The United States District Court, Southern District of New York recently issued the first decision interpreting the 2009 amendment of New York State's Insurance Law § 3420. Atlantic Cas. Ins. Co. v. Value Waterproofing, Inc., 2013 U.S. Dist. LEXIS 6044 (S.D.N.Y. 2013). Prior to 2008, liability insurance companies only had to prove that a policyholder provided late notice of a claim in order to disclaim coverage under New York law (although the courts often accepted certain excuses for a delay in reporting).
This changed when the New York legislature amended the Insurance Law to require the insurer to show that it was prejudiced by the untimely notice. The statute, applicable to policies issued subsequent to January 2009, provides that an insurer is prejudiced if the failure to timely provide notice "materially impairs the ability of the insurer to investigate or defend the claim."
Atlantic Cas. Ins. Co. v. Value Waterproofing, Inc. involves an insurance coverage dispute that arose out of a breach of contract and negligence lawsuit pending in New York Supreme Court. In the underlying action, Kansas Fried Chicken, Inc. ("KFC") hired Value Waterproofing, Inc. ("Value") to perform work on a cross beam of a barrel vaulted roof of a two story structure owned by KFC in New York City. Shortly after the work was complete, a major snow storm occurred in New York City leaving approximately 20 inches of snow on the roof and the roof partially collapsed. A day or two later, KFC discovered the collapsed roof and informed Value. KFC also requested Value's certificate of insurance, which was provided approximately a week and half later. During that time, Greenwich Insurance Company ("Greenwhich"), the insurer of KFC, received notice of the partial collapse and hired U.S. Adjustment Corp to inspect the property. The property was inspected by U.S. Adjustment Corp four separate times over the course of two weeks. The New York City Department of Buildings ordered the demolition of the second floor of the property. The demolition was completed over the course of the following three weeks.
Atlantic was not informed of the collapse until Greenwich sent it a liability claim letter approximately six months after the loss. Atlantic subsequently hired an investigator to investigate the collapse. The investigator contacted Greenwich's counsel to request photographs and documentation, but the investigator never received a response. The investigator also went to the property and discovered that the entire roof had been removed. A week later, Atlantic declined coverage to Value citing late notice among other policy provisions.
Greenwich initiated a subrogation action against Value for the loss in Supreme Court. The complaint asserted claims for breach of contract and negligence arising out of Value's work and the partial collapse.
In the federal action, Atlantic sought a declaratory judgment that it had no duty to defend or indemnify Value, its insured, because it was prejudiced by its late notice.
Value and Greenwich offered two arguments to excuse the delay. They argued that Value had a reasonable belief in nonliability because it appeared the collapse of the roof was caused by a heavy snowfall. However, the District Court found this argument unconvincing because KFC reached out to Value immediately after the collapse and a few days later requested a certificate of insurance. The District Court noted that due to Value's work on the structure just days prior to the collapse, any reasonable contractor would believe that its work may be the subject of a claim.
Value and Greenwich next argued that it was "impractical" for KFC to provide prompt notice to Atlantic because the demolition occurred so quickly after the collapse. The District Court disagreed and found that the prompt demolition of the second story and roof did not interfere in any way with the provision of notice or make it "impractical" to give notice. There was almost three weeks between the roof collapse and the completion of the demolition. Additionally, KFC knew Atlantic was Value's insurer prior to the completion of the demolition; however, Atlantic was not notified until six months later.
The District Court also found that Atlantic established that the late notice materially impaired its ability to investigate and defend the claim. Atlantic argued that the demolition was not complete until several weeks after the collapse and during that time Greenwich was able to investigate the claim on four occasions. Further, the late notice prevented Atlantic from being able to independently ascertain potential causes of the collapse, which was highly relevant to its investigation and defense of the claim.
Value and Greenwich argued that Atlantic was not prejudiced because it did little investigation of the loss after it received notice and also because ample discovery materials provided Atlantic "more than adequate information concerning the facts associated with the collapse." Defendants arguments were unpersuasive. The District Court reasoned that no meaningful investigatory steps remained available when Atlantic received notice. Nevertheless, Atlantic's investigator promptly contacted Greenwich's counsel, requested relevant photographs and documents, visited the property and interviewed Value's employee. Moreover, Greenwich and Value were adverse parties in the underlying action and the scope of Value's construction work, whether it was negligent, and whether any deficient repairs proximately caused the collapse are central issues in that litigation. As a result, the District Court reasoned that the late notice forced Atlantic to rely on its adversary's investigation to defend its insured.
Although Atlantic did not submit evidence as to how KFC's investigation was biased or incomplete, the court held that it did not have to do so in order to carry its burden of prejudice. Since the defendants denied Atlantic the opportunity to inspect the property, it is unreasonable to impose upon Atlantic the burden to show precisely how it would have been advantaged by its own inspection. The District Court held that "where the best physical evidence was available to only one side but not the other because of an unreasonable failure to provide notice, prejudice has been shown." As such, Atlantic satisfied its heavy burden.
This case is significant because it is the first decision to interpret the amended statute regarding late notice and it established that insurers can meet their heavy burden. Additionally, the decision helps to establish a benchmark as to what may constitute prejudice in a late notice situation. However, it should be noted that this case was issued by a lower court and was decided on a compelling set of facts. Last, it is important to keep in mind that it is an insurer's burden to establish that it was prejudiced by the late notice, and the manner in which it was prejudiced.
If you require further information regarding the information presented in this Legal Alert and its impact on your organization, please contact Anthony J. Piazza, Chair of the firm's Insurance Coverage & Regulation Practice Area, at (585) 295-4420 or apiazza@hblaw.com.