NY Court Applies Old Late Notice Rule to A Post-January 17, 2009 Policy

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…

                       

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(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.”

Dismissal for Delay at Status Hearings

The Court of Appeal has answered a question that arises fairly frequently in civil litigation: under what circumstances should an action be dismissed by the court following a status hearing?

In Faris v. Eftimovski, 2013 ONCA 360 (C.A.), the action was commenced in 2007 alleging damages from real estate transactions in 2003 and 2005.  At the time of the status hearing in 2012, pleadings had not been finalized, no documentary productions had been exchanged, and no examinations for discovery had occurred.  Two of the defendants had died.  The status hearing judge dismissed the action, holding that there were unexplained delays in the action and there was non-compensable prejudice to the defendants since parties had died.

The Court of Appeal dismissed the appeal.  Justice Tulloch distinguished between r. 24, which permits a defendant to take a deliberate procedural step to have the action dismissed, and r. 48, which allows the court to control the pace of litigation. The onus is on the plaintiff to demonstrate there was an acceptable explanation for the delay and that, if the action was allowed to proceed, the defendant would suffer no non-compensable prejudice.

There has been much discussion recently about lengthy delays in trial lists.  Could the Court of Appeal be signalling an attempt to clear out cases that are slowing down the system?

Michigan Court Holds Notice of Potential Claim Insufficient

In its recent decision in Lemons v. Mikocem, LLC, 2013 U.S. Dist. LEXIS 133976 (E.D. Mich. Sept. 19, 2013), the United States District Court for the Eastern District of Michigan had occasion to consider the issue of whether an insured’s notice of circumstances that could give rise to a claim was sufficient to preserve coverage for a future claim. 

Federal Insurance Company insured Indian Nation and its subsidiaries, including Mikocem, under a directors and officers policy with an employment practices liability coverage part.  Indian Nation and Mikocem operated funeral homes in Michigan and Tennessee.  The policy provided claims made and reported coverage for the period April 20, 2005 through April 20, 2006, but was extended through October 20, 2006.  Federal decided not to renew the policy upon its expiration.  On October 19, 2006, Federal received a letter from Indian Nation accusing Federal not to renewing the policy because of information it had learned in an Internet search; specifically, articles regarding Indian Nation’s alleged investment fraud.  The letter stated that:

Since [Federal] has chosen to non renew [sic] our account please let this serve as notice of an "incident" or "claim" to protect our rights under the policy. At this time no formal demands have been made against the company, however if there are any formal demands they will promptly be forwarded to [Federal] when they are received.

At issue in the Lemons case was coverage for a wrongful termination suit filed in April 2007 by John Lemons against Mikocem.  Lemons obtained a judgment against Mikocem and then sought to enforce that judgment, as a garnishee, against Federal.  On motion for summary judgment, Federal argued that it had no indemnity obligation with respect to Lemons’ judgment against Mikocem because Lemons’ suit was not a claim first made during the policy period.  Lemons argued in response that Indian Nation’s October 19, 2006 letter to Federal was sufficient notice under the policy’s reporting provision, which states:

If during the Policy Period, or any applicable Extended Reporting Period, an Insured becomes aware of a Potential Employment Claim or Potential Third Party Claim which could give rise to any Employment Claim or Third Party Claim (as such terms are defined in the Employment Practices Liability Coverage Section) or becomes aware of circumstances which could give rise to any Claim, other than an Employment Claim or a Third Party Claim (as such terms are defined in the Employment Practices Liability Coverage Section), and gives written notice of such Potential Employment Claim, Potential Third Party Claim or circumstances to the Company as soon as practicable thereafter but before the expiration or cancelation [sic] of this Policy, then any Claim subsequently arising from such Potential Employment Claim, Potential Third Party Claim  or circumstances shall be considered to have been made against the Insured during the Policy Year in which the Potential Employment Claim, Potential Third Party Claim or circumstances were first reported to the Company.

Notably, the policy defined “Potential Employment Claim” as a complaint or allegation of a wrongful act lodged with the insured’s human resources department or functional equivalent thereof. 

