Chapter Twelve
| Jurisdiction | New York |
Chapter Twelve
Limitations on the Ability of Insurers to Disclaim Coverage
Jared T. Greisman, Esq.* Jennifer F. Mindlin
* This chapter was previously authored by Michael Pilarz, Esq.
I. Introduction
It is not uncommon for an insurer to receive a claim and, upon review, identify a defense to coverage for the claim, possibly based on late notice of the claim by the insured, lack of coverage, a policy exclusion or fraud. Once the defense is identified, the insurer’s objective is to preserve the defense or defenses.
An insurer, nonetheless, navigates perilous procedural straits before it can achieve its objective. An insured may attempt to thwart the defense by asserting a procedural fault in steps taken by the insurer to assert its defense. In such a case, an insured generally will use one of three legal doctrines to compel an insurer to provide coverage for a loss that otherwise would not be covered: (1) statutory preclusion,1444 (2) waiver and (3) estoppel. These doctrines are applied differently depending on the type of insurance at issue.
Nevertheless, an insurer should be able to successfully preserve its defenses so long as it has adequate safeguards and procedures in place.
II. The Three Doctrines: An Overview
The Court of Appeals distinguished the doctrines to compel coverage as follows: “The statute [Insurance Law § 3420(d)] . . . depends merely on the passage of time rather than on the insurer’s manifested intention to release a right as in waiver, or on prejudice to the insured as in estoppel.”1445
The law set forth in Insurance Law § 3420(d)(2) came into being in 1939.1446 Before the statute’s enactment, the validity of an insurer’s disclaimer was determined by reference to the common law doctrines of waiver and estoppel. The doctrines are still widely used, either in conjunction with a § 3420(d)(2) analysis or in cases where the section does not apply. This chapter analyzes each doctrine and reviews when each may apply to limit an insurer’s ability to deny coverage or disclaim liability.1447 Before 2009, the language presently contained in § 3420(d)(2) was found at § 3420(d).
III. Threshold Issues
When an insurer receives notice of a claim against an insured, the insurer must promptly either: (1) acknowledge receipt of the notice and advise the insured that coverage will be provided; (2) advise the insured that it will defend, subject to a reservation of rights to disclaim liability on one or more grounds; (3) disclaim coverage entirely; or (4) rescind the policy.1448 An additional option for the insurer is to enter into a non-waiver agreement with the insured.
A. Reservation of Rights
In certain cases, an insurer’s legal obligation to indemnify cannot be immediately established. Sometimes the issue requires a declaratory judgment action; sometimes it requires resolution of the underlying lawsuit. Meanwhile, how does the insurer respond to the pending lawsuit against the insured? Often, the insurer will want to protect the rights of the insured in the interim. Consequently, the insurer often will agree to defend the insured, subject to a reservation of rights pending resolution of the dispute. Through the act of reserving rights, an insurer can defeat the following argument of the insured: The insurance company is estopped from denying coverage because by defending the insured it acted in a manner inconsistent with its position that it is not obligated to provide coverage.
A reservation of rights letter is issued by an insurer to advise an insured of a defense to coverage for a loss. Such a letter permits an insurer to provide a defense to an insured without waiving its right to later assert coverage defenses.1449 The reservation of rights should be, and frequently is, contained in the insurer’s letter advising the insured of retention of defense counsel. A reservation of rights letter should state the specific possible defenses to coverage.1450 A reservation of rights letter by itself does not constitute an effective notice of disclaimer.1451
B. Nonwaiver Agreement
A nonwaiver agreement is an agreement between insurer and insured which provides that the insurer does not waive any legal rights as a result of investigating the claim or defending the insured. It is, in essence, identical to a reservation of rights letter, except here the insured specifically assents to the absence of waiver. The nonwaiver agreement may also contain a reciprocal covenant that the insured also does not waive any rights under the policy.1452 The validity of such agreements has long been recognized. The nonwaiver agreement does not afford an insurer greater rights than a unilateral reservation of rights letter.1453 An insurer cannot compel an insured to sign a nonwaiver agreement as a condition to the insurer’s assumption of the insured’s defense.1454
Once an insurer has identified a possible coverage issue and protected its rights, it must move quickly to disclaim liability under the policy.
