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This opinion is uncorrected and subject to revision before

publication in the New York Reports.

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The Argo Corporation, et al.,

Appellants,

v.

Greater New York Mutual Insurance

Company,

Respondent.

 

G.B. SMITH, J.:

 

The issue in this case is whether a primary insurer can disclaim coverage based

solely upon a late notice of lawsuit or must show prejudice. We hold that,

under the circumstances of this case, plaintiffs’ late notice was unreasonable

as a matter of law, that the Appellate Division correctly applied Matter of

Brandon v Nationwide Mut. Ins. Co. (97 NY2d 491 [2002]) and that the insurer

need not show prejudice.

On January 2, 1997, Igo Maidenek slipped and fell on ice on the sidewalk

adjacent to 137-01, 83rd Avenue in Kew Gardens, New York. Maidenek was a tenant

of the premises. The property was owned by Henry Moskowitz and managed by two

companies owned by Moskowitz, Argo Corporation and Martinique Realty Associates

(Argo).

On February 23, 2000, Maidenek brought suit for personal injuries against Argo

by serving a summons and complaint on the New York Secretary of State. Argo

acknowledged receipt of the summons and complaint by signing a return-receipt

dated February 28, 2000. On November 10, 2000, Argo was served with a default

judgment. On February 13, 2001, Argo received a notice of entry of the default

judgment and of the scheduling of a hearing on that judgment. On February 21,

2001, Argo received service of a note of issue for trial readiness.

Argo notified Greater New York Mutual Insurance Company (GNY), its commercial

liability insurance carrier,[1] on May 2, 2001. On June 4, 2001, GNY disclaimed

coverage because of the late notice of the lawsuit, and occurrence, which,

according to GNY, was a “condition precedent” to coverage under the insurance

policy.[2]

In January, 2003, Argo brought a declaratory judgment action against GNY

challenging GNY’s disclaimer. GNY responded with a motion to dismiss for

failure to comply with the contract provision which required timely notice to

the carrier of the occurrence and of the lawsuit against the insured. The

contract required notice “as soon as practicable.”[3]

Supreme Court agreed that defendant failed to comply with a condition precedent

to coverage under the contract, stating, “Plaintiff’s policy required them to

Asee to it that we [the insurer] are notified as soon as practicable of an

‘occurrence’ or an offense which may result in a claim. Plaintiffs did not

notify defendant of Maidenek’s suit until 14 months after service of the

complaint upon the Secretary of State as their agent, until 6 months after

service of the default motion upon plaintiffs, until more than 3 months after

default was entered and until almost 3 months after service of the Note of Issue

upon plaintiffs.” As a result, Supreme Court granted defendant’s motion to

dismiss for failure to timely notify the insurer.

The Appellate Division affirmed, stating:

“[T]he insureds are unable to provide an excuse for their failure to comply with

the policy’s notice provisions. Unlike in Matter of Brandon v Nationwide Mut.

Ins. Co., (97 NY2d 491), this is not a case where the carrier had prior notice

of the claim before the action was commenced (citations omitted).”

We granted leave to appeal and now affirm.

For years the rule in New York has been that where a contract of primary

insurance requires notice “as soon as practicable” after an occurrence, the

absence of timely notice of an occurrence is a failure to comply with a

condition precedent which, as a matter of law, vitiates the contract (see

Security Mut. Ins. Co. of NY v Acker-Fitzsimons Corp., 31 NY2d 436, 440-43

[1972]) [failure to notify in a timely manner allowed insurer to disclaim

coverage]). No showing of prejudice is required (id.). Strict compliance with

the contract protects the carrier against fraud or collusion (id.); gives the

carrier an opportunity to investigate claims while evidence is fresh; allows the

carrier to make an early estimate of potential exposure and establish adequate

reserves and gives the carrier an opportunity to exercise early control of

claims, which aids settlement (Unigard Sec. Ins. Co. v North River Ins. Co., 79

NY2d 576, 582 [1992]).

We have applied the no-prejudice rule in various contexts in recent years:

supplementary underinsured motorist insurance (SUM)(Matter of Metropolitan Prop.

& Cas. Ins. Co. v. Mancuso, 93 NY2d 487, 495-96 [1999]; cf. Matter of Brandon

and Rekemeyer v State Farm Mutual Automobile Ins. Co. _____NY_____ [decided

today]); and excess insurance (American Home Assur. Co. v International Ins.

Co., 90 NY2d 433, 442-47 [1997]). We have held, however, that the rule

enunciated in Security Mutual does not apply to reinsurance and a reinsurer must

show prejudice before it can be relieved of its obligations to perform under a

contract (Unigard Sec. Ins. Co. v North River Ins. Co., 79 NY2d 576, 582-84

[1992]).

