Another Exception to the No-Prejudice Rule -- First Department Holds that Insurer Must Show Prejudice to Disclaim for Late Notice of Suit Where It Had Timely Notice of Accident and Claim

AUTO – LATE NOTICE OF SUIT – PREJUDICE REQUIRED
American Tr. Ins. Co. v. Rechev of Brooklyn, Inc.
(1st Dept., decided 12/9/2008)

We're only 38 days away from the January 17, 2009 effective date of the Direct DJ/Late Notice bill and its new requirement that liability insurers show prejudice in order to disclaim for late notice of an accident or occurrence. We also know that the Court of Appeals previously relaxed New York's longstanding no-prejudice rule in the SUM coverage context in Matter of Brandon (Nationwide Mut. Ins. Co.) (97 NY2d 491 [2002][a SUM carrier that received timely notice of a claim must show prejudice before disclaiming SUM benefits based on late notice of a legal action]) and Rekemeyer v State Farm Mut. Auto. Ins. Co. (4 NY3d 468 [2005][a SUM carrier that received timely notice of the accident must show prejudice before disclaiming SUM benefits based on late notice of claim]). The First Department has now apparently created yet another exception to the no-prejudice rule, holding that a liability insurer which has timely been notified of both an accident and a claim must show prejudice in order to disclaim coverage for late notice of the corresponding lawsuit.

I've always contended that there are two types of notice that are required under a standard liability insurance policy: (1) notice of accident or occurrence; and (2) notice of claim or suit. The First Department apparently thinks there are three types applicable to liability insurance: (a) notice of accident; (b) notice of claim; and (c) notice of suit. In instances where the liability insurer has received timely notice of the accident and "claim", the First Department now holds that the insurer must show prejudice from the untimely notice of suit in order to sustain a late notice disclaimer on that ground.

Late notice mavens might wonder whether and how this ruling can be reconciled with the Court of Appeals' 2005 decision in Argo Corp. v Greater N.Y. Mut. Ins. Co., 4 NY3d 332, in which the Court held:

The rationale of the no-prejudice rule is clearly applicable to a late notice of lawsuit under a liability insurance policy. A liability insurer, which has a duty to indemnify and often also to defend, requires timely notice of lawsuit in order to be able to take an active, early role in the litigation process and in any settlement discussions and to set adequate reserves. Late notice of lawsuit in the liability insurance context is so likely to be prejudicial to these concerns as to justify the application of the no-prejudice rule. Argo's delay was unreasonable as a matter of law and thus, its failure to timely notify GNY vitiates the contract. GNY was not required to show prejudice before declining coverage for late notice of lawsuit.

Such wonderment would be valid and reasonable. Since Argo Corp. was decided, most courts outside the First Department have summarily granted judgment to liability insurers in cases where notice of suit was found to be unreasonably delayed, without requiring the insurers to show prejudice from such delay.

But not in the First Department. Almost immediately, the First Department, which is the court from which the Argo Corp. case was appealed, began to chip away at the Argo Corp. ruling, holding in City of New York v Continental Cas. Co. (27 AD3d 28 [1st Dept., decided 12/13/2005]) that Continental's reliance on Argo Corp. was "misplaced" and instead finding that the facts of that case were more in accord with Matter of Brandon (Nationwide Mut. Ins. Co.). Since Continental had already been defending its named insured in the underlying personal injury action, the First Department found that Continental was not prejudiced by the City's "lackadaisical attitude in forwarding the suit papers" and invalidated Continental's late notice of suit disclaimer.

Forward to April, 2007, when the First Department held in American Tr. Ins. Co. v B.O. Astra Mgt. Corp. (39 AD3d 432), that "[h]aving received timely notice of claim, plaintiff insurer was not entitled to disclaim coverage based on untimely notice of the claimant's commencement of litigation unless it was prejudiced by the late notice (see Rekemeyer v State Farm Mut. Auto. Ins. Co., 4 NY3d 468, 476 [2005]; Matter of Brandon [Nationwide Mut. Ins. Co.], 97 NY2d 491, 498 [2002]), and such prejudice was not shown." Even more puzzling to an understanding of this decision was the First Department's acknowledgment that "[t]he relief afforded defendant claimant Kuok Hang Leong [the injured party] was proper notwithstanding the default of plaintiff's insured." The lower court's decision in that case (12 Misc3d 740) explained:

[U]nlike Argo, American Transit received notice of the lawsuit before a default judgment had been entered. Furthermore, American Transit could have prevented the default (see, e.g., Halali v Vista Envts., Inc., 8 AD3d 435, 435 [2d Dept 2004] ["(t)he non-party . . . Insurance Company" is an "interested person" under CPLR 5015]), but chose instead to allow the default judgment to be entered unopposed so that it could later avail itself of the "no-prejudice" rule. Accordingly, the "no-prejudice" rule does not apply in this case.

The potential for confusion existed when in September of this year the First Department held in 1700 Broadway Co. v Greater N.Y. Mut. Ins. Co. (54 AD3d 593), that Greater New York Mutual was not required to show prejudice from the additional insured's late notice of suit:

It is undisputed that plaintiff did not serve defendant with notice of the underlying personal injury action until eight months after plaintiff was served with the summons and complaint naming it as a defendant therein. Plaintiff has offered no excuse for this delay. Such delay without explanation constituted late notice as a matter of law. Defendant was not required to demonstrate prejudice by reason of the delay in order to disclaim coverage. New York has generally adhered to a no-prejudice rule, which allows a personal injury insurer in commercial general liability cases to disclaim coverage due to late notice of claim regardless of whether or not the insurer suffered any harm by reason of the delay (see Argo Corp. v Greater N.Y. Mut. Ins. Co., 4 NY3d 332 [2005]).

