Late Notice Disclaimer Upheld -- Not Filing Change of Address with NY Secretary of State for Service of Process Did Not Excuse Insured's Late Notice of Suit

CGL – LATE NOTICE – NO-PREJUDICE RULE
Briggs Ave. LLC v. Insurance Corp. of Hannover
(Ct. Apps., decided 11/20/2008)

In July 2003, a tenant in plaintiff's building commenced a personal injury action against plaintiff, serving the summons and complaint on the New York Secretary of State, the plaintiff's statutory and designated agent for service of process.  Plaintiff's sole member had moved since first organizing the LLC but did not file a change of address with the Secretary of State reportedly because the lawyer who formed the company did not tell him he was required to do so.  Consequently, plaintiff did not learn about the lawsuit until it was served directly with a motion for default judgment in April 2004, at which time plaintiff notified its CGL insurer, defendant Insurance Corporation of Hannover, of the claim and suit.

ICH disclaimed coverage based on plaintiff's failure to provide notice of suit "as soon as practicable".  Plaintiff commenced this DJ action in state court for defense and indemnification coverage in relation to the underlying action, and ICH removed the action to federal court.  On motion, the District Court dismissed plaintiff's complaint, holding that ICH's disclaimer was valid. Plaintiff appealed to the United States Court of Appeals for the Second Circuit, which certified to the following question to the New York Court of Appeals:

"Upon all the facts of this case, given the terms of the insurance policy and the reason for the insured's failure to give more prompt notice of the lawsuit to the insurer, should the insurer's disclaimer of coverage be sustained?"

In a unanimous decision, the Court of Appeal answered the certified question with a yes, holding that a liability insurer is entitled to disclaim coverage when the insured, because of its own error in failing to update the address it had listed with the Secretary of State, did not comply with a policy condition requiring timely notice of a lawsuit. While acknowledging that the plaintiff's mistake was understandable, that it caused no prejudice to ICH, and that the loss of insurance coverage was a a harsh result, the Court nonetheless reasoned:

Briggs relies on Agoado Realty Corp. v United Intl. Ins. Co. (95 NY2d 141 [2000]), in which we held that there was an issue of fact as to whether notice of a lawsuit was given "as soon as practicable." But Agoado is distinguishable. In that case, the Secretary of State sent documents to the insureds' lawyer, but the lawyer had died, and the insureds claimed they did not know of his death. Thus, in Agoado it may really have been impracticable for the insureds to find out about the lawsuit and give timely notice to the insurer. In this case, however, it is clear that the insured could have prevented the mishap.

Briggs's argument is essentially that its mistake was understandable; that it caused no prejudice to the insurer; and that the loss of insurance coverage is a harsh result. All this may be true, but it is irrelevant. We have long held, and recently reaffirmed, that an insurer that does not receive timely notice in accordance with a policy provision may disclaim coverage, whether it is prejudiced by the delay or not (Argo Corp. v Greater N.Y. Mut. Ins. Co., 4 NY3d 332, 339 [2005]; Security Mut. Ins. Co. of N.Y. v Acker-Fitzsimons Corp., 31 NY2d 436, 440 [1972]). While this rule produces harsh results in some cases, it also, by encouraging prompt notice, enables insurers to investigate claims promptly and thus to deter or detect claims that are ill-founded or fraudulent. The Legislature, weighing the competing interests at stake, has recently enacted legislation that strikes a different balance, more favorable to the insured (see L 2008, ch 388, §§ 2, 4 [amending Insurance Law § 3420, applicable to policies issued after January 17, 2009]), but that legislation has not yet become effective. The common law no-prejudice rule applies to this case.

Remember, to disclaim liability coverage based on late notice under occurrence-based liability policies issued, renewed or modified on or after January 17, 2009, insurers will need to demonstrate prejudice from a notification delay of less than two years, i.e., that the delay materially impaired the insurer's ability to investigate or defend the claim.