An Insurer’s Failure to Investigate an Accident and Decline Coverage Based Upon a Policy Exclusion Renders the Subsequent Disclaimer of a Claim Untimely as a Matter of Law

The New York legislature and courts impose strict requirements on insurance companies to  “timely disclaim” coverage under a liability policy. New York Insurance Law § 3420(d) requires that insurers disclaim coverage under a liability policy issued or delivered in New York “as soon as is reasonably possible.”[1] The New York Court of Appeals has clarified that a “timely” disclaimer is measured from the “time when the insurer first learns of the grounds for disclaimer.”[2] And New York appellate courts interpreting the phrase “as soon as reasonably practicable” have found that that, absent excuse or mitigating circumstances, “relatively short periods” are “unreasonable as a matter of law.” [3] Thus, it is well-established that an insurer in New York must swiftly decline coverage after an insured provides notice of a claim and/or requests a defense under a liability policy.

The Appellate Division, First Department recently determined that an insurer’s obligation to investigate and decline coverage based upon a policy exclusion begins ticking before receiving a notice of claim from the insured. In ADD Plumbing, Inc. v. Burlington Insurance Co., 2021 N.Y. App. Div. LEXIS 1580 (1st Dep’t 2021), the court held that the insurer’s duty to investigate and decline coverage promptly pursuant to a policy exclusion is triggered not by receiving a notice of claim but by becoming aware of the underlying accident. Specifically, the court found that where the insurance company was “on notice of the underlying accident” for “several months before it disclaimed coverage and commenced an investigation with respect to the alleged incident,” the disclaimer of coverage was “untimely as a matter of law.” Id. at *2.[4] Further, the court unanimously reversed the lower court’s finding that the timeliness of a disclaimer is not based upon the knowledge of an accident alone but by the insured’s actual notice of claim. Add Plumbing, Inc. v. Burlington Ins. Co., 2020 N.Y. Misc. LEXIS 419 at *1.

What does this mean for the insured?

After an insured provides a notice of claim, there are generally three likely responses by the insurer:

1. Accept the claim and defense without any reservation of rights. If the accident is covered under the policy and no exclusions apply, the insurance company will be obligated to assume the policyholder’s defense subject to the insured’s cooperation and preservation of the insurance company’s rights.
2. Decline Coverage for Claims Not Covered by the Policy. If the claim is not covered under the policy, the insurer will issue a declination of coverage letter explaining that the accident is not covered by the terms of the policy.
3. Investigate and Defend Under a Reservation of Rights and/or Promptly Decline Coverage for Claims Barred by a Policy Exclusion. If the claim is covered in part under the policy but is subject to one or more policy exclusions, the insurer must promptly advise the insured of same and issue a clear reservation of rights delineating what is covered and what is barred under the policy. However, if the entire claim is barred by a policy exclusion, the insurer must issue a timely disclaimer letter.

ADD Plumbing relates to the third listed outcome, and the takeaway for the insured is that it may be able to successfully challenge the timeliness of an insurer’s disclaimer of coverage of a notice of claim if the insured provided prior notice of the underlying accident and the insurer failed to investigate the accident and identify the facts that would have triggered a policy exclusion prior to the insured providing an actual notice of claim.

What does this mean for insurers?

The takeaway from Add Plumbing for the insurer is that New York places a high bar on “timely” disclaiming coverage under a liability policy. The case instructs that insurer’s must promptly investigate any accident reported (regardless of whether the insured has been named in a litigation); determine the existence of any facts that trigger a policy exclusion, and “timely” decline coverage based upon same, or risk that a court will find that any delay in disclaiming coverage caused by failing to take these steps renders a subsequent declination of coverage untimely as a matter of law (in colloquial terms: late and out of luck).

[1] N.Y. Ins. Law § 3420(d)(2) provides in relevant part: “If under a liability policy issued or delivered in this state, an insurer shall disclaim liability or deny coverage for death or bodily injury arising out of a motor vehicle accident or any other type of accident occurring within this state, it shall give written notice as soon as is reasonably possible of such disclaimer of liability or denial of coverage to the insured and the injured person or any other claimant.”

[2] Country-Wide Ins. Co. v. Preferred Trucking Servs. Corp., 22 NY3d 571, 575-576 (NY 2014).

[3] Travelers Inc. Co. v. Volmar Constru. Co., 300 A.D. 2d 40. 43 (1st Dep’t 2002).

[4] The underlying court’s decision and order, which was reversed by the appellate court, framed the issue this way: “At issue in this action is whether an insurer’s knowledge of an underlying accident is sufficient to trigger an insurer’s duty to disclaim coverage under Insurance Law § 3420(d)(2).” Add Plumbing, Inc. v. Burlington Ins. Co., 2020 N.Y. Misc. LEXIS 419 at *1 (N.Y. Co.) In concluding that that the duty to disclaim had not been triggered, the lower court noted that the notice provided by the insured was marked “For Records Only”; no demand for coverage had been made; the named insured had not been sued, and the additional insured under the policy had not tendered the claim to the insurance company at the time the insurer became aware of the underlying accident. Id. at *2. Based upon these facts, the lower court reasoned that, pursuant to binding precedent “[t]he mere occurrence of an event which could potentially implicate coverage if a claim is later made does not mean that an insurer’s responsibility to timely disclaim has been triggered” and that knowledge of an accident alone “is insufficient to trigger the time to issue a disclaimer.” Id. at *2. The Appellate Division First Department unanimously reversed the lower court’s decision on the law.