STATUS UPDATE -- Late Notice/Material Prejudice Bill in New York State

Here's what I know -- from which you can discern what I don't know.

1. Although there have been a few glancing blows to the coverage defense, New York case law still does not require insurers to show prejudice in order to sustain disclaimers based on late notice of an occurrence or loss.

2. Injured parties may not bring a direct DJ action against the insured defendant's liability insurer to challenge a disclaimer until they get a money judgment against the insured, present it to the insurer, and wait at least 30 days for payment.

Last year, the New York State Legislature passed a bill that would have both required insurers to show "material prejudice" in order to sustain late notice disclaimers and allowed injured parties to commence DJ actions against tortfeasors' insurers before completing their personal injury lawsuits. Senate Bill 6306 was introduced and passed by BOTH houses of the state legislature in a lightning-quick five days last June. That bill:

1. amended New York CPLR § 3001 to permit non-insured declaratory judgment actions to be brought against insurers before that non-insured party has obtained a money judgment against the insurer’s insured, effectively overruling the New York Court of Appeals’ 2004 decision in Hanover v. Lang (3 N.Y.2d 350 [2004]); and

2. converted New York fully into a “prejudice state” for late notice of claim defenses by adding New York Insurance Law § 3451, which would have required insurers to demonstrate “material prejudice” in order to support denials of coverage based on an insured’s failure to give “timely notice of a claim”.

The insurance industry called an offensive foul/charging, and on August 1, 2007, former Governor Eliot Spitzer pocket vetoed that bill, noting in his veto memorandum:

Much of this dispute seems to result from the manner in which this bill was passed. The bill was not introduced until June 17, 2007, and passed both houses just three days [sic] later. Most of the affected parties were unaware that the bill had been introduced, and claim that they had no opportunity to testify at any hearings or otherwise make their views known before the Legislature acted. As a result, there are significant unanswered questions relating to what the actual impact of the bill might be, and the members of the Legislature have not had an opportunity to appropriately balance the views of both sides.

Former Governor Spitzer kept the discussion and debate going, however, by reporting:

As a result, I have instructed my staff and the Superintendent of Insurance to work with both houses, the insurance industry, business groups, consumer advocates, the trial bar and the Office of Court Administration to investigate this issue further and to determine the impact of these provisions on injured parties, on insurance rates, and on court caseloads.

As noted above, this bill's dual goals - streamlining litigation and prohibiting the denial of coverage for mere technicalities - are sound, and hopefully we can enact a new bill that accomplishes these important goals in a manner that protects the interests of claimants, policyholders and insurers alike.

Aside from what I think of our former governor's use of terms like "trial bar" (translation: personal injury plaintiff attorneys) and "mere technicalities" (aka conditions precedent to coverage), we can eventually expect to see a bill introduced, passed and signed in New York State that changes the "no prejudice" rule for insurers and perhaps also creates an immediate and direct DJ action right for non-insureds injured by insureds whose insurers have declined coverage.

Within weeks after that veto, I became aware that at least one New York insurance industry organization was working on drafting its own proposed bill, probably realizing the inevitability of eventual state legislation on these issues and wanting to "get out in front" of these changes. I saw the latest version of that draft bill a week ago, but am not aware that any state legislator has been enlisted to introduce it any time soon.

Currently pending in the New York State Legislature are at least three bills: two Assembly bills, A9059 and A9188; and one Senate bill, S7031. You can search for and review those proposed bills here by selecting "NYS Legislative Bills". A9059 is the Assembly's counterpart to S7031, which, as you can see, was re-introduced on February 29, 2008 and immediately referred to the Senate's Insurance Committee. S7031 addresses only the late notice/prejudice issue, by proposing to add a new section to New York Insurance Law prohibiting insurers from denying coverage based on an insured falure to give timely notice of a claim "unless the insurer can demonstrate that it has suffered substantial prejudice as a result of the delayed notice."

Coverage Counsel will continue to watch the State Legislature for activity on these issues and will report any developments in this blog as they occur.

June 24, 2008 -- The Governor's Program Bill #65 passed yesterday. See my Status Update (Part IV) post and related posts for details.

July 25, 2008 -- Governor Paterson signed this bill on July 21, 2008m , making its provisions effective on January 17, 2009. For a discussion of the various provisions of that bill, see my Direct DJ/Late Notice Bill label.