Lemons did not contend that Indian Nation’s letter of October 19, 2006 qualified as notice of a Potential Employment Claim.  He nevertheless contended that the policy’s reporting clause permitted notice of three different events: Potential Employment Claims, Potential Third Party Claims, or “circumstances which could give rise to any claim.”  He argued that circumstances reporting serves the purpose of “protect[ing] the insured when the insured is aware of facts (“circumstances”) and their potential affect [sic], but lacks enough detail to draw a legal conclusion as to a particular claim.”  In other words, Lemons argued that the notice provision allowed for reporting of specific types of potential claims (i.e., Potential Employment Claims and Potential Third Party Claims) but that the policy also had a “catch-all” reporting provision that allowed for generic reporting of circumstances that could result in any type of covered claim.

The court rejected Lemons’ reading of the notice provision since it ignored the clause immediately preceding the “notice of circumstances” language that expressly carved out Employment Claims and Third Party Claims (i.e., the clause stating “…other than an Employment Claim or a Third Party Claim.”)  This qualifying clause, explained the court, made clear that the policy only allowed reporting of circumstances for claims other than Employment Claims and Third Party Claims.  As such, concluded the court, notice of circumstances alone was insufficient to preserve coverage for employment claims first made subsequent to the policy’s expiration.  As such, and because the October 19^thletter did not give sufficient details of a Potential Employment Claim, the court agreed that Lemons’ wrongful termination claim could not be considered one first made during the policy period for which coverage was available.

Maryland Court Considers Prejudice in Claims Made and Reported Policy

In its recent decision in McDowell Bldg. v. Zurich Am. Ins. Co., 2013 U.S. Dist. LEXIS 133166 (D. Md. Sept. 17, 2013), the United States District Court for the District of Maryland had occasion to consider Section 19-110 of the Insurance Article of the Maryland Code, and in particular whether this provision imposes a prejudice requirement in claims made and reported policies.

Zurich insured Brasher Design under a series of claims made and reported architects and engineers professional liability policy.  Brasher had been hired by McDowell, a real estate developer, to prepare and file various applications for tax credits for the construction of a building.  Upon learning that Brasher failed to file the applications in a timely fashion, McDowell filed against various entities, including Brasher.  Although suit was filed against Brasher in June 2006, Brasher did not give notice of the matter to Zurich until November 2009.  Zurich subsequently denied coverage under each of its prior policies on the basis that the claim was not first made and reported within the same one year policy period.  McDowell later settled with Brasher and took an assignment of Brasher’s rights under the Zurich policies.  It then filed a declaratory judgment action against Zurich, arguing that Zurich’s denial of coverage was improper since it failed to demonstrate that it was prejudiced as a result of Brasher’s failure to report the claim during the relevant policy period. 

At issue in the McDowell decision was the application of § 19-110 of the Maryland Code, which states:

An insurer may disclaim coverage on a liability insurance policy on the ground that the insured or a person claiming the benefits of the policy through the insured has breached the policy by failing to cooperate with the insurer or by not giving the insurer required notice only if the insurer establishes by a preponderance of the evidence that the lack of cooperation or notice has resulted in actual prejudice to the insurer.  (Emphasis supplied.)

Zurich argued on motion to dismiss that § 19-110 does not apply to policies under which notice is a condition precedent to coverage, such as claims made and reported policies.   

In considering the issue, the district court examined the history of the statute and the case law it generated, most significantly, the decision by the Maryland Court of Appeals (Maryland’s highest court) in Sherwood Brands, Inc. v. Great American Insurance Co., 13 A.3d 1268 (2011).   The court observed that intention of the statute is to prevent an insured’s forfeiture of coverage based on a technicality, but to also preserve the insurer’s right to void coverage “where the insured's failure to provide notice has undercut the carrier's opportunity to limit its liability.” 

The Sherwood Brands decision, explained the court, considered this rule in the context of a claims-made policy requiring notice as soon as practicable but no later than ninety (90) days after the policy’s expiration.  The Sherwood Brands court held that the statute did, in fact, apply to such a policy, and in doing so, articulated the following rule:

… we hold that § 19-110 does apply, as is the case at present, to claims-made policies in which the act triggering coverage occurs during the policy period, but the insured does not comply strictly with the policy's notice provisions. In the latter situation, § 19-110 mandates that notice provisions be treated as covenants, such that failure to abide by them constitutes a breach of the policy sufficient for the statute to require the disclaiming insurer to prove prejudice.

