Estoppel by Delay

PROFESSIONAL LIABILITY  – LATE NOTICE – UNTIMELY DISCLAIMER – ESTOPPEL
B&R Consol., LLC v Zurich Am. Ins. Co.
(2nd Dept., decided 9/24/2014)

At my firm's biennial coverage seminar last September I spent a good deal of time talking about Insurance Law § 3420(d)(2) untimely disclaimer/denial case law.  But 3420(d)(2) applies only to coverage declinations regarding accidentally caused death or bodily injury.

No accident?  No death or bodily injury?  No risk of a disclaimer or denial being invalidated as untimely, right?  No, not right.  Liability insurers' coverage disclaimers and denial can be found to be untimely and therefore unenforceable even if 3420(d)(2) does not apply.  How?  Estoppel.

As applied to liability insurers as in this case, estoppel is an equitable doctrine deriving from common law rather than statute.  It essentially provides that an insurer may not take or change its position on coverage if either its delay in doing so or previous words or conduct caused prejudice to its insured's legal position.  I advise my firm's insurer clients that reservation of rights (ROR) letters protect against the application of estoppel.  Or, I should say, are supposed to protect against invalidation of disclaimers and denials by estoppel.

Zurich insured a then lawyer, Frederick Powell, who misappropriated funds intended for his client, B&R Consolidated, LLC.  An amended complaint filed and served on Powell alleged that he had breached his fiduciary duty and duty of loyalty to B&R.  Powell notified Zurich of the lawsuit 51 days after receiving the summons and complaint.  Zurich assigned defense counsel and issued a reservation of rights letter to Powell 18 days after it first received notice of the claim and underlying lawsuit.  The reservation of rights letter reserved Zurich's right to disclaim coverage based upon certain policy exclusions and Powell's failure to give timely notice of the commencement of the action against him.

Approximately five months later, Zurich issued a full disclaimer of coverage based on Powell's asserted failure to give timely notice of the commencement of the underlying action. Zurich also advised Powell that it reserved the right to deny coverage on all other grounds set forth in its earlier ROR letter, and that it would no longer provide a defense or indemnify him in the underlying action. After obtaining on motion a judgment against Powell in the principal amount of $585,056.18, B&R commenced this Insurance Law § 3420(b) action against Zurich.

Supreme Court denied Zurich's and granted B&R's cross motion for summary judgment.  In AFFIRMING that order, the Appellate Division, Second Department, held first that Zurich could be held liable to B&R under Insurance Law § 3420(b) even though it did not issue the professional liability policy in question because there was an apparent agency relationship between Zurich and defendant American Guarantee and Liability Insurance Company given that: (1) Zurich's logo was on documents created and distributed by American Guarantee; (2) Zurich's claims counsel was assigned to handle Powell's case; (3) assigned counsel was required to follow Zurich's guidelines and to submit bills to Zurich; and (4) Powell was contacted by Zurich's Customer Care Center regarding the claim and was directed to file his claim on Zurich's website.

In upholding Supreme Court's finding that American Guarantee was estopped from relying upon its late notice defense because its disclaimer to Powell was untimely, the Appellate Division reasoned:

Where, as here, the matter does not involve death or bodily injury, the untimely disclaimer by an insurer does not automatically estop the insurer from disclaiming on the basis of late notice unless there has been a showing of prejudice to the insured due to the delay (see Only Natural, Inc. v Realm Natl. Ins. Co., 37 AD3d 436 [2007]; United States Fid. & Guar. Co. v Weiri, 265 AD2d 321 [1999]; Esseks, Hefter & Angel v Government Empls. Ins. Co., 215 AD2d 430 [1995]). Although the court did not make a determination that Powell was prejudiced by the defendants' approximate five-month delay in disclaiming coverage, based upon this record, B&R made a sufficient showing of prejudice to Powell due to the defendants' late disclaimer such that the defendants are estopped from disclaiming coverage (cf. Legum v Allstate Ins. Co., 33 AD3d 670 [2006]). Moreover, the purported reason for the disclaimer of coverage was evident on the face of the original complaint, and did not require any additional investigation by the insurer (see Uptown Whole Foods v Liberty Mut. Fire Ins. Co., 302 AD2d 592, 593 [2003]). The defendants failed to rebut this showing.

The appellate court did not explain or indicate what B&R's "sufficient showing of prejudice to Powell" consisted of, and neither had the lower court's decision.  In fact, the lower court did not even rule on B&R's argument of estoppel by delay.  Was the prejudice American Guarantee's sudden withdrawal of defense counsel?  

So what to do about the advice that ROR letters protect against estoppel?