That brings us to the present case, the facts of which may be gleaned from New York County Supreme Court Justice Edward Lehner's decision on motions (2007 NY Slip Op 32384[U]). On March 31, 2003, Judith Klausner was injured in an automobile accident with a vehicle owned by American Transit's insured, Rechev of Brooklyn, Inc. Shortly afterwards, she or her attorney notified American Transit of the accident, pertinent facts, and her "claim" against Rechev. Less than two months after the accident, American Transit sent a letter addressed to Klausner as "Claimant", requesting that she complete a form providing information about the accident and her injuries. When Klausner's claim could not be settled, she commenced a personal injury action against Rechev in August 2004, but did not advise American Transit of the suit until after she had obtained an order for default judgment on liability against Rechev in September 2005.

By letter dated September 23, 2005, Klausner's counsel notified American Transit of the suit and order of default. On October 24, 2005, American Transit disclaimed coverage due to the failure of Rechev or Klausner to timely advise it of the underlying action. Klausner then proceeded to inquest and on March 29, 2006 obtained a $150,000 judgment Rechev and its employee driver. After receiving notice of the order of default, American Transit offered to provide liability coverage if Klausner would stipulate to vacate the default. Klausner refused. American Transit then commenced this DJ action to confirm its late notice of suit disclaimer and moved for summary judgment. Krausner cross-moved for payment of the $150,000 default judgment.

In AFFIRMING Justice Lehner's order granting American Transit's motion and denying Klausner's cross motion, the four-justice majority of the First Department held:

Although appellant had provided plaintiff with information about the accident shortly after it occurred, in compliance with the policy, she failed to give plaintiff notice of her suit against its insureds until 14 months after the suit was commenced and she had obtained an order for a default judgment. Plaintiff having thus lost its right to appear and interpose an answer, its disclaimer of coverage was proper (see Insurance Law § 3420(a)(3); American Tr. Ins. Co. v B.O. Astra Mgt. Corp., 39 AD3d 432 [2007], lv denied 9 NY3d 802 [2007]).

Leaving nothing to guess or doubt about the First Department's position on late notice of suit cases, Justice James McGuire concurred with the court's holding but wrote a separate memorandum "because [he] believe[d] we should explain that conclusion, especially in light of decisions by this Court and the Second Department that appear to support a different conclusion." Justice McGuire's concurring memorandum explains why the First Department's decision in 1700 Broadway and the Second Department's 2007 decision in Matter of GEICO Co. v Wingo, 36 AD3d 908 are distinguishable and why this appeal was controlled by the First Department's decision in American Tr. Ins. Co. v B.O. Astra Mgt. Corp.:

Consistent with the emphasis the Court of Appeals placed in Argo on the fact that the carrier had not received timely notice of claim, this Court held that "[h]aving received timely notice of claim, plaintiff insurer was not entitled to disclaim coverage based on untimely notice of the claimant's commencement of litigation unless it was prejudiced by the late notice" (id. at 432). This case is a fortiori to B.O. Astra, because ATIC received both timely notice of the accident and timely notice of Klausner's claim.

Finally, Justice McGuire addressed the issue of prejudice and found that a liability insurer which receives first notice of a suit after a default judgment has already been taken against its insured should not be required to make a motion to vacate the default:

The majority's analysis premises the propriety of the disclaimer of coverage on ATIC "having ... lost its right to appear and interpose an answer." For this reason, and because the majority goes on to cite B.O. Astra, it appears that the majority has concluded, albeit implicitly, that ATIC was required to show prejudice. As stated above, I agree that B.O. Astra requires that conclusion. Unquestionably, moreover, ATIC was prejudiced by Klausner's failure to provide notice until after she had obtained a default judgment. As Justice Lehner observed in his written decision granting ATIC's motion for summary judgment, although ATIC "could ... have applied to vacate the default ... on the part of its insured, it is far from clear whether such a motion would be granted, and it could be prejudicial to [ATIC's] rights to require it to appear for its insured under such circumstances." I would add only — I doubt Justice Lehner meant to suggest otherwise — that it is prejudicial to ATIC's rights to require it to shoulder the burden of moving to vacate the default.

Thus, the Matter of Brandon (Nationwide Mut. Ins. Co.) exception to the no-prejudice rule has been expanded to liability insurance, at least in the First Department.

So does this decision conflict with the Court of Appeals' decision in Argo Corp.? Well, the Court of Appeals denied American Transit's motion for leave to appeal the B.O. Astra Mgt. Corp. case to that court -- the first First Department case explicitly holding that an insurer which receives timely notice of a "claim" is not entitled to disclaim coverage based on untimely notice of the claimant's commencement of litigation unless it was prejudiced by the late notice. Arguments can be made for and against reconciling the First Department's decisions on this issue with the Court of Appeals' Argo Corp. decision.

Regardless of whether this case is a departure from or natural extension of the Court of Appeals' decision in Argo Corp., how much will the First Department's exception to the no-prejudice rule really matter, given that we are only a few weeks away from the effective date of the new prejudice rules anyway? At least about as much as the number of claims that can still be placed into suit in the First Department under liability policies issued prior to January 17, 2009. For those matters in which the liability insurer received timely notice of the accident and the injured party's "claim", it will need to demonstrate prejudice to sustain a late notice of suit disclaimer, irrespective of when the policy under which coverage is sought was issued.