Differences In Notice Standards Between Primary, Excess And Reinsurance Insureers In First-Party Property Cases
September, 2004
New York has consistently permitted primary insurers in the first-party property context to disclaim coverage when the insured fails to give timely notice of the loss regardless of whether the delay caused any prejudice to the insurer. New York courts have also applied the same “no prejudice” rule to excess carriers, but have applied a higher standard in the reinsurance context.
In New York, compliance with a notice provision in an insurance policy is a condition precedent to an insurer’s liability. See, e.g., Mt. Vernon Fire Ins. Co. v. Abesol Realty Corp., 288 F.Supp.2d 302 (E.D.N.Y. 2003); Fireman’s Fund Ins. Co. v. Schuster Films, Inc., 811 F.Supp. 978 (S.D.N.Y. 1993). New York courts, unlike other states, do not require a showing of prejudice by the insurer in order to rule that late notice by the insured precludes a claim. Id. In fact, absent a valid excuse, an insured’s failure to comply with a notice provision serves as a complete defense regardless of prejudice to the insured. See Security Mut. Ins. Co. v. Acker-Fitzsimmons Corp. 31 N.Y.2d 436, 440 (1972). This is the general rule applied to primary carriers.
As set forth in the Court of Appeals decision in American Home Ass. Co. v. International Ins. Co., 90 N.Y.2d 433, 440 (1997), the “no prejudice” rule applies to excess carriers as well. The Court of Appeals held that excess carriers have the same vital interest in prompt notice as do primary insurers and, as such, excess insurers need not establish prejudice to assert a late notice defense. The reasoning given by the courts is that excess insurers have virtually the same rights and obligations as primary insurers; they have the right to investigate a claim, join in settlement negotiations and make their own settlement decisions. Thus, absent a valid excuse, an insured is not only required to notify its primary carrier of a loss, but its excess carrier as well. If timely notice is not provided to the primary and/or excess carrier, the carrier may assert a late notice defense.
While primary and excess carriers need not demonstrate prejudice, a reinsurer is held to a higher standard. A reinsurer must prove prejudice in order to disclaim based on late notice. Unigard Sec. Ins. Co. v. North Riv. Ins. Co., 79 N.Y.2d 576, 581 (1992). The primary reasoning behind this is that, unlike primary and excess carriers, reinsurers are not responsible for providing a defense, investigating a claim or gain control of the claim in order to effectuate an early settlement. This does not mean that a reinsurer may never assert late notice as a ground for avoiding its obligations under a reinsurance contract. In cases in which reinsurers were able to establish prejudice, the reinsurer demonstrated that it was prevented from: (a) posting appropriate reserves; (b) participating in the defense and control of a particular claim; (c) asserting claims for their own reinsurance; and (d) establishing premiums that accurately reflect past loss experience. See, e.g., Christiana Gen’l Ins. Corp. v. Great American Ins. Co., 979 F.2d 268, 274 (2d Cir. 1992)(the primary functions of prompt notice to a reinsurer are to enable it to set proper reserves, to allow it to decide whether it wants to participate in the defense of a certain claim, and to permit it to establish premiums that accurately reflect past losses). Notwithstanding the normal requirement of prejudice, New York courts have held that a reinsurer is not required to show prejudice when the reinsurance contract specifically requires prompt notice as a condition precedent to coverage. See, e.g., Christiana, 979 F.2d at 273 (“For a reinsurer to be relieved from its indemnification obligations because of the reinsured’s failure to provide timely notice, absent an express provision in the contract making prompt notice a condition precedent, it must show prejudice resulted from the delay”). As such, so long as a reinsurer makes prompt notice a condition precedent to coverage in the policy, failure of the reinsured to provide prompt notice of the claim to the reinsurer is a complete bar to coverage -- regardless of whether the reinsurer was prejudiced by the delay.
Learning Point:
It is well-settled in New York that, absent a valid excuse, the insured must provide timely notice of its claim to both its primary and excess carrier, regardless of whether its delay caused any prejudice to the insurer. Reinsurers are held to a higher standard and must show that the delay prejudiced them in order to utilize the late notice defense. However, reinsurers can be held to the same standard as primary and excess carriers by explicitly providing in the reinsurance contract that prompt notice of a claim is a condition precedent to coverage. •
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