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June 20, 2008

Legislative Update: Governor Proposes Legislation Permitting Direct Action by Injured Party and Requiring Prejudice for Late Notice Defense by Insurer

In our June, 2007 Legal Alert, we discussed pending legislation which would have substantially affected liability policies issued in New York State. The proposed bill would have eliminated this state's "No-Prejudice Rule" with respect to late notice, and permitted an injured party to bring a direct, declaratory judgment action against a defendant's insurer prior to the rendering of judgment in favor of the injured party against an insured. That legislation was subsequently withdrawn by Governor Spitzer for further evaluation and comment by interested parties.

As expected, the issue is again before the New York State Legislature. Governor Paterson has submitted proposed legislation to allow an injured party to commence a declaratory judgment action against the insurer of an alleged tortfeasor to determine the validity of the insurer's denial of coverage based on failure to provide timely notice of an accident. Additionally, it would require that an insurer attempting to deny coverage based on its insured's late notice prove that it was prejudiced as a result of the late notice. Current indications are that the proposed legislation is likely to be adopted, in some fashion, before the close of the legislative session on June 30, 2008.

Summary of Provisions:

The pending bill amends New York Civil Practice Law and Rules §3001 to permit a party who has brought a claim for personal injury or wrongful death against another party to maintain a declaratory judgment action directly against the liability insurer of the tortfeasor. The bill also amends §3420 of the New York Insurance Law to require liability policies issued or delivered in New York to include a new provision with respect to personal injury or wrongful death claims. That clause would state that if the insurer disclaims liability or denies coverage based on the insured's failure to provide timely notice of the claim, then an injured person or "other claimant" may maintain an action against the insurer to determine the issue of late notice, unless, within sixty days of the insurer's disclaimer, the insured or insurer initiates an action under the policy to determine the issue of coverage, naming the injured person or other claimant as a party to the action.

The right of direct action against the insurer by an injured person or claimant would be limited to the "sole question" of the insurer's disclaimer based on failure to provide timely notice. Under existing law, the insured can, at any time, commence a declaratory judgment action to challenge a denial of coverage based upon late notice, and may also challenge any other coverage issue raised by the insurer. The proposed legislation does not change the insured's rights in this regard. It does allow injured parties and other "claimants" (presumably parties asserting indemnification or contribution rights against the insured), to commence a declaratory judgment action where the injured parties or claimants have a pending tort action against the insured, and where the insurer has raised a disclaimer issue involving late notice. The right of direct action by an injured party does not apply to property damage claims.

The legislation further provides that in order to successfully disclaim coverage based upon the insured's late notice, the insurer must prove that the late notice has prejudiced the insurer. Currently, New York is one of a minority of states which do not have a prejudice rule, and this legislation is purportedly aimed at bringing New York in line with the majority of other states in the country. The new legislation provides that "[t]he insurer's rights shall not be deemed prejudiced, unless the failure to timely provide notice materially impairs the ability of the insurer to investigate or defend the claim." The prejudice requirement is also applicable to property damage claims.

Under the legislation the burden of proof is on the insurer to prove prejudice if the notice "was provided within two years of the time required under the policy". Generally, liability policies require notice from the insured of an accident or claim "as soon as possible". Thus, there is some ambiguity as to when the two year period begins to run. Beyond the two year time period, the legislation places the burden on the insured, injured person or other claimant, to prove that the insurer was not prejudiced. Finally, the legislation provides an "irrebuttable presumption of prejudice" if the insured's liability has already been determined by a court or by binding arbitration, or if the insured has resolved the claim or suit by settlement prior to notice to the insurer.

Under the proposed legislation, the insured and injured parties will continue to have the right to litigate the issue of whether notice was given as soon as reasonably practicable under the circumstances, including issues frequently litigated involving whether the insured had a reasonable belief of non-liability or that no claim would be asserted.

Significantly, the legislation also includes a provision amending §3420 of the Insurance Law to provide that upon receipt of a written request by an injured person who has filed a claim, or by another claimant, an insurer must, within sixty days of receipt of the request, confirm in writing to the injured person or other claimant, whether its insured had a liability insurance policy in effect with the insurer on the date of the occurrence, and must specify the liability limits of the policy. Failure to comply with the statute constitutes a violation of the Unfair Claims Settlement Practices Act provisions under §2601 of the Insurance Law.

The proposed legislation would take effect 180 days after it becomes law and applies to policies issued or delivered in New York on or after that date and to any action brought under such a policy.

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 Practice Area.


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