In the Matter of William C. Brandon,
2002 NY Int. 46
Insurance policies providing Supplementary Uninsured
Motorists (SUM) coverage typically require the insured not only
to submit a notice of claim but also to transmit promptly to the
insurer the summons and complaint in any action the insured
brings against a tortfeasor. In many contexts, including SUM
coverage, an insured's failure to furnish timely notice of claim
vitiates the contract, and the insurer may rely on this defense
regardless of whether it can demonstrate that the insured's
On March 1, 1997, a motor vehicle driven by Griselda Cancel collided with a parked 1985 Buick in which petitioner was a passenger and which was owned and insured by petitioner's son. Nine days later, petitioner forwarded a sworn Notice of Intention to Make Claim to his insurer, respondent Nationwide Mutual Insurance Company. The notice of claim indicated that Cancel negligently struck the Buick, injuring petitioner, and that treating these injuries would cost a sum yet to be determined. The notice also indicated that Cancel drove an uninsured car, and that petitioner was making his claim under his policy's Uninsured Automobile Endorsement.
Petitioner sent the notice of claim to his local
Nationwide agent. An employee of the agency acknowledged
Meanwhile, on September 19, 1997, petitioner brought a
personal injury action against Cancel, but did not forward the
summons and complaint to Nationwide. Indeed, it was not until
over a year later that Nationwide learned of the personal injury
action from petitioner's attorney. Soon afterward, Nationwide
sent him a reservation of rights letter, alleging that petitioner
was not entitled to SUM coverage both because he had failed to
send a timely notice of claim and because he had not promptly
forwarded the personal injury summons and complaint. During the
following weeks, petitioner finally did forward those papers, and
The policy language on which Nationwide relied states that if the insured sues any person legally responsible for the use of a motor vehicle involved in the accident, a copy of the summons and complaint * * * shall be forwarded immediately to us by the insured * * *. Other relevant clauses provide that Nationwide pays on an SUM claim only after the limits of liability under other applicable policies are exhausted; that an insured who receives a settlement offer equal to such limits may release the opposing party after notifying Nationwide unless Nationwide advances the insured a sum equal to the offer; and that the insured may not otherwise settle such a suit without Nationwide's consent. In deference to these latter provisions, petitioner did not immediately accept a January 1999 offer by Cancel's insurer to settle for her policy limits, but rather notified Nationwide of the offer. That July, after further discussions, Nationwide confirmed that it had denied coverage and that petitioner was free to pursue his best interests in the matter.
On September 27, 1999, petitioner commenced the instant
proceeding, pursuant to CPLR 7503(a) , seeking an order to compel
Nationwide relies on cases holding that an insured's
failure to provide timely notice of claim relieves the insurer of
its obligation to perform, whether or not it can show prejudice
(see Security Mut. Ins. Co. v Acker-Fitzsimmons Corp., , 31 NY2d 436, 440 ). This is known as a no-prejudice exception.
Generally, one seeking to escape the obligation to
perform under a contract must demonstrate a material breach or
prejudice (Unigard Sec. Ins. Co. v North River Ins. Co., , 79 NY2d 576, 581 ). By allowing insurers to avoid their
obligations to premium-paying clients without showing prejudice,
Security Mutual created a limited exception to this general rule.
The rationales for this limited exception include the insurer's
Here, Nationwide has not shown that the same factors support allowing insurers to evade their obligations, without showing prejudice, when insureds seeking SUM coverage provide late notice of legal action. While immediate notice of legal action may indeed help SUM insurers to protect themselves against fraud, set reserves, and monitor and perhaps settle the tort actions, the notice of claim requirement serves this purpose. More is required to justify extending the Security Mutual no- prejudice exception further. Nationwide contends that personal injury claims that result in litigation are especially likely to involve questionable injuries or fraud, but it presents no support for this assertion.
