New York’s “No-Prejudice” Rule In Late Notice Coverage Cases Appears To Be Changing
February, 2004
New York is one of the few states that continues to allow an insurer to disclaim coverage for late notice of an occurrence and of a lawsuit without proving prejudice. The majority of states do not allow an insurance company to disclaim for the mere passage of time between the date of the occurrence, claim or lawsuit and the date the insured notifies the insurance carrier.
New York courts have always considered timely notice a condition precedent to coverage. Olin Corp. v. Ins. Co. of N. Am., 966 F.2d 718 (2d Cir. 1992); Commercial Union Ins. Co. v. International Flavors & Fragrances, Inc., 822 F.2d 267, 271 (2d Cir. 1987). The rationale is that the notice condition within a liability policy allows an insurer to make a timely and thorough investigation of a claim and protect itself against unjustifiable claims. Id. New York courts have consistently held that the insured’s failure to satisfy the notice requirements within a policy relieves the insurer of its coverage obligations, regardless of whether the delay materially prejudices the insurer. Hovdestad v. Interbor Mut. Indem. Ins. Co., 522 N.Y.S.2d 895 (2d Dept. 1987). Recently, however, a few New York courts -- including the highest court, the New York Court of Appeals -- have indicated that the time has come for New York to join the majority of states in adopting the “no-prejudice” rule.
The erosion of the New York “no-prejudice” rule began in 2002, in Brandon v. Nationwide Mutual Insurance Co., 97 N.Y.2d 491, 743 N.Y.S.2d 53 (2002). Brandon involved a lawsuit regarding supplementary uninsured motorist (“SUM”) benefits, where notice of the occurrence had been provided. The New York Court of Appeals stated that the insurer must prove prejudice to disclaim for late notice of the suit. While the Brandon court did not explicitly expand the application of the “no-prejudice” rule beyond situations involving SUM benefits and failure to notify a carrier about a lawsuit, as opposed to an “occurrence” or “claim,” dicta contained in “Footnote 3” of the Brandon decision indicated that further changes in the law may be forthcoming. Footnote 3 stated:
New York is one of a minority of states that still maintain a no-prejudice exception (see, Ostrager and Newman, Insurance Coverage disputes S. 4.04 [11th ed.]). Formerly a majority of states took this approach, but, as the Supreme Court of Tennessee noted when it recently adopted a prejudice requirement in a case involving a late notice of claim for uninsured motorist coverage, “the number of jurisdictions that still follow the traditional view has dwindled drastically” (Alcazar v. Hayes, 982 S.W.2d 845, 850 [Tenn. 1998]). Indeed, that court noted that in the preceding 20 years, only two states -- New York and Colorado -- had “considered the issue” and “continued to strictly adhere to the traditional approach” (id. at 853). Since then, Colorado adopted the majority rule, requiring insurers to demonstrate prejudice (see Clementi v. Nationwide Mutual Fire Ins. Co., 16 P.3d 223, 230 [Colo. 2001]).
As Clementi and Alcazar illustrate, states often begin the shift to a prejudice requirement in the uninsured motorist context, where various policy considerations -- the adhesive nature of insurance contracts, the public policy objective of compensating tort victims, and the inequity of the insurer receiving a windfall due to a technicality -- are clearly implicated (see Clementi, 16 P.3d at 229). The issue of whether New York should continue to maintain the no-prejudice exception when insurers assert late notice of claim as a defense is not before us.
The Court of Appeals sees its own movement away from a “no-prejudice” rule as part of a trend spearheaded by other states that first shifted to a prejudice requirement in the uninsured motorist context, and later applied the requirement to claims and occurrences as well. The Brandon court in Footnote 3 specifically noted that the issue of the “no-prejudice” rule as to late notice of claim in other contexts was not before it, and its ultimate resolution would have to wait for another day. The comment does not inspire confidence that New York will remain in the minority much longer.
Since Brandon, New York’s lower courts have not taken a uniformed approach to the issue. Some appear to be applying the old rule until the Court of Appeals says otherwise, while others are running with the dicta of Brandon, and expanding its holding, even to situations where SUM benefits are not involved.
