Insurance Law

New York Court Holds Disclaimer Letter Untimely

In its recent decision in Endurance American Specialty Ins. Co. v. Utica First Ins. Co., 2015 N.Y. App. Div. LEXIS 7272 (N.Y. 1st Dep’t Oct. 8, 2015), [subscribers can access an enhanced version of this opinion: | Lexis Advance], the New York Appellate Division, First Department, reinforced the rule that when the basis for a disclaimer of coverage for a bodily injury claim has been determined, an insurer must issue its letter promptly, even if other aspects of its coverage obligation have not yet been completed.

The underlying suit in the Endurance matter was a garden variety New York Labor Law claim wherein an injured employee sued a general contractor, Adelphi, which in turn sought coverage as an additional insured under the general liability policy of the injured plaintiff’s employer, CFC. CFC’s general liability policy, issued by Utica, contained an exclusion for bodily injuries sustained by employees of any insured, or by contractors or employees of contractors hired by any insured.

On November 21, 2011, Utica was given notice of the accident by Adelphi’s general liability insurer. In response, Utica wrote only to CFC, asserting the position that as a result of its policy’s employee bodily injury exclusion, it would not defend any party in connection with the underlying suit. Utica, however, did not issue a copy of this letter to Adelphi or to its insurer. In May 2012, Adelphi’s insurer officially tendered the matter to Utica on behalf of Adelphi, claiming Adelphi was entitled additional insured status under the Utica policy. Utica did not respond to the letter. A follow up letter was sent to Utica in November 2012, again with no response. On January 28, 2013, another letter tender was received by Utica, this time enclosing a copy of the contract between CFC and Adelphi evidencing the fact that CFC was required to procure insurance naming Adelphi as an additional insured. On January 29, 2013, Utica issued a disclaimer of coverage to Adelphi on the basis of the injured employee exclusion.

The court agreed that Utica’s disclaimer of coverage was untimely per New York Insurance Law §3420(d), [subscribers can access an enhanced version of this opinion: | Lexis Advance]. As an initial matter, it concluded that Utica’s disclaimer letter to its own insured in November was not a proper disclaimer as to Adelphi since that letter was not sent to Adelphi. This was significant, explained the court, since once Utica determined that the exclusion was applicable to its own insured, it knew that the exclusion would apply with equal force to any other putative insured under the policy, and it knew that the matter had been reported by Adelphi, which was a defendant in the underlying suit. As such, concluded the court, Utica should have disclaimed coverage to the employer in November 2011 rather than waiting until January 29, 2013.

Utica argued that its delay in disclaiming to Adelphi was justified in that Utica was entitled to first investigate whether Adelphi actually qualified as an additional insured under the Utica policy. This investigation required obtaining a copy of the subcontract, which Utica ultimately did not receive until late January 2013. The court disagreed with this argument, noting that under New York law, an insurer essentially is required to disclaim coverage on a piecemeal basis, meaning that for disclaimers governed by New York Insurance Law §3420(d), the insurer must disclaim coverage whenever the basis for doing so is determined, even if the entirety of the coverage investigation has not been concluded. As the court explained:

Insurance Law § 3420(d) “precludes an insurer from delaying issuance of a disclaimer on a ground that the insurer knows to be valid . . . while investigating other possible grounds for disclaiming” … If Adelphi was not entitled to coverage because of the employee exclusion, it did not matter one way or the other whether it was an additional insured under the CFC/Utica policy, and Utica therefore did not need to investigate Adelphi’s status in order to disclaim coverage under the exclusion … Indeed, given its statement that it would not indemnify “our insured or any other party for any judgment awarded,” Utica must have known that the employee exclusion was effective not only as to CFC but also as to Adelphi, and therefore, Utica should have immediately disclaimed to Adelphi on that basis.

As such, the court held that Utica’s disclaimer of coverage was ineffective as to Adelphi regardless of the fact that the exclusion was otherwise applicable to the underlying lawsuit.

    Brian Margolies, Partner, Traub Lieberman Straus & Shrewsberry LLP

Read more at the Traub Lieberman Insurance Law Blog, Edited by Brian Margolies.

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