Despite Irrebuttable Presumption Of Prejudice, Insurer Who Failed To Timely Disclaim Coverage For Default Judgment Against Its Insured Must Pay

In Montpelier U.S. Insurance Co., v. 240 MT. Hope Realty Co., et al., 2015 WL 6395949 (S.D.N.Y. Oct. 22, 2015), the United States District Court for the Southern District of New York joined the ever-growing list of courts interpreting N.Y. Insurance Law §3420(d)(2) to hold insurers who issue or deliver policies in New York strictly accountable for failing to timely disclaim coverage for bodily injury claims arising out of accidents occurring within the state.

This concept is by no means a fresh one in New York, whose courts routinely find that insurers that are sluggish in denying coverage for otherwise uncovered bodily injury claims are estopped from disclaiming coverage under N.Y. Insurance Law §3420(d)(2), which compels written notice of a disclaimer “as soon as reasonably possible. ” What is noteworthy about the decision is that the District Court found that even where the insured’s liability had been determined – in this case, through the entry of a default judgment – before the insurer received notice of the claim, if the insurer subsequently fails to timely disclaim coverage for that liability, it will be estopped from doing so under Section 3420(d)(2).

In Mt. Hope Realty Co., a default judgment was entered against the insured, a commercial landlord, in connection with a bodily injury lawsuit following a dog bite on its premises in New York. The insurer received notice of the default judgment approximately eight months after the initial complaint was filed against the insured and over two months after the entry of the default judgment. Upon learning of the default judgment, the insurer initially provided a defense and attempted to vacate the default judgment without reserving its right to deny coverage to the insured based on late notice. The default judgment was initially vacated, however, the vacateur was subsequently reversed. It was only after the default judgment was reinstated, and after ten months had elapsed since the insurer first received notice of the default judgment, that the insurer first denied coverage to the insured on late notice grounds.

The District Court confirmed that under N.Y. Ins. Law §3420(c)(2)(B), there is an “irrebuttable presumption of prejudice” to the insurer where it first receives notice of a claim against its insured after the insured’s liability for the claim has been determined by a court of competent jurisdiction. Thus, although the District Court recognized that the insurer in Mt. Hope Realty Co. would otherwise have been entitled to deny coverage on late notice grounds, it found that the insurer was estopped from doing so under Section 3420(d)(2) because it had defended the insured without a reservation of rights for more than 10 months, despite notice of the default judgment. This portion of the District Court’s holding is somewhat puzzling, since it could be construed as indicating that an insurer may essentially “stop the clock” for purposes of issuing a timely disclaimer under Section 3420(d)(2) by issuing a reservation of rights, even where it is aware of a basis to deny coverage.

Ultimately, Mt. Hope Realty Co. is another decision in a long line that confirm that insurers issuing or delivering policies in New York that ignore Section 3420(d)(2)’s requirement of timely disclaimers do so at their own peril.