Misreading the Policy Does Not Excuse Late Notice

D&O – CLAIMS-MADE POLICY – LATE NOTICE – EXCUSE
The Penn Traffic Co. v. National Union Fire Ins. Co. of Pittsburgh, Pa
(4th Dept., decided 12/30/2010)

Plaintiff sought reimbursement from defendant under a two-year, claims-made "Executive and Organization Liability Insurance Policy" of defense costs associated with two, separate federal investigations.  Defendant denied coverage on the ground that plaintiff failed to make the claim within the policy period. 

In MODIFYING the lower court's order to completely grant summary judgment to defendant, the Appellate Division, Fourth Department, held that plaintiff failed to comply with the policy's requirement that notice be given "as soon as practicable . . ., but in no event later than . . . the end of the Policy Period or Discovery Period[.]"  The appellate court also rejected the plaintiff's contention that that its failure to give timely notice of the claim should be excused because it did not realize that subpoenas it had been served with were covered under the policy until after the deadline date:

The policy unambiguously includes the subject subpoenas within the definition of potential claims, and plaintiff's unilateral mistake in reading the policy cannot serve as a basis for expanding coverage. "[O]ne who executes a plain and unambiguous [contract] cannot avoid its effect by merely stating that [he or] she misinterpreted its terms" (Koster v Ketchum Communications, 204 AD2d 280, lv dismissed 85 NY2d 857).

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.

Lawyer's "Please Be Advised..." Letter Found Not To Constitute a "Claim"

D&O COVERAGE – CLAIMS-MADE POLICY – WHAT CONSTITUTES A "CLAIM"
Yale Club of New York City, Inc. v. Reliance Ins. Co. in Liquidation
(1st Dept., decided 9/2/2008)

As the name implies, under "claims-made" insurance policies, only claims made and reported during a policy period qualify for coverage. The policy in force on the date the insured became aware and gave notice of a "claim" is the policy that must respond with defense and indemnification coverage, provided the negligent act, error or omission giving rise to the claim occurred after a specified “prior acts” or “retroactive” date.

Yale Club of New York City was the insured under two "claims-made" insurance policies issued by Lloyds, London and Reliance, providing directors and officers liability coverage for the years ending on November 23, 1993 and November 23, 1994, respectively. On August 12, 1993, while Yale Club was insured under the Lloyds policy, it received a letter from an attorney representing certain waiters and other employees at the Yale Club who alleged to have been "deprived of tips and bonuses." The letter requested information to enable compliance with counsel's stated "obligation to make a reasonable inquiry into the facts before filing a pleading with the courts." Yale Club did not notify Lloyds about the letter.

In February 1994, after coverage had commenced under the Reliance policy, the attorney instituted an action against Yale Club on behalf of 13 Yale Club employees represented by his firm. Yale Club notified Reliance of the claim the following month, which disclaimed coverage under its policy on the ground that the August 1993 letter constituted notice of a claim made.

Some years later, the Yale Club settled with the waiters for $370,000. Shortly thereafter Reliance went into liquidation and the Yale Club submitted a proof of loss to its Ancillary Receiver for the sum of the $370,000 settlement, plus $405,005.07 in attorney fees, as well as interest at 9% from May 2000. Like Reliance, the Ancillary Receiver of Reliance asserted that the date of the Yale Club's receipt of the August 1993 lawyer's letter constituted the date upon which the waiters' claims were first made, and, since this date occurred prior to the policy period, denied coverage.

The issue of the August 1993 letter's effect on Reliance's liability to Yale Club was submitted to a referee, who found that "the letter was merely a request for information; the claim was properly filed after the Reliance coverage began." Yale Club successfully moved New York County Supreme Court to confirm the referee's report, and the New York Superintendent of Insurance, as Ancillary Receiver for Reliance, appealed.

In a 3-2 decision, the First Department AFFIRMED the judgment for Yale Club, Justice Tom writing the majority's opinion, which began:

At issue is whether a letter received by an insured constitutes a "claim" within the meaning of a claims-made insurance policy. Although the term is undefined in the insurance contract, defendant Superintendent of Insurance, as Ancillary Receiver for Reliance Insurance Company, contends that case law dictates that the letter be treated as a claim. Since there is an ambiguity as to what constitutes a claim under the Reliance policy, such ambiguity must be construed against the insurer under the doctrine of contra proferentum. 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.

The majority rejected the Superintendent's invitation, absent a definition in Reliance's policy on what constituted a "claim", to resolve any ambiguity in that term by speculating on the parties' intent. Instead, the majority, noting that New York law ascribes no generally accepted meaning to the term in the context of a claims-made policy, held that under established New York case law, the term has been defined as, for instance, "a demand received by the Insured . . . for money or services":

While the disputed letter certainly conveys the suggestion that a lawsuit was being contemplated, it also states unequivocally that counsel was seeking information in connection with his obligation to determine whether legal action was warranted. Moreover, the letter does not even state that the purpose of any such action would be the recovery of civil damages, merely alleging that the Yale Club's actions variously "constitute criminal violations, as well as civil violations of RICO and the New York State Labor Law, and fraud and conversion."

