SUM Arbitration Stay Denied -- Prejudice from Late Notice of SUM Claim Not Shown

SUM – LATE NOTICE – PREJUDICE
Matter of Liberty Mut. Ins. Co. (Frenkel)
(3rd Dept., decided 1/29/2009)

The New York Court of Appeals' April 2005 decision in Rekemeyer v State Farm Mut. Auto. Ins. Co. created a new rule:  New York auto insurers were required to show prejudice before disclaiming SUM coverage for an insured's late notice of a SUM claim.  Three years earlier, that same court had ruled in Matter of Brandon (Nationwide Mut. Ins. Co.), 97 NY2d 491 (2002) that a SUM carrier which receives timely notice of a SUM claim must show prejudice before disclaiming SUM benefits based on late notice of the underlying legal action.  In Rekemeyer, inasmuch as State Farm had received timely notice of the accident and the insured's no-fault claim, the court held that State Farm was required to but had not established prejudice from late notice of the actual SUM claim, especially since State Farm had investigated the accident and conducted IMEs in relation to the insured's no-fault claim.

The Third Department has now carried the Rekemeyer rule a step farther.  In this case, Liberty's insured was involved in an automobile accident in an auto accident in October 2004 when the vehicle he was driving was rear-ended.  Three weeks later, the insured's attorney sent a letter to Liberty notifying it that the insured had been injured in an automobile accident, had incurred medical expenses, lost wages from work and would be seeking no-fault benefits under his insurance policy. The letter also stated that "if our investigation reveals that the offending vehicle was not insured or underinsured, we are therefore reserving our rights to pursue [uninsured motorist/supplemental uninsured/underinsured motorist] benefits under [said] endorsement in the policy."

More than two years later, in December 2006, the insured's attorney notified Liberty that the insured was in the process of settling a lawsuit that he had commenced against the tortfeasor for the limits of the tortfeasor's insurance policy and that the insured, upon such settlement, intended to seek supplemental uninsured/underinsured motorist (SUM) benefits under his policy with Liberty.  On January 3, 2007, Liberty notified the insured that it was disclaiming coverage under the policy on the grounds that the insured had failed to provide Liberty with timely notice not only of his lawsuit against the tortfeasor, but also of his claim for SUM benefits. After the insured served Liberty with a notice to compel arbitration, Liberty commenced this CPLR article 75 special proceeding for a permanent stay of that arbitration.  Albany Supreme dismissed Liberty's petition, and Liberty appealed.

In AFFIRMING the dismissal of Liberty petition for a permanent stay of the SUM arbitration, the Third Department noted that the 2004 attorney's letter did put Liberty on notice "of the existence of the accident and the potential implications it held for its policy" and ruled:

There is no dispute that petitioner was put on notice of the existence of the accident within three weeks of its occurrence and that respondent would be submitting a claim pursuant to the no-fault provisions of the policy. With that notice, petitioner also received the police report prepared in connection with the accident that identified the individuals involved in the accident as well as the vehicle each individual was operating.  Petitioner was also notified at that time that respondent would seek SUM coverage under its policy if the tortfeasor's policy proved inadequate to fully compensate him for the injuries that he sustained in the accident.  Under the circumstances, petitioner had ample information at its disposal shortly after the accident occurred to properly investigate this claim and ensure that its interests under the policy were fully protected. Equally important, petitioner has failed to demonstrate that respondent's delay in notifying it of the third-party action or the SUM claim in any way compromised its ability to investigate the circumstances surrounding the accident or to protect its interests under this policy (see Rekemeyer v State Farm Mut. Auto. Ins. Co., 4 NY3d at 475; Matter of Nationwide Mut. Ins. Co. [Mackey], 25 AD3d at 907). As such, its application to stay arbitration was properly denied. 

Under this holding, a mere letter from the insured notifying the auto insurer of an accident with injuries and impending no-fault claim would appear to be enough to satisfy an insured's notice of SUM claim requirement if the auto insurer is unable to prove prejudice from the insured's delay in actual, formal notice of such a claim.  Does this mean that New York auto insurers should investigate every accident reported to them, regardless of seriousness and far in advance of having any reason to believe that a SUM claim may be made?  Why would they?