Policyholders: Beware of Choice of Law Provisions

Source: Saxe Doernberger & Vita, P.C., October 2013

New York District Court Applies “No Prejudice” Rule to Late Notice Claim for Policy “Issued and Delivered” Outside the State with NY Choice of Law Provision

A New York federal district court applied the antiquated “no prejudice” rule to an insured’s late notice claim in Indian Harbor Insurance Co. v. City of San Diego, 2013 WL 5340380 (S.D.N.Y. Sept. 25, 2013). The insurance policy in question was issued in Pennsylvania, delivered to the policyholder in California, and insured risks located in California. The policy contained both New York choice of law and forum selection clauses. In holding that the insurer had no duty to indemnify, the court held that only those policies “issued and delivered” in New York are entitled to take advantage of New York’s statutory “notice-prejudice” standard, which requires that an insurer show prejudice resulting from the policyholder’s late notice in order to deny coverage on that basis. Rather, the court held that foreign insurance policies with New York choice of law provisions are subject to the draconian common law “no prejudice” standard, under which an insurer does not have to show that it was prejudiced by late notice in order to deny coverage.

The Indian Harbor case involved three underlying pollution claims made against the California State Association of Counties and the City of San Diego (collectively “the City”). For each claim, the City failed to give timely notice to the insurer after receiving the claim. The insurer disclaimed coverage and sought a declaration that it had no duty to indemnify the City due to the late notice.

One of the City’s principle defenses to Indian Harbor’s suit was that New York Insurance Law § 3420(a)(5) establishes a prejudice standard regarding late notice claims. The statute provides, in relevant part:

(a) No policy or contract insuring against liability for injury to person…or against liability for injury to, or destruction of, property shall be issued or delivered in this state, unless it contains in substance the following provisions . . .

(5) A provision that failure to give any notice required to be given by such policy within the time prescribed therein shall not invalidate any claim made by the insured, injured person or any other claimant, unless the failure to provide timely notice has prejudiced the insurer . . .

N.Y. Ins. Law § 3420 (2008) (emphasis added). The City claimed that its policy should not be governed by the “no prejudice” standard because it was issued after January 17, 2009 and was valid upon signature of a New York-based representative of the insurer. Indian Harbor countered that § 3420(a)(5) did not apply because the policy was issued and delivered outside the state – issued in Pennsylvania, delivered in California – and therefore the common law “no prejudice” standard applied.

The court agreed with Indian Harbor, holding that under New York law, a policy is not issued when signed, but rather when it is “sent out or distributed officially.” Because the policy was “sent out” from Pennsylvania, the City could not take advantage of New York statutory law, and, instead, New York’s common law “no prejudice” rule applied. The court also rejected the City’s public policy argument that the statute should apply equally to all policies whether issued in-state or out of state, as well as the argument that California law should apply to the interpretation of the policy because the New York choice of law provision was unconstitutional.

While a strict reading of the statute yields the result produced in Indian Harbor, it is unlikely that the New York legislature’s intent in passing § 3420(a)(5) was to subject foreign insurance policies with New York choice of law provisions to the draconian “no prejudice” standard. Holding insureds to a prejudice standard simply by virtue of where the policy was “issued or delivered” seems arbitrary and unfair.

Indian Harbor stresses the importance of reviewing a policy for choice of law provisions and thoroughly reviewing the implications of applicable state law.

To review the full decision, click here.

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