One of the most common experiences faced by  individuals, businesses, attorneys, doctors and other  professionals is whether to give notice to the insurance  company of a potential claim.  There is a general  reluctance on the part of people, even attorneys who  should know better, to give notice of a potential claim.  The most common concern is that giving notice of a  potential claim will result in increased rates. This is  not so. Even in the case of automobile coverage, a claim  will result in a surcharge only if the insurance company  is required to make a payment under the law of most  jurisdictions.  With all types of coverage, the mere  reporting of a potential claim will simply result in a  file being opened and, if no claim results, the file will  thereafter be closed based on the procedure of the  particular insurance company.  

         A recent case illustrates the danger of not giving  notice of a potential claim although it involves a  slightly different aspect of the notice requirements in an  insurance policy.  In Executive Risk Indemnity, Inc. v.  Pepper Hamilton LLP, - - NY3d - -, 2009 NY Slip Op 07453 (October 20, 2009) New York's court of appeals decided a case under the laws of Pennsylvania where the law firm was  located.  In that case, the activities of the law firm's  client had led to some lawsuits against the client.  The  firm had not been sued but it was apprehensive of its  possible malpractice exposure.  It had several insurance  policies providing both primary and excess coverage and  each policy excluded coverage for a category called "prior  knowledge exclusions" which involved acts that the insured  might foresee as producing a claim.  The law firm did not  report its apprehensions of possible malpractice exposure  in applying for coverage.  The New York Court of Appeals  applied Pennsylvania law (based on where the firm was  located) and concluded that the firm was on notice of its possible implication in the wrongdoing and that "a  reasonable attorney with [that] knowledge should have  anticipated the possibility of a lawsuit."  Consequently, two of the insurers were allowed to void the coverage and not pay the claim. 

        We like to tell what we call "cautionary tales" and  advise clients, including law firms, that it is better to  advise the insurance company of the potential for claim  than to try and hope that there won't be a claim when  there is knowledge that there might be one. Even where the  insurance company may be required to show prejudice, such  as where the insured fails to give notice of a claim or  lawsuit, it is never worth the risk of having to explain  why any information, even only a potential claim,  was  held back. Keeping the insurance company on notice of the  potential for a claim has no down side - not advising the  insurance company has potentially serious consequences,  i.e. the loss of the coverage.

This is truly a "cautionary tale" about a Nursing  Home that was held criminally liable for the acts of an employees. The  legal issue is whether that an LLC that owns the  Nursing Home can be criminally liable for the acts of employees. The law  is already established that a corporation can be held criminally liable. But there is more to this case than that....     

An equally important issue not discussed by the Court is that the  Nursing Home itself (or any business - see below) can be held  criminally liable if its employees falsify records. What was the Nursing  Home's crime? The Court did not say that the Nursing Home knew the  employees were falsifying records.  According to the decision, the  Nursing Home "was aware of chronic understaffing resulting in deficiencies in care." This type of knowledge does not seem at all  equivalent to the criminal intent exhibited by the employees who, the  Nursing Home conceded, were acting within the scope of their employment.  Nevertheless, the Nursing Home was criminally convicted, fined $15,000,  and its operations suspended for a year because it knew of "chronic  understaffing."    

This decision should be troubling for any Nursing Home because the mere  knowledge of understaffing can result in criminal  charges if its  employees falsify records as to the care of residents. Unless the decision is reversed by New York's highest Court, which seems unlikely  since an LLC should be treated like a corporation in these  circumstances, we can anticipate more criminal charges against Nursing Homes.     

One more point. This decision is about whether an LLC, like a  corporation, can be held criminally liable when its employees falsify  records and all it was aware of was chromic understaffing. It is not  limited to Nursing Homes.  Any LLC, any corporation, any business for  that matter, presumably, can be criminally liable in these  circumstances. Hospitals are likely candidates and have already been the  targets of civil complaints about understaffing (Remember the case  involving Sidney Zion's daughter and New York Hospital where the interns worked 36 hours or more each shift?). But the same can be said of any business where chronic understaffing, perhaps more common in this  economic climate, allegedly results in employees falsifying records that  relate to care or safety.    

This is why this decision is a "cautionary tale."        

The question as to the applicability of CGL and/or 1B Coverage in any given case remains a fertile ground for dispute.  The 1B Coverage generally provides liability coverage for bodily injury sustained by an employee, excluding coverage of the employer for contractual indemnity but covering it for common law indemnity or contribution.  The CGL coverage covers the employer for contractual indemnity but excludes coverage for common law indemnity or contribution.

