Chapter Four

• Jurisdiction: New York

Chapter Four

Policy Notification, Cancellation and Cooperation Requirements

Stuart E. Kahan, Esq.*

* This chapter was previously updated by James G. Eberz, Esq.

I. Introduction

The topics of policy notification, policy cancellation and the insured’s obligation to cooperate with its defense in an insurance dispute are vital to a discussion of insurance coverage and law. There are numerous reported cases dealing with these subjects, so the discussion that follows, by necessity, focuses on general principles.

In establishing insurance company participation in a dispute, the insured has reaped the first benefit of premium payments. Notification triggers carrier involvement in the dispute, and notification to the carrier and cooperation with the defense are obligations of the insured—based on contract and explained in court cases over the years. The breach of those obligations may result in disclaimer of the obligation to defend and indemnify. “Cancellation” refers to the insurer’s avoidance of its obligations under a policy, usually in advance of any claim having been brought. The distinction between cancellation and disclaimer is significant in many ways, not the least being the insurer’s duty to notify claimants of the latter but not the former.⁶⁴⁶

II. Notification

A. Contract Provisions

The duty to notify the insurer is found in the insurance contract. The following is typical language from an insurance contract written in traditional (non-plain-English) style:

Insured’s Duties in the Event of Occurrence, Claim or Suit:

a. In the event of an occurrence, written notice containing particulars sufficient to identify the insured and also reasonably obtainable information with respect to the time, place and circumstances thereof, and the names and addresses of the injured and of available witnesses, shall be given by or for the insured to the company as soon as practicable.

b. If claim is made or suit is brought against the insured, the insured shall immediately forward to the company every demand, notice, summons or other process received by him or his representative.

Language can vary from the above, such as where the insurer requires that additional information be submitted. The notification requirement in each contract, therefore, must be read carefully. There are two major components to the requirement—timeliness and form.

B. Timeliness

Case law is well established: An insurer is not obliged to pay the loss or defend the insured unless it receives timely notice of the loss in accordance with the contract.⁶⁴⁷ In 2008, New York State amended Insurance Law § 3420 regarding timeliness of notice and prejudice. The amendments are effective for all policies issued or delivered in New York after January 17, 2009. Insurance Law § 3420(a) details provisions to be included in policies issued or delivered in New York State. Paragraph (a)(5) provides that policies should include, “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, injured person or any other claimant, unless the failure to provide timely notice has prejudiced the insurer, except as provided in subparagraph four of this subsection.” With respect to a claims-made policy, however, the policy may provide that the claim shall be made during the policy period, any renewal thereof, or any extended reporting period, except as provided in paragraph four of this subsection. As used in this paragraph, the terms “claims-made policy” and “extending reporting period” shall have their respective meanings as provided in a regulation promulgated by the superintendent.”⁶⁴⁸

In considering the notification requirement, the courts look at substance rather than at technical form. The question often posed is “was notice given within a reasonable time under all the circumstances?” As might be expected, the reasonableness of a delay in notification is often a question of fact.⁶⁴⁹ There are, however, many cases where declaratory judgment actions involving these issues are decided as matters of law. The decisions in these declaratory judgment actions emphasize that the insured and insurer have obligations to act reasonably. Failure to do so can, and often does, result in summary denial of coverage or an ineffective disclaimer.

In Melhado v. Catsimatidis,⁶⁵⁰ the insured had notified the carrier of the accident and the carrier had conducted an investigation. The insured, however, did not forward the suit papers when they were later served. The carrier sought to avoid its liability on the basis of late notice. The court held that the delay “caused the insurer irreparable harm by depriving it of the opportunity to participate meaningfully in pretrial discovery proceedings”⁶⁵¹ and granted the insurer’s motion for summary judgment.⁶⁵²

In Acker-Fitzsimons Corp., the insured (the owner of a commercial building) heard “rumors” in November 1965 that several firemen had been injured while extinguishing a fire in its building. In December, the insured learned from a newspaper article that the firemen had filed a claim against the city of New York. The story mentioned alleged liability of the owners of the premises. In April 1967, the insured was served with legal papers and promptly notified Security Mutual, its insurer. The N.Y. Court of Appeals held that the delay of 19 months was not reasonable and permitted the insurer to disclaim coverage. Noting that the newspaper article alone “probably was not a sufficient predicate for giving immediate notice,”⁶⁵³ the court held that “such information would cause a reasonable and prudent person to investigate the circumstances, ascertain the facts, and evaluate his potential liability.”⁶⁵⁴ Having failed to do so, the insured could no longer excuse late notice on the basis of “lack of knowledge” or a “belief of nonliability.”

