The court of appeals for the Second Circuit recently confirmed that a liability insurer that waits to deny coverage so that it can investigate the facts giving rise to the disclaimer will not be estopped from denying coverage under Insurance Law Section 3420(d)(2), provided that the insurer does not use the investigation as a tactic to delay the disclaimer. United Fin. Cas. Co. v. Country-Wide Ins. Co., No. 18-3022, 2019 WL 2724267 (2d Cir. July 1, 2019).
Section 3420(d)(2) requires that for liability policies “issued or delivered” in New York, an insurer must disclaim coverage in writing for claims involving bodily injury or death arising from a motor vehicle or other type of accident that occurred in New York “as soon as is reasonably possible.” The issue before the Second Circuit was whether an insurer, United Financial Casualty Company (UFCC), complied with the statute in a case involving coverage for an insured driver for an underlying bodily injury lawsuit arising from a multi-vehicle accident in New York that occurred when the driver was hauling goods for a trucking group.
UFCC issued a “non-trucking liability” policy to the driver’s employer and it agreed to defend the driver for the bodily injury lawsuit under that policy. However, the UFCC policy contained an exclusion that barred coverage when an auto is being used for a business purpose, but the exclusion applied only when other insurance is available. After UFCC learned through the DOT’s Licensing and Insurance Database that Country-Wide Insurance Company (Country-Wide), who insured the trucking group, might also owe the driver coverage, UFCC tendered to Country-Wide several times over a four-month period.
Eventually, Country-Wide disclaimed coverage. Fifty-two days after it received the disclaimer, UFCC filed a declaratory judgment action seeking a determination that because the driver was insured under the Country-Wide policy, the exclusion within the UFCC policy applied to bar coverage to the driver. In response, Country-Wide argued that UFCC was estopped from disclaiming coverage under section 3420(d)(2) because it waited 52 days after it received Country-Wide’s disclaimer to file the coverage action. The District Court granted summary judgment to Country-Wide and found that UFCC had failed to timely disclaim. The Second Circuit reversed.
In its decision, the Second Circuit pointed out that under New York law, the timeliness of a disclaimer for purposes of section 3420(d)(2) runs from when the insurer has sufficient facts to disclaim coverage. The court also noted that a carrier is entitled to conduct a reasonable investigation to determine if a policy exclusion applies if the basis of the denial is not readily apparent. The Court then found that the facts giving rise to UFCC’s disclaimer – the presence of another policy covering the driver – were not known to UFCC, despite its efforts, until Country-Wide produced its policy in the coverage litigation filed by UFCC. Thus, because the Court concluded that the filing of a declaratory judgment action constitutes sufficient written notice of a disclaimer, it ruled that UFCC timely disclaimed coverage, since it filed the coverage action before the Country-Wide policy was produced.
Ultimately, while the decision may provide some comfort by recognizing insurers’ rights to conduct a reasonable investigation of a claim where the basis of the denial is unclear, insurers would be wise to conduct this investigation as quickly as possible and to document the steps taken to identify the factual basis giving rise to the disclaimer.