Late Notice Disclaimer Letter Ruled Ineffective Against Insureds to Whom It Was Not Specifically Addressed

CGL – INEFFECTIVE DISCLAIMER – INSURANCE LAW § 3420(D)(2)
Maughn v. RLI Ins. Co.
(2nd Dept., decided 12/22/2009)

New York case law is legion, as they say,  that a liability insurer's non-compliance with New York Insurance Law § 3420(d)(2) can excuse the insured's breach of the policy's notice condition.  Add this decision to that legion. 

RLI Insurance Company insured Fay Neiss, Neiss Management Corp., and 91-01 through 91-11 Church Limited Liability, all at the same mailing address.  Within three weeks of receiving late notice of an accident involving the insureds, RLI Insurance Company sent a disclaimer letter to the insureds' mailing address but specifically addressed only to Neiss Management.  The underlying plaintiff brought this action for a judgment declaring that RLI was obligated to defend and indemnify all three insureds in his underlying personal injury action. The insureds moved and RLI cross-moved for summary judgment.  Kings Supreme granted the insureds' motion and denied RLI's cross motion, and RLI appealed.  

In MODIFYING the order appealed from, the Second Department ruled that RLI was not obligated to defend or indemnify Neiss Management, but it was obligated to defend and indemnify the other two insureds because its disclaimer letter had not been specifically addressed to them, even though it was sent to their address:

On their motion for summary judgment, the defendants Fay Neiss and 91-01 through 91-11 Church Limited Liability (hereinafter Church) met their burden of establishing that the defendant RLI Insurance Company (hereinafter RLI) did not properly disclaim coverage as to them by submitting RLI's disclaimer letter, which was not addressed to them specifically (see Matter of Eveready Ins. Co. v Dabach, 176 AD2d 879). In response, RLI failed to raise a triable issue of fact. Athough actual notice of RLI's disclaimer letter may have been sent to the address at which all of the moving defendants were located, the disclaimer was only addressed to the defendant Neiss Management Corp. (hereinafter Management). That disclaimer, therefore, was ineffective as to Fay Neiss and Church, to whom it was not addressed (see Insurance Law § 3420[d][2]), and the Supreme Court properly granted that branch of the motion which was for summary judgment as to those defendants.

However, the Supreme Court erred in granting that branch of the motion which was for summary judgment in favor of Management, and, in effect, denying that branch of RLI's cross motion which was for summary judgment against Management. In support of its cross motion, RLI submitted, inter alia, the disclaimer letter, which was properly addressed and issued to Management, through its building manager, within three weeks of receiving notice of the accident, and established that the notice provided to it by Management was untimely (see DeFreitas v TIG Ins. Co., 16 AD3d 451; Yarar v Children's Museum of Manhattan, 4 AD3d 420, 421; cf. 875 Forest Ave. Corp. v Aetna Cas. & Sur. Co., 30 NY2d 726). Therefore, RLI met its prima facie burden of establishing its entitlement to judgment as a matter of law against Management. In opposition, Management failed to raise a triable issue of fact.

Takeaway Point:   Make sure liability disclaimer and denial letters are specifically addressed to each and every insured to whom or which coverage is being denied, even if all insureds are related and located at the same mailing address. The insertion of a few more characters, spaces and lines into RLI's disclaimer in this case ostensibly would have saved it the cost of defending and potentially indemnifying two of its three insureds in the underlying personal injury action.

Question of Fact Found on Timeliness of Auto Insurer's Late Notice Disclaimer

AUTO – INSURANCE LAW § 3420(A)(2) – TIMELINESS & SUFFICIENCY OF DISCLAIMER – LATE NOTICE
Liriano v. Eveready Ins. Co.
(2nd Dept., decided 8/4/2009)

Plaintiff sued and obtained a $40,122,06 default judgment against Eveready's insured.  In accordance with Insurance Law § 3420(a)(2), plaintiff served a copy of the default judgment with notice of entry on Eveready by mail on August 13, 2007. Eveready claimed that it never received that judgment in the mail, but first learned of it on March 13, 2008, issuing a disclaimer six days later.  Plaintiff commenced this direct action pursuant to Insurance Law § 3420(b)(1) and successfully moved for summary judgment.  Eveready appealed. 

In REVERSING judgment to the plaintiff, the Second Department ruled that the motion court had improperly granted plaintiff's motion:

In response, the defendant came forward with a sworn denial of receipt and an affidavit of an employee with personal knowledge regarding the defendant's regular practices and procedures in retrieving, opening, and indexing its mail and in maintaining its files on existing claims. That affidavit indicated that the defendant did not receive the judgment in the mail, and instead first learned of it on March 13, 2008, promptly issuing a disclaimer only six days later. Under the circumstances of this case, the defendant's submissions sufficed to raise a triable issue of fact regarding the service of the judgment, and the question of whether the defendant's disclaimer of coverage was timely must await the resolution of that issue (see e.g. Matter of TNT Petroleum, Inc. v Sea Petroleum, Inc., 40 AD3d 771; Johnson v Deas, 32 AD3d 253; First Union Mtge. Corp. v Silverman, 242 AD2d 258; Long Is. Sav. Bank v Meliso, 229 AD2d 478; Poet v Kolenda, 142 AD2d 633). 

