New York’s High Court Holds That An Insurer’s Delay in Disclaiming Coverage Could Be Excused When The Delay Resulted From Unsuccessful Attempts To Secure The Policyholder’s Cooperation

by Proskauer - Insurance Recovery & Counseling

Until recently, New York’s Insurance Law presented something of a dilemma for insurance companies concerning how quickly they were required to inform their policyholders that they were denying coverage for a claim. On the one hand, the law requires insurers to inform them “as soon as is reasonably possible” when disclaiming coverage for certain types of liability. On the other hand, the law prohibits insurers from disclaiming coverage based on the policyholder’s failure to cooperate unless first diligently seeking to secure such cooperation – a process which requires time and effort. Reconciling the tension between these two principles, New York’s highest court recently clarified in Country-Wide Insurance Company v. Preferred Trucking Services Corp. that a delay in denying coverage does not run afoul of the requirement that a disclaimer be made as soon as reasonably possible, if the delay is explained by genuine efforts to obtain the policyholder’s cooperation.

In Country-Wide, the policyholder, Preferred Trucking, had been sued for personal injuries suffered during the unloading of one of its trucks. Country-Wide, which insured Preferred Trucking under a standard “business auto” policy, first learned of the personal injury lawsuit in September of 2007 when it received a copy of a motion for default judgment against Preferred Trucking – which had failed to respond to the complaint. Country-Wide promptly reserved its right to deny coverage, but did not formally inform Preferred Trucking that it was denying coverage until more than a year later, in November of 2008.

Country-Wide attributed its delay to Preferred Trucking’s refusal to cooperate in defending against the personal injury lawsuit. Although Preferred Trucking’s owner repeatedly refused to cooperate in defending the claim against the company, the employee who drove the truck had, at various times, indicated that he would cooperate. Country-Wide made several attempts to secure his cooperation, including enlisting a Spanish-speaking investigator to communicate with the driver, who did not speak English. Only after these efforts failed, and the driver failed to cooperate, did Country-Wide deny coverage.

Both the trial court and appellate court held that Country-Wide’s delay in disclaiming coverage precluded Country-Wide from asserting its coverage defense for lack of cooperation. Those decisions relied on New York Insurance Law Section 3420, which provides that an insurer can only disclaim liability or deny coverage for injury caused by motor vehicle accidents if it provides written notice to the policyholder “as soon as is reasonably possible.”

The Court of Appeals reversed, indicating that evaluating whether an insurer has denied coverage as soon as reasonably possible is a case-specific inquiry and the analysis is different when the insurer denies coverage based on an alleged breach of a cooperation clause. That is so, the Court explained, because New York law imposes upon the insurer an affirmative duty to diligently seek to secure cooperation before denying coverage for lack of cooperation. Based on the specific facts of the case, the Court found that Country-Wide’s delay was not unreasonable but rather reflected its diligent efforts to secure cooperation of a key witness.

The Country-Wide decision underscores the need for companies to carefully review their polices before making a claim, or ask counsel to do so, and ensure compliance with all relevant policy terms to avoid losing insurance benefits to which they may otherwise be entitled.  But insurance companies should not read Country-Wide as supplying a broad excuse for any delay in informing their insureds whether there is coverage for a claim. New York’s highest court made clear that its analysis applied strictly to disclaimers based on lack of cooperation. It also noted that an insurance company cannot easily escape coverage based on the insured’s lack of cooperation, but bears a “heavy burden” in showing it acted diligently in securing such cooperation.

DISCLAIMER: Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

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