In Atlantic Casualty Insurance Company v. Value Waterproofing, Inc., 2013 WL 152854 (S.D.N.Y., 2013), the Southern District Court of New York held that a commercial general liability insurer had no duty to defend or indemnify its insured where the insured had failed to provide timely notification of a claim. This appears to be the first decision to address New York Insurance Law § 3420(a)(5), which provides that an insurer cannot deny coverage on late notice grounds unless it demonstrates direct prejudice.
Atlantic Casualty Insurance Company issued a commercial general liability policy to Value Waterproofing, Inc. In early February 2010, Value was hired by Kansas Fried Chicken (KFC) to repair its roof. Later that month, a major snow storm hit New York, leaving approximately 20 inches of snow on KFC’s roof. KFC’s roof collapsed.
KFC immediately informed Value and its own insurance carrier, Greenwich Insurance Company, of the collapse. Value, however, failed to notify Atlantic.
Atlantic was first made aware of the loss some six months later by letter from Greenwich, which was seeking to subrogate against Value on behalf of KFC. Atlantic sent a claims investigator to the property who observed that the damaged portion of the building already had been demolished. Atlantic requested information relating to the damage and repair work from Greenwich, but its request was ignored. Upon revisiting the property, Atlantic discovered that the entire roof had been replaced.
Atlantic denied coverage for the loss, and filed suit seeking a declaration that it had no duty to defend or indemnify Value in connection with the subrogation action because it was unable to investigate the underlying loss due to late notice.
Atlantic prevailed. The court emphasized the significance of notification provisions in allowing insurers to both investigate losses and maintain adequate loss reserves. By delaying notification for over six months, the insured had “materially impaired” Atlantic’s ability to “ascertain potential causes of the collapse, information which would be highly relevant to an investigation and defense of [Value’s] claim.”
It was prudent for Atlantic to investigate the underlying loss as soon as it was placed on notice, even though the delay had caused it prejudice. An insurer that receives late notification of a claim should not automatically assume it will be entitled to rely upon the insured’s dilatory notice as a ground for a denial. It is advisable that an insurer seeks to protect its position by undertaking inquiries as best it can, pending determination of its coverage obligation.