Insurer Has No Duty To Defend Where Insured Fails To Comply With The Policy’s Notice Requirement, Thereby Vitiating The Policy
April, 2010
In Ponok Realty Corp. v. United National Specialty Ins. Co., 893 N.Y.S.2d 125, 69 A.D.3d 596 (2d Dep’t 2010), the Appellate Court held that the insured failed to timely notify its insurer of a potential claim against the insured, which would have triggered the insurer’s duty to defend. Further, the Court found the insured’s failure to notify to be unreasonable under the circumstances, thereby vitiating the Policy and negating the insurer’s duty to defend.
Plaintiff Ponok Realty Corp. (“Ponok”) owned a commercial building in Long Island City, New York, which it leased to Omega Shell Ltd. from 1988 to 2005. Omega’s sole shareholder was Robert Rogal, an art dealer who used the building as a warehouse to store fine arts. Id. On several occasions throughout his 17 years of tenancy, Rogal reported water leaks to Ponok, which resulted in damage to the artwork stored in the building. Id. This culminated in a lawsuit filed by Rogal in August, 2003, against Ponok and Ponok’s roofing company, alleging that water leaked from the roof on two occasions in June and July of 2002, causing irreparable damage and spoilage to the artwork stored on site. Id. Significantly, the complaint was amended in August, 2004, to include an additional leak incident that occurred on February 5, 2004. Id.
Defendant United National Specialty Ins. Co. (“United”) issued a general commercial liability policy to Ponok for the subject premises for the period of October 3, 2003, to October 3, 2004. Id. Plaintiff, however, did not notify United that a claim may be filed based on the leaks until April 5, 2005, when it requested United provide a defense to this claim. Id. The Policy provided that the insured “must see to it that we [United] are notified as soon as practicable of an ‘occurrence’ or an offense which may result in a claim.” Id. On April 8, 2005, United denied the claim on the grounds that it did not receive timely notice of the claim, per the terms and conditions of the Policy. Id.
In October, 2005, Ponok filed suit against United for breach of contract, breach of the covenant of good faith and fair dealing, breach of fiduciary duty, and for a declaration that United had a duty to defend and indemnify it in the underlying action. Id. Ponok claimed its untimely notice was reasonable because it had no reason to believe that a claim would be made against it for the February, 2004 leak, until its counsel received notice of the Amended Complaint in March, 2005. Id. United moved for summary judgment to dismiss the Complaint and declare that it had no duty to defend on the grounds that Ponok breached the notice provision of the Policy, thereby vitiating the contract. Id. The trial court granted United’s motion, finding that, in light of the history of leaks at the building and the fact that Ponok was aware of the original Complaint filed in August, 2003, at the time of the February, 2004 leak, a prudent insured should have realized that there was a reasonable possibility that United’s Policy could be triggered. Id.
The Appellate Court affirmed the trial court’s ruling in favor of United. Ponok, 893 N.Y.S.2d at 128. The Court initially set out the standard for issues involving untimely notice of a potential claim by an insured as follows:
Where an insurance policy requires that notice of an occurrence be given ‘as soon as practicable,’ notice must be given within a reasonable time in view of all the circumstances (citations omitted). ‘The Insured’s failure to satisfy the notice requirement constitutes a failure to comply with a condition precedent which, as a matter of law, vitiates the contract.’ (Citations omitted). ‘[C]ircumstances may exist that will excuse or explain the insured’s delay in giving notice, such as a reasonable belief in nonliability’ (citations omitted). Id. at 127.
The Court held that the existence and reasonableness of Ponok’s good faith belief that Rogal would not seek to hold it liable for the February, 2004 leak were questions of fact to be decided by the trial court, with Ponok bearing the burden of demonstrating its reasonableness. Id. Finding that Ponok failed to raise a triable issue of fact as to whether its belief that Rogal would not file a claim was reasonable, the Court upheld the trial court’s ruling that the notice given one year and two months after the February, 2004 leak was untimely, thereby vitiating the Policy and relieving United of its duty to defend. Id. at 128.
Learning Point
An insurer has no duty to defend its insured where the insured fails to comply with the notice requirement contained within its policy of insurance. There are times, however, where an insured may choose not to notify its insurer based on a reasonable good faith belief that the injured party will not seek to hold the insured liable for its damages; but, it is the insured’s burden to prove the reasonableness of its belief.
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