Liability Insurer did not Waive Defense of Late Notice by Failing to Disclaim Coverage on this Ground "As Soon as Reasonably Possible"

On June 10, 2014, the Court of Appeals issued a decision in KeySpan Gas Electric Corp. v. Munich Reinsurance America, Inc., 2014 NY Slip Op. 04113, holding that the "mere passage of time" does not effect a waiver of a liability insurer's right to disclaim coverage for untimely notice by the insured; rather the insurer's delay must be assessed under the common law doctrines of waiver and estoppel.

In KeySpan, the plaintiff brought a declaratory judgment action seeking coverage for losses relating to environmental contamination at sites formerly owned by LILCO. The insurer asserted an affirmative defense based on LILCO's failure to give timely notice of the claim, which was a condition precedent to coverage under the policy. On summary judgment, the Supreme Court rejected LILCO's argument that the insurer waived the untimely notice by failing to disclaim coverage on that basis prior to the lawsuit. The Appellate Division reversed, finding that "issues of fact remain as to whether defendants waived their right to disclaim coverage based on late notice" by "failing to timely issue a disclaimer." The Appellate Division held that, on remand, a jury should consider whether the insurance company "possessed sufficient knowledge to require that they meet the obligation to issue a written notice of disclaimer on the ground of late notice as soon as reasonably possible after first learning of the accident or of grounds for disclaimer of liability."

The Court of Appeals held that the Appellate Division applied the wrong standard in evaluating the waiver argument. The Appellate Division's "as soon as reasonably possible" standard derives from a provision of the New York Insurance Law (Section 3420(d)(2) that by its terms is limited to coverage for "death or bodily injury":

If under a liability policy issued or delivered in this state, an insurer shall disclaim liability or deny coverage for death or bodily injury arising out of a motor vehicle accident or any other type of accident occurring within this state, it shall give written notice as soon as is reasonably possible of such disclaimer of liability or denial of coverage to the insured and the injured person or any other claimant.

The Court of Appeals held that this standard did not apply in this case, where the coverage at issue concerned environmental harm rather than death or bodily injury:

The Legislature enacted section 3420(d)(2) to "aid injured parties" by encouraging the expeditious resolution of liability claims. To effect this goal, the statute establishes an absolute rule that unduly delayed disclaimer of liability or denial of coverage violates the rights of the insured or the injured party. Compared to traditional common-law waiver and estoppel defenses, section 3420 (d) (2) creates a heightened standard for disclaimer that "depends merely on the passage of time rather than on the insurer's manifested intention to release a right as in waiver, or on prejudice to the insured as in estoppel.

By its plain terms, section 3420(d)(2) applies only in a particular context: insurance cases involving death and bodily injury claims arising out of a New York accident and brought under a New York liability policy. Where, as here, the underlying claim does not arise out of an accident involving bodily injury or death, the notice of disclaimer provisions set forth in Insurance Law § 3420 (d) are inapplicable. In such cases, the insurer will not be barred from disclaiming coverage simply as a result of the passage of time, and its delay in giving notice of disclaimer should be considered under common-law waiver and/or estoppel principles.

Here, the Appellate Division erred when it held that defendants had a duty to disclaim coverage "as soon as reasonably possible" after they learned that LILCO's notice was untimely under the policies. The environmental contamination claims at issue in this case do not fall within the scope of Insurance Law § 3420 (d) (2), which the Legislature chose to limit to accidental death and bodily injury claims, and it is not for the courts to extend the statute's prompt disclaimer requirement beyond its intended bounds. Indeed, Keyspan has never relied on section 3420 (d) (2) and instead asserts a common-law waiver defense. The Appellate Division must determine whether the evidence supporting this defense is sufficient to defeat defendants' motion for summary judgment based on LILCO's failure, as a matter of law, to give timely notice under the policies. Specifically, the Appellate Division must consider if, under common-law principles, triable issues of fact exist whether defendants clearly manifested an intent to abandon their late-notice defense. We therefore remit this matter to the Appellate Division to make these determinations.

(Citations omitted) (emphasis added).

The common law waiver standard is much more difficult to satisfy. One imagines it will be difficult to show that the insurer's delay in disclaiming coverage for late notice "clearly manifested an intent to abandon" the defense where, as here, the insurance company expressly reserved the right to disclaim coverage on that ground.