55-Day Delay in Disclaiming Based on Livery Exclusion Held to Be Unreasonable in Light of Complaint Allegations

AUTO – PUBLIC OR LIVERY CONVEYANCE EXCLUSION – INSURANCE LAW § 3420(D) – UNTIMELY DISCLAIMER
Long Is. Ins. Co. v Johnson
(Sup. Ct., Kings Co., decided 7/22/2008)

This is the second time in a month that a New York court has held that when the allegations of a personal injury complaint make it clear that a policy exclusion applies, further investigation may be deemed "superfluous" or unnecessary, and the insurer will be found to owe coverage if it has not issued a timely declination of coverage based on that exclusion. The first time was in the GEICO v. Liberty Mutual case, posted last week.

On July 3, 2007, Ann Gulston was allegedly injured in a head-on collision with a van owned and operated by Oneil Johnson in which Deon Denny was a paying passenger. At the time of the accident, Johnson was insured by the then nine-year-old Long Island Insurance Company (LIICO) under an automobile insurance policy that excluded "liability arising out of the ownership or operation of a vehicle while it is being used as a public or livery conveyance[.]" Gulston sued Johnson for her personal injuries.

LIICO first learned of the underlying lawsuit on July 26, 2007, when it received a copy of Gulston's verified complaint, which alleged, in relevant part, that:

"defendant Johnson was in the course of his employment by defendant Rescue Car Service, Inc. at the time of the below referenced motor vehicle accident"; and

"defendant Johnson operated the above reference[d] motor vehicle with the permission and in the business of [defendant] Rescue Car Service, Inc."

LIICO sought unsuccessfully to EUO its insured, Johnson, but was able to conduct an EUO of his passenger, Denny, on August 30, 2007. On September 19, 2007 -- 55 days after receiving the underlying personal injury complaint -- LIICO issued a written disclaimer to Johnson and Gulston based on the policy's livery exclusion.

In granting Gulston's cross motion for summary judgment and declaring that LIICO's 55-day delay in disclaiming was unreasonable as a matter of law, Kings County Supreme Court Justice Robert Miller held:

Investigation into issues affecting an insurer's decision whether to disclaim coverage may excuse the delay in notifying the policyholder of a disclaimer (see First Fin. Ins. Co., 1 NY3d at 69; Delphi, 43 AD3d at 852) if such excuse relates to the insurer's decision to disclaim (see First Fin. Ins. Co., 1 NY3d at 69). If the reason for the delay is not excusable, the final inquiry is whether the delay is unreasonable as a matter of law (see First Fin. Ins. Co., 1 NY3d at 69-70).

Notwithstanding this nearly two-month delay, LIICO asserts that its disclaimer was timely "[s]ince the primary reason for disclaiming coverage herein was not readily apparent and required investigation," including an examination before oath of the paying passenger. LIICO's investigation, however, was superfluous, as the grounds for its disclaimer were readily apparent, before the onset of the delay, from the face of the complaint, which alleged that, at the time of the accident, Johnson was using his van as a livery vehicle in connection with his employment with Rescue. Several courts have held relatively short delays in notifying the insured of denial of coverage to be unreasonable as a matter of law (see First Fin. Ins. Co., 1 NY3d at 69-70 [a 48-day delay was unreasonable as a matter of law]; Matter of Nationwide Mut. Ins. Co. [Steiner], 199 AD2d 507, 508 [1993] [an unexplained 41-day delay was unreasonable as a matter of law]; Transcontinental Ins. Co. v Gold, 18 Misc 3d 1135 [A], 2008 NY Slip Op 50322, *1 [U] [2008] [even a "thirty-day delay is unreasonable as a matter of law where the sole ground on which coverage is disclaimed is obvious from the face of the notice of claim and the accompanying complaint, and there existed no need to conduct an investigation before determining whether to disclaim"]; but see New York Central Mut. Fire Ins. Co. v Majid, 5 AD3d 447, 448 [2004] [a 31-day delay in issuance a disclaimer letter based upon a livery vehicle exclusion was reasonable in light of the insurer's need to consult with counsel prior to the issuance of the disclaimer]). Accordingly, due to its untimely disclaimer, LIICO waived its right to rely upon the livery/public conveyance exclusion contained within its policy.

