Governor Paterson signs Late Notice Prejudice Bill into Law

July 23, 2008

On July 21, 2008 Governor Paterson signed the Late Notice Prejudice bill (S.8610/A.11541) into law. The new law, will become effective 180 days from the date of its signing, i.e. on January 19, 2009 and will apply to policies issued, renewed or modified on and after that date.

The new law will amend the Civil Practice Law and Rules (“CPLR”) and the New York Insurance Law (“NYIL”) in relation to liability insurance policies. Notably, NYIL § 3420(d) is not being amended, so a carrier's late disclaimer will still invalidate justified denials of coverage based on breaches of policy conditions and exclusions, even if the insured or injured party is not prejudiced.

The main points of the act are: (1) A carrier cannot disclaim on late notice unless it proves material prejudice defined as that which impairs the ability of the insurer to investigate or timely defend the claim; (2) If notice is given to the insurer within two years of the time required by policy, the burden of proving prejudice rests on the insurer. If notice is given after two years of time required by policy, the burden of proving prejudice rests on the insured; (3) Pre-judgment declaratory judgment actions by injured parties are permitted solely on the question of late notice and only if the insurer or insured fails to commence a declaratory judgment action within 60 days of disclaimer; (4) Where personal lines primary or statutorily required policies are involved, the injured party can seek coverage information from the carrier pre-lawsuit.

Prejudice Required For Disclaimers Based on Late Notice

A new subdivision, NYIL § 3420(a)(5), is added. It provides 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, the injured party or any other claimant unless the failure to provide timely notice has prejudiced the insurer, with certain exceptions for claims made policies.

Defining Prejudice

As part of the new NYIL § 3420(c)(2), this bill provides that 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 timely defend the claim.”

Burden of Proof in Establishing Prejudice

In any action where the insurer alleges it was prejudiced as a result of a failure to provide timely notice, the burden of proof is on the insurer to demonstrate prejudice if notice was provided within two years of the time required by the policy and on the insured or injured person if the notice was provided more than two years after the time required by the policy.

There is an irrebutable presumption of prejudice if, prior to notice, the insured's liability has already been determined by a court or arbitrator, or if the insured has settled the case on his, her or its own.

Direct Actions

In wrongful death and personal injury claims, if the insurer disclaims liability or denies coverage upon the failure to provide timely notice, then the injured person or other claimant may maintain an action directly against such insurer, in which the sole question is the insurer's disclaimer or denial based on the failure to provide timely notice. This limits direct actions to late notice cases only, unless there is already a judgment against the purported insured, in which event the insured claimant may seek to enforce such judgment against the tortfeasor’s insurer(s).

However, the pre-judgment direct action could not commence if, within 60 days following the disclaimer or denial of coverage, the insured or the insured commences a declaratory judgment action, naming the injured person or any other claimant as a party to the action.

Thus, the only direct action that may commence, prior to the injured party taking judgment against the insured, is one based on late notice. It can only be brought by a person who seeks recovery for injury or wrongful death. It can only be brought if the insurer or the insured has not commenced a declaratory judgment action within 60 days after the denial, naming the injured person as a party.

Written Request to Confirm Coverage

Liability policies that provide coverage with respect to claims for bodily injury or wrongful death, where the policy is a personal lines policy (subject to NYIL § 3425 relating to automobile insurance) other than an excess or umbrella policy, must state that an insurer shall, within 60 days of receipt of a written request by an injured party who has filed a claim or by another claimant, confirm to the injured person or other claimant in writing whether the insured had a liability insurance policy in effect with the insurer and the limits of coverage provided under that policy. If the insurer does not have sufficient information to identify such a policy, the insurer has 45 days from the initial request to ask for more information, and then another 45 days after it is provided such information to comply with the request for confirmation of coverage.