The McDowell court observed case law from the U.S. District Court of Maryland and from the Fourth Circuit calling into question the application of Sherwood Brands in the context of a true claims made and reported policy. Minnesota Lawyers Mut. Ins. Co. v. Baylor & Jackson, PLLC, 852 F.Supp. 2d 647 (D. Md. 2012); Financial Industry Regulatory Authority, Inc. v. Axis Ins. Co., 2013 U.S. Dist. LEXIS 82343 (D. Md. June 12, 2013).  The McDowell court questioned these subsequent decisions in light of the fact that the Sherwood Brands decision expressly applied its holding to any policy in which notice is a condition precedent to coverage, including claims made and reported policies.  As such, the court agreed that while Zurich demonstrated that Brasher’s notice was late, this alone was not sufficient to merit dismissal of McDowell’s lawsuit. The court therefore denied Zurich’s motion so that the issue of prejudice could be further developed.

Timing of Summary Judgment Motions

At what point in a lawsuit is it appropriate to bring a summary judgment motion?

In Stever v. Rainbow International Carpet Dyeing & Cleaning Inc., 2013 ONSC 4054 (S.C.J.), the defendant brought a summary judgment motion prior to discoveries, alleging there was no issue requiring a trial as the limitation period had expired.  Justice Morgan held that summary judgment motions typically proceed after discoveries are complete, or with affidavit evidence and cross-examinations that "go a long way to replicating what will be produced at discoveries."  Justice Morgan adjourned the summary judgment until after discoveries had been completed.

Stever is in line with the Court of Appeal's decision in Combined Air, which held:

58     Moreover, the record built through affidavits and cross-examinations at an early stage may offer a less complete picture of the case than the responding party could present at trial. As we point out below, at para. 68, counsel have an obligation to ensure that they are adopting an appropriate litigation strategy. A party faced with a premature or inappropriate summary judgment motion should have the option of moving to stay or dismiss the motion where the most efficient means of developing a record capable of satisfying the full appreciation test is to proceed through the normal route of discovery. This option is available by way of a motion for directions pursuant to rules 1.04(1), (1.1), (2) and 1.05.

In many cases, especially where there is an issue of discoverability, summary judgment is likely not appropriate until discoveries are complete.

New Jersey Supreme Court Addresses Inter-Insurer Contribution Rights

In a case of first impression, the Supreme Court of New Jersey, in its recent decision in Potomac Ins. Co. of Illinois v. Pennsylvania Manufacturer’s Association Ins. Co., 2013 N.J. LEXIS 847(N.J. Sept. 16, 2013), had occasion to consider the novel issue of whether an “insurer with an obligation to indemnify and defend an insured has a direct claim for contribution against its co-insurer for defense costs arising from continuous property damage litigation.”

The Potomacdecision arose out of an underlying construction defect case brought against Roland Aristone, Inc. (“Aristone”).  Aristone had been hired in 1991 by the Township of Evesham to serve as the general contractor with respect to the construction of a new middle school.  In December 2001, Evasham brought suit against Aristone for alleged construction defects, primarily relating to the school’s roof.  Aristone was insured by five different primary layer general liability insurers during the relevant ten year triggered period: Pennsylvania Manufacturers’ Insurance Company (“PMA”) for two years, Newark Insurance Company (“Newark”) for one year, Royal Insurance Company (“Royal”) for one year, OneBeacon Insurance Company (“OneBeacon”) for one year and Selective Way Insurance Company (“Selective”) for five years.  Selective and OneBeacon agreed from the outset to provide Aristone with a defense in the underlying lawsuit, whereas PMA and Royal/Newark (apparently related companies) denied coverage, thereby prompting Aristone to file suit against those insurers.  PMA eventually settled with Aristone for $150,000 to be used toward Aristone’s settlement of the underlying suit.  In return, Aristone agreed to release PMA from all claims associated with the underlying action.  Days later, the underlying suit was settled for $700,000, with OneBeacon paying $150,000, Selective paying $260,000 and Royal paying $140,000.

