N.Y. Requires Showing of Prejudice Before Insurers Disclaim for Late Notice

New York has enacted a bill requiring a showing of prejudice before insurers can disclaim coverage for late notice.

The bill amends Section 3420 of the New York Insurance Law to require liability policies to provide that insurers may not disclaim coverage for an insured’s failure to provide timely notice of the claim unless the delay “prejudices” the insurer. There is, however, an exception for claims-made policies. The new law places the burden of proof concerning prejudice on the insurer if the notice is provided within two years of the time required, or on the insured if the notice is provided more than two years after the time required.

It defines “prejudice” to be a material impairment of the insurer’s ability to investigate or defend the claim. Prejudice, however, is conclusively presumed if the insured’s liability has been established after a court or arbitration proceeding or if the insured has settled the claim before providing notice to the insurer.

The legislation will significantly alter the landscape of New York’s insurance law. Historically, insurers have frequently relied on New York’s traditional interpretation of the insured’s contractual duty to give notice to its insurer “as soon as practicable” to deny coverage. New York courts have long construed such requirements strictly, finding that the insured had the burden to establish compliance and that an insured’s unexcused delay could relieve the insurer of its duties to defend and indemnify regardless of whether the delay prejudiced the insurer. Thus, New York courts often permitted insurers to disclaim coverage on the basis of notice delays of only a few months, or even weeks — without requiring a showing of prejudice. This traditional interpretation has become the minority view among American jurisdictions. Most states now require the insurer to show that it has been prejudiced by delays in receiving notice of a claim or loss.

The bill also includes two additional changes to New York law. First, it allows personal injury or wrongful death claimants to maintain declaratory judgment actions directly against a tortfeasor’s insurer without first obtaining a judgment to determine whether coverage exists for such claims. Previously, such claimants had been required to obtain a judgment against the tortfeasor before seeking a coverage determination.

Second, it requires insurers to confirm the existence and limits of coverage to claimants who make a written request for that information and makes it an unlawful practice to fail to respond to a request.