New York's Common Law "No Prejudice" Late Notice Rule Has Close Call With Legislature, And Despite Governor's Veto, The Issue Is Likely Not Over
October, 2007
Over the course of three days in June, 2007, just prior to the summer recess, a bill was introduced and passed by both houses of New York’s Legislature. Senate Bill Number 6306, introduced by Senator John A. DeFrancisco, contained proposed changes to New York’s civil law and practice rules pertaining to the insurance law. Specifically, the proposed changes would: (1) prohibit insurers from denying coverage on the basis of late notice of claim, unless the insurer is able to demonstrate that is has been “materially prejudiced” by such late notice; and (2) allow a claimant to sue a carrier directly and before obtaining a judgment against the carrier’s insured, on the issue of the carrier’s insurance coverage obligations for the claimant’s lawsuit.
The first portion of the bill, relating to late notice, was directed at the State’s common law rule that primary carriers may disclaim coverage on the basis of an insured’s failure to provide timely notice of a claim or suit without demonstrating prejudice. New York courts have long held that an insured’s compliance with the notice provisions of an insurance policy operates as a condition precedent to coverage and that a carrier need not show prejudice to rely on the defense of late notice. See, e.g., Security Mut. Ins. Co. v. Acker-Fitzsimmons Corp., 31 N.Y.2d 436, 340 N.Y.S.2d 902 (1972); Great Canal Realty Corp. v. Seneca Ins. Co., Inc., 5 N.Y.3d 742, 800 N.Y.S.2d 521 (2005).
New York is one of the few states that adheres to the “no prejudice rule,” which has been criticized in the past since short delays in providing notice have often been held to be untimely. As Senator DeFrancisco noted within the bill’s “Sponsor’s Memo,” “it is inherently unfair for an insurance company to deny a claim based on late notice, where in fact the late notice has no negative effect on the insurer’s ability to respond to the claim. Such denials amount to a windfall to the insurer based upon a technicality.”
The second portion of the bill, relating to a claimant’s ability to file a direct action against a carrier, was directed at Insurance Law § 3420(b)(1). Pursuant to § 3420(b)(1), a claimant may maintain a direct action against a carrier only when the claimant has obtained judgment against the carrier’s insured and the judgment has remained unsatisfied for 30 days.
Bill No. 6306’s proposed changes would have allowed a claimant to sue a carrier directly on the issue of the carrier’s insurance coverage obligations for the claimant’s lawsuit. The Sponsor’s Memo noted, as the reasoning for the changes, that:
[u]nder current law, the question of whether an insurance policy covers a particular claim may not be determined until after a verdict has been rendered. This causes substantial delay, is an inefficient use of judicial resources, and only adds to the burden of an injured party who is waiting whatever monetary award a jury or judge had determined is appropriate due to their injury. This bill would correct this circumstance, permitting the question of insurance coverage to be determined at the onset of a lawsuit, thus providing for a more streamlined litigation process, along with certainty and prompt payment for a plaintiff.
The bill was passed overwhelmingly by both houses in a matter of days with virtually no input from, or debate by, the insurance industry and others, and was delivered to Governor Spitzer on July 20, 2007. Governor Spitzer, however, vetoed the proposed legislation on August 1, 2007, noting as one of the reasons for the veto the fact that there is a dispute about the actual impact of the provisions and that many insurers and business groups strenuously objected to the bill. The Governor specifically noted in his Veto Message that “[m]uch of the dispute seems to result from the manner in which this bill was passed. * * * Most of the affected parties were unaware that the bill had been introduced, and claim that they had no opportunity to testify at any hearings or otherwise make their views known before the Legislature acted.”
Nonetheless, Governor Spitzer indicated his support for the “sound” goals of the bill, noting that “the late notice provisions of the bill are an important reform, because they would prevent insurers from denying coverage to insureds based on a technicality” and “the declaratory judgment provisions of the bill also have a commendable goal.” The Governor further noted that he instructed his staff and the Superintendent of Insurance to work with both houses, the insurance industry, consumer advocates and others to investigate the issue so that a new bill can be enacted.
Indeed, it appears that the Insurance Department has already drafted proposed amendments to the Insurance Law which are similar to those contained in Bill No. 6306. It remains to be seen what specific amendments the Insurance Department will propose and whether the proposed amendments will be sponsored in a bill.
Learning Point: Thus, for the time being, (1) New York’s “no prejudice” rule, by which a carrier may disclaim coverage based on the insured’s failure to provide timely notice without prejudice to the carrier, continues to be the law in New York, and (2) claimants do not have standing to file a direct action against a defendant’s insurance carrier unless and until the requirements of Insurance Law § 3420(b)(1) are met, that is, only when the claimant has obtained judgment against the carrier’s insured and the judgment has remained unsatisfied for 30 days. However, it appears that the days may be limited for both of these rules, which will likely become more apparent when the Legislature convenes in January, 2008.
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