Loss of opportunity to defend or investigate - New York’s late notice standard

Until relatively recently, New York was one of the few states remaining that enforced liability insurance policy provisions requiring insureds to promptly notify the insurer of a potentially covered occurrence, claim or suit, without requiring a showing that the delay prejudiced the insurer.

The New York State Legislature abrogated the common law in that regard as respects policies effective on or after January 17, 2009, by amending New York Insurance Law § 3420 to require prejudice. Although nearly a decade has now passed since the law became effective, few published judicial opinions have addressed it, leaving uncertain the precise nature of the prejudice required to defeat coverage. The statutory language and the limited case law addressing it, however, provide some valuable clues.

The relevant provisions of the statute are as follows:

[F]ailure to give any notice required to be given by such policy within the time prescribed therein shall not invalidate any claim by the insured, injured person or any other claimant, unless the failure to provide timely notice has prejudiced the insurer. § 3420((a)(5).

In any action in which an insurer alleges that it was prejudiced as a result of a failure to provide timely notice, the burden of proof shall be on: (i) the insurer to prove that it has been prejudiced, if the notice was provided within two years of the time required under the policy; or (ii) the insured, injured person or other claimant to prove that the insured has not been prejudiced, if the notice was provided more than two years after the time required under the policy. § 3420(c)(2)(A).

Notwithstanding subparagraph (a) of this paragraph, an irrebuttable presumption of prejudice shall apply if, prior to notice, the insured’s liability has been determined by a court of competent jurisdiction. § 3420(c)(2)(B). 

The insurer’s rights shall not be deemed prejudiced unless the failure to timely provide notice materially impairs the ability of the insurer to investigate or defend the claim. § 3420(c)(2)(C).

The sole specific example of what constitutes prejudice provided in the statute is thus where “the insured’s liability has been determined by a court of competent jurisdiction.” Under that circumstance, prejudice is irrebuttably presumed. While that is a narrow, well-defined example, it arguably suggests what the Legislature intended more generally as regards prejudice. More precisely, the fact that the statute provides no exception, even where it can be shown that the insured would have been found liable even if prompt notice had been given, suggests the Legislature did not have in mind an outcome-determinative test i.e., that prejudice exists only if the claim’s outcome would have been more favorable to the insured (and thus the insurer) had timely notice been given.

The fact that the statute defines prejudice generally to mean the delay must impair the insurer’s “ability to defend or investigate” likewise suggests the prejudice test is not an outcome-determinative one. Rather, this language suggests that prejudice may be shown where the delay substantially deprived the insurer of an opportunity to defend or investigate the claim, regardless of whether the investigation or defense would likely have resulted in a more favorable outcome.

The limited case law in New York addressing the issue also supports this conclusion. In Atlantic Casualty Insurance Co. v Value Waterproofing, Inc., 918 F.Supp.2d 243 (S.D.N.Y. 2013), aff’d on other grounds, 548 Fed.Appx. 716 (2d Cir. 2013), the court addressed late-notice prejudice in connection with a claim arising from the collapse of the roof of a two-story building owned by KFC, Greenwich’s insured, following a major snow storm. Shortly before the collapse, Value, Atlantic’s insured, had performed work to the roof. Although KFC quickly notified Greenwich of the loss, enabling it to inspect the property before the second floor was demolished by order of the New York City Department of Housing Preservation, Atlantic was not notified until over six months later, thus precluding it from meaningfully investigating the collapse’s cause. Atlantic sued to obtain a judgment declaring it had no duty to defend or indemnify Value as respects the property-damage subrogation action Greenwich brought against Value, based, in part, on late notice.

In finding Atlantic satisfied its burden of establishing prejudice, the court cited its inability to investigate first-hand, and rejected the claim that any such prejudice was mitigated by the fact that it had access to Greenwich’s investigation. Id. at 255-56. In coming to that conclusion, the court stated:

While Atlantic Casualty has not submitted evidence of the investigation done by KFC and its insurer before the demolition was completed, nor shown precisely how that investigation may have been biased or incomplete, it need not do so in order to carry its burden of showing prejudice. It is not disputed that Atlantic Casualty had a right to inspect the remnants of the roof, the bow truss, the bottom chord, and the site of Value's repairs. The defendants having denied Atlantic Casualty an opportunity to make that inspection, it is unreasonable to impose upon Atlantic Casualty the burden to show precisely how it would have been advantaged by that inspection.

Id. at 256.

Thus, although the case law on the issue is still sparse, it appears the late-notice prejudice standard in New York places a greater emphasis on the loss of opportunity to investigate or defend than the end result of that lost opportunity.