N.Y. Court Rules Insurer Must Show Prejudice to Deny Claim Based on Late Notice

May 10, 2004

A state trial court in Suffolk County in New York has required an insurance company to demonstrate that it was prejudiced by its policyholder’s untimely notice of claim before it could deny coverage on that basis. See St. Charles Hospital and Rehabilitation Center v. Royal Globe Insurance Company, No. 29155-98 (April 28, 2004).

Liability insurance policies usually require a policyholder to give its insurance company notice of a claim “as soon as practicable.” In New York, the failure of a policyholder to comply with this technicality, by even short periods of time, has operated in the past as a complete bar to coverage. Moreover, New York courts have long adhered to the “no-prejudice” exception, which allows an insurance company to deny coverage based on its policyholder’s late notice of claim without having to demonstrate that it was somehow prejudiced by the late notice.

But New York Supreme Court Justice James M. Catterson recently ruled that, in order to effectively deny coverage, Royal Globe Insurance Company “was required to show that it was prejudiced by receiving the notice of claim and legal action 21 years and nine months after the occurrence as opposed to having received it 21 years after the occurrence.” Justice Catterson further held that, “as a matter of law, Royal was not prejudiced by the nine month delay in notification.”

In the case, the underlying claim involved allegations of medical malpractice on the part of St. Charles Hospital and Rehabilitation Center, which occurred 21 years before the underlying plaintiff brought suit. St. Charles’ first notice of the underlying occurrence came when it was served with the summons and complaint in the underlying action. Seeking coverage under a hospital malpractice liability endorsement to a commercial general liability insurance policy, St. Charles notified Royal of the underlying suit nine months after it was served. Royal disclaimed coverage on the basis that St. Charles’ notice of claim to Royal was nine months late.

A declaratory judgment action ensued and St. Charles eventually moved for summary judgment arguing that, under the circumstances of the case, Royal should have to demonstrate prejudice before it could evade its obligations to its policyholder. Royal cross-moved for summary judgment relying on the no-prejudice exception. Justice Catterson agreed with St. Charles.

This decision comes in the wake of the recent New York Court of Appeals decision in Brandon v. Nationwide Mut. Ins. Co., 97 N.Y.2d 491 (2002). In Brandon, New York’s highest court declined to apply the no-prejudice exception in the uninsured motorist context where, although timely notice of claim was submitted, the policyholder’s notice of suit was over a year late. The Brandon court explicitly declined to comment on the issue of whether New York should continue to maintain the no-prejudice exception when insurers assert late notice of claim as a defense, because that issue was not before
the court.

Taking his signal from Brandon, Justice Catterson pointed out the “turning of the tide” in New York with respect to the application of the no-prejudice exception and refused to apply it in a late notice of claim case where the underlying rationales for the rule were not advanced; and where policy considerations such as the compensation of tort victims and the inequities of the insurance company receiving a windfall, militated against application of the rule.

Justice Catterson wrote that: “Since the rationale for the ‘no-prejudice’ exception is based on the presumption that an insurer will be prejudiced if it cannot investigate a claim or negotiate a settlement on a timely basis, it necessarily follows that whatever need exists to conduct an investigation or enter into settlement negotiations exists within a timeframe that occurs ‘soon after the underlying event.'”

“This decision provides policyholders with long-needed relief from New York’ s draconian application of the ‘no-prejudice’ exception,” said John B. Berringer, attorney for St. Charles. “An insurance company should not be permitted a windfall by allowing it to evade its contractual obligations to its policyholder due to a technical, non-material breach of the insurance contract, especially where the insurance company cannot show prejudice.”

St. Charles was represented by John B. Berringer and Dennis J. Artese of Anderson Kill & Olick, P.C., which specializes in representing policyholders in insurance coverage disputes, and by Donald S. Neumann, Jr. and Frank J. Cafaro of Montfort, Healy, McGuire and Salley.

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