In Matter of Brandon (Nationwide Mut. Ins. Co.)(97 NY2d 491 [2002]), we again

departed from the general “no prejudice” rule and held that the carrier must

show prejudice before disclaiming based on late notice of a lawsuit in the SUM

context (see 97 NY2d 491, 498, supra). Under the facts of Brandon, the carrier

received timely notice of claim but late notice of a lawsuit (see id. at

494-95). We were unwilling to extend the no prejudice exception in regard to

late notice of a lawsuit because “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” (see id. at 498).

Brandon did not abrogate the no-prejudice rule and should not be extended to

cases where the carrier received unreasonably late notice of a claim. The facts

here, where no notice of claim was filed and the first notice filed was a notice

of law suit, are distinguishable from Brandon where a timely notice of claim was

filed, followed by a late notice of law suit, and distinguishable from

Rekemeyer, where an insured gave timely notice of the accident, but late notice

of a SUM claim. Argo was notified of the lawsuit against it in February, 2000

but did not notify GNY until May, 2001. The burden of establishing that the

delay was not unreasonable falls on the insured (see U.S. Underwriters Ins. Co.

v A&D Maja Const. Inc., 160 F Supp2d 565, 569, [SDNY 2001]).

Argo admits that Maidenek filed the lawsuit against it in late 1999, and that

it received notice of the claim in early 2000. Argo further admits that its

notice to GNY was late but argues that GNY has not shown prejudice as a result

of this late notice. Argo notified GNY 14 months after it was first served with

the lawsuit, and six months after a default judgment was entered against it.

Argo asks this court to extend the Brandon “prejudice analysis to notice of suit

in commercial policies where the notice was admittedly late.”

The rationale of the no-prejudice rule is clearly applicable to a late notice of

lawsuit under a liability insurance policy. A liability insurer, which has a

duty to indemnify and often also to defend, requires timely notice of lawsuit in

order to be able to take an active, early role in the litigation process and in

any settlement discussions and to set adequate reserves. Late notice of lawsuit

in the liability insurance context is so likely to be prejudicial to these

concerns as to justify the application of the no prejudice rule. Argo=s delay

was unreasonable as a matter of law and thus, its failure to timely notify GNY

vitiates the contract. GNY was not required to show prejudice before declining

coverage for late notice of law suit.

Accordingly, the order of the Appellate Division should be affirmed, with costs.

* * * * * * * * * * * * * * * * *

 

Order affirmed, with costs. Opinion by Judge G.B. Smith. Judges Ciparick,

Rosenblatt, Graffeo, Read and R.S. Smith concur. Chief Judge Kaye took no part.

 

 

 

Decided April 5, 2005

 

[1]Previously, “GNY issued a commercial-package insurance policy to Henry

Moskowitz that included commercial-liability insurance coverage for some 35

buildings in New York City.”

[2]”A condition precedent is >an act or event, other than a lapse of time,

which, unless the condition is excused, must occur before a duty to perform a

promise in the agreement arises=” (Oppenheimer & Co. v Oppenheimer, Appel, Dixon

& Co., 86 NY2d 685, 690 [1995][citations omitted]).

[3]Section IV–Commercial General–Liability Conditions

2.Duties in The Event of Occurrence, Offense, Claim or Suit

a. You must see to it that we are notified as soon as practicable of an

“occurrence” or an offense which may result in a claim (emphasis added). To the

extent possible, notice should include:

(1) How, when and where the “occurrence” or offense took place:

(2) The names and addresses of any injured person and witnesses; and

(3) The nature and location of any injury or damage arising out of the

“occurrence” or offense.

 

b. If a claim is made or “suit” is brought against any insured, you must:

1. Immediately record the specifics of the claim of “suit” and the date

received; and

2. Notify us as soon as practicable.

 

c. You and any other involved insured must:

1. Immediately send us copies of any demands, notices, summonses or

legal papers received in connection with the claim or “suit”;

2. Authorize us to obtain records and other information;

3. Cooperate with us in the investigation or settlement of the claim or

defense against the “suit” and;

4. Assist us, upon our request, in the enforcement of any right against

any person or organization which may be liable to the insured because of injury

or damage to which this insurance may also apply.

 

d. No insured will, except at that insured’s own cost, voluntarily make

a payment, assume any obligation, or incur any expense, other than for first

aid, without our consent.

Court of Appeals of New York.

Cynthia A. REKEMEYER, Appellant,

v.

STATE FARM MUTUAL AUTOMOBILE INSURANCE COMPANY, Respondent.

April 5, 2005.

 

G.B. SMITH, J.