Plaintiff had also challenged the sufficiency of Eveready's disclaimer, contending that it was defective and, thus, invalid as against the plaintiff.  The Second Department rejected that argument, as well, holding:

Contrary to the plaintiff's contention and the determination of the Supreme Court, the letter of disclaimer was not defective and, therefore, was not invalid as against the plaintiff. Rather, the letter sent to the plaintiff adequately recited that the defendant was disclaiming coverage as to the plaintiff on the ground that he failed to provide the defendant with timely notice of the underlying litigation and with legal papers filed in connection therewith (see American Tr. Ins. Co. v Sartor, 3 NY3d 71; Matter of GEICO Co. v Wingo, 36 AD3d 908; cf. Shell v Fireman's Fund Ins. Co., 17 AD3d 444; Vacca v State Farm Ins. Co., 15 AD3d 473).

Turnabout Is Fair Play -- Court Finds Disclaimer Ineffective Against Injured Party

AUTO – UM – INEFFECTIVE DISCLAIMER – CIRUCCI DEFECT
Tri-State Ins. Co. v. Salguero
(Sup. Ct., Queens Co., decided 5/26/2009)

Salguero was injured in an 2004 auto accident with Frempong. Tri-City insured Salguero; State Farm insured Frempong. When negotiations with State Farm became unsuccessful, Salguero's attorney commenced a personal injury action against Frempong but did not notify State Farm of either the action or Frempong's default in that action. After obtaining a $33,173.98 default judgment against Frempong in 2007, Salguero commenced an Insurance Law § 3420(b)(1) action against State Farm in January 2008.

In response to the 3420(b)(1) action, State Farm issued a disclaimer letter to Frempong, its insured, advising her that "[y]our failure to send us copies of any notices or legal papers received is in violation of your policy's provision regarding the reported claims. As such State Farm Mutual Automobile Insurance Company disclaims coverage for any and all claims resulting from this loss". A copy of that letter went to Salguero's attorney. On the same day, State Farm send a separate letter to Salguero's attorney, advising him that "[o]ur Insured failed to forward the Summons & Complaint for the law suit filed against her to State Farm Insurance. This is in violation of our insured's policy provision regarding the duties after an accident or loss. You received an order of judgment entered on September 5, 2007 that allegedly was served on the insured, Sherina Frempong. Again our insured has not forwarded us the court's order of default. Accordingly, we decline to afford coverage for the above date of loss due to our insured's failure to forward suit papers."

Based on State Farm's disclaimer, Salguero then filed and demanded arbitration of a uninsured motorists (UM) coverage claim made to Tri-City. Tri-City then commenced this special proceeding pursuant to CPLR 7503 to stay arbitration of Salguero's UM claim, and the court added Frempong and State Farm as respondents and directed a hearing on the issue of whether coverage for the accident was available from State Farm. The parties agreed that the sole question for determination was whether State Farm's disclaimer letters -- to Frempong and Salguero's attorney -- were ineffective as to Salguero for having not disclaimed coverage on the separate ground that Salguero had also failed to provide timely notice of his underlying personal injury to State Farm.

In finding in favor of Tri-City and declaring that State Farm was obligated to defend and indemnify Frempong for her accident with Salguero, Queens County Supreme Court Justice Jaime Rios rejected State Farm's reliance on a First Department decision, holding that Second Department case law controlled and required the finding that State Farm's disclaimers were ineffective as against Salguero for having said nothing about Salguero's late notification of the underlying personal injury action:

In support, State Farm relies on the holding in Schlott v Transcon. Ins. Co., Inc., (41 AD3d 339 [2007]), wherein the Appellate Division, First Department determined that the insurer complied with the mandates of Insurance Law § 3420(d) when it gave notice of disclaimer to the insured and sent a copy to the injured party, despite its omission of any specific reference to the injured party's failure to timely notify it of the accident.

Salguero maintains that State Farms's disclaimers are not effective against him, since they failed to include his alleged failure to timely notify State Farm of the lawsuit as a basis for disclaiming and only referred to its insured's failure. /div>

Insurance Law §3420(d) provides that an insurer shall give written notice of a disclaimer of liability or denial of coverage to the insured and injured party or any other claimant as soon as is reasonably possible (see First Fin. Ins. Co. v Jetco Contr. Corp., 1 NY3d 64 [2003]; Hereford Ins. Co. v Mohammod, 7 AD3d 490 [2004]; State Farm Ins. Co. v Cooper, 303 AD2d 414 [2003]).

