An Illinois federal district court in Frankenmuth Mutual Insurance Company v. The Hockey Cup, LLC held that an insurer was excused from its defense obligations due to late notice, since the court found that New York Insurance Law Section 3420(a)(5)’s requirement that insurers show prejudice to deny coverage based on late notice did not apply because the policy was not issued or delivered in New York.
The underlying lawsuit, in which the National Hockey League was one of the plaintiffs, alleged the insureds, A&R Collectibles, Inc. and its executive officer, Roger Dewey, were infringing on the NHL’s intellectual property rights by selling beer stein replicas of the Stanley Cup. Although the insurer paid the entirety of the settlement of the underlying lawsuit and one-third of the insureds’ reasonable defense costs, the insurer sought a ruling that it did not owe the remaining two-thirds in defense costs. Specifically, the insurer contended it did not have the duty to defend due to the insureds’ failure to give timely notice of the claims asserted in the underlying lawsuit. Indeed, 16 months elapsed between A&R’s receipt of a cease-and-desist letter and the tender of the underlying lawsuit to the insurer.
Before analyzing the substantive matters, the court first considered whether Illinois or New York law applied. After reviewing Illinois’ most significant contacts test, the court concluded New York law applied because the insured’s liability arose in New York, the NHL suit was filed in New York, and the insureds’ use of the NHL’s intellectual property in marketing and sales conducted in New York and elsewhere. As a result, although the insureds were domiciled in Illinois and the policy was issued in Illinois, the weight of the contacts favored applying New York law.
Turning to the issue of late notice, the court concluded a 16-month delay breached the late notice provision. Crucially, the court disagreed that the insurer needed to show prejudice pursuant to the issued or delivered requirement of New York Insurance Law Section 3420(a)(5). Instead, the court agreed with the insurer’s argument that Section 3420(a) did not apply because the policy was not issued or delivered in New York. Accordingly, since New York common law did not require a showing of late notice to deny coverage, the insurer was relieved of its defense obligations.
While the insurer prevailed at the district court, it is possible that the decision rests on shaky ground since it did not provide a discussion of the New York high court’s decision Carlson v. American International Group, Inc. In Carlson, the New York Court of Appeals reaffirmed that the issued or delivered requirement of Section 3420 did not solely pertain to policies issued in New York. By contrast, it stated the requirement was satisfied if the policy covered both insureds and risks located in New York. In other words, the location of the risk to be insured was the key question, not where the policy document was handed over or mailed to the insured. Under this backdrop, it remains to be seen if an appeal to the Seventh Circuit will be brought in an attempt to clarify the interpretation of Section 3420.