Question of Fact Found on Timeliness of Insurer's Non-Cooperation Disclaimer

PROFESSIONAL LIABILITY – NON-COOPERATION – TIMELINESS OF DISCLAIMER
Continental Cas. Co. v. Stradford
(Ct. Apps., decided 11/25/2008)

When an insured is not cooperating in the defense of a suit against him that alleges bodily injuries, at what point does New York Insurance Law § 3420(d) require the insurer timely to disclaim coverage? Judge Ciparick, who wrote this opinion for the Court of Appeals, said it best: "Fixing the time from which an insurer's obligation to disclaim runs is difficult." Especially in non-cooperation situtations, such as this.

Continental insured Staten Island dentist Terrance Stradford, who was sued for dental malpractice in two separate actions. Over the course of nearly six years from 1998 through 2004, Stradford cooperated only sporadically with Continental in the defense of those actions. In July 2004, Continental mailed Stradford two detailed letters -- one for each underlying action -- setting forth his history of noncompliance, evasion and broken commitments. Those letters also demanded that Stradford schedule a meeting with newly-retained counsel Stradford himself had demanded be retained for a date on or before August 13, warned that further non-cooperation "may imperil" his coverage, and, given adverse expert findings regarding Stradford's care of the underlying defendants, recommended that he consent to settlement of both actions. On August 11, 2004, Continental received both letters back as "unclaimed" (Stradford and his former employee, Christina Hachadoorian, apparently being preoccupied with other matters at that very time).

Approximately two months later, on October 13, 2004, Continental's outside counsel sent a disclaimer letter to Stradford. Two days later, Continental commenced this action, seeking a declaratory judgment that it had no duty to defend or indemnify Stradford in the two underlying dental malpractice actions. Continental's decision to disclaim was bolstered by a declaratory judgment issued on June 1, 2004 in two other dental malpractice actions then pending against Stradford. In that DJ action, the court had held that Stradford's failure to respond to multiple letters seeking his cooperation and his absence on trial dates constituted sufficient grounds for a disclaimer of coverage. Stradford never appeared in this DJ action, but the two underlying plaintiffs, named as defendants in this DJ, contested Continental's disclaimers.

Following discovery, the parties moved and cross-moved for summary judgment, the defendants contending that Continental's disclaimer was untimely or that it had not sustained its burden of proving Stradford's non-cooperation. Richmond Supreme granted Continental's motion, concluding that Stradford was not entitled to defense and indemnification because of his multiple breaches of the the cooperation clause. In a 3-2 decision, the Second Department reversed, the majority holding that Continental had sufficient information to support a disclaimer of coverage not later than August 11, 2004, when its letters to Stradford came back marked unclaimed and that Continental's subsequent two-month delay in disclaiming was not "as soon as reasonably possible" in violation of Insurance Law § 3420(d) as a matter of law. Continental appealed.

The Court of Appeals MODIFIED by denying the defendants' cross motion for summary judgment:

Even if an insurer possesses a valid basis to disclaim for non-cooperation, it must still issue its disclaimer within a reasonable time (see 14 Couch on Insurance 3d § 199:69). When construing Insurance Law § 3420 (d), which requires an insurer to issue a written disclaimer of coverage for death or bodily injuries arising out of accidents "as soon as is reasonably possible," we have made clear that timeliness almost always presents a factual question, requiring an assessment of all relevant circumstances surrounding a particular disclaimer (First Fin. Ins. Co. v Jetco Constr. Corp., 1 NY3d 64, 69 [2003]; Hartford Ins. Co. v County of Nassau, 46 NY2d 1028, 1030 [1979]; Allstate Ins. Co. v Gross, 27 NY2d 263, 270 [1970]). One of those circumstances is the time necessary for an insurer to conduct a prompt investigation into those grounds supporting a potential disclaimer (see Gross, 27 NY2d at 270; First Fin. Ins. Co., 1 NY3d at 69). Although we have declined to provide a "fixed yardstick" against which to measure reasonableness of a delay in disclaiming coverage (see id. at 70), we have said that cases in which the reasonableness of an insurer's delay may be decided as a matter of law are exceptional and present extreme circumstances (see Hartford, 46 NY2d at 1030; Gross, 27 NY2d at 270). This is not such a case.