Generally, both common law and contractual claims are asserted against the employer.  While the two policies cover different types of liability, in Labor Law cases a common scenario arises in which both policies apply. Because the Labor Law imposes strict liability on owners and general contractors (“GC”) regardless of fault, such entities are commonly found liable in construction accidents, particularly involving scaffolding claims under Labor Law § 240, even where they are free from fault and have no involvement in the accident or in the work.  In such cases, the owner and GC will commonly pass the entire liability on to the contractor who is at fault by means of a third-party action or a cross-claim.  Furthermore, although New York General Obligations Law (“GOL”) § 5-322.1 prohibits contractual indemnification in the construction context where the party to be indemnified is to any extent negligent, the New York Court of Appeals held in Brown v. Two Exchange Plaza Partners that a finding of absolute liability under the Labor Law will not prevent an owner and GC from obtaining contractual indemnity as long as they are not found to any extent negligent.

Having addressed the meaning of “accidental” in the “sudden and accidental” pollution exclusion in 1989 in Technicon, it took eight years before the New York Court of Appeals, in a case handled by Melito & Adolfsen and others, addressed the meaning of “sudden” in Northville Industries.  Northville involved an enormous quantity of pollution emanating from underground storage tanks and pipelines at two sites.  The discharges were accidental.  Consistent with its previous interpretations of the exclusion, the Court concluded that the language of the exclusion was unambiguous and that “sudden” had a temporal meaning.  The Court held that the “sudden” element of the exclusion is satisfied if there is an abrupt discharge of a significant quantity of a pollutant having some potentially damaging environmental effect.  Of arguably equal importance, the Court also placed the burden of proof on the policyholder to establish that the “sudden and accidental” exception applies -- after the insurer first demonstrates that the underlying complaint alleges damages attributable to a discharge of a pollutant into the environment.  The insurers were granted summary judgment.

POST-SCRIPT:  Shortly after Northville, Melito & Adolfsen obtained a voluntary dismissal with prejudice of an environmental case in New York involving a leaking underground storage tank at a dry cleaner based on just the threat of a Northville summary judgment motion.

NEW YORK’S NO PREJUDICE RULE: THE RULE REMAINS AS TO POLICIES ISSUED BEFORE JANUARY 20, 2009. AFTER THAT DATE, PREJUDICE MUST BE SHOWN IN SOME CASES BUT THE NEW STATUTE HAS COMPLEX RULES

In cases involving late notice to an insurance company, New York has traditionally (but soon to be changed by statute) applied a strict rule. The rule is: “[a]bsent a valid excuse, a failure to satisfy the notice requirements vitiates the policy…and the insurer need not show prejudice before it can assert the defense of noncompliance.” Security Mutual Ins. Co. of New York v. Acker-Fitzsimons Corp. 31 N.Y.2d 436, 340 N.Y.S.2d 902 (1972). See also Argo Corp. v. Greater New York Mutual Ins. Co., 4 N.Y.3d 332, 794 N.Y.S.2d 704 (2005). The New York Court of Appeals has had occasion to consider this rule in a number of contexts. The court held that the no prejudice rule does not apply to reinsurers, Unigard Sec. Ins. Co. v. North Riv. Ins. Co., 79 N.Y.2d 576, 584 N.Y.S.2d 290 (1992), but the rule does apply to excess insurers, American Home Assur. Co. v. International Ins. Co., 90 N.Y.2d 443, 661 N.Y.S.2d 584 (1997).

The Court of Appeals addressed this issue once again in Brandon v. Nationwide Mutual Ins. Co., 97 N.Y.2d 491, 743 N.Y.S.2d 53 (2002). In Brandon, the court held that where the insured under a supplementary uninsured motorists (SUM) policy provides timely notice of the claim, but gives late notice of legal action brought against the insured, an insurer “relying on late notice of legal action should be required to demonstrate prejudice.” The court also held that the burden of proving prejudice is on the insurer because it has the relevant information about its own procedures and a alternative approach would “saddle the policyholder with the task of proving a negative.” 97 N.Y.2d at 498, 743 N.Y.S.2d at 53.

An assertion by an insured that it had a “reasonable belief in non-liability” has been recognized as a valid excuse for delayed notice. However, in order to be accepted as an excuse for the late notice, the insured’s belief that it is not liable must be objectively reasonable under the circumstances. See Kim v. Maher, 226 A.D.2d 350, 640 N.Y.S.2d 579 (2d Dep’t 1996). The validity of the excuse will turn on whether the insured anticipated that a claim would be filed against it. See Avery & Avery, P.C. v. American Insurance Co., 51 A.D.3d 695, 858 N.Y.S.2d 319 (2d Dep’t 2008).