For example, in Banks v. American Manufacturers Mutual Insurance Company, 306 A.D.2d 120, 762 N.Y.S.2d 588 (1st Dep’t 2003), the First Department (one of New York appellate courts) expanded Brandon’s footnote dicta to affirmatively state that “[a]n insured’s late notice to the insurer of the pendency of a legal action against the tortfeasor does not vitiate SUM coverage absent a demonstration that the insurer has been prejudiced by the delay.” While the insurance policy in Banks required that notice of a claim for coverage be made no more than 90 days after the accident, and notice was not given until 25 months after the accident and 16 months after the lawsuit was commenced, the First Department reversed and remanded the lower court’s granting of the insurer’s motion for summary judgment due to late notice of claim. The First Department stated that the undeveloped record did not yet show the notice was not “as soon as practicable,” and focused its attention on the issue of prejudice and the late notice of a legal action. The First Department left open the possibility that prejudice must be shown before an insurer will be relieved of its obligation to provide coverage after late notice of a claim.
Likewise, in State Farm Mutual Automobile Insurance Company v. Sparacio, 297 A.D.2d 284, 746 N.Y.S.2d 167 (2d Dept. 2002) (another uninsured motorist benefits case), the Second Department cited Brandon and explicitly stated: “Failure to serve a copy of the summons and complaint in the underlying personal injury action upon State Farm does not, by itself, relieve State Farm of its obligation. Insurers relying on the late notice of legal action defense are required to show prejudice.” The Second Department remitted the matter for a determination as to whether timely notice of the claim had been given.
While some courts, such as the Supreme Court, Bronx County in Torres v. Morse Diesel International, Inc., NYLJ, December 19, 2003, p. 20, col. 3, interpret Brandon to limit the requirement of demonstrating prejudice to SUM cases, others have expanded the rule outside the SUM context. In Genesee Management, Inc. v. Barrette, NYLJ, October 21, 2003, p. 20, col. 1 (Sup. Ct. Onondaga County), the trial court applied Brandon to liability policies. The insurer disclaimed solely on the basis of late notice of suit, having received timely notice of the accident. After a detailed analysis of Brandon, the trial court stated:
Thus, the issue for the court is simply whether Brandon v. Nationwide, 97 NY2d 491 [2002] is limited to cases involving SUM insurance coverage or whether Brandon’s elimination of the “no-prejudice” exception in SUM cases applies to or should be extended to other forms of insurance policy agreements. This court finds that Brandon does apply to other forms of insurance agreements and that Fireman’s may not disclaim coverage under the late notice of suit provision absent a showing of prejudice.
The court agrees with the Varrichio Court’s finding that the Court of Appeals indicated that the holding of Brandon “might well be expanded beyond the context of SUM coverage” (Varrichio, 213 F2d at 549).
New York Mutual Underwriters v. Kaufman, 257 A.D.2d 850, 685 N.Y.S.2d 312 (3d Dept. 1999), involved a homeowners’ policy, where an insured waited 2 1/2 months to provide the insurer with notice of the suit. The Third Department, applying Brandon, stated:
This court previously has held that principles governing the failure of an insured to give timely notice of an accident are entirely different from those governing the requirement of notice of suit. In the latter case, late notice will be excused where no prejudice has inured to the insurer.
The United States Court of Appeals for the Second Circuit, applying New York law in an unpublished opinion, has also expanded Brandon to include non-SUM policies. In U.S. Underwriters Insurance Company v. 203-211 West 145th Street Realty Corp., 37 Fed.Appx. 575, 2002 WL 1334794 (2d Cir. June 18, 2002), the court stated, “where timely notice of claim has been provided, insurers relying on late notice of legal action should be required to demonstrate prejudice.”
Learning Point:
In New York, the tide is turning toward a requirement that a carrier prove prejudice in order to rely upon a late notice of claim/suit defense. In the SUM context, there are a number of reported decisions requiring a showing of prejudice and in the non-SUM context, the case law is expanding to require a showing of prejudice. •
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