Legal Malpractice Policy Found to Constitute Insurance Against Liability for "Injury to Person(s)" Under New York Insurance Law § 3420(A)

PROFESSIONAL LIABILITY – NOTICE OF CLAIM – INSURANCE LAW § 3420(A) – INSURANCE AGAINST "LIABILITY FOR INJURY TO PERSON"
McCabe v. St. Paul Fire & Mar. Ins. Co.
(Sup. Ct., Erie Co., decided 8/19/2009)

New York Insurance Law § 3420(a) mandates that certain provisions be included in all policies issued or delivered in New York State that insure against liability for "injury to person . . . or . . . injury to, or destruction of, property[.]"  One such required provision allows injured persons to satisfy an insured's contractual obligation to give timely notice of an occurrence (accident) and/or claim:

§ 3420. Liability insurance; standard provisions; right of injured person

(a) No policy or contract insuring against liability for injury to person, except as provided in subsection (g) of this section, or against liability for injury to, or destruction of, property shall be issued or delivered in this state, unless it contains in substance the following provisions or provisions that are equally or more favorable to the insured and to judgment creditors so far as such provisions relate to judgment creditors:

*  *  *  *  *

(3) A provision that notice given by or on behalf of the insured, or written notice by or on behalf of the injured person or any other claimant, to any licensed agent of the insurer in this state, with particulars sufficient to identify the insured, shall be deemed notice to the insurer.

(4) A provision that failure to give any notice required to be given by such policy within the time prescribed therein shall not invalidate any claim made by the insured, an injured person or any other claimant if it shall be shown not to have been reasonably possible to give such notice within the prescribed time and that notice was given as soon as was reasonably possible thereafter.

There's no question that  § 3420(a) applies to auto, homeowners and commercial general liability policies, but does it apply to a legal malpractice policy issued or delivered in New York?  Yes it does, says this court. 

St. Paul Fire and Marine Insurance Company insured attorney David Fretz under a $1 million claims-made professional liability policy effective from January 14, 2006 and January 14, 2007.  Coverage under that policy depended on two preconditions:  (1) that a claim for legal malpractice was made against Fretz during the policy period; and (2) that such claim was reported to St. Paul within the policy's period or 60-day extended reporting period of January 14, 2006 through March 14, 2007.

Fretz represented the plaintiffs on their insurance claim for the December 2003 fire loss of their home.  As a consequence of Fretz' neglect of their insurance claim, plaintiffs lost their ability to recover on that claim.  After sending several letters to Fretz, including one dated January 2, 2007, plaintiffs commenced an action for malpractice against Fretz in late March 2007.  Fretz failed to notify St. Paul of plaintiffs' malpractice claim against him in time for St. Paul to submit an answer on his behalf in the action, and Fretz eventually was determined to be in default.  In December 2007, following an inquest on damages, plaintiffs were awarded compensatory damages of $226,000, and those damages were ordered trebled pursuant to Judiciary Law § 487. Accordingly, by judgment entered January 2, 2008, Fretz was directed to pay plaintiffs just over $700,000, inclusive of costs, disbursements, and interest to the date of entry of the judgment.

By letter to plaintiffs' attorney dated July 17, 2007, St. Paul disclaimed coverage under Fretz' legal malpractice policy on the ground that, although plaintiffs' claim against Fretz may have been made (as claimed in their attorneys' letter) within the policy period, such claim had not been reported to St. Paul within the policy period or the 60-day Extended Reported Period, as required by the policy.

After obtaining a money judgment against Fretz, plaintiffs commenced this action against St. Paul in June 2008 pursuant to Insurance Law §§ 3420(a)(2) and (b)(1). St. Paul interposed an answer and counterclaim, asserting only that the plaintiffs' malpractice claim had not been timely reported.  Subsequently, by letter dated October 7, 2008 letter, St. Paul attempted to add a new and additional basis for disclaiming coverage, i.e., that plaintiffs' letter to Fretz of January 2, 2008 did not in fact constitute the making of a claim by plaintiffs against Fretz within the policy period, as required in order to give rise to coverage under the policy.  Plaintiffs moved and St. Paul cross-moved for summary judgment.

In granting plaintiffs' motion for summary judgment, Erie County Supreme Court Justice Patrick Nemoyer held that St. Paul's professional liability policy fell constituted a policy insuring against liability for "injury to person" within the meaning of Insurance Law § 3420(a).  Thus, in the opinion of the court, "plaintiffs acted diligently in an attempt to garner the relevant insurance information from Fretz [and], as a matter of law, plaintiffs did not unduly or unreasonably delay in reporting the claim to St. Paul":

Plaintiffs reported the making of the claim to St. Paul on June 22, 2007, the very day on which they were informed of St. Paul's identity as Fretz's malpractice insurer. The period of delay to be examined with reference to plaintiffs' asserted diligent efforts is the period from March 14, 2007, the end of the 60-day extension period, until June 22, 2007, when notice was given to St. Paul. During that period alone, more particularly on March 26, April 9, April 24, and May 8, 2007, plaintiffs' then attorney Doyle sent four certified letters to Fretz, repeatedly emphasizing the importance of notice being given immediately to his malpractice insurance carrier and pleading with Fretz to reveal the name of such carrier so that plaintiffs could exercise their independent right to give such notice. Those letters were in addition to an unspecified number of telephone calls made for the same purpose. In each instance, the mentally incapacitated Fretz failed to respond to the letter or telephone call. Doyle was reduced to asking this Court for an order compelling Fretz to disclose the identity of his carrier, and only then were plaintiffs made aware of that identity. Those various attempts by Doyle were a follow up to his earliest certified letter of March 2, 2007, in which Doyle likewise sought to have Fretz provide him with the identity of his carrier and place that carrier on notice of the malpractice claim. That plaintiff first undertook and were thwarted in those efforts to discover the identity of the insurer before March 14, 2007, at a time when it would have been possible for them to comply with the requirements of the policy, demonstrates their due diligence as a matter of law. 