The specifics of this case, moreover, do not help
Nationwide. There is no allegation that petitioner and Cancel
At bottom, then, Nationwide's position must be that it
needs a no-prejudice exception here too, because it depends on
notices of legal action to awaken it in SUM matters where the
notices of claim do not at first get its attention. Nationwide
articulates something like this point when it asserts, citing
Mancuso, that a claim for underinsurance benefits * * * has a
Thus, unlike most notices of claim _- which must be
submitted promptly after the accident, while an insurer's
investigation has the greatest potential to curb fraud _- notices
of legal action become due at a moment that cannot be fixed
relative to any other key event, such as the injury, the
discovery of the tortfeasor's insurance limits or the resolution
of the underlying tort claim. Contrary to Nationwide's position,
then, the timing of the notice of legal action requirement does
little to make performance of this requirement stand out as an
event that informs the insurer of its "ripened" need to
investigate, set reserves or take charge of settlement. Possibly
another insurer will show that a policyholder's failure to
deliver timely notice of action prejudiced it by hindering it
from addressing this need. But Nationwide has not established
Under these circumstances, and given the protection SUM insurers already enjoy by virtue of the notice of claim requirement and the clauses governing settlement, insurers relying on the late notice of legal action defense should be required to demonstrate prejudice. We place the burden of proving prejudice on the insurer because it has the relevant information about its own claims-handling procedures and because the alternative approach would saddle the policyholder with the task of proving a negative.
In light of this conclusion we need not and do not pass on petitioner's alternative contention that Nationwide's disclaimer was untimely.
Accordingly, the order of the Appellate Division should be affirmed, with costs.
1 In the briefs and record before us, the name is variously spelled "Cancel," "Concel" and "Conceal." We have selected the version used by a research bureau that investigated Cancel to determine the extent of her assets and in the files of Cancel's insurer.
2 In fact, Cancel had $25,000 in liability insurance, but because this sum was less than petitioner's $100,000 in SUM coverage, she remained uninsured within the Nationwide policy's definition, which includes underinsured motorists.
3 New York is one of a minority of States that still maintain a no-prejudice exception (see Ostrager and Newman, Insurance Coverage Disputes § 4.04 [11th ed]). Formerly a majority of states took this approach, but, as the Supreme Court of Tennessee noted when it recently adopted a prejudice requirement in a case involving a late notice of claim for uninsured motorist coverage, the number of jurisdictions that still follow the traditional view has dwindled dramatically (Alcazar v Hayes, 982 SW2d 845, 850 [Tenn 1998]). Indeed, that court noted that in the preceding twenty years, only two States _- New York and Colorado _- had considered the issue and continued to strictly adhere to the traditional approach (id. at 853). Since then, Colorado adopted the majority rule, requiring insurers to demonstrate prejudice (see Clementi v Nationwide Mut. Fire Ins. Co., 16 P3d 223, 230 [Colo 2001]).
As Clementi and Alcazar illustrate, States often begin the shift to a prejudice requirement in the uninsured motorist context, where various policy considerations _- the adhesive nature of insurance contracts, the public policy objective of compensating tort victims, and the inequity of the insurer receiving a windfall due to a technicality _- are clearly implicated (see Clementi, 16 P3d at 229). The issue of whether New York should continue to maintain the no-prejudice exception when insurers assert late notice of claim as a defense is not before us.
4 Nationwide stated at oral argument that notice of claim typically is submitted before notice of legal action, as in this case.
5 When petitioner submitted his no-fault claim, Nationwide was aware of the potential for SUM exposure, and made note of a plan to investigate any injuries petitioner may have had before the accident. The record does not show whether Nationwide followed up on this plan, a procedure designed to limit its exposure to claims based on questionable injuries or fraud. The claims file also does not show that Nationwide, aware by late 1997 of the SUM potential and the operation, asked its customer about suit against the tortfeasor.
Nationwide's procedures for handling no-fault and SUM claims doubtless differ, and we do not say that notice of one kind of claim can substitute for the other. Nevertheless, the least that can be said on this record is that neither Nationwide's treatment of the no-fault claim nor its treatment of the SUM claim suggests that Nationwide took any active interest in investigating, settling or setting reserves for petitioner's claim. The emphasis in both cases was solely on determining whether late notice might relieve Nationwide of its coverage obligations.