Monday, December 6, 2010

The Eight-Month Million Dollar Delay -- CGL Insurer's Delayed Disclaimer Results in Finding of Coverage Up to $1M Policy Limit

Burlington Ins. Co. v. Galindo & Ferreira Corp.

(2nd Dept., decided 11/30/2010)

New York Insurance Law § 3420(d)(2) provides:
If under a liability policy issued or delivered 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.  (Bold added.)
Liability insurers doing business in New York should know that the consequence of not issuing a disclaimer or denial that is governed by 3420(d)(2) as soon as is reasonably possible is the invalidation of what otherwise would be valid exclusion-based and condition-based coverage declinations.

On October 7, 2006, a construction accident occurred at the defendant insured's Queens, New York premises, killing one worker and injuring two others.  The insured provided notice of that accident to its surplus lines CGL insurer, Burlington Insurance Company, three days later on October 10, 2006.   The accident eventually gave rise to two lawsuits, one for personal injury and one for wrongful death.  On December 29, 2006, an attorney for the insured sent a claims representative working for Burlington a copy of the summons and complaint in the personal injury action.  On January 3, 2007, Burlington informed the insured that it had assigned the insured's defense in the personal injury action to a law firm, and and also informed the insured that Burlington’s coverage limits for the policy were $1,000,000 for all claims arising out of the accident.  There was no reservation of rights to disclaim or limit any insurance coverage relating to any claim or action arising out of or related to the alleged accident.

Approximately eight months after receiving first notice of the accident, by letter dated June 5, 2007, Burlington, through its counsel, disclaimed any coverage for any claims brought in an action yet to be commenced by the deceased worker's estate, and also announced its intention to limit coverage for all claims arising out of the accident, including claims in the pending personal injury action, to $50,000 from $1,000,000.  Burlington's disclaimer letter cited exclusions and limitations found in the policy's Independent Contractor’s Employees Endorsement, Real Estate Operations Endorsement, and Amendment of Coverage Endorsement.  On November 5, 2007, Burlington commenced this action, seeking a declaration that it was not obligated to defend or indemnify the insured in the yet-to-be-commenced wrongful death action and that the coverage limit available to the insured in the pending personal injury action, which Burlington continued to defend, was only $50,000.

On the parties' motions and cross motions for summary judgment, Queens County Supreme Court (Augustus C. Agate, J.) rejected Burlington's argument that it was not obligated to disclaim coverage for the wrongful death action until that action was commenced.  The trial court instead found that Burlington did not timely disclaim or limit coverage to the insured and, consequently, was obligated to defend and indemnify the insured in both actions up to the policy's $1,000,000 per occurrence limit:
An insurer’s time to disclaim based on a policy exclusion begins to run when the insurer becomes aware of facts sufficient to issue the disclaimer (see Fireman’s Fund Ins. Co. v Farrell, 57 AD3d 721 [2008]; Delphi Restoration Corp. v Sunshine Restoration Corp., 43 AD3d 851 [2007]; Schulman v Indian Harbor Ins. Co., 40 AD3d 957 [2007]).  Under Insurance Law § 3420(d), a written disclaimer is required as soon as reasonably possible after first learning of the grounds for the disclaimer of liability or the denial of coverage, and failure to comply renders any disclaimer ineffective (see Sirius Am. Ins. Co. v Vigo Constr. Corp., 48 AD3d 450 [2008]; N. Country Ins. Co. v Tucker, 273 AD2d 683 [2000]).  Here, Burlington’s claim notes indicate that Burlington became aware of the facts that support the first reason for the disclaimer, the Independent Contractor’s Employees Endorsement, as early as 10 days after the accident.  The facts also establish that the second reason for a disclaimer, based on the Real Estate Operations Endorsement of the policy, was known to Burlington as early as 10 days after the accident.  Additionally, while there is no indication of when the plaintiff became aware of the third reason for the disclaimer, the Amendment of Coverage Endorsement, the evidence established that the plaintiff should have known that insurance coverage was denied for Galindo Construction by the end of October 2006 or shortly thereafter at the latest.  The plaintiff, however, waited until its letter dated June 5, 2007, which was sent almost eight months after the accident, before disclaiming coverage and reducing the coverage limits.  The plaintiff also has not offered an excuse for the delay. Therefore, the delay in disclaiming coverage and reducing the coverage limits from $1,000,000 to $50,000 is unreasonable as a matter of law (see Delphi Restoration Corp., 43 AD3d at 852).  Additionally, inasmuch as the plaintiff in its letter dated January 3, 2007, assumed control of the defense and did not reserve the right to decrease the coverage from the $1,000,000 per occurrence, it is estopped from denying coverage or reducing the coverage amounts based upon a policy exclusion (seeFireman’s Fund Ins. Co. v Zurich Am. Ins. Co. , 37 AD3d 521 [2007]; Wise v McCalla, 24 AD3d 435 [2005]; Utica Mut. Ins. Co. v 215 W. 91st St. Corp., 283 AD2d 421 [2001]).

The opponent of a summary judgment motion must present admissible evidence that is sufficient to raise an issue of fact (see Zuckerman v City of New York, 49 NY2d 557 [1980]).  In opposition, the plaintiff failed to raise an issue of fact that would warrant the denial of the summary judgment motion.  The reasonableness of any delay must be judged from the time the insurer is aware of the facts to disclaim.  Here, given the evidence that established that the plaintiff became aware of the reason to disclaim within a few weeks of the accident, the fact that a lawsuit had yet to have been filed does not constitute a reasonable reason for the delay in disclaiming (see N. Country Ins. Co., 273 AD2d at 685).  In fact, the plaintiff was aware of the reason for the disclaimer and sent a letter attempting to disclaim coverage in the Guerrero Action before the Guerrero Action was commenced.
Burlington appealed, and in AFFIRMING the lower court's grant of summary judgment to the insured, the Second Department, Appellate Division, succinctly held: 
The defendant Galindo & Ferreira Corp. (hereinafter Galindo) established its prima facie entitlement to judgment as a matter of law declaring that the plaintiff was obligated to defend and indemnify it up to coverage limits of $1,000,000 in both underlying actions at issue by showing that, under the circumstances, the plaintiff insurer failed to provide a disclaimer of coverage as soon as reasonably possible (see Insurance Law § 3420[d]; Mid City Constr. Co., Inc. v Sirius Am. Ins. Co., 70 AD3d 789; Tex Dev. Co., LLC v Greenwich Ins. Co., 51 AD3d 775; cf. Matter of New York Cent. Mut. Fine Ins. Co. v Steiert, 68 AD3d 1120).  In response, the plaintiff, which had the burden of explaining its delay in providing the notice of disclaimer (see Tex Dev. Co., LLC v Greenwich Ins. Co., 51 AD3d 775), failed to raise a triable issue of fact (id.; see Mid City Constr. Co., Inc. v Sirius Am. Ins. Co., 70 AD3d 789).
If New York Insurance Law § 3420(d) applies -- i.e., there is a bodily injury or death claim arising from an accident submitted under a liability policy issued or delivered in this state for which there is no or limited coverage by operation of either one or more policy exclusions or conditions -- insurers must complete their investigations as soon as they can and issue written disclaimers or denials "as soon as is reasonably possible."  The consequence of not doing so is paying defense and indemnification dollars for a potentially uncovered claim, as in this case.

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