Notice, prejudice, and first-party property damage claims
Notice conditions in policies require insureds to provide their insurers with timely notice of a loss or occurrence giving rise to a claim. An insured that provides notice belatedly, may be deemed to have breached this condition precedent to coverage. While many states require a showing of prejudice before an insurer can disclaim coverage on the basis of late notice, New York has long subscribed to the so-called “no-prejudice rule.” Then, in 2008, the New York Legislature amended Insurance Law § 3420 - Liability Insurance; Standard Provisions; Right of Injured Person - to require a showing of prejudice before liability insurers can disclaim coverage for late notice. Though specifically addressed to liability policies, the amendment raised questions whether the no-prejudice rule remained applicable to denials of first-party property damage claims. Subsequent jurisprudence, however, indicates that the no-prejudice rule remains alive and well with respect to the notice requirement of first-party policies.
Evolution of the prejudice requirement
Historically, it was “settled New York law that the notice provision for a primary insurer operates as a condition precedent and that the insurer need not show prejudice to rely on the defense of late notice.” Unigard Se. Ins. Co. v. North River Ins. Co., 79 N.Y.2d 576, 581 (1992). New York courts founded the no-prejudice rule upon the courts’ belief that with respect to primary insurers, prompt notice enables the insurer to protect itself by investigating claims while facts and witnesses remain available, setting sufficient reserves, preventing fraud, and enhancing the possibility of settlement. See Security Mut. Ins. Co. v. Acker-Fitzsimons Corp., 31 N.Y.2d 436 (1972); Power Auth. v. Westinghouse Elec. Corp., 117 A.D.2d 336 (1st Dep’t 1986); Commercial Union Ins. Co. v. International Flavors & Fragrances, 822 F.2d 267 (2d Cir. 1987). In short, New York courts considered prompt notice indispensable to a primary insurer’s claim adjustment.
In 2008, the New York Legislature amended Insurance Law § 3420 to require language in liability policies providing that failure to give timely notice “shall not invalidate any claim made by the insured, injured person or any other claimant, unless the failure to provide timely notice has prejudiced the insurer.” Insurance Law § 3420 specifies that it, and therefore the 2008 amendment, applies to policies “insuring against liability.” The amendment, however, created a wrinkle in the long-standing no-prejudice rule that policyholder attorneys used to argue that insurers were now also required to establish prejudice when denying first-party claims for property damage on the basis of late notice.
The distinction between liability and property insurance is well-established under New York law. “The principal distinction between liability and property insurance is that liability insurance covers one’s liability to others for bodily injury or property damage, while property insurance covers damage to one’s own property.” Gap, Inc. v. Fireman’s Fund, Ins. Co., 11 A.D.3d 108, 112 (1st Dep’t 2004); Vineyard Sky, LLC v. Ian Banks, Inc., 123 A.D.3d 461, 462 (1st Dep’t 2014).
To that end, the District Court for the Southern District of New York described the 2008 amendment as a “change to the state’s common-law-no-prejudice rule with respect to liability insurance policies issued or delivered in New York.” Indian Harbor Ins. Co. v. City of San Diego, 972 F.Supp.2d 634, 648 (S.D.N.Y. 2013), aff’d, 586 F.App’x 726 (2d Cir. 2014) (emphasis supplied). The District Court for the Eastern District of New York likewise held, “[a]s its title – ‘Liability insurance; standard provisions; right of injured person’ – indicates, Section 3420 applies to liability insurance, not property insurance.” Sunrise One, LLC v. Harleysville Ins. Co. of N.Y., 293 F.Supp.3d 317, 333 (E.D.N.Y. 2018). In so holding, the Sunrise court quoted the Office of General Counsel to the New York State Insurance Department’s June 23, 2009 opinion on this very issue as stating, “Insurance Law § 3420 is limited to establishing minimum requirements for liability policies.” Office of General Counsel Op. No. 09-06-08 (June 23, 2009).
New York State courts have, however, addressed this issue with less consistency. In the unpublished decision of Gateway II LLC v. Hartford Ins. Co., the Supreme Court, New York County refused to apply § 3420 to an insurer’s denial of a first-party property damage claim for water damage that was reported 11 months after the insured learned of the damage. 2016 N.Y. Misc. LEXIS 1325 (Sup. Ct., New York Cnty 2016). The same court, however, applied § 3420 to an insurer’s denial of a first-party property damage claim for damage resulting from renovations at a neighboring property. See Kormilitsyna v. Everest Natl. Ins. Co., 2015 N.Y. Misc. LEXIS 2029 (Sup. Ct., New York Cnty 2015).
In the context of first-party property damage claims, the no-prejudice rule remains the law of New York. Insurers should, nonetheless, expect policyholders to argue that Insurance Law § 3420 applies to policies of property insurance. While this argument had some recent success in the courts, it remains unsupported by the majority of New York state and federal courts and the statutory language. Accordingly, insurers can firmly maintain that first-party claims for property damage remain governed by the long-standing no-prejudice rule.