Coverage Disclaimer May Not Await Investigation of Other Defenses

Pursuant to its subcontract with Campbell, Safespan had obtained primary liability insurance with a $1 million limit that covered both Campbell and TBTA as additional insureds. In addition, Safespan had obtained an umbrella policy with National Union Fire Insurance Company of Pittsburgh (“National Union”) with a $10 million limit that provided excess coverage to any person included as an additional insured in the underlying primary policy.

In December 2003, Conklin commenced a lawsuit against both TBTA and Campbell. In turn, TBTA and Campbell tendered their defense to Safespan's primary insurer in January 2004. They did not, however, notify the excess insurer until November 2005, when they informed National Union that the damages were likely to exceed the primary layer and requested that National Union participate in the handling and resolution of the Conklin matter. Subsequently, on Dec. 23, 2005, National Union requested additional information and reserved all of its rights, including with respect to whether or not Campbell and TBTA were additional insureds and whether or not they had provided timely notice under the terms of the policy. On Jan. 19, 2006, in response to National Union's request for further information, Campbell and TBTA forwarded an Aug. 23, 2004 status report from their defense counsel, which advised that the value of the underlying claim was far in excess of the primary coverage available.

National Union did not disclaim coverage based on late notice at that time. Rather, it continued to investigate for an additional four months as to whether or not Campbell and TBTA were in fact additional insureds under the policy (which it ultimately determined that they were) before issuing a disclaimer dated May 17, 2006 based on late notice.

In July 2008, the Conklin matter was settled for $5.5 million with Safespan's primary insurer contributing its full $1 million limit and Campbell's primary insurer contributing $1 million and its excess insurer agreeing to contribute $3.5 million. Subsequently, Campbell and TBTA brought a declaratory judgment action against National Union and moved for summary judgment on the grounds that
National Union's disclaimer was untimely under ' 3420(d). The lower court granted summary judgment for Campbell and TBTA, and the First Department affirmed.

The New Rule

While National Union's delay in disclaiming coverage may have been permitted under the DiGuglielmo rule, the First Department expressly overruled DiGuglielmo stating that the plain language of the statute “cannot be reconciled with allowing the insurer to delay disclaiming on a ground fully known to it until it has completed its investigation (however diligently conducted) into different, independent grounds for rejecting the claim.” The court further stated:

[I]f the insurer knows of one ground for disclaiming liability,
the issuance of a disclaimer on that ground without further delay is not placed beyond the scope of “reasonably possible” by the insurer's ongoing investigation of the possibility that the insured may have breached other policy provisions, that the claim may fall within a policy exclusion, or (as here) that the person making the claim is not covered at all. Stated otherwise, the statute mandates that the disclaimer be issued not “as soon as is reasonable,” but “as soon as is reasonably possible.”

The court also noted that measuring compliance with the “as soon as reasonably possible” standard begins “when the insurer first acquired knowledge of the ground upon which it disclaimed.” As such, the court determined that National Union had all the information it needed to disclaim based on late notice as of Jan. 19, 2006 (the date it received the August 2004 status report), noting that “not a single document or piece of information” referenced by National Union's disclaimer had been obtained after January 2006.

The court also pointed to two rulings of the Court of Appeals, Allstate Ins. Co. v. Gross, 27 N.Y.2d 263 (1970) and First Fin. Ins. Co. v. Jetco Contr. Corp., 1 N.Y.3d 64 (2003), for the proposition that the “Court of Appeals has made it abundantly clear that the determination of whether the disclaimer was issued 'as soon as was reasonably possible' is made with reference to the time when the insurer first acquired knowledge of the ground upon which it disclaimed.” As such, the First Department declined “to replace the Court of Appeals' rule with a rule that measures the timeliness of a notice of disclaimer from the point in time when the insurer has completed its investigation of any and all possible grounds for rejecting the claim, regardless of when the insurer had sufficient knowledge to disclaim on the particular grounds relied upon.” Moreover, the First Department's decision in Campbell also brings it in line with the Second Department, which never adopted
the DiGuglielmo rule.

Richard J. Geddes is a partner in Sedgwick, LLP in Chicago and co-author (with David Scorey and Chris Harris) of The Bermuda Form: Interpretation and Dispute Resolution of Excess Liability Insurance. He has represented U.S. and international insurers in connection with catastrophic and complex claims for more than 30 years. Sarah Champion is the Assistant Vice President of Excess Casualty Claims at ACE Bermuda, Ltd. Prior to joining ACE, Champion worked as an associate at Choate, Hall & Stewart, LLP in Boston, focusing on reinsurance and insurance litigation.

New York Insurance Law ' 3420(d) requires certain liability insurers to provide written notice of disclaimer of a personal injury claim “as soon as is reasonably possible.” In a 2004 ruling, the New York Supreme Court, Appellate Division, First Department held that, notwithstanding the statutory language of ' 3420, an insurer was “not required to disclaim on timeliness grounds before conducting a prompt, reasonable investigation into other possible grounds for disclaimer.” DiGuglielmo v. Travelers Prop. Cas. Co. , 776 N.Y.S.2d 542, 544 (1st Dep't 2004). In a Jan. 17, 2012 decision, the First Department revisited ' 3420 and expressly overruled DiGuglielmo, reasoning that its previous holding was inconsistent with the statutory language, New York Court of Appeals precedent, and public policy considerations. In George Campbell Painting v. National Union Fire Ins. Co. of Pittsburgh, PA , 2012 N.Y. App. Div. LEXIS 249 (Decided Jan. 17, 2012), the unanimous court held that “' 3420(d) precludes an insurer from delaying issuance of a disclaimer on a ground that the insurer knows to be valid ' here, late notice of the claim ' while investigating other possible grounds for disclaiming.” In Campbell, the court ruled that because the insurer had sufficient knowledge of a late notice defense nearly four months before it provided a written disclaimer to the insured, the disclaimer was ineffective as a matter of law.

