INSURANCE -- REINSURANCE -- NOTICE
BREACH OF A NOTICE PROVISION IN AN EXCESS INSURANCE POLICY WHERE ACTUAL
PREJUDICE HAS NOT BEEN SHOWN IS NONETHELESS GROUNDS FOR DISCLAIMING COVERAGE.
] | [ISSUE & DISPOSITION
| [AUTHORITIES CITED
] | [COMMENTARY
On December 23, 1985, the faulty servicing of a furnace by Mobile Gas Company
led to the deaths of five individuals. Mobile maintained a $300,000 primary
liability insurance policy with Liberty Mutual Insurance Company, a $5
million excess policy with American Home Assurance Company, and a $10 million
excess policy with seven different companies including National Casualty
Company and International Insurance Company. Liberty Mutual agreed to contribute
the entire face value of the primary policy. Liberty Mutual also notified
American of the probability of an unfavorable verdict. After initiating
settlement negotiations, American contacted the second tier excess liability
carriers. Claiming untimely notice, four of these excess carriers refused
to contribute their shares of the settlement reached by American.
American initiated suit against the four disclaiming carriers in New
York Supreme Court. Two carriers removed to federal court, where it was
held that in the event of untimely notice, excess carriers need not show
actual prejudice to disclaim liability. The New York Supreme Court subsequently
granted summary judgment to both National and International based on collateral
estoppel stemming from the federal suit. The Appellate Division reversed
these determinations and reinstated both complaints, reasoning that collateral
estoppel was inapplicable to the purely legal question of whether the excess
insurers must show prejudice. The Appellate Division also granted leave
to appeal on the certified question of whether the reversal of the Supreme
Court was proper.
ISSUE & DISPOSITION
Whether excess insurers can disclaim liability due to untimely notice without
a showing of actual prejudice.
Yes. Excess insurers may disclaim liability for untimely notice without
showing actual prejudice.
Cases Cited by the Court
Commercial Union Ins. Co. v. International Flavors and Fragrances,
822 F.2d 267 (2d Cir. 1987).
American Home Assur. Co. v. Republic Ins. Co., 788 F.Supp. 214 (S.D.N.Y.
1992), aff'd, 984 F.2d 76 (2d Cir. 1993), cert. denied, 508
U.S. 973 (1993).
Security Ins. Co. v. North River Ins. Co., 79 N.Y.2d 576 (1992).
Restoration Realty Corp. v. Robero, 58 N.Y.2d 1089 (N.Y. 1983).
J.N.A. Realty Corp. v. Cross Bay Chelsea, 42 N.Y.2d 392 (N.Y. 1977).
Matter of McGrath v. Gold, 36 N.Y.2d 406 (N.Y. 1975).
Security Mut. Ins. Co. v. Acker-Fitzsimons Corp., 31 N.Y.2d 436
American Home Assur. Co. v. National Cas. Co., 227 A.D.2d 160 (N.Y.
App. Div. 1996).
American Home Assur. Co. v. International Ins. Co., 219 A.D.2d 143
(N.Y. App. Div. 1996).
Hartford Accident and Indem. Co. v. Michigan Mut. Ins. Co., 93 A.D.2d
337 (N.Y. App. Div. 1983), aff'd 61 N.Y.2d 569 (1984).
May v. Maryland Cas. Corp., 792 F.Supp. 63 (E.D.Mo. 1992).
Hartford Accident and Indem. Co. v. Michigan Mut. Ins. Co., 462
N.Y.2d 175 (N.Y. 1983).
Midwest Employers Cas. Co. v. East Ala. Health Care, 695 So.2d 1169
Nationwide Mut. Ins. Co. v. Starr, 575 A.2d 1083 (Del. 1990).
Monsanto Co. v. Aetna Cas. and Sur. Co., 1993 WL 563245 (Del. Super.
Ct. 1993) (No. 88C-JA-118).
Barry R. Ostrager and Thomas R. Newman, Handbook on Insurance Coverage
Disputes, § 4.04 (8th ed.1995).
State of the Law Before American Home Assur. Co.
Most liability insurance contracts contain provisions requiring the insured
to provide prompt notice of any occurrence which may trigger liability.
Traditionally, a party claiming a breach of a notice provision will be
excused from performance of the contract only if actual prejudice resulting
from the inadequate notice is shown. A limited exception exists for insurance
contracts, where failure of notice vitiates the policy without a showing
of prejudice. See Security Mut. Ins. Co. v. Acker-Fitzsimons Corp.
