New York stands virtually alone in allowing insurers to deny coverage based upon late notice without demonstrating appreciable prejudice from the delay. The Second Circuit, however, recently certified a question to New York's Court of Appeals, which requires it to revisit the issue.
In Varrichio v. Chicago Ins. Co., 312 F.3d 544 (2nd Cir. 2002), the attorney policyholder became aware that he might be sued for malpractice. Pursuant to the policy's "notice of claim" clause, the policyholder promptly notified his insurer of the potential suit. The insurer opened a file, set a reserve on the claim and began an investigation. The policyholder thereafter received a summons and complaint, but he failed to forward them to the insurer for over two months. The insurer denied coverage pursuant to the policy's "notice of suit" clause, which required that the policyholder "immediately forward to the Company every demand, notice, summons or other process received by the Insured." The District Court granted the insurer summary judgment, agreeing it need not prove appreciable prejudice to avoid coverage based upon late notice of the malpractice complaint.
The Second Circuit, on appeal, analyzed an intervening New York Court of Appeals' decision, In re Brandon, 97 N.Y.2d 491, 498 (2002). See 312 F. 3d at 549-550. The Court of Appeals in that Supplementary Uninsured Motorists ("SUM") coverage matter held that "insurers relying on the late notice of legal action defense should be required to demonstrate prejudice." Id. Because Brandon involved a SUM claim, the Second Circuit declined to rule that it applied to the malpractice coverage dispute (although it expressed the opinion that Brandon should apply). Id. The Second Circuit therefore certified the following question to the Court of Appeals:
Where an insured has already complied with a policy's notice of claim requirement, does New York require the insurer to demonstrate prejudice in order to disclaim coverage based on the insured's failure to comply with the policy's notice of suit requirement?
312 F. 3d at 550.
This development affords New York's highest court the opportunity to reexamine New York law with respect to late notice. If the Court of Appeals recognizes that forfeiture of coverage is a disproportionately harsh result where a policyholder's breach of a policy's timeliness requirements has not resulted in the loss of critical evidence, the opportunity to investigate, or the chance to settle or avoid liability, New York would join the majority of jurisdictions requiring a showing of prejudice. We will advise of the Court of Appeal's decision.