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American Home Assur. Co. v. International Ins. Co., as: 90 N.Y.2d 433 (June 17, 1997).

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.

[SUMMARY] | [ISSUE & DISPOSITION] | [AUTHORITIES CITED] | [COMMENTARY]

SUMMARY

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.

Disposition

Yes. Excess insurers may disclaim liability for untimely notice without showing actual prejudice.

AUTHORITIES CITED

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).
  • Unigard 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 (N.Y. 1972).
  • 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).

RELATED SOURCES

  • 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 (Ala. 1997).
  • 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).

COMMENTARY

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 excess insurers.

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 timely notice.

Unanswered Questions

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 excess coverage.

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.

Prepared By:

  • Sarah E. Buffett, '99
  • Jason E. Murtagh, '99
  • Phillip M. Pippenger, '98
  • Barbara Raben, '98
  • Spencer F. Robert, '98
  • Justin M. Zamparelli, '99