Gov. Eliot Spitzer's veto of Bill No. 6306 this past summer brought to light the unique position insurance companies find themselves in when writing New York policies. Among other things, Bill No. 6306 sought to eliminate an insurance doctrine known as the no-prejudice rule. As it now stands in New York, the no-prejudice rule presumes that a primary insurer suffers prejudice where its policyholder fails to give the insurer timely notice of a claim. Thus, a policyholder's failure to give timely notice of claim to his or her insurer, absent a valid excuse for the late notice, allows the insurer to deny coverage of the claim.

At first blush, New York's no-prejudice rule appears to be a boon to insurance companies writing policies in New York. However, the no-prejudice rule has been a viable counterweight to other insurance-related issues that are unique to New York and that provide protection to policyholders.

A history of challenges

The New York no-prejudice rule finds its roots in precedents going back more than a century.

The no-prejudice rule assists an insurer in protecting itself against fraud by allowing it to investigate claims soon after the underlying events. Also, the no-prejudice rule facilitates efficient claims handling, such as the setting of appropriate reserves and assessing the potential for settlement. Timely notice of claim allows insurers to investigate while witnesses are available and memories are fresh, and to begin preparing any defenses on its behalf at an early stage.

Even in light of these important benefits to insurers, the New York Court of Appeals, the state's highest court, has steadily chipped away at the no-prejudice rule over the past 15 years.

Unigard Security Ins. Co. v. North River Ins. Co. (79 N.Y.2d 576, 1992) was the first case to water down the no-prejudice rule, holding that it was inapplicable to a policyholder who failed to give timely notice to a reinsurer in a reinsurance contract. Five years after the Unigard decision, the court reaffirmed the application of the no-prejudice rule regarding excess insurance carriers. However, not too long afterward, the court in Matter of Brandon v. Nationwide Mutual Insurance Co. (97 N.Y.2d 491, 2002) held that the no-prejudice rule did not apply in the context of a claim for supplementary underinsured motorists (SUM) benefits where late notice of a legal action existed.

Most recently, the court in Rekemeyer v. State Farm Mutual Auto Insurance Co. (4 N.Y.3d 468, 2005) held that insurance companies now need to demonstrate prejudice where the policyholder within a SUM context gives late notice of a claim. The court decided Argo v. Greater New York Mutual Insurance Co. (4 N.Y.3d 332, 2005) on the same day as Rekemeyer, upholding the no-prejudice rule concerning liability insurance policies outside of the SUM context.

On the legislative front

Running parallel to the court's erosion of the no-prejudice rule was the perennial bill in either the Assembly or Senate seeking to quash the no-prejudice rule in New York. The Legislature's recent iteration was Bill No. 06306, which was two-pronged. The bill would have prohibited insurers from denying coverage for late notice of claims unless the insurers demonstrated that they sustained "material prejudice" from the delayed notice. The bill also would have permitted claimants in an underlying tort claim to bring a declaratory-
judgment action for a determination of the existence and the extent of insurance coverage an insurer owed to the party against whom the underlying claim was interposed. In curious, expedient fashion, Bill No. 6306 was first introduced on June 17 and passed both the Assembly and Senate a mere three days later.

Spitzer noted the Legislature's fast passage of the bill in his explanatory memorandum accompanying his veto. "Most of the affected parties," he stated, "were unaware that the bill had been introduced, and claim that they had no opportunity to testify at any hearings or otherwise make their views known before the Legislature acted. As a result, there are significant unanswered questions relating to what the actual impact of the bill might be, and the members of the Legislature have not had an opportunity to appropriately balance the views of both sides."

In that memorandum, Spitzer instructed his staff and the state's superintendent of insurance to work with both houses, the insurance industry, business groups, consumer advocates, the trial bar, and the Office of Court Administration to investigate the no-prejudice issue further and to determine the impact of these provisions on injured parties, insurance rates and court caseloads.

Stay tuned

In the explanatory memorandum, Spitzer indicates that he would likely sign a bill similar to 6306 in the future, after the appropriate debate and input from different interests occurs. As of press time, it was anticipated that the governor would introduce a new bill for consideration in the special legislative session this week. The expected legislation requires that an insurer demonstrate prejudice to deny coverage based upon an insured's late notice.

Prejudice is roughly defined as an act that impairs a significant interest of the insurer, including its ability to investigate the claim, negotiate a settlement, defend the claim or maintain adequate reserves. An irrebuttable presumption of prejudice is established when, prior to notice, the insured's liability has been established by a court or arbitration, or if the insured has settled or compromised the claim or suit. The insurer will bear the burden of proving prejudice unless notice is provided after two years of the time required under the policy. When this is the case, the insured, injured party or other claimant will have to demonstrate that the carrier was not prejudiced by the late notice.

The current version of the proposed legislation is substantially different from the Aug. 3 draft circulated by the New York State Department of Insurance. That proposal would have required that a carrier show that it was hampered or hindered in effectively investigating, negotiating, settling or defending the claim prior to being able to deny coverage for failure to give timely notice. Even more interesting, the Aug. 3 draft also attempted to amend Insurance Law § 3420(d).

New York is unique in that insurers must abide by the ambiguous time limits under Insurance Law § 3420(d). Section 3420(d) creates an unclear deadline by which insurers must disclaim bodily-injury matters; the failure to do so within a loosely defined time period causes a waiver of the insurer's exclusionary and condition-based defenses, regardless of whether the policyholder is prejudiced by the delay.

Currently, Insurance Law § 3420(d) only applies to accidents resulting in bodily injury or death for policies issued or delivered in New York and for accidents occurring in New York. The August 2007 draft proposed to extend 3420(d) to all claims, including property damage, and to all events regardless of whether they occurred in New York.

As Insurance Law § 3420(d) has been considered in the late notice/prejudice debate, consideration should be made as to whether there should be prejudice component in § 3420(d). In other words, if an insured is to be excused from complying with the contractual duty to provide timely notice of occurrence, claim or suit to an insurer, unless prejudice to an insurer is established, then equities may favor excusing an insurer from complying with the statutory duty to provide timely notice of a late notice disclaimer, unless prejudice to an insured is established. This is the case in many other jurisdictions where common-law estoppel applies.

The original goal of Bill No. 6306 was to ensure that insurance coverage was determined on its merits and not what some construe as a technicality. Similarly, it may make sense that an insurer not lose an otherwise viable defense because it issued its disclaimer one day late and thus is found precluded by the technical application of § 3420(d).

Regardless of the next iteration, the landscape of notice both to and from an insurer in New York is likely to change dramatically. This will, no doubt, substantially impact personal-injury plaintiffs, insureds and insurers in ways yet to be determined, especially in how and when a court might find prejudice.

Daniel Gerber is a partner at Goldberg Segalla LLP's Buffalo office and has a national practice litigating complex commercial and insurance disputes. Matthew Lerner is an associate in the firm's Albany office and concentrates his practice on insurance and appellate advocacy. In 2005, they argued Rekemeyer v. State Farm Mutual Auto Insurance Co. before the State of New York Court of Appeals.