The court's ruling is consistent with Halloway v State Farm Ins. Cos. (23 AD3d 617 [2005], lv denied 6 NY3d 708 [2006]), on which LIICO relies. In Halloway, the Appellate Division, Second Department held that the insurer's disclaimer, which was issued five months from the date of the accident but immediately after the completion of an investigation, was timely based on the objective need for the insurer's prior investigation. "[I]n view of the contradiction between [the insured's] alleged statement at the time of the accident as related by the plaintiffs' attorney, and [the insured's] subsequent denial that passengers were present and the police report, it was reasonable for [the insurer] to investigate the incident to determine, inter alia, whether the livery vehicle exclusion applied" (id. at 618). The holding in Halloway was a justified departure, based on the numerous inconsistencies in the insured's testimony and in the police report, from the general rule enunciated in Republic Franklin Ins. Co. (16 AD3d at 479) that "[w]hen in doubt, an insurer should issue a prompt disclaimer and then seek a declaratory judgment concerning its duty to defend or indemnify" (id. at 618). After deciding Halloway, the Appellate Division, Second Department applied Republic's "disclaim first" approach, albeit without citing to it, in Allstate Ins. Co. v Swinton (27 AD3d 462 [2006]). In Allstate, an insurer's 34-day delay in disclaiming coverage, based upon lack of notice of the accident and the fact that the driver was not listed as an insured driver, was held to be unreasonable as a matter of law. The Appellate Division stated that the insurer "could have immediately disclaimed based upon lack of notice and thereafter disclaimed in a separate letter on the additional ground that the driver was not listed as insured driver once that fact was ascertained" (id. at 463). Subsequent to Allstate, the Appellate Division, Second Department held in Tully Const. Co., Inc. v TIG Ins. Co. (43 AD3d 1150 [2007]), that a 42-day delay in the issuance of the disclaimer was reasonable in light of the discrepancies in the oral and written communications by the insured, warranting further investigation by the insurer, including obtaining a copy of the summons and complaint in the underlying action. The court acknowledges that investigation into issues affecting an insurer's decision whether to disclaim coverage obviously may excuse delay in notifying the insured of a disclaimer (see e.g. DeSantis Bros. v Allstate Ins. Co., 244 AD2d 183, 184 [1997] [delay reasonable because of need to review 500-page file and conduct legal research], lv denied 91 NY2d 808 [1998]; Aetna Cas. & Sur. Co. v Brice, 72 AD2d 927, 928-929 [1979] delay reasonable due to insurer's difficulty gathering evidence because all those involved in accident had been killed], affd 50 NY2d 958 [1980]). In the instant case, however, it bears repeating that the excluded use of the insured van as a livery vehicle was readily apparent upon LIICO's receipt of the complaint in the underlying action.

Commentary: I am mildly troubled by this decision. Liability insurers should be encouraged, not discouraged, to make contact with their insureds and ask, "Hey, is what this complaint says true?", rather than accepting the allegations as accurate and issuing uninvestigated disclaimers to their insureds, leaving them without defense or indemnification coverage. In 1991, the New York Court of Appeals held in Fitzpatrick v. American Honda Motor Co., Inc., that even in cases in which pleadings do not allege a covered occurrence, a liability insurer must defend its insured when it has actual knowledge of facts demonstrating that the lawsuit does involve such an occurrence. The "disclaim first" and investigate or DJ later rule potentially leads to a number of problems. Nonetheless, liability insurers should take note of what seems to have become a prevailing view in the First and Second Departments.