While late notice is perhaps most often thought of in terms of a liability policy when a third party makes a claim, the principle applies equally to first-party claims. When the insured does not give his own insurer prompt notice of an accident, his right to seek payments under his underinsurance coverage,⁶⁵⁵ supplemental uninsured⁶⁵⁶ or uninsured coverage benefits⁶⁵⁷ clause is lost.

Lack of knowledge and belief of nonliability are exceptions that appear to buffer against an otherwise harsh ruling that affects not only the insured but, in the case of third-party claims, the injured person as well. While a good faith belief of nonliability may excuse or explain a failure to give timely notice, the insured bears the burden of demonstrating that the delay in giving notice was reasonable.⁶⁵⁸ However, for policies issued or delivered in New York after January 17, 2009, Insurance Law § 3420(c)(2)(A) provides:

In any action in which an insurer alleges that it was prejudiced as a result of a failure to provide timely notice, the burden of proof shall be on: (i) the insurer to prove that it has been prejudiced, if the notice was provided within two years of the time required under the policy; or (ii) the insured, injured person or other claimant to prove that the insurer has not been prejudiced, if the notice was provided more than two years after the time required under the policy.

Further, Insurance Law § 3420(c)(2)(C) provides, “the insurer’s rights shall not be deemed prejudiced unless the failure to timely provide notice materially impairs the ability of the insurer to investigate or defend the claim.”⁶⁵⁹

In Acker-Fitzsimons Corp., the insured was initially without knowledge that there had been an “accident” within the meaning of the liability policy. Even if there is knowledge of an accident, lack of knowledge of a significant injury may excuse late notice to the carrier. In Kelly v. Nationwide Mutual Insurance Co.,⁶⁶⁰ the insured’s auto hit the rear bumper of William Diaz’s vehicle. The police responded and arrested the insured for driving while intoxicated. The police report indicated no one had been injured and that the vehicles had only minor damage. One year later Diaz sued Kelly, alleging serious injuries. Kelly notified Nationwide of the suit. The First Department held that the insured “had no reason to believe that a claim would be made against him” and that notice first given when the lawsuit was commenced was reasonable.

Compare, however, the facts in Greater New York Mutual Insurance Co. v. Farrauto,⁶⁶¹ where the carrier successfully disclaimed on the basis of late notice. In Farrauto, the insured’s granddaughter fell down stairs and sustained a serious eye injury. The court held that “[t]he fact that an insured is unaware that an interfamilial lawsuit can be commenced is not a legally cognizable reason to delay notifying an insurer of an accident.”⁶⁶²

Cases discussing the seriousness of the injury (or lack thereof) merge with the concept of belief of nonliability. This exception is fact-specific, although some cases are illustrative of how the exception may be applied.

In Merchants Mutual Insurance Co. v. Hoffman,⁶⁶³ the infant sustained a broken arm that necessitated “a short [hospital] stay . . . [and] some physical therapy for two months.”⁶⁶⁴ At the time, he was a foster child residing in the Hoffman household. The Department of Social Services was promptly notified and paid all the medical bills. The infant continued to reside with the Hoffmans “for a few more months” after his discharge from the hospital. The suit was commenced thereafter.⁶⁶⁵ The court held that the Hoffmans “demonstrated a good faith belief in nonliability and were not required to notify their insurer [at the time of the accident].”⁶⁶⁶

That it is difficult to forecast a result is a point made clear by comparing two (somewhat similar) cases. In Briggs v. Nationwide Mutual Insurance Co.,⁶⁶⁷ a motorboat passenger was rocked in her seat and taken to the hospital for spine X-rays. There was no further contact from the...