An Insured's Good Faith Belief That An Incident Is Not Covered By The Policy Does Not Excuse The Three Year Delay In Notice Of Claim
November, 2009
The United States Court of Appeals for Second Circuit in Eastern Baby Stores, Inc., doing business as USA Baby v. Central Mutual Insurance Company, 2009 U.S. App. LEXIS 15190 (2009) addressed the issue of whether the insured's three-year delay in submitting a notice of claim to the insurer was a delay that is reasonable.
Eastern Baby Stores learned of an incident in one of its stores in August, 2003, but did not inform its insurer until June, 2006 when it learned of a lawsuit. The insured claimed that it did not submit a notice of claim because it thought the incident was not covered. The insured's belief of non-liability was based on the fact that the injured employee's exclusive remedy was under the Workers' Compensation Law. Id. at 3. Additionally, the insured did not provide notice of the accident because it believed that coverage was unavailable based on a policy exclusion for "bodily injury to an employee of the insured arising out of and in the course of employment by the insured or performing duties related to the conduct of the insured's business." Id. The district court found that the insured was not entitled to coverage due to untimely notice of claim. Eastern Baby Stores appealed.
The United States Court of Appeals for the Second Circuit held that the three-year delay was not reasonable and that the insured was not entitled to coverage. Id. This ruling was based on the fact that the insured failed to provide timely notice of a claim and that this untimely notice of claim was not excused by a good faith belief in non-liability. Id. at 2.
In its decision, the Court of Appeals relied upon New York law which states that compliance with a notice-of-occurrence provision in an insurance policy is a condition precedent to an insurer's liability under the policy. Id. Therefore, an insured's failure to provide timely notice of an occurrence vitiates an insurance contract and permits the insurer to disclaim coverage regardless of whether it was prejudiced. Id. The Court stated that where a policy of liability requires that notice of an occurrence be given as soon as practicable, such notice must be accorded the carrier within a reasonable period of time. Id. Notwithstanding the notice requirement, the Court noted that New York courts have held that an insured's good faith belief in non-liability may excuse delay in notifying its insurer of the occurrence. Id.
The Court of Appeals noted that the test for determining whether the notice provision was triggered is whether the circumstances known to the insured at that time would have suggested to a reasonable person the possibility of a claim. Id. For this analysis, the Court of Appeals stated that it was important to note whether and to what extent, the insured inquired into the circumstances of the accident or occurrence. Id. The insured has the burden of establishing that its belief in non-liability was reasonable. Id.
The Court of Appeals stated that the burden of proving that the insured's belief that its Workers' Compensation policy would cover any liability rested on the insured and that it failed to satisfy that burden. Id. at 3. The affidavit submitted by the insured stating its belief as to coverage under the Workers' Compensation Law did not satisfy its burden. Id. Furthermore, the court held that the insured's belief that another insurance policy would cover the incident was not a reasonable basis for concluding that the accident was not an occurrence which may result in a claim. Id. Under the policy, the insured was required to notify Central Mutual Insurance Company of an "occurrence which may result in a claim." Id.
However, the Court of Appeals held that the insured's assumption that other parties would bear the ultimate responsibility for the incident is insufficient as a matter of law to excuse the three- year delay in giving notice. Id. The court believed that the insured should have conducted an inquiry into the circumstances of the accident, the extent of the employee's injury, and potential liability under its policy. Id. Because the insured had not done this, the court reasoned that the insured's belief that another policy would cover the incident was not reasonable. Id.
Learning Point: In New York, an insured must provide its carrier with timely notice. If an insured fails to provide timely notice to its carrier, the carrier may disclaim coverage for late notice. However, if the insured can then prove certain accepted reasons for the delay, even in the case of a three year delay, the carrier may then be required to cover the claim.
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