August 14, 2008

NEW LAW SIGNIFICANTLY LIMITS
NEW YORK’S “NO PREJUDICE” RULE

New York’s Governor David Paterson recently signed into law legislation that substantially changes the ability to strictly enforce notice requirements in insurance policies issued in New York after March 1, 2009.

Under existing case law in New York, courts upheld denials of coverage where the insured provides untimely notice without requiring any showing that the insurer was prejudiced by the late notice. Under the new law, if a claimant provides notice to an insurer within two years of the period established in the policy, then the insurer bears the burden of demonstrating that it was prejudiced by the lack of timely notice.

To prove prejudice, the insurer must show that the lack of timely notice materially impaired its ability to investigate or defend the claim. If, on the other hand, the claimant provides notice more than two years after the period established in the policy, then the burden shifts to the claimant to prove that the insurer was not prejudiced. The new law does, however, establish a carve-out for claims-made policies: insurers of claims-made policies may still limit claims to the policy period or an extended reporting period, except when the claimant can show that it was not reasonably possible to provide notice within the prescribed time and that notice was given as soon as was reasonably possible thereafter.

New York common law historically has strictly interpreted contractual notice provisions and permitted insurers to deny coverage of claims without a showing of prejudice when the insured failed to comply with policy requirements that notice be provided as soon as practicable after he or she learns of an occurrence. This “no prejudice” rule offered one of the strongest coverage defenses available for insurers in New York by placing the burden on claimants to demonstrate that it was not reasonably possible to give notice within the prescribed period of time. With its strict adherence to the notice provisions of liability policies, the “no prejudice” rule placed New York in the minority of jurisdictions. This new law dramatically reduces an insurer’s ability to rely on the contractual notice provision.

The new law introduces a second change to New York insurance law by permitting claimants in actions arising from death or personal injury claims to seek a declaratory judgment directly against insurers when those insurers disclaim liability or deny coverage on the basis of failure to provide timely notice. The new bill limits the scope of a claimant’s declaratory judgment action to the issue of the insurer’s disclaimer or denial of coverage. In addition, the insurer may pre-empt the claimant’s new right to direct action by bringing its own declaratory judgment action, within sixty days of the disclaimer, in which the claimant is a named party and in which the insurer seeks to establish the parties’ rights under the policy. Previously, New York law only permitted claimants to initiate claims directly against insurers after a judgment against the insured remained unsatisfied for thirty days.

The new bill represents the legislature’s second attempt in the past two years to reform the “no prejudice” rule. In June 2007, the Senate and Assembly passed a substantively similar bill, but then-Governor Eliot Spitzer vetoed the bill, citing the short period—three days—between the bill’s introduction and passage and recommending further findings on the actual impact of the bill’s provisions.