This is a declaratory judgment action in which plaintiff seeks a declaration that she is entitled to payment under the Supplemental Uninsured/Underinsured Motorists (SUM) provision of her insurance contract. The insurance carrier disclaimed on the ground that written notice of the SUM claim was not given as soon as practicable and that a copy of the summons and complaint in plaintiff’s legal action were not immediately given to it. On the facts of this case, we hold that the carrier must show prejudice before it may disclaim coverage due to plaintiff’s late notice of SUM claim.

On May 8, 1998, plaintiff, Cynthia Rekemeyer, was rear-ended while driving her car. Shortly after the accident occurred, Rekemeyer notified State Farm of the occurrence and and made a claim for no fault benefits. At the time of the accident, plaintiff had been unable to work for eighteen years due to an existing back problem. Throughout 1998, plaintiff received medical care from a number of doctors for accident related injuries. In December 1998 and again in February 2000, at the request of State Farm, plaintiff was evaluated by a doctor of State Farm’s choice concerning accident related injuries.

On April 27, 1999, plaintiff filed suit against the driver of the other car, Sherwood Bouyea. By letter dated July 21, 1999, plaintiff notified State Farm of the lawsuit. In a bill of particulars dated July 1999, plaintiff alleged that she had suffered “severe and permanent injuries to her left arm and cervical spine.” In September 1999, plaintiff learned that Bouyea’s maximum liability coverage was $50,000. Plaintiff’s demand was for $1 million.

In October 1999, plaintiff underwent surgery on her back for injuries she alleges she sustained as a result of the car accident. On March 12, 2000, Bouyea’s attorney offered $45,000 to settle the claim. On March 31, 2000, plaintiff notified State Farm that she would pursue Supplementary Uninsured/Underinsured Motorist (SUM) coverage under her own policy. On April 10, 2000, Bouyea’s attorney made a settlement offer of $50,000. On April 25, 2000, State Farm disclaimed coverage based upon plaintiff’s failure to notify it of the SUM claim as soon as practicable and because of failure to notify it immediately of the lawsuit.

In October 2000, plaintiff brought this declaratory judgment action against State Farm. State Farm answered the complaint. It then filed a motion for summary judgment dismissing the complaint for failure to comply with the insurance contract provision requiring notice of the SUM claim as soon as practicable. On June 19, 2003, Supreme Court denied defendant’s motion to dismiss, and, citing Metropolitan Prop. & Cas. Ins. Co. v. Mancuso (93 N.Y.2d 487 [1999] ), granted plaintiff’s motion for a declaratory judgment for SUM coverage. Supreme Court stated:

On the facts of this case, it cannot be concluded that plaintiff did not give notice of her SUM claim as soon as practicable as a matter of law. The slowly evolving nature of plaintiff’s injuries, her pre-existing injury and daily pain, intervening surgeries and the bona fide questions as to severity and causation of the new injury, along with the tortfeasor’s defenses on the issue of liability can reasonably be said to have prevented knowledge that the tortfeasor was underinsured until at or about such time as a settlement offer near or at the limit of his policy was tendered. It was at that point that plaintiff promptly notified defendant of her SUM claim. Thus, defendant’s motion must be denied and plaintiff’s cross motion will be granted.

On May 20, 2004, Appellate Division reversed and determined:

“… plaintiff knew or reasonably should have known that Bouyea’s insurance was insufficient to provide full compensation for her injuries and yet she inexplicably waited six months before providing notice to defendant of her intent to make a claim for supplemental coverage. We find such notice to have been untimely and thus, Supreme Court erred in granting her cross-motion for summary judgment.”

On September 21, 2004, this Court granted plaintiff leave to appeal.

Initially, plaintiff argues that she submitted her notice of SUM claim to State Farm as soon as practicable and did not breach the insurance contract. We have held that in the SUM context, the phrase “as soon as practicable” means that “the insured must give notice with reasonable promptness after the insured knew or should reasonably have known that the tortfeasor was underinsured” (Metropolitan Prop. & Cas. Ins. Co. v. Mancuso, 93 N.Y.2d at 495). The requirement that the insured give notice be given as soon as practicable “contemplates elasticity and a case-by-case inquiry as to whether the timeliness of the notice was reasonable, taking all of the circumstances into account” (see id., at 494; see also Mighty Midgets v. Centennial Ins. Co., 47 N.Y.2d 12, 19 [1979] ).

We agree with the Appellate Division that plaintiff did not submit her notice of SUM claim as soon as practicable. Although plaintiff had disabling injuries prior to the accident that may have interfered with her assessment of the extent of new injuries, she stated in her bill of particulars in the underlying personal injury action–drafted eight months before plaintiff notified defendant of her claim for SUM coverage–that she had suffered serious and permanent injuries as a result of the accident. The record thus belies any claim that she was unaware that her injuries were serious. Moreover, Bouyea informed plaintiff in September 1999 that he was insured for only $50,000. Accordingly, the Appellate Division appropriately concluded that plaintiff’s notice of her SUM claim in March 2000–approximately six months later–was untimely.

