The Fine Line Between Diligence And Delay: Insurance Law Section 3420[D] And Its Affect On Disclaiming Coverage For Lack Of Cooperation
December, 2007
Continental Casualty Company v. Terrance D. Stradford, et al, 2007 N.Y. App. Div. LEXIS 12577 at *1 (2d Dep’t 2007), involved a declaratory judgment action, wherein the Second Department provided further insight into what is required to effectively disclaim coverage based on an insured’s lack of cooperation. This action stems from two medical malpractice cases in which Continental provided defense counsel to its insured, Terrance D. Stradford. Throughout the defense in these cases, Continental contended that Stradford ignored written correspondence and telephone calls, and further refused to provide requested documents, records and evidence. Additionally, Continental argued that Stradford unreasonably refused to consent to recommended settlements based on expert findings and, despite his own request, refused to execute stipulations consenting to a change of attorney. Id. at *3. On July 8, 2004, Continental sent two letters to Stradford regarding these cases indicating that he “risked a disclaimer of coverage on the underlying actions if he continued to fail to cooperate.” These letters were returned to Continental on August 11, 2004, marked “unclaimed.” Approximately two months later, on October 13, 2004, Continental sent Stradford two disclaimer of coverage letters and brought declaratory judgment actions. Id. at *6.
At the trial court, Continental argued that it should be permitted to disclaim coverage based on Stradford’s lack of cooperation in his defense and submitted numerous letters, dating back to 1999, sent to Stradford requesting compliance, along with other documents illustrating a pattern of non-compliance. Continental further provided the court with a June 1, 2004, declaratory judgment order relieving it of its defense and indemnity obligations to Stradford in two additional cases, occurring during the same time period and characterized by Continental as “absolutely identical” to the underlying medical malpractice cases at issue in this dispute. The trial court record demonstrated that Stradford’s failure to cooperate equally permeated all four of the claims.
It is established under New York law that to effectively disclaim coverage for lack of cooperation, “an insurance carrier must demonstrate (1) that it acted diligently in seeking to bring about the insured’s cooperation, (2) that the efforts employed by the carrier were reasonably calculated to obtain the insured’s cooperation, and (3) that the attitude of the insured, after his cooperation was sought, was one of willful avowed destruction.” Physicians’ Reciprocal Insurers v. Keller, 243 A.D.2d 547, 547-48, 665 N.Y.S.2d 515 (2d Dep’t 1997); see Thrasher v. United States Liab. Ins. Co., 19 N.Y.2d 159, 225 N.E.2d 503, 278 N.Y.S. 793 (1967); Hyer v. Travelers Ins. Co., 297 A.D.2d 707, 747 N.Y.S. 393 (2d Dep’t 2002); Commercial Union Ins. Co. v. Burr, 226 A.D.2d 416, 641 N.Y.S.2d 69 (2d Dep’t 1996); Pawtucket Mut. Ins. Co. v. Soler, 184 A.D.2d 498, 584 N.Y.S.2d 192 (2d Dep’t 1992). The trial court concluded that Continental satisfied each of the three factors and that it met the heavy burden required to establish lack of cooperation.
The Appellate Division agreed with the trial court and also concluded that Continental satisfied each of the above factors required to disclaim coverage based on lack of cooperation. However, the Court further held that Continental failed to make out a prima facie case that its October 13, 2004, disclaimer of coverage letters were timely under the circumstances. As a result, not only was Continental prohibited from disclaiming for lack of cooperation, but the Court ruled that the delay in disclaiming coverage necessitated granting Stradford’s cross-motion and requiring Continental to continue providing defense and indemnification in the underlying cases to Stradford. Continental Cas. Co., 207 N.Y. App. Div. LEXIS 12577 at *6.
In support of its holding, the Court reasoned that at the time Continental moved for declaratory judgment in the two cases adjudicated in the June 1, 2004, Order, Continental had sufficient knowledge to reasonably disclaim coverage on the same non-cooperation grounds in the cases underlying this dispute. The Court stated that upon Continental’s receipt of the June 1, 2004, Order, it had sufficient basis to disclaim coverage to Stradford and that at the very latest could have disclaimed coverage on August 11, 2004, when it received back the disclaimer letters marked “unclaimed” and it became obvious that any effort to obtain Stradford’s cooperation was futile. Id. at *7. The Court held that since Continental waited until October 13, 2004, over two months after receiving back the disclaimer letters, to disclaim coverage to Stradford on the underlying cases without adequate explanation, Continental’s disclaimer was not as “soon as is reasonably possible” as required by Insurance Law § 3420(d). Continental was unable to sufficiently justify this delay and the Court concluded that the trial court erred in granting summary judgment in Continental’s favor.
Learning Point:
While an insurer must act diligently and use reasonably calculated efforts to encourage an insured’s cooperation in its defense, if the insurer does not disclaim for lack of cooperation in a timely manner it will be precluded from later doing so. While this decision does not set a definitive line between what is considered diligent and reasonably calculated, and what is an inexcusable delay, it does put the insurer on notice that Insurance Law §3420(d) and its reasonableness requirement can and will trump even a successfully substantiated lack of cooperation disclaimer.
Back to New York CM Report of Recent Decisions (2007v4) 2007 Volume 4 Table of Contents