31 N.Y.2d 436, 440 (N.Y. 1972).
In New York, courts distinguish among types of coverage in determining
whether to apply this limited exception. Typically three categories of
coverage exist: primary insurance, excess insurance, and reinsurance. Primary
insurance is insurance which is immediately triggered upon the occurrence
of a defined event. Excess insurance coverage is triggered only after the
primary coverage is exhausted. Reinsurance involves a contract between
an insurer and a reinsurer, whereby the insurer cedes part of its risk
and part of its premiums to the reinsurer. Primary insurers generally are
not required to show prejudice before disclaiming coverage. In Security
Mut. Ins. Co., supra, the court established the "no prejudice rule",
reasoning that primary insurers must have an opportunity to protect their
interests. Unlike primary insurers, reinsurers must show actual prejudice.
Explaining that the rights and obligations of reinsurers are substantially
different from those of primary insurers, the court in Unigard
Security Ins. Co. v. North River Ins. Co. held that the breach
of a notice provision is not grounds for disclaiming coverage unless the
reinsurer shows actual prejudice from the delay. 79 N.Y.2d 576 (N.Y. 1992).
Excess insurers are generally likened to primary insurers. See Hartford
Accident and Indem. Co. v. Michigan Mut. Ins. Co., 462 N.Y.2d 175 (N.Y.
1983) (reasoning that excess insurers' rights and obligations are substantially
similar to those of primary insurers). Nevertheless, it has been unclear
whether the "no prejudice" rule applies to excess insurers.
Effect of American Home Assur. Co. on Current Law
The court finds that the contractual rights and obligations of excess insurers
are more closely aligned to those of primary insurers than those of reinsurers.
These similarities include the right to conduct independent investigations
and to participate in and determine settlements. Accordingly, excess insurers
have a vital interest in timely notice of claims filed by their insured,
and the Security Mut. Ins. Co.
exception should be extended to include
In the future, courts must examine the extent of insurers' contractual
rights to determine whether Unigard
or Security Mut. Ins. Co. is controlling. Those insurers with limited
investigative function or limited ability to determine settlements must
show actual prejudice prior to disclaiming coverage based on a lack of
The court raises the possibility that the existence of an agreement among
excess carriers may affect the analysis. It can be inferred that if an
excess carrier is authorized to act as lead carrier in settlement negotiations
and to determine the appropriate time to notify the other excess carriers,
the late notice problem would be mitigated, and Unigard
would apply. Where an agreement authorizes settlement negotiation but does
not set the time period for appropriate notice, or vice versa, it is not
clear which precedent would control
Finally, the court does not address the applicable standard for timeliness
of notice. This is especially important where the first-tier excess insurer
expects in good faith to settle for an amount that would not exceed first-tier
Survey of the Law in Other Jurisdictions
In contrast to the holding in this case, most other jurisdictions require
a showing of prejudice by both primary and excess insurers when there is
a violation of a prompt-notice provision. Barry R. Ostrager and Thomas
R. Newman, Handbook on Insurance Coverage Disputes
, § 4.04
(8th ed.1995); see also Monsanto Co. v. Aetna Cas. and Sur. Co.
1993 WL 563245 (Del. Super. Ct. 1993) (No. 88C-JA-118), citing Nationwide
Mut. Ins. Co. v. Starr
, 575 A.2d 1083, 1088 (Del. 1990) and May
v. Maryland Cas. Corp.
, 792 F.Supp. 63, 67 (E.D.Mo. 1992).
Some states allow a primary insurer to disclaim based on inadequate
notice, even without a showing of actual prejudice. However, most of these
states still require that an excess insurer show prejudice before disclaiming,
because excess carriers do not bear the same investigative burden as primary
insurers. Midwest Employers Cas. Co. v. East Ala. Health Care, 695
So.2d 1169 (Ala. 1997). To that extent, New York law, which now permits
an excess insurer to disclaim coverage based on a violation of the prompt-notice
provision without showing prejudice, is the minority viewpoint.
Sarah E. Buffett, '99
Jason E. Murtagh, '99
Phillip M. Pippenger, '98
Barbara Raben, '98
Spencer F. Robert, '98
Justin M. Zamparelli, '99