Liability Insurer That Does Not Receive Notice of Underlying Action Can Contest Merits of Underlying Claim in Insurance Law § 3420(a)(2) Action

AUTO – LATE NOTICE OF SUIT – DEFAULT JUDGMENT AGAINST INSURED – INSURANCE LAW § 3420(A)(2) DIRECT ACTION
Jimenez v. New York Cent. Mut. Fire Ins. Co.
(2nd Dept., decided 3/2/2010)

It has long been the rule in New York that a liability insurer which disclaims coverage in relation to a pending action against its insured may not contest the merits of that action -- the insured's liability and injured party's damages -- if the insured defaults in that action and the underlying plaintiff brings an subsequent action against the insurer for payment of the judgment pursuant to New York Insurance Law § 3420(a)(2).  In such a situation, the liability insurer may not "open the default" and litigate the merits of underlying claim.  Only the grounds the insurer asserted to disclaim or deny coverage may be litigated as defenses to the 3420(a)(2) direct action.

But what if the liability insurer does not receive notice of the underlying action until after the default judgment has already been taken against its insured?  In the subsequent 3420(a)(2) action, can the insurer contest the merits of the judgment creditor's underlying claim against the insured?  Yes it can, says the Second Department in this case.

Plaintiff Doris Jimenez obtained a default judgment against Roxana Sanchez, New York Central Mutual Fire Insurance Company's insured, in the amount of $32,382.50 for injuries she had allegedly sustained in a motor vehicle accident.  Jimenez then commenced this action pursuant to Insurance Law § 3420(a)(2) against New York Central Mutual to recover on the unsatisfied judgment.  Although Jimenez had not given NYCM notice of the underlying action against its insured until after the default judgment had been entered, the Supreme Court granted her motion for summary judgment on the complaint against NYCM in this action.

In REVERSING judgment against NYCM, the Second Department held that an affidavit from NYCM's claims manager denying that it had received the underlying judgment prior to plaintiff's commencement of this action created a triable question on the issue of whether plaintiff complied with Insurance Law § 3420(a)(2)'s requirement that notice of entry of the judgment be served on the judgment debtor's liability insurer at least 30 days before commencing a 3420(a)(2) direct action against that insurer.  The court also found that although NYCM was entitled to disclaim coverage because of the almost two-year delay in receiving notice of the commencement of the underlying negligence action against its insured, a triable issue of fact existed as to the timeliness of NYCM's disclaimer, precluding summary judgment in NYCM's favor.

With respect to the issue of NYCM's opportunity to contest the merits of the underlying action, the Second Department noted:

Furthermore, while an insurance carrier that knowingly chooses not to participate in an underlying action "may litigate only the validity of its disclaimer and cannot challenge the liability or damages determination underlying the judgment" (Lang v Hanover Ins. Co., 3 NY3d 350, 356 [emphasis added]; Insurance Law § 3420[a][2]), here, NYCM asserts it did not receive notice of the commencement of the underlying action until after the entry of judgment against its insured. Under these circumstances, NYCM is not collaterally estopped from litigating the merits of the underlying action, as it was not provided "a full and fair opportunity to contest the decision now said to be controlling" (Tydings v Greenfield, Stein & Senior, LLP, 11 NY3d 195, 199, quoting Buechel v Bain, 97 NY2d 295, 304, cert denied 535 US 1096). Although summary judgment in favor of the plaintiff should have been denied in light of the existence of the triable issues of fact described above, the award of summary judgment in the plaintiff's favor was premature in any event since NYCM is entitled to raise affirmative defenses, receive responses to its outstanding discovery requests, and conduct additional appropriate discovery relating to the extent of the plaintiff's injuries (see CPLR 3212[f]; Kiernan v DaimlerChrysler Corp., 65 AD3d 614; Desena v City of New York, 65 AD3d 562). 

The important takeway points of this decision for liability insurers doing business in New York are:

1.  A liability insurer that disclaims or denies both defense and indemnification coverage with respect to a personal injury or property damage action that it knows has been commenced against its insured may not later contest the merits of that action if its insured defaults and the underlying plaintiff attempts to recover on the judgment via an Insurance Law § 3420(a)(2) action against the insurer. Only the validity of its disclaimer can be litigated in the 3420(a)(2) direct action. 
   
   
2. A liability insurer that does not learn of the underlying action until after a default judgment has been taken against its insurer may contest the merits of that action in addition to litigating timely asserted coverage defenses in the context of the subsequent Insurance Law § 3420(a)(2) action.