Background

The underlying dispute arose from an accident that occurred during renovation work on the Henry Hudson Bridge in New York in which James Conklin, an employee of Safespan Platform Systems (“Safespan”), was injured when he fell down a makeshift hillside ramp. The bridge was owned by the Triborough Bridge and Tunnel Authority (“TBTA”), and the renovation was being conducted by George Campbell Painting (“Campbell”). Campbell, as general contractor, had employed Safespan as one of its subcontractors on the project.

Pursuant to its subcontract with Campbell, Safespan had obtained primary liability insurance with a $1 million limit that covered both Campbell and TBTA as additional insureds. In addition, Safespan had obtained an umbrella policy with National Union Fire Insurance Company of Pittsburgh (“National Union”) with a $10 million limit that provided excess coverage to any person included as an additional insured in the underlying primary policy.

In December 2003, Conklin commenced a lawsuit against both TBTA and Campbell. In turn, TBTA and Campbell tendered their defense to Safespan's primary insurer in January 2004. They did not, however, notify the excess insurer until November 2005, when they informed National Union that the damages were likely to exceed the primary layer and requested that National Union participate in the handling and resolution of the Conklin matter. Subsequently, on Dec. 23, 2005, National Union requested additional information and reserved all of its rights, including with respect to whether or not Campbell and TBTA were additional insureds and whether or not they had provided timely notice under the terms of the policy. On Jan. 19, 2006, in response to National Union's request for further information, Campbell and TBTA forwarded an Aug. 23, 2004 status report from their defense counsel, which advised that the value of the underlying claim was far in excess of the primary coverage available.

National Union did not disclaim coverage based on late notice at that time. Rather, it continued to investigate for an additional four months as to whether or not Campbell and TBTA were in fact additional insureds under the policy (which it ultimately determined that they were) before issuing a disclaimer dated May 17, 2006 based on late notice.

In July 2008, the Conklin matter was settled for $5.5 million with Safespan's primary insurer contributing its full $1 million limit and Campbell's primary insurer contributing $1 million and its excess insurer agreeing to contribute $3.5 million. Subsequently, Campbell and TBTA brought a declaratory judgment action against National Union and moved for summary judgment on the grounds that
National Union's disclaimer was untimely under ' 3420(d). The lower court granted summary judgment for Campbell and TBTA, and the First Department affirmed.

The New Rule

While National Union's delay in disclaiming coverage may have been permitted under the DiGuglielmo rule, the First Department expressly overruled DiGuglielmo stating that the plain language of the statute “cannot be reconciled with allowing the insurer to delay disclaiming on a ground fully known to it until it has completed its investigation (however diligently conducted) into different, independent grounds for rejecting the claim.” The court further stated:

[I]f the insurer knows of one ground for disclaiming liability,
the issuance of a disclaimer on that ground without further delay is not placed beyond the scope of “reasonably possible” by the insurer's ongoing investigation of the possibility that the insured may have breached other policy provisions, that the claim may fall within a policy exclusion, or (as here) that the person making the claim is not covered at all. Stated otherwise, the statute mandates that the disclaimer be issued not “as soon as is reasonable,” but “as soon as is reasonably possible.”

The court also noted that measuring compliance with the “as soon as reasonably possible” standard begins “when the insurer first acquired knowledge of the ground upon which it disclaimed.” As such, the court determined that National Union had all the information it needed to disclaim based on late notice as of Jan. 19, 2006 (the date it received the August 2004 status report), noting that “not a single document or piece of information” referenced by National Union's disclaimer had been obtained after January 2006.

The court also pointed to two rulings of the Court of Appeals, Allstate Ins. Co. v. Gross , 27 N.Y.2d 263 (1970) and First Fin. Ins. Co. v. Jetco Contr. Corp. , 1 N.Y.3d 64 (2003), for the proposition that the “Court of Appeals has made it abundantly clear that the determination of whether the disclaimer was issued 'as soon as was reasonably possible' is made with reference to the time when the insurer first acquired knowledge of the ground upon which it disclaimed.” As such, the First Department declined “to replace the Court of Appeals' rule with a rule that measures the timeliness of a notice of disclaimer from the point in time when the insurer has completed its investigation of any and all possible grounds for rejecting the claim, regardless of when the insurer had sufficient knowledge to disclaim on the particular grounds relied upon.” Moreover, the First Department's decision in Campbell also brings it in line with the Second Department, which never adopted
the DiGuglielmo rule.

Richard J. Geddes is a partner in Sedgwick, LLP in Chicago and co-author (with David Scorey and Chris Harris) of The Bermuda Form: Interpretation and Dispute Resolution of Excess Liability Insurance. He has represented U.S. and international insurers in connection with catastrophic and complex claims for more than 30 years. Sarah Champion is the Assistant Vice President of Excess Casualty Claims at ACE Bermuda, Ltd. Prior to joining ACE, Champion worked as an associate at Choate, Hall & Stewart, LLP in Boston, focusing on reinsurance and insurance litigation.