Unresolved by the settlement with Evesham was allocation of defense costs.  OneBeacon and Selective paid a combined $528,868 in legal fees and expenses in defending Aristone through resolution of the case.  OneBeacon subsequently demanded that PMA and Royal contribute their proper share of defense costs.  Specifically, OneBeacon argued that under New Jersey law regarding allocation of defense costs for matters involving a continuous trigger, as set forth in cases such as Owens-Illinois Inc. v. United Insurance Co.,138 N.J. 437 (1994), and Carter-Wallace, Inc. v. Admiral Insurance Co., 154 N.J. 312 (1998), the proper allocation of costs, based on the number of years that each insurer was on the risk, was that 50% of total defense costs should be allocated to Selective, 10% should be allocated to OneBeacon, 20% should be allocated to PMA and the remaining 20% should be allocated to Royal/Newark.  While Royal/Newark ultimately settled with OneBeacon, PMA rejected OneBeacon’s demand, arguing among other things, that its release with Aristone precluded OneBeacon’s right to contribution for defense costs.  The matter later was the subject of a three day bench trial that eventually concluded in OneBeacon’s favor.  The trial court agreed that PMA’s settlement with Aristone did not preclude OneBeacon’s contribution claim for defense costs, and thus assigned PMA an allocated share of costs consistent with the approach outlined in Carter-Wallace.  On appeal, the New Jersey Appellate Division acknowledged the lack of New Jersey case law addressing OneBeacon’s right to recover defense costs from PMA.  The court nevertheless relied on California case law, in particular the decision in Fireman's Fund Insurance Co. v. Maryland Casualty Co., 77 Cal. Rptr. 2d 296 (Ct. App. 1998), for the proposition that a coinsurer has a direct right of action against another for defense costs arising out of the same risk. 

On appeal to the Supreme Court of New Jersey, PMA argued that the Appellate Division created a novel cause of action by permitting an insurance company that had already settled with its insured to be sued for a share of defense costs by a co-insurer.  OneBeacon, on the other hand, argued that the decision by the Appellate Division was consistent with decades of New Jersey case law concerning allocation of costs in matters involving a continuous trigger. 

In considering the issue, which it acknowledged was novel, the Supreme Court revisited its decision in Owens-Illinois wherein it adopted a continuous trigger theory for cases involving progressive or individual injury, and wherein it established a pro rata methodology for allocating loss among multiple insurers during the triggered period based on policy limits and years on the risk.  The court noted that its decision in Owens-Illinois “envisioned the litigation of direct claims between co-insurers to ensure that the policyholder's losses would be equitably allocated among its carriers.”  While Owens-Illinoisand its progeny concerned allocation of indemnity amounts among insurers and their respective insured, the court reasoned that it should also apply in the context of claims for reimbursement of defense costs:

We concur with the Appellate Division that recognizing an insurer's cause of action for contribution against a co-insurer for allocation of defense costs comports with Owens-Illinois and its progeny. Although the Court in Owens-Illinois considered an issue not raised by this case -- co-insurers' obligations to indemnify their common insured -- it envisioned a judicial determination of "the portion allocable [to each carrier] for defense and indemnity costs." …  The Court recognized in Owens-Illinois that the insurer's obligation to indemnify the policyholder may engender contribution claims between insurers that share the same insured, independent of any right of subrogation to the claims of the insured. …  Like the obligation to indemnify the insured addressed in Owens-Illinoisand Carter-Wallace, the obligation of successive insurers to pay the policyholder's defense costs can be readily determined by equitable allocation. Absent a right of contribution, a carrier that pays defense costs as they are incurred might alone bear a burden that should be shared. An inequitable allocation of the cost of defense, like an unfair allocation of the obligation to indemnify, may justify a judicial remedy.

The court found several justifications for its holding.  Allowing such a contribution claim, explained the court, fosters a “strong incentive for prompt and proactive involvement of all responsible carriers.”  The court also reasoned that the right to contribution may promote early settlement and create an incentive for insureds to purchase sufficient coverage in every year.  Perhaps just as important to the court is that permitting a contribution claim under the circumstances “serves the principle of fairness recognized in Owens-Illinois.”  In this connection, the court noted that:

… an insurer that refuses to share the burden of a policyholder's defense is rewarded for its recalcitrance, at its co-insurer's expense, unless the insurer who pays more than its share of the costs has an effective remedy. Recognition of an insurer's contribution claim against its co-insurer serves "the demands of simple justice." … In short, an insurer's direct claim for allocation, asserted by an insurer that pays a disproportionate amount of the defense costs against other insurers of the same policyholder, promotes the principles underlying this Court's decisions in Owens-Illinois and Carter-Wallace.

Discount Rate

The new discount rates have been posted on the Attorney General's website.  They can be found at:

http://www.attorneygeneral.jus.gov.on.ca/english/courts/civil/pecuniary_damages.asp

For 2014, the discount rate is 0.3% for the first 15 years and 2.5% thereafter.