New York Court of Appeals Rules That Insurers Are Not Required to Prove Prejudice in Late Notice Case
April, 2005
The New York Court of Appeals has recently held that the “no-prejudice” rule, providing that a primary insurer is not required to show prejudice, is applicable to the late notice of a lawsuit under a liability insurance policy. The Argo Corporation v. Greater New York Mutual Insurance Co., 4 N.Y.3d 332, 827 N.E.2d 762, 794 N.Y.S.2d 704 (2005). In Argo, the High Court found that late notice of a lawsuit to a liability insurer was so likely to be prejudicial that application of the no-prejudice rule was justified.
The Underlying Action
Plaintiff in the underlying action, Maidanek, slipped and fell on an icy sidewalk outside of a residence in Queens, New York. The property was owned by Henry Moskowitz and managed by Argo Corporation and Martinique Realty Associates. Three years later, Maidanek brought suit against Argo for personal injuries suffered as a result of the fall. Maidanek served Argo via New York’s Secretary of State. After nine months with no response, Argo was served with a default judgment. Approximately three months later, Argo received notice of entry of the default judgment and the scheduling of a hearing on the judgment. Shortly thereafter, Argo received a Note Of Issue for trial readiness.
The Declaratory Judgment Action
Approximately three months after it received the entry of the default judgment and the Note Of Issue, Argo notified Greater New York Mutual Insurance Company (“GNY”), its commercial liability insurance carrier, of the lawsuit. The following month, GNY disclaimed coverage due to late notice of the lawsuit and occurrence, which was a condition precedent of the policy. Approximately nineteen months later, Argo brought this declaratory judgment action against GNY, challenging GNY’s disclaimer and asserted that GNY did not suffer prejudice as a result of the late notice.
Upon receipt of the declaratory judgment action, GNY moved to dismiss the action for failure to comply with the notice provision of the policy. Specifically, this provision provided that the insured:
see to it that we [the insurer] are notified as soon as practicable of an “occurrence” or an offense which may result in a claim.
The trial court held that Argo failed to comply with a condition precedent of the policy, reasoning that Argo failed to notify GNY of Maidanek’s lawsuit until fourteen months after service of the complaint upon the Secretary of State, six months after service of the default motion, and more than three months after the default was entered. Argo subsequently appealed the trial court’s decision.
The Appellate Division affirmed the lower court’s decision, holding, “the insureds are unable to provide an excuse for their failure to comply with the policy’s notice provision. Unlike Matter of Brandon (Nationwide Mut. Ins. Co.) 97 N.Y.2d 491 (2002), this is not a case where the carrier had prior notice of the claim before the action was commenced.” Argo, 4 N.Y.3d at 338 (citations omitted).
The Court of Appeals’ Opinion
The Court of Appeals affirmed the Appellate Division’s holding. The Court cited the long standing rule that where a primary insurance policy requires notice “‘as soon as practicable’ after an occurrence, the absence of timely notice of an occurrence is a failure to comply with a condition precedent which, as a matter of law, vitiates the contract (see Security Mut. Ins. Co. Of N.Y. v. Acker-Fitzsimons Corp., 31 N.Y.2d 436, 440-443 [1972]) ([failure to notify in a timely manner allowed insurer to disclaim coverage]). No showing of prejudice is required.” Id. at 339. The Court, explaining the reasoning for such long standing rule, stated:
Strict compliance with the contract protects the carrier against fraud or collusion; gives the carrier an opportunity to investigate claims while evidence is fresh; allows the carrier to make an early estimate of potential exposure and establish adequate reserves and gives the carrier an opportunity to exercise early control of claims, which aids settlement.
Id. (citations omitted). The Court next distinguished the present case from Matter of Brandon (Nationwide Mut. Ins. Co.), 97 N.Y.2d 491 (2002). The Court stressed the fact that in Brandon, the insured gave notice of the claim, however, he failed to give timely notice of the lawsuit. In the case at bar, the insured did not give a timely notice of claim. The insured merely gave notice of the occurrence fourteen months after the service of the suit. “The burden of establishing that the delay was not unreasonable falls on the insured.” Id. at 340 (citations omitted). The Court further reasoned that a liability insurer has a duty to defend and indemnify. As such, it requires timely notice of a lawsuit so that it may take an “active, early role in the litigation process and in any settlement discussions and to set adequate reserves.” Id. Based on this reasoning, the Court explained that late notice “is so likely to be prejudicial to these concerns as to justify the application of the no-prejudice rule.” Id. Ultimately, the Court concluded that Argo’s delay was unreasonable as a matter of law and GNY was not required to show prejudice before declining coverage.
Learning Point:
In New York, as a result of the Court of Appeal’s decision in Argo, a liability carrier is not required to show prejudice when disclaiming coverage based upon late notice of a lawsuit. Carriers, however, should distinguish late notice of a lawsuit when a notice of claim has been filed from late notice of a lawsuit when no notice of claim has been filed. If a notice of claim is filed, the Brandon decision controls, and the notice of claim is sufficient notice to the carrier. If no notice of claim has been given to the carrier, then Argo’s “no-prejudice” rule applies. •
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