Why Does New York's Timely Disclaimer Statute -- Insurance Law § 3420(D)(2) -- Apply To SUM Claims?

A client recently asked why New York Insurance Law § 3420(d)(2) -- which requires insurers wishing to disclaim liability or deny coverage under liability policies for death or bodily injury arising out an accident occurring within this state to do so "as soon as is reasonably possible" -- applies to SUM (supplementary uninsured motorists) or underinsurance claims.

The reason, I told him, is because SUM coverage, like UM coverage, insures against inadequate or non-existent liability coverage of the tortfeasor, leading the New York courts to hold that Insurance Law § 3420(d)(2) applies to require timely disclaimers and denials of SUM coverage when such coverage declinations are based on either policy exclusions or conditions. See, e.g., Hess v. Nationwide Mut. Ins. Co., 273 AD 2d 689 (3d Dept. 2000) (condition requiring claimant to notify SUM insurer of underlying personal injury action).  Declinations of SUM coverage based on lack of inclusionary grounds – claimant is not an “insured”; injury-causing incident was not an accident; offending vehicle not an “uninsured motor vehicle”; etc. – are not subject to 3420(d)(2). See, e.g., Matter of Nationwide Ins. Co. v. Smaller, 271 AD 2d 537 (2d Dept. 2000) (claimant not a resident relative of named insured’s household).

Perhaps that's also why our state's Insurance Law § 3420, which is entitled "Liability insurance; standard provisions; right of injured person", includes subsections for UM (3420[f][1]) and SUM (3420[f][1]) coverage requirements.

My client's core question related to whether his company would have "enough time" to conduct an EUO of the claimant before deciding whether to accept or deny the SUM claim.  I explained there is plenty of New York case law holding that an insurer should be given sufficient time to investigate coverage, and that the timely disclaimer/denial requirement imposed by Insurance Law § 3420(d)(2) accrues, if you will, only from when the insurer possesses sufficient information with which to make a coverage decision.  If an EUO is required to ascertain facts and information needed to make the SUM coverage decision, and the potential non-coverage ground is exclusion or condition based, then 3420(d)(2) should not apply to invalidate a declination sent as soon after the EUO’s completion as possible.  If the potential non-coverage ground is non-inclusionary based, 3420(d)(2) shouldn’t apply at all.

Remember the light switch.  And if you don't know what that is, you haven't been to one of my firm's annual coverage seminars.   On, off, and the power/power cord.