On July 21, 2008, Governor Patterson signed a change in the law which shifts the burden to the insurance company in late notice disclaimers of coverage. See A11541/S8610.
The new law provides two changes which are favorable to people injured in accidents and defendants and policyholders.
I. Late Notice to the Insurer Will Not Invalidate a Claim
The first provision amends the law so that an insured’s late notice to his insurer will not automatically invalidate a claim.
Under the new law an insurance company can only disclaim coverage based on late notice if it can prove that it was materially prejudiced by the late notice. Before this change, the insurance company could deny coverage based on late notice on the theory that late notice was a breach of insurance contract. New York was in the distinct minority of states which permitted this type of denial. New York has joined the majority of states which permit an insurer to deny coverage only if the insurer were prejudiced by the late notification by its insured.
The new law provides that if the notice is provided to the insurance company within 2 years of the time from the time required under the policy (i.e., approximately from the date of accident), then the burden to show prejudice falls on the insurer. If notice is provided by the policyholder or injured party after 2 years, then the burden falls on the insured or injured party.
The law provides some safety to the insurance industry in that insureds cannot provide first notice after a judgment or settlement is obtained in the personal injury or property damage lawsuit. If notice is provided after judgment or settlement, then the insured cannot seek coverage.
II. The Policyholder and the Injured Party Can Sue the Insurance Company
In the event of a disclaimer by the insurance carrier for late notice, either the insured or the injured party can sue the insurance company to contest the denial. This would be done in a declaratory judgment action in which the court would determine and declare the rights of the parties under the contract.
The injured person can bring his lawsuit contesting coverage if either the policyholder or insurer did not bring their own lawsuit within 60 days of the disclaimer.
This change corrects a bad Court of Appeals decision which held that an injured party could only bring a coverage suit after a judgment had been obtained in the personal injury action. The law was very impractical and harmful to an injured person in that the injured person would have to litigage his personal injury case before determining whether there would be any coverage. If ultimately, there is no coverage to pay the judgment, the trial of the personal injury case would have been a wasteful and expensive exercise.
A Personal Perspective
In the 1980’s I handled insurance coverage lawsuits on behalf of insurance carriers at an insurance defense firm. At that time, in the event of a disclaimer, an injured party would often bring his own declaratory judgment action before the trial of his personal injury case. Often, the insurance company and the parties in the personal injury case had an agreement to stay the personal injury case pending the outcome of the coverage lawsuit. Often, the personal injury and insurance cases would be settled at once. This was an economical and fair way for the injured party to test coverage and ultimate recovery. However, subsequently, the courts ruled that a coverage lawsuit brought by the injured party would be premature if it is brought before the personal injury case is resolved. Unintentionally, the courts had undone a fair and efficient system.
The following is a case that I handled. It is an excellent example of the benefit of allowing the injured party to bring the coverage lawsuit before his personal injury case is tried.
A teenager occasionally helped-out in a Bronx bagel store called Bagel Time. He was not a regular employee. He helped bake the bagels. One day he sustained very serious and life altering injury to his hand in the dough mixing machine. The young man brought a lawsuit against Bagel Time for having a dangerous machine without proper safety guards. Bagel Time’s insurance carrier, Fireman’s Fund, denied coverage on late notice. The young man’s attorneys started both the personal injury suit against Bagel Time as well as a coverage lawsuit against Fireman’s Fund. This was prudent because Bagel Time had no assets; it was a neighborhood bagel store. A judgment against it would have been worthless. If a judgment were obtained, Bagel Time would have had to go into bankruptcy.
The declaratory judgment action came to trial first. It was settled. Fireman’s Fund settled directly with the young man. The young man secured a fair recovery, and Bagel Time was allowed to continue in business. All in all, it was a fair and efficient way to resolve both the personal injury and insurance cases.
The new law restores this fair and economical procedure.
III. Effective Date
The law will go into effect on January 19, 2009. It will be applicable for all insurance polices either written or renewed on or after January 19, 2009. Typically, insurance policies are written annually.
This is a very favorable law to consumers.
It should be noted that this law pertains only to disclaimers based on late notice. If the insurance company disclaims on other grounds, such as “lack of occurrence” or an exclusion, this change does not affect those situations. In those disclaimers, the injured party would have to litigate his personal injury case before filing his coverage lawsuit against the insurance company.
Mark E. Seiteman, 7/29/08, www.seitelman.com.