BY JODI SOKOLOWSKI
Buffalo Law Journal

Teenagers may avoid telling their parents that they caused a car accident for fear of punishment. They may also worry about the parents' reaction to a possible premium increase, or possibly being dropped by the insurance carrier.

But as of Jan. 19, when an amended insurance law goes into effect, insurers will have to prove that they suffered prejudice, or harm, as a result of a delayed notice of a claim in order to have cause to cancel a policy.

The revised Insurance Law Section 3420 states that carriers have been harmed only if the late notice "impairs (their) ability to investigate or defend a claim."

The bill, signed July 21 by Gov. David Paterson, is a revision that resulted from a gubernatorial veto last year. While the American Insurance Association still has concerns with some of the bill's language, "We find it much more acceptable than the legislation that was vetoed by Gov. Spitzer last year," said Gary Henning, the association's assistant vice president for its Northeast region.

The revised bill states that if notice is given within two years of the time required by the policy, the burden of proving harm rests on the insurer. If an insurance company is notified two years after it should have been, the burden shifts to the insured, the injured person or other claimant.

The new law will likely increase the cost of doing business for both insurers and the insured, sources say.

"How much cost is going to be added to the system, I don't know," Henning said. "It will really have to play out in the marketplace."

Frank Grimaldi, an insurance agent at Buffalo-based John J. Grimaldi & Associates Inc., predicts that it will result in higher premiums.

The change will definitely increase insurance companies' costs because of the burden of proving harm before they drop a customer based on late notice, Henning said.

More litigation is expected since an attorney can argue, on behalf of the policy holder expected to be dropped, the definition of "as soon as reasonably possible," Henning added.

"Yes, they could have told me a year ago when they found out about an environmental claim of lead seeping into groundwater, but am I being harmed by that?" he asked. "We're definitely going to have to pick up claims we wouldn't have before."

Legislators say that's only fair. The Assembly bill's summary notes: "insurers (were) collecting billions of dollars in premiums annually (by) disclaiming coverage over an inconsequential technicality."

However, NYTortReformNow.org, a coalition of businesses, municipalities and nonprofits, argues that the bill is "flawed and constitutes an unacceptable precedent which may lead to future mischief."

For the first time under state law, the legislation will allow the injured party to challenge an insurance company's decision to deny the policy holder coverage based on late notice even before the injured party has taken judgment from a lawsuit, Kohane explained. Previously, the injured party had to wait until after the lawsuit was settled or decided.

"We have a philosophical problem with third-party direct action because an insurance contract is between two parties - an insured and the insurer," Henning said.

But the Legislature decided that the "injured party has interest in the pool of money," Kohane explained.

That's why the bill also permits an injured party's attorney to find out if the responsible party is insured and, if so, at how much.

"In the old days, the only time you could find out if someone had insurance was to sue them," Kohane said. "This bill now requires (insurance companies) to provide the information even before the lawsuit is commenced."

Grimaldi said that's because plaintiffs' attorneys want to know if they can sue for more. That may be good for the injured party, he said, but the more money insurance companies have to pay out, the higher premiums will go.

"If people were honest," Grimaldi said, "we would pay less. But that's not the situation in real life, and now the overall percentage of people will pay for it."