What Consitutes Prejudice to a Liability Insurer? A Default Judgment Taken Against its Insured Does.

AUTO – LATE NOTICE OF SUIT – DEFAULT JUDGMENT AGAINST INSURED – PREJUDICE
Vernet v Eveready Ins. Co.
(2nd Dept., decided 11/1/2011) 

Under certain types of New York liability insurance policies issued, renewed or modified on and after January 17, 2009, an insured's late notice of an accident or occurrence or of a related lawsuit must prejudice the insurer before it may decline coverage based on the late notice.  New York Insurance Law § 3420(a)(5) now provides that qualifying liability policies issued or delivered in New York State on or after January 17, 2009 must contain 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, injured person or any other claimant, unless the failure to provide timely notice has prejudiced the insurer, except as provided in paragraph four of this subsection. 

Although the policy at issue in this case was issued prior to January 17, 2009, its notice of suit condition adopted a prejudice requirement by specifying that the Eveready had no duty to provide coverage "if the failure to comply [with the policy] is prejudicial to [Eveready]."

Plaintiffs were passengers in a livery cab and allegedly sustained personal injuries when the cab was involved in an automobile accident with an individual insured by Eveready.  The accident occurred on October 15, 2000, in Brooklyn. On or about October 25, 2000, Eveready learned of the accident and opened a claims file. Thereafter, on May 29, 2001, and September 26, 2001, Eveready received letters from the plaintiffs' counsel informing it of counsel's representation of the plaintiffs. The next correspondence from the plaintiffs' counsel regarding the insured was received by Eveready on August 15, 2005, nearly five years after the accident date.  In this correspondence, counsel for plaintiffs informed Eveready that an action had been commenced against, among others, Eveready's insured, on July 9, 2003, and that a default judgment dated November 19, 2004, had been entered in that action in favor of the plaintiffs and against, among others, Eveready's insured.  Eveready disclaimed coverage on the ground that its insured had breached the insurance policy by failing to timely notify it of the commencement of an action regarding the accident.

Plaintiffs then commenced this action against Eveready pursuant to New York Insurance Law § 3420(b)(2) to obtain payment of their default judgment against Eveready's insured from Eveready.  Supreme Court, Kings County (Bunyan, J.), denied Eveready's original and renewed motions for summary judgment, and Eveready appealed.

In REVERSING the lower court's order and granting summary judgment to Eveready, the Appellate Division, Second Department, held that Eveready's support on its renewed motion for summary judgment demonstrated, as a matter of law, that notice of suit was late and that it had been prejudiced by the insured's (and the injured parties') late notice:

Here, in support of its renewed motion for summary judgment, the defendant presented prima facie proof of untimely notice via the deposition testimony and affidavit of its claims manager. The manager stated that it was not until August 15, 2005, that the defendant first learned that an action had been commenced and a default judgment entered against the insured. Additionally, as to prejudice, the defendant established that, since it was first informed of the commencement of an action against the insured more than two years after the commencement of the action, the delay constituted "late notice as a matter of law" (1700 Broadway Co. v Greater N.Y. Mut. Ins. Co., 54 AD3d 593, 593).  The defendant further demonstrated that the failure of the insured to provide notice until after a default judgment had been entered prejudiced it because it lost its right to appear and interpose an answer, thus requiring it to shoulder the burden of moving to vacate the default judgment (see American Tr. Ins. Co. v Rechev of Brooklyn, Inc., 57 AD3d 257, 259).

In opposition, the plaintiffs failed to raise a triable issue of fact. The plaintiffs' contentions amounted to unsupported, speculative, and conclusory allegations, and lacked any probative value in determining whether the defendant received timely notification of the underlying action and default judgment (see generally Paladino v Time Warner Cable of N.Y. City, 16 AD3d 646). Further, no excuse or explanation was ever posited as to the late notice.

What was plaintiffs' counsel thinking?  Or not thinking?  Having written not once, but twice, to Eveready in 2001 about the accident and plaintiffs' injuries, why didn't counsel provide a copy of the 2003 suit papers to Eveready and make sure it received timely notice of that suit?  Did counsel mistakenly believe and decide that it would be better not to tell Eveready of the lawsuit and instead obtain a default judgment against its insured before notifying Eveready of the suit?  If that was counsel's strategy, it wasn't a very good one.  Unless counsel knew that the insured had passed along copies of the suit papers to Eveready, the better course of handling would have been to provide notice of the suit directly to Eveready and give it an opportunity to defend its insured.