 Justice Neymoyer also rejected as untimely St. Paul's second ground for disclaiming coverage -- that no malpractice claim had actually been made against Fretz within the policy period:

Having determined the applicability of Insurance Law § 3420(a)(2), it remains for this Court to determine the validity of St. Paul's disclaimer under the policy. St. Paul now contends that it validly disclaimed coverage under the policy on two grounds: first, that no claim was made during the policy period; and second, that no claim was reported to St. Paul during the policy period or the 60-day extension period. The problem for St. Paul is that only the second of those disclaimer grounds was articulated in St. Paul's July 17, 2007 disclaimer letter to Fretz. The pertinent paragraph of the letter stated that St. Paul was denying Fretz any defense and indemnity in the malpractice action on the ground that "this Claim' was neither reported to St. Paul during the Policy Period,' nor was the Claim' or your disability reported within the 60 days following the date of the St. Paul Policy's" lapse. It is of course a fundamental principle of the law in this realm that an insurer's attempt at disclaimer is strictly limited to those grounds articulated in the notice of disclaimer, and that a ground not raised in a disclaimer letter may not be later asserted by the insurer (see General Accident Ins. Co v Cirucci, 46 NY2d 862, 864 [1979]; City of Kingston v Harco Nat. Ins. Co., 46 AD3d 1320, 1321 [3d Dept 2007]; Benjamin Shapiro Realty Co. v Agric. Ins. Co., 287 AD2d 389 [1st Dept 2001]; see also Wraight v Exchange Ins. Co., 234 AD2d 916, 917-918 [4th Dept 1996] [held: where insurer disclaimed coverage based solely upon its insured's failure to provide timely notice, insurer is subsequently estopped from raising the injured party's allegedly untimely notice as a defense in the declaratory judgment action]). Indeed, St. Paul's July 17, 2007 letter explicitly assumed, based on Doyle's representations, that the claim was first made against the insured on January 2, 2007, within the policy period. The Court understands that St. Paul entertained that assumption without having seen the January 2, 2000 letter, but St. Paul's own lack of reasonable investigation into the circumstances is not a ground for departing from the aforementioned principle that the insurer is strictly limited to those disclaimer grounds articulated in the letter of disclaimer (see 2540 Associates, Inc. v Assicurazioni Generali, S.p.A., 271 AD2d 282, 284 [1st Dept 2000] [held: "as a matter of policy, reasonable investigation is preferable to piecemeal disclaimers"]; see also DiGuglielmo v Travelers Property Cas., 6 AD3d 344, 346 [1st Dept 2004], lv denied 3 NY3d 608 [2004]). Contrary to St. Paul's contention, enforcement of the rule that an insurer's attempt at disclaimer is strictly limited to those grounds articulated in the notice of disclaimer does not involve the creation of coverage where none would otherwise exist. St. Paul's belated attempt to supplement its disclaimer letter to Fretz by adding or resurrecting the "claim not timely made" disclaimer ground — an attempt not made until October 7, 2008, after the commencement of this declaratory judgment action by plaintiffs and indeed following the interposition of St. Paul's answer and counterclaim asserting only that the malpractice claim had not been timely reported — cannot avail for obvious reasons, both procedural and substantive. 

It remains to be seen, on what undoubtedly will be St. Paul's appeal to the Fourth Department, whether the court's preclusion of St. Paul's no-claim-within-policy-period defense will withstand appellate scrutiny.  New York case law is legion that coverage may not be created by either waiver or estoppel.  Three of the four cases cited by the court -- Cirucci, City of Kingston and Wraigth -- involved bodily injury claims and, as such, implicated then Insurance Law § 3420(d) (now [d][1]), which explains those courts' preclusion of coverage defenses not initially raised in a timely disclaimer or denial.  Although this court concluded that the Fretz malpractice policy insured against liability for "injury to person", the plaintiffs' claims clearly did not fall within the purview of § 3420(d)(1) because they were not ones for "bodily injury" or death.

If the Fourth Department decides that St. Paul was not precluded from asserting its no-claim-within-policy-period defense, either it or the motion court will need to address whether the plaintiffs' January 2, 2007 letter constituted a "claim" against Fretz within the meaning of his malpractice policy with St. Paul:

"We [have] attempted to contact you for over six months, we also had another attorney attempt to contact you. We don't understand what is happening with our case. Upon our own research, we understand that our insurance lawsuit with Erie Insurance has been closed, due to negligence, on your part.

Please contact us immediately to rectify this. If we do not he[ar] from you, this letter, a letter explaining our hardships, and letter explaining the irresponsibility of our lawyer, will be sent to The Attorney Grievance Committee. With or without you we are going forward."

Compare that letter with what the First Department said about what constitutes a "claim" under a legal malpractice policy in it September 2008 decision in Yale Club of New York City, Inc. v. Reliance Ins. Co. in Liquidation:

In the context of ongoing attempts by the union representing the insured's employees to resolve the parties' dispute, the letter, which neither makes any demand for payment nor advises that legal action will be forthcoming, is insufficient to state a claim.