Prejudice, Presumptions, and Burdens of Proof

Not sure whether it is fatalism, pessimism or perhaps legal realism that has me thinking the direct DJ/late notice/prejudice bill is going to pass the NYS Legislature in the next 9 days, but maybe now is a good time to review what liability insurers will need to prove or establish to sustain late notice disclaimers in about 189 days or so. Actually, the new provisions will apply to qualifying policies "issued or delivered in this state on or after [the effective] date and to any action maintained under such a policy[.]"

Not mentioned in any of the alerts, articles or blogs I've read on this bill is the upfront cost that New York liability insurers will necessarily incur in complying with the new law. By adding new subsection 5 to Insurance Law § 3420(a), which mandates the "provision[s]" qualifying New York BI and PD liability policies must contain, the bill will require insurers to amend their policy language, which means new New York amendatory endorsements, notices, mailings, etc. Once the new law takes effect and until new endorsements are in place, of course, existing policies will be deemed to include the new late notice provision.

Prejudice

That provision, pursuant to what will be Insurance Law § 3420(a)(5), will state or provide that a "failure to give any notice required to be given by [this] policy within the time prescribed [here]in shall not invalidate any claim made by any insured, injured person or any other claimant, unless the failure to provide timely notice has prejudiced [us] the insurer[.]"

The new law will not explicitly define what is meant by "prejudiced", but does states that in DJ litigation over a late notice disclaimer, "the insurer's rights shall not be deemed prejudiced unless the failure to timely provide notice materially impairs the ability of the insurer to investigate or defend the claim."

Expect litigation over and court interpretation of what constitutes a "material impairment". The use of the qualifying adverb "materially" probably means that not all impairments will sustain a late notice disclaimer. My vision is impaired, but I can wear contacts or glasses to correct it, so is my impairment material? In other words, how much of an impairment of either an insurer's investigation or defense will be enough to rise to the level of being "material"?

Presumptions

In the "giveth" column vis-à-vis insurers, the new law will provide that an "irrebuttable presumption" -- a/k/a the kind summary judgment motions are made of -- of prejudice "shall apply if, prior to notice, the insured's liability has been determined by a court of competent jurisdiction or by binding arbitration; or if the insured has resolved the claim or suit by settlement or other compromise."

That means pre-notice default judgments and settlements, essentially. I see a potential loophole, or wormhole, however. Homeowners accident. Insured is sued, let's say, 18 months later. Doesn't notify insurer. Plaintiff files/serves default judgment motion. Insurer now gets notice. Contacts plaintiff's counsel to learn of pending default judgment motion. Asks for adjournment of motion to investigate apparent late notice issue. Plaintiff's attorney want to bargain -- concession of coverage for withdrawal of default judgment application. Insurer declines offer. Default judgment taken. Insurer timely disclaims for late notice.

Under that scenario, there arguably would be no "irrebuttable presumption" of prejudice because the insured's liability had not been determined by a court of competent jurisdiction "prior to notice". The insurer would be left to argue that its defense of the claim was "materially impaired" by the delayed notice and, since the notice was less than 2-years delayed, the burden of proving material impairment or prejudice would be on the insurer. Of course, one would think that a default judgment taken after first notice should easily constitute material impairment, but I can envision plaintiffs' counsel arguing that without first testing whether the default judgment can be vacated (which most courts routinely grant on the slimmest of excusable neglect and meritorious defense grounds), the insurer cannot argue that its defense was materially impaired in any sort of permanent way.

Is it meaningful, therefore, that 3420(a)(5) uses the present and not past tense of the verb "impairs"? If a present impairment can be overcome, will or should that negatively impact the insurer's argument of impairment and render it non-material? I don't think so, but I won't get to decide this question. The courts will.

Burdens of Proof

This will be the 2-year rule:

• If the notice is delayed by more than two years, the burden will be on the insured, injured person or other claimant to prove a negative, viz, that the insurer was not prejudiced.
• If the notice was provided within two years, the burden will be on the insurer to prove that it was prejudiced.

New Insurance Law § 3420(c)(2)(A), however, will speak of late notice from "the time required under the policy[.]" Especially in cases of late notice of more than two years in length, expect increased, vigorous litigation over whether facts known to the insured triggered the notice provision in the first place.

I know what's material. The material court decisions will provide for future blogs on this subject after this law goes into effect. Looking forward.