Should Liability Insurers Investigate Coverage Issues in New York?

You've just received first notice of a claim for coverage under a liability insurance policy in New York. The scant paperwork you've received doesn't tell you much. The loss date is months or years ago, but, in good faith, your instinct is to contact your insured and investigate potential coverage issues, including late notice. You know that there is a time imperative in New York to disclaim or deny coverage as soon after first notice as possible. You've heard that delays as short as 30 days in disclaiming have been found to invalidate an otherwise appropriate coverage declination. But you've also heard that what's not in a declination letter cannot later be asserted as a coverage defense in a declaratory judgment action, so, if a coverage declination is warranted, you want to be careful to include all applicable noncoverage grounds, and some amount of investigation seems to be needed in order to to make a conscientious coverage determination. What do you do?

New York's "timely disclaimer statute", Insurance Law § 3420(d)(2) provides:

(d)(2) If under a liability policy delivered or issued for delivery in this state, an insurer shall disclaim liability or deny coverage for death or bodily injury arising out of a motor vehicle accident or any other type of accident occurring within this state, it shall give written notice as soon as is reasonably possible of such disclaimer of liability or denial of coverage to the insured and the injured person or any other claimant.

For this statute to apply there must be four things:

1. coverage sought under a liability policy
2. delivered or issued for delivery in New York State
3. for a death or bodily injury claim
4. that arose out of a accident that occurred in New York State.

If implicated, this timely disclaimer requirement applies only to exclusion-based or breach-of-condition-based disclaimers or denials. Technically it does not apply to apply to coverage declinations based on lack of coverage (inapplicability of inclusionary terms).

One need only to click the "untimely disclaimer" label of this blog to see that New York courts can be unforgiving of unexcused delays as short as 45 days (exclusion), 45 days (late notice), 55 days (exclusion), and 62 days (exclusion) in disclaiming coverage. Even a 30-day delay (late notice) has been held to be unreasonable as a matter of law. Holy cow. Understand the angst now?

Last Friday, the Appellate Division, Fourth Department, issued two decisions with two opposite results: timely disclaimer (44 days); untimely disclaimer (62 days). Was it just the length of the insurers' delays that determined the outcomes? No. It was the court's acceptance or rejection of each insurer's contention that an investigation of coverage was necessary to reach a coverage determination.

In Matter of GMAC Ins. Co. v. Jones the Fourth Department ruled that Nova Casualty Company's 44-day delay in disclaiming personal auto liability coverage based on late notice was justified given its investigation into the 18-month late notice situation. The court found that the fact that Nova knew of the 18-month late notice upon receipt of the claim did not make it readily apparent that it had the right to disclaim coverage. "Only an investigation of the type ordered by [Nova] would yield [information that it] needed in order to make a good faith decision regarding disclaimer", said the court.

Contrast that outcome with the ruling in Crocodile Bar, Inc. v. Dryden Mut. Ins. Co. in which the court found Dryden Mutual's 62-day delay in disclaiming coverage based on a policy exclusion to be unreasonable as a matter of law, even though Dryden Mutual also argued that it needed time to investigate coverage.  Pivotal to the outcome was the court's observation that "Dryden's claims adjuster was aware when he received the claim ... that the claim was excluded from the policy[.]"

Although some might attribute the different rulings to the fact that UM coverage was still available to the claimant in the GMAC v. Jones case whereas no coverage ostensibly would have been available to the injured underlying plaintiffs had the court sustained Dryden Mutual's disclaimer in the Crocodile Bar case, the Dryden Mutual case underscores an important rule:  when a liability insurer either (1) has sufficient knowledge of facts entitling it to disclaim, or (2) knows that it will be disclaiming coverage, it must do so as soon as reasonably possible or risk invalidation of an exclusion- or condition-based disclaimer as untimely under New York Insurance Law § 3420(d).

Some might say or think that there is an inherent tension between this rule and an insurer's good faith obligation to investigate and evaluate claims for liability coverage. If you say or think that, you're right. There is such a tension. Couple that with the "one bite of the apple" rule that has been applied to preclude liability insurers from asserting in subsequent litigation certain noncoverage defenses not raised in their original coverage disclaimer or denial letters.

