4-Month Delay in Disclaiming Based on Family Member Exclusion Held to be Timely

AUTO – SUM – STAY OF ARBITRATION – TIMELY DISCLAIMER – INSURANCE LAW § 3420(D)
Matter of New York Central Mut. Fire Ins. Co. v. Steiert
(Sup. Ct., Nassau Co., decided 7/17/2008)

Dawn Steiert was injured in a motor vehicle accident with a vehicle owned and/or driven by Erich John Bohn and insured by Eagle Insurance Company. The Eagle policy had a $50,000 per person liability coverage limit. Bohn apparently lived with his grandfather, who owned a car insured by Kemper. Excess coverage was sought for Bohn under his grandfather's policy.

Kemper received notice of the accident on October 18, 2001 and issued a reservation of rights letter on October 26, 2001. It conducted EUOs of Bohn and his grandfather on January 2, 2002 and received the EUO report on January 21, 2002. Thirty-six days later, Kemper issued a disclaimer on February 27, 2002 based on its policy's exclusion for autos owned by a family member that were not covered autos.

Although the decision does not say so, Steiert presumably collected the $50,000 policy limit from Eagle and then made a claim for supplementary uninsured motorist (SUM) coverage benefits to New York Central, which commenced this special proceeding for a stay of arbitration based on its assertion that Kemper owed excess coverage to Bohn. New York Central argued that Kemper's disclaimer, sent four months and nine days after Kemper first received notice of the accident was untimely under Insurance Law § 3420(d).

Nassau County Supreme Court Justice Kenneth Davis disagreed and dismissed New York Central's petition, finding that Kemper's 36-day delay after receiving the EUO report in issuing the disclaimer was reasonable:

The issue currently before this court is whether Kemper timely disclaimed. Where, as here, Insurance Law § 3420 (d) is applicable and a disclaimer is based on a policy exclusion, a timely disclaimer of coverage is required. Given that Kemper's disclaimer of coverage rested on an exclusion in the insured's policy, Kemper had a statutory duty to timely disclaim. On the facts presented, the court finds that Kemper credibly testified that it did not have " sufficient knowledge of the facts entitling it to disclaim" until after receipt of the Examinations Under Oath report. As such, we conclude that Kemper's disclaimer of coverage, made approximately 36 days after receipt of the report, satisfied the statute and was timely as matter of law.

Finding that Kemper "offered a sufficiently reasonable explanation for the delay, accounting for the time that [it] took to issue the disclaimer", Justice Davis rejected New York Central's argument that Kemper could have and should have used more expedient means of investigating coverage than conducting EUOs:

In the instant case, the claim against Kemper was for excess coverage, and respondent Steiert had a viable primary claim against Eagle and NYCM. Kemper issued a reservation of rights letter twelve days after receiving first notice of the claim. Kemper then initiated an investigation in order to flesh out the basis for denying coverage. This investigation, which according to the testimony of the senior claim representative handling the litigated first and third-party claims William Lavoie, included Examinations Under Oath of both the defendant/grandson , Erich John Bohn, and the insured/grandfather, was needed to attain the facts providing the basis on which to disclaim. Contrary to petitioner's contention that Kemper could have used a method other than Examination Under Oath, Mr. Lavoie credibly testified that examinations are the primary tool used by Kemper to determine coverage in these types of instances. Mr. Lavoie also credibly testified that in accordance with Kemper's internal policy, the next step in the investigation into the propriety of the claim was to refer the claim to the technical claim manager who consults with the home office liability executive, who ultimately makes the decision whether to approve or deny coverage.