The notice of disclaimer must address with a high degree of specificity the grounds upon which it is based (see General Acc. Ins. Group v Cirucci, 46 NY2d 862 [1979]; State Farm Mut. Auto. Ins. Co. v Cooper, 303 AD2d 414, supra; State Farm Mut. Auto. Ins. Co. v Joseph, 287 AD2d 724 [2001]). An insurer's justification for denying coverage is limited to the ground(s) stated in the disclaimer and waives any ground for denying coverage that is not specifically asserted in its disclaimer, regardless of merit (see General Acc. Ins. Group v Cirucci, 46 NY2d 862, supra; Adames v Nationwide Mut. Fire Ins. Co., 55 AD3d 513 [2008]; Vacca v State Farm Ins. Co., 15 AD3d 473 [2005]).

Additionally, contrary to the holding in Schlott v Transcon. Ins. Co., Inc., (41 AD3d 339, supra), the Second Department has consistently held that in order for a disclaimer to be valid against an injured party, the notice of disclaimer must advise the claimant that his or her notice was not timely (see State Farm Mut. Auto. Ins. Co. v Cooper, 303 AD2d 414, supra; State Farm Mut. Auto. Ins. Co. v Joseph, 287 AD2d 724, supra).

Here, the sole basis of State Farm's disclaimer notices was Frempong's failure to notify it of the lawsuit. The disclaimer notices are thus, ineffective against Salguero, despite his failure to provide State Farm with notice of the lawsuit. As such, State Farm is estopped from raising his failure as a ground to disclaim coverage, despite the questionable practices of respondent's attorney (see Vacca v State Farm Ins. Co., 15 AD3d 473, supra; Gov. Empl. Ins. Co. v Jones, 6 AD3d 534 [2004]; Hazen v Otsego Mut. Fire. Ins. Co., 286 AD2d 708 [2001]; Legion Ins. Co. v Weiss, 282 AD2d 576 [2001]; Eagle Ins. Co. v Ortega, 251 AD2d 282 [1998]).

In State Farm v. Cooper, a CPLR 7503 proceeding to stay a UM claim, State Farm had made precisely the same argument against Zurich -- that Zurich's disclaimer was ineffective vis-à-vis Cooper, State Farm's insured (the UM claimant) because Zurich's disclaimer had said nothing about Cooper's failure to give timely notice to Zurich of the underlying lawsuit. Both Nassau Supreme and the Second Department agreed, staying Cooper's UM claim against State Farm. The other Second Department decision Justice Rios cited and relied upon -- State Farm v. Joseph -- involved an insured's late notice of the accident, not of the subsequent personal injury lawsuit.

Liability coverage disclaimers and denials can both be untimely and defective. What is sometimes called a "Cirucci defect", based on the New York Court of Appeals' 1979 decision in General Acc. Ins. Group v. Cirucci, 46 NY2d 862, relates to a disclaimer letter's omission of any reference to an injured party's late notice as a separate ground for denying coverage.

Although Justice Rios properly followed the binding precedent of State Farm v. Cooper, since Queens County falls within the Second Judicial Department, the Second Department erroneously decided that case. Cirucci and its progeny apply only to the defense of an insured's or injured party's late notice of an accident, not late notice of the subsequent personal injury lawsuit:

The only other ground stated in the insurance company's notice of disclaimer, the "insured's failure to report this accident to us", was likewise not effective against the third-party claimants. As noted by the Appellate Division, an injured third party may seek recovery from an insured's carrier despite the failure of the insured to provide timely notice of the accident ( Lauritan v American Fid. Fire Ins. Co., 3 AD2d 564, affd 4 NY2d 1028). Although, under the facts of this case a disclaimer might have been premised on the late notice furnished by the third parties themselves to the insurer, since this ground was not raised in the letter of disclaimer, it may not be asserted now. General Acc. Ins. Group v. Cirucci, 46 NY2d 862, 863.

The First Department's 2007 decision in Schlott v Transcon. Ins. Co., Inc. states what I believe is the correct interpretation of Insurance Law §§ 3420(a)(3) and 3420(d) with respect to late notice of lawsuits: "The fact that defendant [insurer] omitted from that notice any specific reference to the injured party's own failure to afford the insurer timely notice [of the underlying lawsuit] did not prejudice plaintiffs." Absent prejudice to the injured party from such an omission -- which in Salguero's case could not have existed or even been argued given his attorney's "questionable practices" of suing and taking a default judment against State Farm's insured without having notified State Farm, which whom that attorney had been negotiating -- a Cirucci defect is immaterial provided the injured party received a copy of the disclaimer letter.

With "only" $33,000 and change at stake, it remains to be seen whether State Farm will appeal this decision to the Second Department (which it likely will lose) and then put the conflict between the First and Second Departments before the Court of Appeals for determination.