Plaintiff also urges this Court to relax its application of the “no-prejudice” rule in SUM cases where the carrier has been timely put on notice of the accident. This argument is persuasive. The rule in New York has been for years that an insured’s failure to provide timely notice of an accident relieves the carrier of its obligation to perform regardless of whether it can demonstrate prejudice (see Security Mut. Ins. Co. v. Acker-Fitzsimons Corp. et al., 31 N.Y.2d 436, 442-43 [1972] ). This rule is known as the “no prejudice” rule. Although this rule has sometimes been characterized as the “traditional rule”, it is actually a limited exception to two established contract principles “(1) that ordinarily one seeking to escape the obligation to perform under a contract must demonstrate a material breach or prejudice; and (2) that a contractual duty [requiring strict compliance] ordinarily will not be construed as a condition precedent absent clear language showing that the parties intended to make it a condition” (Unigard Security Ins. Co. v. North River Ins. Co., 79 N.Y.2d 576, 581 [1992] [citations omitted] ). The idea behind strict compliance with the notice provision in an insurance contract was to protect the carrier against fraud or collusion (see id.)

More recently in Matter of Brandon, this court held that a SUM carrier that received timely notice of a claim must show prejudice before disclaiming SUM benefits based on late notice of a legal action (see 97 N.Y.2d 491, 494-95, 498 [2002] ). In the SUM context, the Brandon court was unwilling to extend the no prejudice exception in regard to late notice of a legal suit because “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.” There are important public policy issues that continue to arise both in federal and state courts which warrant a review of the no prejudice exception, particularly when the insured has given timely notice of occurrence or claim (see Varrichio and Assocs. v. Chicago Ins. Co., 312 F.3d 544, 548-50 [2003] [certified question to New York Court of Appeals of whether timely notice of occurrence required the insurer to show prejudice before disclaiming for late notice of lawsuit; question withdrawn because parties settled] ). This case presents us with an opportunity to reexamine the applicability of the no-prejudice rule in the SUM context.

The facts of the current case, while different from Brandon, also warrant a showing of prejudice by the carrier. Here, plaintiff gave timely notice of the accident and made a claim for no-fault benefits soon thereafter. That notice was sufficient to promote the valid policy objective of curbing fraud or collusion. Moreover, the record indicates that State Farm undertook an investigation of the accident. It also required plaintiff to undergo medical exams in December 1998 and February 2000. Under these circumstances, application of a rule that contravenes general contract principles is not justified. Absent a showing of prejudice, State Farm should not be entitled to a windfall (Brandon, 97 N.Y.2d at 496 n 3, citing Clementi v. Nationwide Mut. Ins. Co., 16 P3d 223, 230 [Colo 2001] ). Additionally, State Farm should bear the burden of establishing prejudice “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” (id. at 498; see also Unigard, 79 N.Y.2d at 584 [placing the burden of showing prejudice on the reinsurer] ). Thus, we hold that where an insured previously gives timely notice of the accident, the carrier must establish that it is prejudiced by a late notice of SUM claim before it may properly disclaim coverage.

Our analysis today is in line with other jurisdictions which require that carriers show prejudice before untimely notice of a SUM claim is held to be a material breach in the contract warranting disclaimer (see Clementi v. Nationwide Mut. Ins. Co., 16 P3d 223, supra; State Automobile Insurance Company v. Youler, 396 S.E.2d 737 [1990]; Oulette v. Maine Bonding & Cas. Co., 495 A.2d 1232 [1985]; State Farm Mutual Automobile Insurance Co. v. Burgess, 474 So2d 634 [1985]; Pennsylvania General Ins. Co., 475 A.2d 1032 [1984]; Rampy v. State Farm Mutual Auto. Ins. Co., 278 So2d 428, 435 [1973]; see also Alcazar v. Hayes, 982 S.W.2d 845, 854 [Tenn.1998][where an insured has failed to provide timely notice of a claim, there is a rebuttable presumption that the carrier has been prejudiced] ).

Accordingly, the order of the Appellate Division should be modified, without costs, by denying defendant’s motion for summary judgment, remitting to the trial court for the carrier to have an opportunity to demonstrate prejudice, and, as so modified, affirmed.

 

Order modified, without costs, by denying defendant’s motion for summary judgment and, as so modified, affirmed.

Judges CIPARICK, ROSENBLATT, GRAFFEO, READ and R.S. SMITH concur.

Chief Judge KAYE took no part.