Notifying Additional Insureds of Coverage Denials Under New York Law

Under N.Y. INS. LAW § 3420(d)(2), insurers that disclaim liability or deny coverage to an insured are required to 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 requirement of INS. LAW § 3420 appears straightforward. Nevertheless, insurance companies continue to defectively comply with the law’s requirements. As an example, in Sierra v. 4401 Sunset Park, LLC, 2014 WL 6607303 (N.Y.A.D. Nov. 4, 2014), the Court held that notice of disclaimer to a building owner’s insurer, but not to the building owner, did not provide compliant notice of disclaimer to the building owner under § 3420.

In Sierra, 4401 Sunset Park, LLC and Sierra Realty Corp. were respectively the owner and managing agent of an apartment building in Brooklyn. They contracted with third-party defendant, LM Interiors Contracting (LM) to do renovation work on the building. Under the contract, LM was required to maintain liability insurance that named the owner and managing agent as additional insureds. LM obtained its liability policy from Scottsdale Insurance Co. The owner and managing agent also had their own liability insurance policy issued by Greater New York Mutual Insurance Co. (GNY).

On August 18, 2008, plaintiff Juan Sierra, an LM employee, lost a finger in an accident while working on the renovation project. The managing agent learned of the accident that day, but failed to give notice of the accident to either GNY or Scottsdale. Three months later, the plaintiff brought suit seeking damages for personal injuries against the owner and managing agent. When the suit was brought, the owner and managing agent notified GNY of the lawsuit. In turn, GNY retained a lawyer for its insureds, but neither the insureds nor GNY informed Scottsdale of the injury or the claim until January 6, 2009, when GNY sent the summons and complaint to Scottsdale. GNY asked Scottsdale to “respond in writing upon receipt of this letter whether you will defend, indemnify and hold our insured harmless in connection with this lawsuit.” Scottsdale replied to GNY on February 2, 2009 disclaiming liability on various grounds including failure to provide timely notice of the occurrence. However, Scottsdale did not send that letter to the owner and managing agent (its additional insureds and GNY’s insureds) or to the lawyer representing the insureds in the action.

The owner and managing general agent sued Scottsdale alleging that Scottsdale was required to provide them with a defense and indemnification. It was undisputed in the action that Scottsdale did not give notice of its disclaimer directly to its additional insureds or to the lawyer who had been retained to represent them. Scottsdale argued that the disclaimer notice it sent to GNY was sufficient to satisfy INS. LAW § 3420. The Court of Appeals in New York disagreed. The Court began its analysis by noting that GNY was not an insured under Scottsdale’s policy but was instead another insurance company. Although GNY had acted on the insureds behalf by sending notice of the claim to Scottsdale, that action did not make GNY the insureds’ agent for all purposes or for the specific purpose of receiving a notice of disclaimer. GNY’s interest was not necessarily the same as its insureds in the litigation. Because the insureds had their own interest at stake, separate and apart from GNY, the Court held that the insureds were entitled to have notice delivered to them, or at least to an agent of theirs who owed a duty of loyalty to them.

The Court of Appeals found that INS. LAW § 3420 obligated an insurance company “to give timely notice of disclaimer to the mutual insureds . . . not to . . . another insurer.”

Notwithstanding the clear requirement of INS. LAW § 3420(d)(2), insurers continue to make mistakes in its application. As demonstrated in the Sierra case, it is insufficient under INS. LAW § 3420 to provide notice of disclaimer of liability to the insured’s insurance company; the notice must be provided directly to the insured or to the insured’s direct agent.