The New York Legislature has passed a bill that reverses New York's longstanding "no prejudice" rule. The legislation, Senate Bill 8610 and Assembly Bill 11541, which was signed by Governor David A. Paterson on July 21, 2008, prohibits an insurer from denying coverage for a claim on the grounds of late notice unless the insurer demonstrates that it has been prejudiced by the delay in reporting. The legislation also permits an underlying plaintiff to commence a declaratory judgment action directly against the defendant's insurer, in limited circumstances, to challenge the insurer's denial of coverage based on untimely notice. The highlights of the legislation are summarized below.
Late Notice Provision
The legislation amends Insurance Law Section 3420 and requires all liability policies for injury to persons or for injury to, or destruction of, property issued or delivered in New York to contain a provision that an insurer cannot disclaim coverage for a claim made by the insured, injured persons or any other claimant on the grounds of late notice unless the late notice has prejudiced the insurer. The legislation also states that if notice is provided to the insurer within two years of the time required under the policy, the insurer has the burden of demonstrating prejudice. If, however, notice is provided to the insurer more than two years after the time required under the policy, the burden shifts to the insured, injured person or other claimant to establish that the insurer was not prejudiced by the untimely notice. The legislation also establishes an irrebuttable presumption of prejudice where notice is provided to the insurer after the insured's liability is determined, or after the insured has settled the case. As a guide to the application of the prejudice requirement, the legislation provides that an insurer's rights will be deemed prejudiced where the untimely notice "materially impairs the ability of the insurer to investigate or defend the claim."
Under the legislation, however, claims-made policies may still contain a provision that the claim should be made during the policy period, any renewal thereof, or any extended reporting period.
Declaratory Judgment Actions
Until the passage of this legislation, a third party claimant could only file a direct action against an insurer where a judgment entered against an insured was unsatisfied for 30 days. The legislation amends Insurance Law Section 3420(a) and, in a suit arising out of bodily injury or wrongful death, permits an injured person or other claimant to file suit directly against the defendant's insurer for declaratory relief where the insurer has disclaimed
coverage on the grounds of late notice. A third party claimant does not, however, have the right to maintain a declaratory judgment action directly against an insurer if the insured or insurer brings a declaratory judgment action within 60 days of the denial naming the injured person or other claimant as a party to the action.
The legislation also establishes a process for a claimant to receive confirmation from an insurer that the insured had a liability insurance policy in effect at the time of the alleged occurrence and information concerning the limits of coverage provided under such policy. The legislation also provides a process in the event that insufficient information is provided to the insurer and such confirmation is not possible.
What This Means to You
The new legislation benefits insureds and represents a change in New York law that previously did not require an insurer who disclaimed coverage for a claim on the grounds of late notice to demonstrate that it had been prejudiced by the late reporting of the claim.
The legislation will not apply retroactively and becomes effective on January 17, 2009, 180 days after it was signed into law, applying only to policies issued on or after January 17, 2009. The legislation does not appear to be limited to domestic insurers and does appear to apply to insurance policies issued or delivered in New York on a surplus lines basis.
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Copyright © 2008 Herrick, Feinstein LLP. Insurance Alert is published by Herrick, Feinstein LLP for information purposes only. Nothing contained herein is intended to serve as legal advice or counsel or as an opinion of the firm. Prior results do not guarantee a similar outcome.