The "should we investigate?" question is a good and valid one. Claims professionals and coverage practitioners have seen plenty of cases in which New York courts have been unforgiving of pretty much any delay in disclaiming when, in the opinion of the courts, one or more grounds for disclaiming coverage were "readily apparent" or "obvious" almost immediately upon or after the insurer's receipt of first notice and "before the onset of the delay". How, then, can an insurer know when an investigation of coverage will be deemed necessary and excuse a delay in issuing a disclaimer?

Before answering that question, it is important to bear in mind that when an insurer attempts to explain a delay in disclaiming liability coverage by asserting that there was a need to investigate issues that would affect its decision on whether to disclaim, the burden will be on the insurer to establish that the delay was reasonably related to the completion of a necessary, thorough, and diligent investigation. Necessary, thorough, and diligent.

In the GMAC v. Jones matter, Nova presumably was attempting to determine why its insured never provided notice of the accident. Late notice, although ultimately the ground upon which Nova disclaimed liability coverage to its insured may be excused, and Nova no doubt wanted and needed to know whether its insured had an excuse for not having notified it of the accident 18 months earlier. Necessary, thorough and diligent.

Dryden Mutual, on the other hand, presumably had all the information it needed to disclaim immediately upon receipt of its insured's notice of the three underlying personal injury action, viz, that they sought to impose liability on the insured for alleged violations of New York's Dram Shop laws, a clearly excluded theory of liability. That the insured may have delayed reporting the occurrences or lawsuits to Dryden was inconsequential to the motion and appellate courts because non-compliance with New York's timely disclaimer statute -- Insurance Law § 3420(d) -- in effect excuses late notice. There is no such thing as an excuse to an exclusion, however, and, in the court's opinion, no amount of investigation was necessary to determine whether the policy's liquor liability exclusion applied to negate coverage.

It appears New York courts are less forgiving and tolerant of investigation caused delays where the applicability of a exclusion to deny coverage is "readily apparent" before any investigation is undertaken. Of course, late notice may also be a potential noncoverage ground, but the insurer should be mindful of the invalidating impact of Insurance Law § 3420(d) on any disclaimer found to be unreasonably or unnecessarily delayed. In two cases, courts found as unreasonable only 30-day delays in disclaiming coverage based on late notice that was, in the courts' opinions, "obvious" or "readily apparent" from the notices and pleadings the insurers initially received. W.16th St. Tenants Corp. v. Public Service Mut. Ins. Co., 290 AD2d 278 (1st Dept. 2002); Transcontinental Ins. Co. v. Gold, 18 Misc 3d 1135(A) (Sup.Ct., Nassau Co., 2008). In both cases, the courts held that there no need under such circumstances to conduct a coverage investigation.

With the recent reminder from Kings Supreme in Grinshpun v. Travelers Cas. Co. of Conn. that legal fees and costs can be recovered in actions seeking coverage where it is alleged and proven that this insurer's disclaimer or denial was made in "bad faith", the importance of making a "good faith decision regarding disclaim[ing]" remains important, in spite of seemingly incompatible decisions such as W. 16th St Tenant Corp. and Transcontinental Ins. Co. which suggest that there are situations in which no coverage investigation should be made. If a liability insurer decides it is necessary to investigate coverage issues, however, it must do so thoroughly and diligently, with meticulous documentation of all efforts made in such an investigation.

So should a liability insurer investigate potential coverage issues in New York? Sure they should, especially if those coverage issues are any less than indisputable. Investigate what appears at first blush to be late notice? Yes, but quickly. But if a policy exclusion also clearly applies to negate coverage regardless of late notice, consider how successful one will be of convincing a court that any delay beyond a week or two in disclaiming was, in the first instance, necessary. The insurer's coverage investigation can be the model of thoroughness and diligence, but if it is found not to have been necessary, even a well-documented investigation followed by a delayed disclaimer will be at risk of invalidation.