American Re-Insurance Company and Northern Assurance Company of America ("American and NACA") provided excess insurance coverage to Long Island Lighting Company ("LILCO") for potential environmental damage claims at a manufactured gas plant site owned by LILCO. The policies required LILCO to provide notice to the insurers when "an occurrence" is "reasonably likely" to give rise to liability on the part of the insured.
In 1994, LILCO notified American and NACA of anticipated liability arising out of certain of LILCO's gas plant sites. Specifically, LILCO expected actions by regulatory agencies and/or a neighboring property owner for environmental contamination allegedly caused by LILCO at the sites.
In 1995, American and NACA issued reservation of rights letters, which reserved the defense of late notice, but did not disclaim coverage on any grounds. The letters requested supplemental information from LILCO. LILCO's responses showed that it was first notified of the potential liability exposure in 1981.
A memorandum prepared by an employee of American in January, 1996, summarizing LILCO's disclosures, stated that LILCO was notified of contamination by the EPA in 1981, and re-notified in 1989. The memo expressly noted the possibility of a late notice defense, and stated that there was no explanation as to why LILCO waited until 1994 to put American on notice.
LILCO filed a declaratory judgment action in 1997. American and NACA moved for summary judgment on late notice grounds, seeking a declaration that they had no duty to defend or indemnify LILCO. Supreme Court granted the insurers' motions. On appeal, the Appellate Division, First Department, reversed, finding that there were issues of fact with respect to the insurers' waiver of the late notice defense even though LILCO had failed, as a matter of law, to provide timely notice under the policies.
On appeal, the New York Court of Appeals reversed, and remanded the matter to the Appellate Division for a determination as to whether the insurers waived the defense of late notice under the common law. On remand, the First Department again found that a question of fact existed regarding whether American and NACA waived the defense of late notice under the common law, noting that it had not relied on Insurance Law Section 3420(d)(2) with respect to its holding in its prior decision.
The First Department cited the rule that an insurer's waiver of a defense is "proved by evidence that the insurer intended to abandon that defense." The Court found sufficient evidence to create a question of fact regarding waiver, because the insurers knew in January 1996, that LILCO was aware of potential environmental claims as early as 1981, yet delayed until 1997 before formally disclaiming coverage upon the grounds of late notice in their answers to LILCO's declaratory judgment action.
The Appellate Division pointed out that other LILCO insurers disclaimed coverage in March, 1995, regarding the same claims, and held that "[t]he fact that other insurers were able to promptly assert disclaimers based on late notice supports a finding of waiver."
The Court concluded that a reasonable jury could infer from the defendants' actions that they intended to abandon their late notice defense. Long Is. Lighting Co. v. American Re-Insurance Company, et al.,2014 N.Y. Slip Op. 08363 (1st Dep't, Dec. 2nd, 2014).
This holding is a reminder that, even in the context of a property damage claim, a reservation of rights letter does not satisfy an insurer's obligation to disclaim coverage, and will not avoid an issue of common law waiver involving the assertion of a late notice defense by the insurer.
Should you have questions regarding the information presented in this alert, please contact Anthony J. Piazza, Chair of the firm's Insurance Coverage & Regulation Practice Area, at (585) 295-4420 or apiazza@hblaw.com.