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July 26, 2012

Insurer Denied Leave to Amend Complaint Based on Prejudice and Undue Delay

The Appellate Division, Third Department recently affirmed a decision of Supreme Court, Warren County, in a declaratory judgment action, denying plaintiff Vermont Mutual Insurance Company's motion to amend its complaint because the proposed amendment would unduly prejudice and surprise the defendant Mowery Construction Inc. Vt. Mut. Ins. Co. v. Mowery Constr., 2012 NY Slip Op. 4814, available at 2012 N.Y. App. Div. Lexis 4759 (3d Dep't June 14, 2012). The case highlights the danger of failing to raise all applicable insurance policy clauses at the outset of litigation.

Defendant James Ciuffo sustained injuries while working at a construction site overseen by defendant Mowery Construction Inc. Mowery did not notify Vermont Mutual Insurance about the incident until two years later when Ciuffo sued Mowery. Vermont Mutual issued a reservation of rights letter regarding the late notice issue. It then commenced a declaratory judgment action seeking a declaration that it was not obligated to indemnify Mowery due to the lack of timely notice of the incident.

Two years later, Vermont Mutual Insurance sought to amend its complaint to add a new ground for disclaiming coverage on the basis that Ciuffo was an employee of Mowery, not an independent contractor as had been previously claimed, triggering a policy provision excluding coverage for injuries to employees. Supreme Court denied the motion to amend, reasoning that the amendment was not timely and that defendant Mowery was prejudiced by the delay because Mowery had based its defense on the argument that Ciuffo was an independent contractor.

On appeal to the Appellate Division, Third Department, that court noted that leave to amend a complaint "should be freely granted if the amendment is not plainly lacking in merit and does not unduly prejudice or surprise the nonmoving party." The Third Department found that "plaintiff failed to show a satisfactory excuse for the delay" and that the record showed that plaintiff had evidence that Ciuffo may have been Mowery's employee before it commenced the declaratory judgment action. The Appellate Division concluded that Supreme Court properly exercised its discretion in denying plaintiff's motion.

This case illustrates that while it is generally true that courts will freely grant leave to amend complaints, where there is undue delay and prejudice, such leave will be denied. This underscores the critical importance of raising all applicable exclusions at the time of the disclaimer and in any ensuing litigation.

If you require further information regarding the information presented in this Legal Alert and its impact on your organization, please contact any of the members of the Insurance Coverage & Regulation Practice Area.


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