition of Coverage Pointers.
04/30/02: MATTER OF BRANDON v. NATIONWIDE MUT. INS. CO.
New York Court of Appeals
In NY Prejudice MUST BE SHOWN Before SUM Carrier Can Reject Coverage For Failure to Receive Suit Papers
New York courts have held for years that an insured who breaches a “notice of accident” or “notice of lawsuit” provision in a liability policy risks losing his or her coverage even without the carrier showing prejudice, a position that stands virtually alone in the nation. Under the SUM (underinsured motorists) provisions of Regulation 35-D, an insured is required to give prompt notice of the filing of a lawsuit against the tortfeasor.
New York’s highest court holds that failure to give the insurer prompt notice of that pending lawsuit is only a breach of the SUM provisions of the policy IF the carrier can show it is prejudiced as a result of that late notice. Given the protection SUM insurers already enjoy by virtue of the notice of claim requirement and the clauses governing settlement, insurers relying on the late notice of legal action defense should be required to demonstrate prejudice, placing “the burden of proving prejudice on the insurer because it has the relevant information about its own claims-handling procedures and because the alternative approach would saddle the policyholder with the task of proving a negative”.
04/30/02: AUGUST v. NEW YORK CENTRAL FIRE INS. CO.
New York Court of Appeals
"YOU" in Auto Policy Means "Named Insured and Spouse" -- Accordingly When Wife is Driving Car She Owns, Coverage is Excluded Under Her Policy
Plaintiff suffered personal injuries when his vehicle collided with a vehicle owned and operated by Susan Schwarz. In addition to pursuing compensation under the Liberty Mutual Insurance policy Susan Schwarz had purchased to cover her vehicle, plaintiff sought compensation under a policy Susan’s husband, Robert Schwarz, acquired from defendant New York Central Mutual Fire Insurance Company, which designated a vehicle he owned as the “covered auto.” Central Mutual timely disclaimed coverage on the ground that the accident fell within an exclusion in the policy.
Plaintiff commenced this declaratory judgment action seeking a determination that Central Mutual was obligated under the policy issued to Robert Schwarz to extend liability coverage to Susan Schwarz on this personal injury claim. Supreme Court granted this relief but the Appellate Division reversed and declared that Central Mutual had properly disclaimed coverage. New York’s high court agrees. Central Mutual’s disclaimer is based on a policy provision excluding liability coverage for the ownership, maintenance or use of any vehicle, other than the designated covered auto, which is owned by “you” or “furnished or available for your regular use.” Elsewhere in the policy, the terms “you” and “your” are defined to include the named insured — in this case, Robert Schwarz — and the spouse of the named insured if the spouse is a resident of the same household.
This case falls squarely within the policy exclusion because Susan Schwarz resided with her husband, thereby meeting the policy’s definition of “you” and she was operating a vehicle she owned which was not designated in the policy as a covered auto.
04/30/02: ALLSTATE v. SERIO
New York Court of Appeals
Insurance Regulation Prohibiting Policy Provision Permitting “Preferred” Repair Shops Found Invalid
The Department of Insurance initiated an investigation to determine whether insurance companies were complying with Insurance Law §2610(b), which regulates the “steering” of policyholders by insurers to particular auto-repair shops with which the insurance company has a relationship. The statute prohibits insurers from recommending or suggesting that repairs be made in a particular shop unless expressly requested by the insured. Allstate, among others, was found to be in violation in connection with Allstate’s Priority Repair Option Program, pursuant to which Allstate employees would inquire whether claimants had a preferred repair shop and, in the event they did not, would inquire whether claimants wanted a recommendation. If so, the agent would recommend a shop that was part of Allstate’s program. Allstate also displayed signs and brochures advertising the program. Allstate and the Department reached a settlement in which Allstate agreed not to (1) discuss the selection of repair shops unless it was actually requested by the claimant, (2) inform claimants that §2610(b) forbade them to recommend a shop unless prompted, (3) knowingly distribute literature referring to any repair facility programs to policyholders once a claim had been reported, unless actually requested to do so by the claimant, and (4) display signs or brochures referring to its Priority Repair Option Program or otherwise advertise any repair facility programs at its offices where claimants might be exposed. The Department then issued advisory Circular Letter 4, which articulated the Department’s interpretation of §2610(b), and contained terms similar to its settlement with Allstate.
Soon thereafter, the Department also rejected a proposal by GEICO to change its Automobile Casualty Manual to provide for a preferred repairer promotion in which in exchange for reduced premium payments, insureds agreed that repairs would be completed at a repair shop recommended by GEICO.
Allstate and GEICO filed suit for injunctive relief and judgments declaring that §2610(b) was unconstitutional and that the Department’s actions be overturned. On certified questions from the Second Circuit, the New York Court of Appeals concluded that the Department’s actions did not comply with §2610(b). Without reaching the constitutional questions, the court held that both Circular Letter 4 and the settlement exceeded the statute’s requirements and were therefore invalid. “The legislative intent in enacting section 2610 was to protect the consumer’s right to choose and to combat the practice of coercing or enticing consumers into using repair shops selected by insurers rather than the ones they preferred to use.” The Department failed to show how Circular Letter 4 advanced the legislative intent of §2610(b), nor was it able to support its broad construction of the statute. The statute does not prohibit the distribution of brochures or other literature, the posting of signs, the initiating of communication that might prompt an insured to request a repair shop recommendation, the discussion of an insured’s repair shop choice, or the mentioning of the mere existence of §2610(b) to an insured.
The court also concluded that the Department’s rejection of GEICO's proposed preferred repairer promotion was similarly based on restrictions not supported by section 2610(b). Thus, its objection was not sustainable.
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