In its recent decision in Indian Harbor Ins. Co. v. The City of San Diego, 2013 U.S. Dist. LEXIS 137873 (S.D.N.Y. Sept. 25, 2013), the United States District Court for the Southern District of New York had occasion to consider whether New York’s “notice prejudice” rule set forth in New York Insurance Law §3420(a) applies to a policy not “issued or delivered” in New York, but which is otherwise governed by New York law.
For decades, the law in New York had been that timely notice of occurrence or suit was a condition precedent to an insured’s right to coverage under an insurance policy. As such, New York courts long recognized that an insured’s failure to provide prompt notice of a triggering event (i.e., occurrence, suit, claim, etc.) operated as a forfeiture of the insured's right to coverage, regardless of whether the insurer was prejudiced as a result. See, Great Canal Realty Corp. v. Seneca Ins. Co., Inc., 800 N.Y.S.2d 521(N.Y. 2005); Security Mut. Ins. Co. v. Acker-Fitzsimons Corp., 340 N.Y.S.2d 902 (N.Y. 1973).
This law changed, in part, with the New York Legislature’s implementation of amendments to New York Insurance Law §3420(a) that went into effect on January 17, 2009. This revised rule states, in pertinent part, that:
(a) No policy or contract insuring against liability for injury to person, except as provided in subsection (g) of this section, or against liability for injury to, or destruction of, property shall be issued or delivered in this state, unless it contains in substance the following provisions…
* * *
(5) A provision that failure to give any notice required to be given by such policy within the time prescribed therein 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… (Emphasis supplied.)
Thus, for policies “issued or delivered” in New York on or after January 17, 2009, a disclaimer of coverage based on late notice will only be upheld when the insurer has been prejudiced. New York courts, however, continue to apply the “no prejudice” rule to policies issued or delivered prior to this date. See, Charter Oak Fire Ins. Co. v. Fleet Bldg. Maint., Inc., 707 F. Supp. 2d 329, (E.D.N.Y. 2009); Rockland Exposition, Inc. v. Great Am. Assur. Co., 2010 U.S. Dist. LEXIS 103267 (S.D.N.Y. Sept. 29, 2010).
The recent decision in City of San Diego addresses whether the prejudice rule established in §3420(a) applies to policies issued after January 17, 2009, that are governed by New York law, but not actually issued or delivered within the state. The policy before the court was a pollution liability policy issued by Indian Harbor (on XL Specialty paper) to the California State Association of Counties. The policy was a claims made and reported policy in effect for the three year period from July 1, 2009 to July 1, 2012, but nevertheless required the insured to give Indian Harbor notice of claims “as soon as practicable.” Notably, while the policy was issued to a California insured to provide pollution liability coverage for California entities, the policy contained a New York choice of law and a New York forum selection provision.
The City of San Diego – an insured under the policy – sought coverage for three underlying pollution claims, each of which was first made and ultimately reported to Indian Harbor while the policy was in effect. In each instance, however, the City’s notice to Indian Harbor was significantly delayed. For one claim, the City waited some thirty-one months to give first notice. For another, the City waited more than twelve months. For the third claim, the City waited almost two months before giving notice. Indian Harbor denied coverage to the City for each of the claims on the basis of late notice.
In a subsequent declaratory judgment action, Indian Harbor argued that it had no coverage obligation with respect to the underlying claims as a result of the City’s failure to have provided timely notice of same. In support of this, Indian Harbor cited to the long line of New York cases standing for the proposition that even small delays in giving notice to an insurer – even as little as twenty-one days – can result in a forfeiture of coverage, regardless of prejudice. The court agreed that in each instance, the City’s first notice to Indian Harbor was not given as soon as practicable under this line of cases, and that in each instance, the City failed to offer a reasonable explanation that would excuse its delay. Among other things, the City argued that its delays should be excused since in each case, it still complied with the requirement that the claim be reported during the policy period. The court rejected this argument, explaining that the policy’s notice provision enables the insurer to commence a timely investigation, which serves a different purpose than the claims reported provision, which provides certainty to the insurer as to when it is "off the risk." The court further explained that the City’s argument, taken to its logical extreme, would improperly “read out the requirement that notice be given as soon as practicable and require only that notice be provided during the policy period.”
More notably, the City asserted that the policy should not be governed by the “no prejudice” line of New York cases because the policy was issued after January 17, 2009, i.e., when the changes to §3420(a) went into effect. In support of this position, the City argued the policy was either expressly governed §3420(a) in light of the policy’s New York choice of law provision, or in the alternative, the changes to §3420(a) signified a shift in New York common law that now requires a showing of prejudice even in instances where the statute does not apply. The court rejected both arguments.
In terms of whether the statute governed the policy, the court noted that by its express terms, §3420(a) only applies to policies “issued or delivered” in New York. The court found that the policy was delivered in California, and that it was not issued in New York but instead was issued in Exton, Pennsylvania, which is where the policy was prepared and signed by Indian Harbor. Thus, while the court agreed that the policy was governed by New York law as a result of its express choice of law provision, it nevertheless concluded that the policy was not governed by §3420(a) since the policy was neither issued nor delivered in the state.
The court further rejected the City’s argument that §3420(a) “creates a new public policy for New York that changes the historic no-prejudice rule.” The court observed that numerous New York courts have continued to apply the “no prejudice” rule to policies issued prior to January 17, 2009, and that if New York public policy truly had changed, then these courts would be reaching a different result. The court also noted that in the Second Circuit decision in Marino v. New York Tel. Co., 944 F.2d 109 (2d Cir. 1991), the court declined to apply a different aspect of §3420 to a policy issued and delivered outside the state, but which was nevertheless governed by New York law. From this holding, the court concluded that “Section 3420(a)(5) applies to policies issued or delivered in New York and has not changed the common law of New York.” In other words, the “no prejudice” common law rule continues to apply to policies governed by New York law that are not otherwise subject to §3420(a).
In passing, the court rejected the City’s argument that the New York choice of law provision was unconstitutional. The City offered no meaningful case law support for this contention, nor could it otherwise demonstrate that the provision was the result of fraud or overreaching. Instead, explained the court, the parties freely contracted to include the provision, and Indian Harbor had sufficient contacts in New York (including the office of its CEO-chairman, general counsel and numerous corporate directors). As such, the court agreed that “there is nothing unfair about enforcing the parties’ choice-of-law clause.”