AN INSURANCE PRIMER : PREJUDICE REVEALED
Steven E. Peiper, Esq.
Hurwitz & Fine, P.C.
1300 Liberty Building
Buffalo, New York 14202
As many of you already know, the New York State Legislature threw a bit of a curve ball at both coverage counsel, and claims professionals, alike last week. In prompt action, both the Senate and General Assembly passed legislation that will significantly alter a carrier’s ability to deny coverage as a result of an insured’s failure to provide timely notice of a claim. The bill, which currently awaits Governor Spitzer’s signature in Albany, will require that an insurance carrier may only prevail on a disclaimer premised upon late notice of claim if it also establishes that it has been prejudiced by the delay of its insured.
As faithful readers of Coverage Pointers are fully aware, New York has a long and proud tradition of being one of the last jurisdictions to abide by a “no prejudice” rule when it comes to violations of notice conditions contained in an insurance policy.[i] However, the strong “no prejudice” rule which has been a fundamental tenant of New York Insurance law for decades has been slightly weakened over the past few years. First, in the context of Supplementary Underinsured Motorists coverage the Court of Appeals ruled that a carrier must establish prejudice when disclaiming coverage for late notice of lawsuit.[ii] Next, in 2005, the Court of Appeals further tweaked the “no prejudice” rule with regard to Supplementary Underinsured Motorists coverage by requiring a demonstration of prejudice when disclaiming as a result of an insured=s failure to provide timely notice of a claim.[iii] Now, with the presumed passage of the current bill, the Legislature has extended the need for prejudice to any disclaimer (regardless of the type of policy) which is premised upon an untimely notice of claim.[iv]
Given the broad reach of the latest developments, it is now a good time to attempt to nail down exactly what a carrier must establish to ensure the validity of a disclaimer premised upon an insured’s failure to provide timely notice of claim. However, to understand where courts might be going given the recent proclamation by the Legislature, it is necessary to first review the status of New York’s “no prejudice” law prior to June of 2007.
WHAT THE RULE WAS
In the landmark decision of Sec. Mut. Ins. Co. v Acker-Fitzsimons Corp., the New York Court of Appeals (New York’s highest hourt) established that insurers need not establish prejudice when disclaiming on an insured’s failure to comply with the policy’s notice provisions.[v] The Court of Appeals explained that “notice provisions in insurance policies afford the insurer an opportunity to protect itself, and the giving of the required notice is a condition to the insurer’s liability.” The holding of Sec. Mut. Inc. Co. v. Acker-Fitzsimons Corp. was recently revisited by the Court of Appeals in Spring of 2005 wherein the Court of Appeals reaffirmed New York’s traditional “no prejudice” rule for denying coverage premised upon an insured’s failure to provide prompt initial notice of a lawsuit or claim.[vi] In protecting the traditional “no prejudice rule,” the Court of Appeals noted that “[S]trict compliance with the contract protects the carrier against fraud or collusion…” The Court of Appeals went on to state that “late notice…is so likely to be prejudicial to these concerns as to justify the application of the no-prejudice rule” (emphasis supplied).
WHAT THE RULE IS
However, as noted above, regardless of the Court of Appeals decision in The Argo Corp., the “no prejudice” rule has suffered some setbacks, particularly in area of Supplemental Underinsured Motorists coverage, in the past few years. First, the Court of Appeals’ decision of In re Brandon (Nationwide Ins. Co.) held that where a carrier was already on notice of an incident, it would have to establish prejudice in order to successful deny coverage as a result of the insured’s failure to provide timely notice of a lawsuit.[vii] In reaching this conclusion, the Court again set forth some of the reasoning behind the “no prejudice” rule which included the need for an insurance carrier to protect itself from fraud by promptly investigating claims, to set reserves immediately after the incident, and to take an active role in initial settlement negotiations.
Thereafter, in Rekemeyer v. State Farm Auto Ins. Co., the Court of Appeals ruled that the “no prejudice” rule was not applicable to an insured’s late notice of claim under his or her Supplementary Uninsured Motorists coverage.[viii] Again, the Court reasoned that the “no prejudice” rule was designed to combat against fraud and collision. The Court intimated that when a carrier is promptly put on notice of an occurrence, it automatically has an opportunity to investigate the incident which is the strongest mechanism to avoid fraud and/or collision. At least in the context of SUM coverage, the Court of Appeals ruled that because the reasoning for the “no prejudice” law is not triggered when there is timely notice of the occurrence, a carrier must establish it was actually prejudiced by the delay when disclaiming as a result of an insured’s late notice of claim.
The effect of the proposed bill is to simply extend the Court of Appeals’ reasoning in Rekemeyer regarding the “no prejudice” rule and late notice of claim beyond SUM coverage to all insurance policies. One must understand, however, that the reasoning for the “no prejudice” remains unchallenged with respect to the presumed prejudicial impact of an insured’s late notice of accident/occurrence. In that regard, we believe that the “no prejudice” rule remains strong.
