Insurance Coverage Alert
July 2008
Authors:
Peter N. Flocos
peter.flocos@klgates.com
212.536.4025
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New York Enacts Statute Prohibiting
Insurance Claims From Being Denied Based
on “Late Notice” Unless the Insurer Has Been
Prejudiced
On July 21, 2008, New York Governor David Paterson signed into law an insurance
statute addressing, in a manner favorable to policyholders, the critical issue of the effect
of insurance policy provisions requiring the policyholder to give notice to its insurer of
a claim or occurrence within a certain period of time (sometimes referred to as the “late
notice” issue). This newly enacted statute is a revised version of a bill passed last year
by the New York legislature but vetoed by then Governor Elliot Spitzer because of his
objection to other provisions in the bill.
Developments in New York insurance law can have great impact. For example, many
policyholders and insurers have their principal place of business or significant operations
in New York. In addition, some insurance policies have choice-of-law clauses specifying
application of New York law and, even in the absence of such clauses, insurers often argue
for application of New York law. Thus, this newly enacted New York insurance statute is
an important development that may significantly benefit policyholders located not only in
New York but also around the country.
Most liability insurance policies – including standard “occurrence”-based general liability
policies as well as “claims-made” policies – contain provisions that, in some form, require
the policyholder to provide the insurer with notice of an occurrence that may result in a
claim against the insured and/or notice of an actual claim made against the policyholder.
Language formulations vary from policy to policy. For example, such provisions may
require notice to be given to the insurer “as soon as practicable,” “promptly,” “immediately,”
or “as soon as possible.”
Although recent New York “late notice” case law has been evolving in a pro-policyholder
direction, insurers historically have argued successfully in a number of New York cases
that coverage is completely forfeited in the event the policyholder provides notification of
a claim that is “late” under a provision in the policy – even if the allegedly “late” notice
did not prejudice or harm the insurer’s legitimate interests in any way. As a result of
such decisions, policyholders have failed to obtain coverage for valid claims as to which
coverage would otherwise have been available. By contrast, the large majority of states
outside New York have flatly rejected, often by statute, the notion that “late” notice of a
claim results in a forfeiture of coverage in the absence of prejudice to the insurer.
The recently enacted New York statute prohibits an insurer from denying a claim based
upon untimely notice of the claim “unless the failure to provide timely notice has prejudiced
the insurer.” The new statute also permits a third-party claimant against the policyholder
to seek declaratory relief directly against the insurer regarding the notice issue prior to the
time that the third party’s underlying action against the policyholder is concluded.
Insurance Coverage Alert
The salient features of the new statute are summarized
below.
Amendments to the New York
Insurance Law
The statute amends Section 3420 of the New York
Insurance Law so as to address the “late notice” issue.
That section applies generally to any insurance policy
“issued or delivered” in New York that insures against
“liability for injury to person” or “liability for injury
to, or destruction of, property.” According to the bill’s
legislative history, the amendments seek to avoid “an
inequitable outcome with insurers collecting billions of
dollars in premiums annually, and disclaiming coverage
over an inconsequential technicality” – namely, notice
which may be “late” under technical policy provisions
but which does not prejudice the insurer.
The amendments to Section 3420 include the following
provisions (emphasis is supplied):
• “Prejudice” to the Insurer Must Exist for “Late”
Claims to be Denied. The new statute provides
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
. . . unless the failure to provide timely notice has
prejudiced the insurer . . .” However, a “claimsmade” policy “may provide that the claim shall be
made during” the applicable policy or reporting
period.
• “Prejudice” Defined at Least in Part. There is no
prejudice to the insurer “unless the failure to timely
provide notice materially impairs the ability of the
insurer to investigate or defend the claim.”
• Burden of Proof Regarding Prejudice. The burden
of proof regarding prejudice is allocated depending
upon the amount of time by which the notice was
“late”: (1) the insurer has the burden to prove that
it was prejudiced if the notice was provided “within
two years of the time required under the policy”;
and (2) the policyholder has the burden 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.”
• Irrebuttable Presumption of Prejudice. The new
statute provides that an “irrebuttable presumption”
of prejudice exists “if, prior to notice, the insured’s
liability has been determined by a court of
competent jurisdiction or by binding arbitration;
or if the insured has resolved the claim or suit by
settlement or other compromise.”
Amendments to the New York CPLR
Regarding Declaratory Judgments
The new law also makes amendments to Section 3001
of the New York Civil Practice Law and Rules (the
rules of procedure of the New York state courts), and
to Insurance Law Section 3420, so as to provide that
a party who has brought a claim for personal injury
or wrongful death against a policyholder may bring
a “declaratory judgment action directly against the
insurer of” that policyholder, “if the insurer disclaims
liability or denies coverage based upon the failure to
provide timely notice.” Such an action may challenge
the insurer’s disclaimer or denial based on the failure to
provide timely notice. The action may not be brought
if, within sixty days following the disclaimer or denial,
the policyholder or the insurer initiates an action to
declare the rights of the parties under the insurance
policy and names the injured person or other claimant
as a party to the action.
Effective Time and Scope of
Applicability of the New Provisions
By its terms, the new bill becomes effective 180 days
after its signing into law on July 21, 2008. The bill also
states that it applies “to policies issued or delivered”
in New York “on or after such date and to any action
maintained under such a policy,” although the New
York Superintendent of Insurance may immediately
make any necessary implementing regulations.
Conclusion
This newly enacted insurance statute should be of
significant benefit to policyholders and should bring
New York “late notice” law clearly into line with
that of the large majority of other states, at least
with respect to policies issued or delivered after the
July 2008 | 2
Insurance Coverage Alert
statute’s effective date. As noted in the legislative
history, the new legislation “prevents insurers from
denying coverage for claims based on a technicality,”
and “eliminates the extreme hardship placed on those
who pay their premiums timely only to find at a time
of need that their policy is not available.”
It remains to be seen, however, what effect the new
law will have on insurer “late notice” defenses under
policies issued prior to the effective date of the bill,
and on cases in which the insurer alleges failure by the
policyholder to satisfy a policy condition other than a
notice provision.
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