Failure To Give Notice Required Under Policies, Relieves Insurer Of Duty To Defend Infringement Suite
December, 2006
The United States District Court, Southern District of New York, applying New York law, recently held in Technaoro, Inc. v. United States Fidelity & Guaranty Company, 2006 WL 3230299 (S.D.N.Y. 2006), that defendant insurer USF&G was not obligated to defend its insured, Technaoro, Inc., in the underlying infringement lawsuit brought by Cartier, because of Technaoro’s failure to satisfy certain conditions precedent to coverage. Specifically, Technaoro failed to comply with the USF&G policy’s notice requirements, which required Technaoro to give notice to USF&G of a claim or suit “as soon as practicable.”
Technaoro acknowledged that it first gave notice of the Cartier claim and related lawsuit to USF&G by letter dated July 29, 2005. However, Technaoro was aware of the Cartier claim several months earlier, when Cartier wrote to Technaoro, in a letter dated February 11, 2005. The letter placed Technaoro on notice of the infringement claim and demanded that Technaoro “immediately discontinue the advertising, promotion and sale of any merchandise incorporating the Cartier Trade Dress, and that all advertising, including internet advertising, containing the Cartier Trade Dress be withdrawn.” A few days later, by letter dated February 15, 2005, Cartier renewed its demand that Technaoro cease the allegedly infringing activity, while also providing Technaoro with a draft Complaint for infringement.
The Court determined that Technaoro was placed on notice of a claim and potential lawsuit in February, 2005, yet failed to provide USF&G with the requisite notice until July, 2005. The Court held that under New York law, an unexcused failure to satisfy a notice requirement relieves an insurer from its duty to defend. See Deso v. London & Lancashire Ind. Co., 3 N.Y.2d 127, 129 (1957). The Court further reiterated a long line of cases which state that under New York law, an insurer may disclaim coverage pursuant to a valid notice provision without showing prejudice. See Security Mut. Ins. Co. of NY v. Acker-Fitzsimons Corp., 31 N.Y.2d 436, 439 (1972).
The Court cited various New York cases, which held that a delay may be unreasonable as a matter of law, including those situations where the delay is shorter than five months, where the insured has not offered any explanation for the delay. See e.g., Deso, supra, 2 N.Y.2d at 130 (in absence of valid explanation or excuse, 51-day delay unreasonable as a matter of law); Gershow Recycling Corp. v. Transcontinental Ins. Co., 22 A.D.3d 460, 461 (2d Dep’t 2005) (five month delay unreasonable as a matter of law and defendant’s disclaimer justified).
Technaoro argued that despite its delay in providing notice to USF&G, USF&G waived its right to disclaim coverage for lack of timely notice by failing to disclaim coverage in a timely manner (USF&G failed to disclaim coverage until December 12, 2005, approximately four and a half months after receiving notice of the Cartier claim and lawsuit). However, the Court noted that all of the cases relied upon by Technaoro were based on Section 3420(d) of New York’s Insurance Law, which only applies to insurance claims based on death or bodily injury. Here, the underlying Cartier lawsuit was for infringement, which had nothing to do with bodily injuries and/or death.
Accordingly, the Court held that where the statue does not apply, New York courts adhere to the common-law rule that “delay in giving notice of disclaimer of coverage, even if unreasonable, will not estop the insurer to disclaim unless the insured has suffered prejudice from the delay.” Fairmont Funding, Ltd. v. Utica Mut. Ins. Co., 264 A.D.2d 581, 581-82 (1st Dep’t 1999); O’Dowd v. American Sur. Co. 3 N.Y.2d 347, 355 (1957). Finally, because Technaoro failed to assert any prejudice arising from USF&G’s delay in issuing its disclaimer, the Court concluded that Technaoro’s failure to provide timely notice to USF&G, relieved USF&G of its duty to defend.
Learning Point:
Under New York law, an insured is obligated to provide timely notice of a claim or lawsuit to its insurer, especially when the underlying claim/lawsuit involves allegations of bodily injury and/or death.
However, if the underlying claim/lawsuit does not contain allegations of bodily injury and/or death, while an insured is still obligated to place its carrier on notice of the claim/lawsuit as soon as practicable, an insurer’s delay in disclaiming coverage will not be waived unless the insured can show that it was prejudiced by the delay.
Pursuant to Technaoro, insurers should immediately issue disclaimers of coverage to their insureds if they determine that the insured failed to provide them with timely notice of the underlying claim and/or lawsuit, irrespective of the allegations contained therein. Additionally, insurers should look to their policies once they are placed on notice of a claim or lawsuit, in order to determine whether their insured complied with the conditions precedent to coverage thereunder. Finally, in circumstances similar to Technaoro, insurers are not required to show that the insured’s delay prejudiced their ability to defend the insured in the underlying claim/lawsuit when issuing their disclaimers. u
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