HOW IT IS DEFINED
In any event, as prejudice is now required for all disclaimers premised upon an insured’s failure to provide timely notice of a claim, one must understand what exactly prejudice is, and how it can be established. Because New York has traditionally been a Ano prejudice@ jurisdiction, our attempt to develop a working definition of what constitutes prejudice begins with a review of how other States have described the term. Initially, we note that Michigan courts have loosely defined prejudice in a late notice context as occurring when delay on the part of the insured Amaterially impairs an insurer=s ability to contest its liability to an insured or the liability of the insured to a third party.” [ix] In contrast, California law requires a carrier to demonstrate a Asubstantial likelihood@ that it could have either successfully defended the underlying tort action, or that the carrier could have settled the claim for a “smaller sum” than its insured was ultimately obligated to pay.[x] A third approach advanced by the courts of the State of New Jersey employs a two pronged approach to the definition of prejudice in late notice situations.[xi] To that end, New Jersey courts focus on (1) Awhether substantial rights [of the carrier] have been irretrievably lost as a result of an insured’s late notice, and (2) whether the insurer is able to establish a likelihood of success in the underlying tort action if the notice of the occurrence/claim was timely.
HOW IT IS ESTABLISHED
While the descriptions of prejudice in a late notice context can not be confined to a singular definition, the prevailing theme in virtually all jurisdictions remains generally consistent. In that vein, a claims professional would be well advised to call upon the words of former Supreme Court Justice Potter Stewart who uttered the famous line “I know it when I see it.” In the current context, there is no secret key to unlock prejudice, but discerning claims professionals will “know it when they see it.”
With this in mind, below is review of what some Courts have found to be prejudicial to insurance companies:
· Loss of document concerning a possible culpable party [xii];
· Inability to locate witnesses [xiii];
· Loss of opportunity to Aeffect an early settlement@ [xiv];
· Loss of opportunity to investigate the claim when still fresh [xv];
· Loss of a viable defense to the action [xvi];
· Physical changes in evidence [xvii];
· Loss of affirmative defenses [xviii];
· Loss of viable claims against other parties [xix]; and,
· Insured either consents to judgment or has default judgment entered against it.
Although the enactment of the current bill will certainly have an impact on coverage decisions premised upon late notices of claims, one must understand that all is not lost. We believe that the “no prejudice" rule remains strong in the context of late notice of an accident/occurrence. Thus, carriers may still disclaim upon late notice of an occurrence without the need to establish prejudice as well. Again, with respect to late notice of claim situations, remember the simple maxim that you will know prejudice when you see it.
[i]. The Argo Corp. v Greater N.Y. Mut. Ins. Co., 3 NY3d 332 (2005); Unigard Sec. Ins. Co. v North River Ins. Co., 79 NY2d 576 (1992); Sec. Mut. Ins. Co. of N.Y. v Acker-Fitzsimons Corp, 31 NY2d 436 (1972).
[ii]. In re Brandon (Nationwide Ins. Co.), 97 NY2d 491 (2002)
[iii]. Rekemeyer v. State Farm Mut. Auto Ins. Co., 4 NY3d 468 (2005)
[iv]. see Hurwitz & Fine, PC’s June 29, 2007 edition of Coverage Pointers for the full text of the proposed law, as well as our analysis of its likely impact on New York coverage law.
[v] Sec. Mut. Ins. Co. of N.Y. v Acker-Fitzsimons Corp, 31 NY2d 436 (1972).
[vi] The Argo Corp. v Greater N.Y. Mut. Ins. Co., 3 NY3d 332 (2005)
[vii] see footnote ii, supra
[viii] see footnote iii, supra
[ix].West Bay Exploration Co. v AIG Spec. Agencies of Texas, Inc., 915 F2d 1030, 1037, citing Wendel v Swanberg, 384 Mich. 468 (1971).
[x].see Northwestern Title Sec. Co. v Allan Boud Flack, 6 Cal App 3d 134, 143 (1st App. Dist. 1970).
[xi].see Kitchnefsky v National Rent-a-Fence of Am., Inc., 88 F Supp2d 360, 368 (DNJ 2000) citing Morales v National Grange Mut. Ins. Co., 176 NJ Super347 (NJ Super. Ct. 1980).
[xii]. New York City Hous. Auth. v Ins. Co of North Am., 210 AD2d 152 (1st Dept 1994).
[xiii]. New York City Hous. Auth. v Ins. Co of North Am., 210 AD2d 152 (1st Dept 1994).
[xiv]. Paramount Ins. Co. v Rosedale Gardens, Inc., 293 AD2d 235, 241 (1st Dept 2001); Hartford Fire Ins. Co. v Baseball Office of Commissioner, 236 AD2d 334 (1st Dept 1997).
[xv]. Paramount Ins. Co. v Rosedale Gardens, Inc., 293 AD2d 235, 241 (1st Dept 2001)
[xvi]. Hartford Fire Ins. Co. v Baseball Office of Commissioner, 236 AD2d 334 (1st Dept 1997);
[xvii] Great Am. Ins. Co. v C.G. Tate Constr. Co., 303 NC 387 (1981).
[xviii] Kermans v Pendleton, 62 Mich App. 576 (Court of App. 1975)
[xix] West Bay Exploration Co. v Int’l. Surplus Lines Ins. Co., 1989 U.S. Dist. LEXIS17026 (W.D. Mich. 1989)