V. Insurance Law § 3420(d)(2): PRECLUSION
A. The Ambit of Insurance Law § 3420(d)(2)
Insurance Law § 3420(d)(2) provides as follows:
If, under a liability policy issued or delivered 1455 in this state, an insurer shall disclaim liability or deny coverage for death or bodily injury arising out of a motor vehicle accident or any other type of accident occurring within this state, it shall give written notice, as soon as it is reasonably possible, of such disclaimer of liability or denial of coverage to the insured and the injured person or any other claimant.
Notwithstanding the phrase “issued or delivered,” Insurance Law § 3420(d)(2) applies to policies that cover insureds and risks located in New York1456 provided that the accident occurs in New York.1457
Further, Insurance Law § 3420(d)(2) governs the timeliness of a disclaimer for death or bodily injury claims.1458 Insurance Law § 3420(d) has been applied to no-fault claims,1459 uninsured motorist claims1460 and underinsured motorist claims.1461 However, it does not apply to environmental damage claims,1462 property damage claims,1463 breach of contract claims1464 or claims for other types of economic injuries.1465 In addition, some coverages, such as workers’ compensation and certain marine insurance, are excluded from the ambit of Ins. Law § 3420 by provision in Ins. Law § 3420(i).
Insurance Law § 3420(d)(2) applies to all types of liability policies, including commercial general liability, excess/umbrella liability1466 and personal liability coverage in homeowner’s policies.1467
The statute lays down an unconditional rule and is interpreted to avoid prejudice to the insured.1468
B. The Critical Passage of Time
The central principle of Insurance Law § 3420(d)(2) is that an insurer will lose its right to avoid covering a loss if it fails to disclaim coverage as soon as is reasonably possible. Critical to that outcome is the length of time between an insurer’s first knowledge of grounds for disclaimer and the issuance of the notice of disclaimer. As a result, the mere passage of time, regardless of whether an insured suffers prejudice, may preclude an insurer from disclaiming coverage based on an exclusion or an insured’s breach of a policy condition.1469 The statute even applies if an insured has failed to give timely notice of the claim.1470
Timeliness of the notice of disclaimer is measured from the moment an insurer learns of grounds upon which to disclaim coverage.1471 In many cases, this is well before the initiation of a lawsuit. Where the grounds for the disclaimer are readily apparent from the notice of the occurrence, claim or suit (as is usually the case with a disclaimer based on late notice), courts will not tolerate delays in notifying the insured of the denial of coverage. Once there is any known ground for the disclaimer, delays are not permitted for investigation into additional grounds for the disclaimer1472 or additional sources of insurance for the insured.1473 However, if the grounds for the disclaimer are not readily apparent, insurers are permitted to conduct a reasonable investigation. This investigation must be prompt and diligent.
The timeliness of a disclaimer is ordinarily a question of fact.1474 An insurer bears the burden of demonstrating reasonable excuse for delay.1475 In Hartford Insurance Co. v. County of Nassau,1476 the Court of Appeals held that notice of disclaimer is unreasonable as a matter of law where the record does not contain explanation for a two-month delay. On the other hand, a delay of longer than two months may sometimes be excused if an insurer encounters difficulty, not of its own making, in performing its investigation.1477 Short, explained delays are reasonable as a matter of law.1478 Delays caused by the insurer ordinarily will not extend the time for the insurer to disclaim.1479 Courts may tolerate insurer delays least when the ground for disclaiming coverage should have been readily apparent to the carrier when it first received notice of the claim.1480
Neither a reservation of rights letter nor a nonwaiver agreement has any bearing on the question of whether an insurer has timely disclaimed under Insurance Law § 3420(d).1481 Neither extends an insurer’s time for providing notice of disclaimer under § 3420(d).1482
C. Insurance Law § 3420(d) Cannot Create Coverage
In interpreting Insurance Law § 3420(d)(2), the N.Y. Court of Appeals explained that “The Legislature in using the words ‘denial of coverage’ did not intend to require notice when there never was any insurance in effect, and intended by that phrase to cover only situations in which a policy of insurance that would otherwise cover the particular accident is claimed not to cover it because of an exclusion in the policy.”1483 Thus, there is a distinction between cases where there would be coverage under a policy but for the application of an exclusion or condition, in which case § 3420(d)(2) would apply, and cases where there was no coverage under the policy...
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