In the Matter of Worcester Insurance Company,
2000 NY Int. 80
While driving his own automobile on November 22, 1995,
appellant Thomas Bettenhauser was seriously injured in a two-car
accident. The other driver's insurance policy had a $10,000
limit, and Bettenhauser's policy did not include underinsurance
coverage. Accordingly, on February 1, 1996, Bettenhauser, who
lived with his parents at the time of the accident, filed an
underinsurance claim pursuant to their policy with respondent
Worcester Insurance Company. Over the next several months,
Bettenhauser responded to Worcester's demands for discovery and
After settlement negotiations on the underinsurance claim stalled, Bettenhauser served Worcester with a demand for arbitration, and the arbitration was set down for March 24, 1997. Worcester then commenced this special proceeding to permanently stay arbitration, urging for the first time that "no coverage exists in respect to Thomas Bettenhauser's claim for underinsured motorist benefits in that [he] was operating his own vehicle at the time of the accident and was not operating a vehicle owned by the policyholder." Supreme Court granted the stay, concluding that the policy did not provide coverage "for family members driving an automobile not covered by [the] policy." A divided Appellate Division affirmed. Because Worcester failed to timely deny coverage, we now reverse.
Analysis begins with the Worcester policy. The "Underinsured Motorists Coverage" endorsement opens with the following "Insuring Agreement:"
We will pay damages which an 'insured' is legally entitled to recover from the owner or operator of an 'underinsured motor vehicle' because of 'bodily injury:'
Sustained by an 'insured;' and
Caused by an accident.
[ ... ]
'Insured' as used in this
You or any 'family member.'"
The policy defines "family member" as "a person related to you by blood, marriage or adoption who is a resident of your household."
Following the "Insuring Agreement" paragraphs is a section labeled "Exclusions," which reads in part:
We do not provide Underinsured Motorists Coverage for 'bodily injury' sustained by any person:
While 'occupying' or when struck by, any motor vehicle owned by you or any 'family member' which is not insured for this coverage under this policy."
Worcester urges that, read as a whole, the policy unambiguously indicated lack of coverage where, as here, a family member was involved in an accident while driving his own car that was not insured under the policy. Consequently, Worcester maintains that it had no duty whatever--whether to arbitrate or timely deny coverage--with respect to Bettenhauser's claim. Bettenhauser, on the other hand, argues that Worcester waived its right to invoke a policy exclusion by failing to timely deny coverage pursuant to Insurance Law § 3420(d). We agree with Bettenhauser and disagree with Worcester.
Insurance Law § 3420(d), applicable only to claims for
"If under a liability policy delivered or issued for delivery in this state, an insurer shall disclaim liability or deny coverage for death or bodily injury arising out of a motor vehicle accident or any other type of accident occurring within this state, it shall give written notice as soon as is reasonably possible of such disclaimer of liability or denial of coverage to the insured and the injured person or any other claimant."
Disclaimer pursuant to section 3420(d) is unnecessary
when a claim falls outside the scope of the policy's coverage
portion. Under those circumstances, the insurance policy does
not contemplate coverage in the first instance, and requiring
payment of a claim upon failure to timely disclaim would create
coverage where it never existed. By contrast, disclaimer
pursuant to section 3420(d) is necessary when denial of coverage
is based on a policy exclusion without which the claim would be
covered (see, Zappone v Home Ins. Co., , 55 NY2d 131, 134, 138
[construing former Insurance Law § 167(8), now Insurance Law §
3420(d)]; see also, Jerge v Buettner, , 90 NY2d 950, 953;
Handelsman v Sea Ins. Co., , 85 NY2d 96, 102, rearg denied , 85 NY2d 924). Failure to comply with section 3420(d) precludes denial of
As the split at the Appellate Division evidences, drawing the line between a lack of coverage in the first instance (requiring no disclaimer) and a lack of coverage based on an exclusion (requiring timely disclaimer) has at times proved problematic. Both are situations where there is no coverage. Zappone and Handelsman, however, illustrate the distinction and demonstrate why, in the case before us, timely denial of coverage was required.
In Zappone, the policy's coverage clause at the outset
conditioned recovery on liability "arising out of the ownership,
maintenance or use of [a covered] or a non-owned automobile"
(see, Handelsman v Sea Ins. Co.,
In Handelsman, by contrast, the coverage portion of the
insurance policy required payment for "'bodily injury' or
In Handelsman, a son was involved in an accident while
driving his mother's car. Both mother and son filed a claim
under the father's insurance policy, which did not specifically
list the vehicle involved in the accident as a "covered auto."
Because mother and son were "insureds" who satisfied all the
conditions of the relevant coverage provisions--which did not
contain any limitation with reference to vehicles--we concluded
that a relationship between the carrier and the claimants
existed, requiring timely denial of coverage based on the policy
exclusion. We further explained that the carrier's failure to
timely disclaim was "dispositive" and precluded subsequent
reliance on the exclusion to avoid its obligations (see also,
Jerge v Buettner,
This case is no different from Handelsman. Timely
disclaimer was necessary because Bettenhauser's claim falls
squarely within the policy's coverage provisions set out in the
The situation presented is precisely the one Insurance Law § 3420(d) was intended to avoid. Section 3420(d) was enacted to avoid prejudice to an injured claimant who could be harmed by delay in learning the insurer's position. Worcester waited more than a year to deny coverage, all the while subjecting Bettenhauser to discovery demands, and ultimately consenting to settlement of his action against the other driver. Having failed to comply with Insurance Law § 3420(d), Worcester cannot now rely on the policy exclusion to escape liability.
Accordingly, the order of the Appellate Division should be reversed, with costs, and the petition to stay arbitration dismissed.