Fixing the time from which an insurer's obligation to disclaim runs is difficult. That period begins when an insurer first becomes aware of the ground for its disclaimer (see First Fin. Ins. Co., 1 NY3d at 68-69, quoting Matter of Allcity Ins. Co. [Jimenez], 78 NY2d 1054, 1056 [1991]). But unlike cases involving late notice of claims (see id. at 66-67; Hartford, 46 NY2d at 1029; Gross, 27 NY2d at 268) or other clearly applicable coverage exclusions, an insured's non-cooperative attitude is often not readily apparent. Indeed, as here, such a position can be obscured by repeated pledges to cooperate and actual cooperation.

The challenge of setting an appropriate date is only heightened by the heavy burden that an insurer seeking to establish a non-cooperation defense must carry (see Thrasher v U.S. Liab. Ins. Co., 19 NY2d 159, 168-169 [1967]; accord Matter of Empire Mut. Ins. Co. [Stroud], 36 NY2d 719, 721 [1975]). To further this State's policy in favor of providing full compensation to injured victims, who are unable to control the actions of an uncooperative insured, insurers must be encouraged to disclaim for non-cooperation only after it is clear that further reasonable attempts to elicit their insured's cooperation will be futile (see Thrasher, 19 NY2d at 168; see also Matter of Liberty Mut. Ins. Co. v Roland-Staine, 21 AD3d 771, 772 [1st Dept 2005] ["strict[] scrutin[y]" of facts supporting non-cooperation defense required to protect "innocent injured parties from suffering the consequences of a lack of coverage"]). In some cases, such as where an insured openly disavows its duty to cooperate (see e.g. Allcity Ins. Co. v 601 Crown Street Realty Corp., 264 AD2d 315, 316-317 [1st Dept 1999]) little time is needed to evaluate the relevant non-cooperative conduct before disclaiming. But here, where an insured has punctuated periods of non-compliance with sporadic cooperation or promises to cooperate, some reasonably longer period for analysis may be warranted.

The Appellate Division majority acknowledged that even after June 1, 2004, when Continental received a declaratory judgment that it was entitled to disclaim coverage in the O'Halloran and Shields actions, the carrier "was continuing to pursue its heavy burden" of attempting to bring about Stradford's compliance in the two actions relevant here (see 46 AD3d at 601). The court also found that the time for disclaimer ran from August 11, 2004, the date when what became Continental's final letters to Stradford were returned unclaimed. Following that date, there is no indication that the company engaged in further communication with Stradford. Thus, on these facts, we agree with both of the Appellate Division's conclusions.

Contrary to the Appellate Division, however, we conclude that a question of fact remains regarding the amount of time required for Continental to complete its evaluation of Stradford's conduct in the two underlying actions. In this case, the reasonableness of an approximately two-month delay to analyze the pattern of obstructive conduct that permeated the insurer's relationship with its insured for almost six years presents a question of fact that precludes entry of summary judgment for either plaintiff or for defendants (see First Fin. Ins. Co., 1 NY3d at 69 ["[I]nvestigation into issues affecting an insurer's decision whether to disclaim coverage obviously may excuse delay in notifying the policyholder of a disclaimer"]; Hartford, 46 NY2d at 1030 ["[A] two-month delay may often be easily justified, if in fact there be justification"]).

When the case returns to Richmond County for further proceedings, its unlikely that Dr. Stradford will be available over the next 116 months or so for testimony. He's got a conflicting appointment. Given Stradford's non-cooperativeness, he made an ironic choice of appellate counsel, don't you think?