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In New York, Failing to Timely Notify an Insurer of a Claim or Occurrence May Not Always Permit an Insurer to Deny Coverage

Two recent decisions of the Supreme Court of New York, Appellate Division, First Department, may indicate a preference by that court to not deprive insureds of coverage based upon an alleged failure to timely notify an insurer of a potential claim.
Last September, the court held in Matter of Ancillary Receivership of Reliance Ins. Co., 2008 NY Slip Op 6690 (N.Y. App. Div. 1st Dep't 2008), that an insurer was not entitled to deny coverage on the basis that the insured had failed to notify the insurer of a potential claim after receipt of a letter from an attorney who represented employees of the insured. In Ancillary Receivership of Reliance, the insured, the Yale Club of New York, received a letter from an attorney for 13 union employees concerning tips and bonuses that the employees claimed were owed by the insured, and the letter “requested information to enable compliance with counsel's stated obligation to make a reasonable inquiry into the facts before filing a pleading with the courts." The insured did not notify Lloyds, London, its then D&O insurer, of the letter. Later, after Reliance Insurance became the subsequent D&O carrier, the insured was sued by the employees, and Reliance Insurance denied coverage on the basis that the letter from the attorney for the employees constituted a claim that was provided to the insured prior to existence of its claims-made policy with Reliance.
The court held that because the D&O policy failed to define the term “claim”, the policy contained an ambiguity that was to be construed against the insurer. In construing the policy language in favor of the insured, the court stated that because the letter from the attorney for the employees neither made a demand for payment nor advised that legal action would be forthcoming, it was insufficient to state a claim under the policy. The court noted that although “the disputed letter certainly conveys the suggestion that a lawsuit was being contemplated, it also states unequivocally that counsel was seeking information in connection with his obligation to determine whether legal action was warranted.” The court found that the “letter to plaintiff falls far short of a demand for money or services... or even the expression of a present intent to initiate legal proceedings”, and reasoned that the letter “is not an assertion of a legally cognizable damage,… a type of demand that can be defended, settled and paid by the insured.”
The Reliance policy also required the insured to “give written notice as soon as practicable” to the insurer if it became “aware of any occurrence which may subsequently give rise to a claim being made against the [d]irectors and [o]fficers, or any of them, for a [w]rongful [a]ct.” The court found that this clause was inapplicable because the insurer had not advanced this clause as a basis for avoiding liability under the policy before the lower court or on appeal. The court noted that “arguably, the letter was sufficient to make plaintiff aware of occurrence[s]”, but that the insurer had failed to preserve for appellate review the issue of the timeliness of the notice of the occurrence.
More recently the same court held than an insured was entitled to summary judgment because it had not failed to notify its insurer of an occurrence as soon as practicable. In Kambousi Rest., Inc. v. Burlington Ins. Co., 2009 NY Slip Op 241  (N.Y. App. Div. 1st Dep't 2009), an injured party fell in the parking lot of the insured. The injured party and her husband told the insured’s manager that she tripped over her shoelaces and they left the restaurant before the manager could obtain any information from them. Six months later the injured party filed a personal injury action against the insured, and the insured provided the insurer with a copy of the summons and the complaint. The insurer denied coverage on the basis that it was not timely notified of the occurrence, but the court held that the insured had established a good-faith belief of its non-liability because there was no reason to believe that the injured party would seek to hold the insured liable for her injuries.
Clearly, the insured in Kambousi has a much stronger argument that it had not failed to provide timely notice to its insurer, and the court’s decision should not cause undue concern to insurance companies. The Ancillary Receivership of Reliance decision may distinguished by subsequent courts because of the very unusual and specific facts involved, and because the insurer appears to have ignored a likely defense. The decision in Ancillary Receivership of Reliance, though, should give insurance counsel reason to examine their policies to determine if the term “claim” has been adequately defined.
[Editor's Note: Readers with a subscription to and the Matthew Bender Insurance Laws Library can quickly and accurately research the law relating to the requirements of an insured to provide notice of a claim or occurrence to its insurer in Business Insurance Law and Practice Guide, § 40.01, at 3-40 Business Insurance Law and Practice Guide § 40.01.]