* * * * *

Counsel's letter to plaintiff falls far short of a demand for money or services (Retirement Fund of the Fur Mfg. Indus. v Republic Ins. Co., 755 F Supp 625 [SDNY 1991], affd 948 F2d 1275 [2d Cir 1991]), or even the expression of a present intent to initiate legal proceedings (see In re Ambassador Group, Inc. Litig., 830 F Supp 147, 155 [EDNY 1993]). Any action that might have been contemplated in pursuit of the employees' claim is implicitly conditioned upon the outcome of counsel's investigation of its merit. Thus, the letter received by plaintiff is not "an assertion of a legally cognizable damage, . . . a type of demand that can be defended, settled and paid by the insurer" (Evanston Ins. Co., 132 AD2d at 185).

* * * * *

Defendant's sole basis for seeking reversal of the judgment against the Liquidation Bureau is his contention that the claim arose prior to the inception of the Reliance policy and, thus, outside the scope of its coverage.

Defendant's contention lacks a sound factual predicate. To sustain his attack on the judgment would require this Court to assign an expansive meaning to the term "claim" under uncertain and contentious circumstances. It is uncontested that the workers on whose behalf the letter sought information were represented by a union, and it is apparent that the union was engaged in efforts to resolve the dispute on their behalf and on behalf of the rest of its members employed at the Yale Club. Plaintiff's mere awareness that an action was being contemplated by the attorney for the 13 Yale Club employees was hardly tantamount to notice that an action would be brought, since his investigation could have revealed that suit was unwarranted or subsequent events could have rendered an action unnecessary. The mere awareness of alleged wrongdoing is not a "claim" within the meaning of the typical claims-made policy (see Purcigliotti, 240 AD2d at 206).

The two-justice dissent disagreed with the majority's assessment of the August 1993 lawyer's letter and distinguished the case law authority upon which the majority relied:

From its very first sentence, the Letter could not have been a plainer statement that its subject matter was the claim being made on behalf of certain named employees of the Yale Club. The sentence read: "Please be advised that our office represents the above named employees of the Yale Club with respect to wage claims..." In the Letter, the waiters claimed, among other things, "that they [had] been deprived of tips and bonuses which amount to hundreds of thousands, and probably, millions, of dollars." The Letter further alleges that "[t]he deprivation of these monies constitute[s] criminal violations, as well as civil violations of RICO and the New York State Labor Law, and fraud and conversion." It requests 13 sets of relevant documents and information, as well as insurance information. Significantly, the Letter states that pursuant to court rules "counsel is under an obligation to make a reasonable inquiry into the facts before filing a pleading with the courts." It is reasonable to assume that were it not for "court rules", counsel would have already filed the summons and complaint.

* * * * *

Further, I contend that both the Yale Club and the majority improperly cite to the nonbinding U.S. District Court opinion in Ambassador to support their contention that the Letter was not a claim because it was not a "demand for money or services." In Ambassador, the state insurance commissioner sent two letters to the insurer stating that it "had uncovered facts which [led] him to conclude that certain former directors and officers were guilty of acts falling within the scope of coverage afforded by the ... policy." In re Ambassador Group, Inc. Litig., 830 F. Supp. at 151 (E.D.N.Y. 1993). The policy did not define the term "claim" and the District Court held that neither of the two letters in question constituted a claim as the term is normally viewed. Id.

In reaching its decision, the Ambassador court relied heavily upon the fact that the policy characterized the reporting of a "claim" to the insurer as giving notice and the reporting of a "claim" directly to the directors and officers as the making of a claim. Id. at 154. The court also relied upon the fact that the letters under evaluation did not specify an alleged wrongdoing nor did they contain a demand for relief. Id. at 155. Thus, the Ambassador court found that the letters in question did not constitute a claim. Id. at 156.

Notwithstanding, Ambassador is distinguishable from the instant case insofar as in this case, the Letter very clearly alleges wrongdoing. Furthermore, in Ambassador, the letters were sent to the insurance company and here, the Letter was sent directly to the directors and the officers of the Yale Club who had knowledge of the ongoing dispute with the wait staff over tips. This fact clearly undercuts the majority's characterization that the Letter constituted merely a notice of a potential claim. See also Retirement Fund of the Fur. Mfg. Indus. v. Republic Ins. Co., 755 F. Supp. 625 (S.D.N.Y. 1991), aff'd, 948 F.2d 1275 (2d Cir. 1991) (disputed letter was not found to be a "claim" in part because the letter was sent to the insurer and not the party against whom a claim was later made).