In my previous blog article, Late and Out of Luck, I recently explained that New York law imposes strict requirements on insurance companies to “timely disclaim” coverage under a liability policy issued or delivered in the state [1] and that the measure of “timeliness” has been interpreted by New York courts to run from the time the insurer is put on notice of the underlying accident, not from the time the insurer receives a notice of claim.[2] In a recent case, the United States Court of Appeals for the Second Circuit found that an insurer must not only “timely” but also “effectively” disclaim coverage based upon a policy exclusion. In other words, the insurer’s reservation of rights letter must be clear.

Applying New York law, the United States Court of Appeals for the Second Circuit recently agreed with the District Court for the Eastern District of New York that an insurer’s unclear reservation of rights letter “failed to adequately disclaim coverage as required by New York law.” 20-1413-cv Philadelphia Indemnity Ins. Co. v. Yeshivat Beth Hillel of Kransa, Inc.at *2.  The court stated that an insurer intending to disclaim coverage must not only “give written notice as soon as is reasonably possible of such disclaimer or liability or denial of coverage” but must also “apprise the claimant with a high degree of specificity of the ground or grounds on which the disclaimer is predicated.” Id. at *4.

In determining that an insurer’s reservation of rights letter failed to meet New York’s legal standard, the Second Circuit noted that phrases such as “there is a question as to whether [the insurer] has a duty . . . to defend” and “[the] claim may qualify as an auto loss which is not covered” were indicative of “an ineffective denial of coverage.” Id. at 4-5 (emphasis in original). Further, the court  explained that such language is particularly inadequate where the insurer “knew of or should have known of all the material, relevant facts underlying the claim for which it sought to disclaim coverage” at the time the reservation of rights was issued. Id.

Based upon the foregoing, the court concluded that the insurer’s weak and unspecific language “did not adequately disclaim coverage”; failed to comply with an insurer’s statutory duty to timely disclaim coverage based upon a policy exclusion, and therefore precluded the insurer from effectively denying or disclaiming coverage for the claim. Id. at 5.

What does this mean for the insured?

As explained in my prior blog, after an insured provides a notice of an accident or a notice of claim, the insurance company has a duty to promptly investigate and issue a declination of coverage letter for any claims that are not covered under the policy as a result of policy exclusion.

Philadelphia Indemnity Ins. Co. further instructs that an insurer must also advise insureds “with a high degree of specificity of the ground or grounds on which the disclaimer is predicated.” Id. at *4. In other words, an insurer is obligated to both timely and effectively decline coverage. To satisfy the second prong of that test, the insurer must clearly apprise the insured that it is disclaiming coverage in whole or in part based upon specific facts as applied to specific policy exclusions.

What does this mean for insurers?

Philadelphia Indemnity Ins. Co. instructs that weak and ineffectual language cannot be used to effectively decline coverage under a liability policy issued or delivered in New York. Rather, insurers must use clear language that tells an insured “with a high degree of specificity” the grounds for disclaiming coverage under the policy. Further, the case reminds that it will be found that insurers knew or should have known “all the material, relevant facts underlying the claim” for which they seek to disclaim coverage[3] and insurers will be expected to incorporate those facts into any reservation of rights or declination of coverage letter in order to “effectively” disclaim coverage based upon a policy exclusion.

The takeaway for insurers is that they must “timely” and “effectively” decline coverage based upon policy exclusions. To satisfy the “effective” prong of the test, insurers should use clear language and avoid wishy-washy language in reservation of rights or declination of coverage letters. Merriam-Webster defines “wishy-washy” as (1) lacking in character or determination: ineffectual, (2) lacking in strength or flavor: weak. Synonyms of wishy-washy include ineffective, ineffectual, pliable, irresolute, and vacillating. Opposites of wishy-washy include strong, resolute, determined, and backboned. When apprising an insured of uncovered claims based upon policy exclusions in a reservation of rights or declination of coverage letter, insurers should avoid “wishy-washy” language. Instead, insurers should identify with clear and resolute language the specific facts that trigger specific policy exclusions if they intend to deny coverage of a claim in whole or in part. An insurer’s failure to either timely or effectively disclaim coverage based upon a policy exclusion could render the declination of coverage ineffective as a matter of law.

[1] See e.g., [1] N.Y. Ins. Law § 3420(d)(2); ADD Plumbing, Inc. v. Burlington Insurance Co., 2021 N.Y. App. Div. LEXIS 1580 (1st Dep’t 2021); Country-Wide Ins. Co. v. Preferred Trucking Servs. Corp., 22 NY3d 571, 575-576 (NY 2014); Travelers Inc. Co. v. Volmar Constru. Co., 300 A.D. 2d 40. 43 (1st Dep’t 2002).

[2] ADD Plumbing, Inc. v. Burlington Insurance Co., 2021 N.Y. App. Div. LEXIS 1580 (1st Dep’t 2021) at *2.

[3] 20-1413-cv Philadelphia Indemnity Ins. Co. v. Yeshivat Beth Hillel of Kransa, Inc.at *4.