If an insured is aware that it will bear responsibility for any injury sustained in an accident, it is under a duty to make inquiries into the circumstances of the incident and into the extent of any injuries sustained by the claimant. The insured cannot simply bury its head in the sand and claim to have been unaware that a claim might be filed against it. See Great Canal Realty Corp. v. Seneca Insurance Co., Inc., 5 N.Y.3d 742, 800 N.Y.S.2d 521 (2005) (“where a reasonable person could envision liability, that person has a duty to make some inquiry,” citing White v. City of New York, 81 N.Y.2d 955, 598 N.Y.S.2d 759 (1993)). Also see York Specialty Food, Inc. v. Tower Ins. Co. of NY, 47 A.D.3d 589, 850 N.Y.S.2d 409 (1st Dep’t 2008); Philadelphia Indemnity Ins. Co. v. Genesee Valley Improvement Corp., 41 A.D.3d 44, 834 N.Y.S.2d 802 (4th Dep’t 2007).

Under these standards, the courts of New York have held that an insured has no obligation to report an accident where it appears that no one was injured or where any injury is trivial. Kelly v. Nationwide Mutual Ins. Co., 174 A.D.2d 481, 571 N.Y.S.2d 258 (1st Dep’t 1991).

However, New York Senate Bill 8610 (“S.B. 8610”) was signed into law on July 24, 2008. S.B. 8610 modifies N.Y. Ins. Law section 3420(c)(2)(A) such that it will provide:

(a) No policy . . . shall be issued or delivered in this state, unless it contains . . .

(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. . . .

The revised statute provides that ""[i]n any action in which an insurer maintains that it was prejudiced as a result of failure to provide timely notice, the burden of proof shall be on . . . the insurer to prove that it has been prejudiced, if the notice was provided within two years of the time required under the policy . . ."

S.B. 8610 further provides that it will “take effect on the one hundred eightieth day after it shall have become a law” (i.e., January 2009) and will only “apply to policies issued or delivered in this state on or after such date. . . .” (S.B. 8610 § 8.) Accordingly, late notice disputes under future policies containing the provisions specified in the new law will be governed by a prejudice rule.

It should be noted that with respect to a claim for property damage and not bodily injury, the rules under New York’s Insurance Law § 3420(d), which requires prompt disclaimers (generally within 30 days) do not apply.

Can a business co-owned by an admitted arsonist who pleads guilty to mail fraud in connection with filing a false insurance claim recover under a fire insurance policy?  Not possible, right?  Well, a federal court in Michigan denied the insurer summary judgment and when the case went to the jury, the jury was charged that the arsonist, who co-owned the torched Dairy Queen with his wife, must have had “exclusive” control of all aspects of the Dairy Queen in order for the insurer to deny coverage based on the arson.  The jury found that the arsonist didn’t have exclusive control and the insurance company had to pay.  To add insult to injury, the jury found the insurer acted in bad faith by denying the claim.  While the trial judge found the bad faith award went too far, it allowed the other findings to stand.  Melito & Adolfsen was retained to handle the appeal.  Distinguishing the purportedly controlling “exclusive control” case in Michigan and a host of arson cases from around the country involving husband and wife co-ownership of homes, Melito & Adolfsen prevailed upon the Sixth Circuit Court of Appeals to listen to reason and reverse a grossly unfair decision.  

A New York intermediate appellate court has made a ruling on allocation of the settlement of a lead paint claim between consecutive insurers of the same building.  This ruling is significant, not only to lead paint cases, but to any toxic tort cases arising in New York.  In Serio v. Public Service Mutual Insurance Co., Docket No. 13599, (April 23, 2003) the Appellate Division, Second Department held as follows:

 “Where the exposure occurred over a period of three years, and where the two insurers covered that loss, respectively, during consecutive periods of two and one years, we hold that each insurer shall bear a share of liability for the purpose of funding their negotiated settlement with the injured parties, directly proportionate to each insurer’s time on the risk”

In Serio, Public Service Mutual Insurance Company (“Public Service”) provided $1,000,000 in liability coverage for two consecutive one-year terms from June 1, 1993 to June 1, 1995.  First Central Insurance Company (“First Central”) provided identical coverage for the period June 29, 1995 to June 29, 1996.  On or about March 19, 2002 the parties in the underlying personal injury action stipulated to settle for the sum of  $390,000.  However, the two insurance companies reserved their rights to seek a judicial determination as to their proportionate contribution obligations to the settlement.

Since First Central was in liquidation, the Superintendent of Insurance commenced an action in Supreme Court, Nassau County seeking a declaratory judgment.  The “other insurance clauses” in all three policies contained the same “method of sharing.”  Since First Central policies covered only one relevant year, it argued that it should pay only one-third of the settlement.  Public Service argued that the decision of the Appellate Division, First Department in American Empire Ins. Co. v. PSM Ins. Co., 259 A.D.2d 341 687 NYS2d 32 (1^st Dept. 1999) was applicable.  In that case where three insurers argued over their liability for a lead paint exposure case, the First Department found equal apportionment rather than pro rata, to be the appropriate analysis in accordance with the “other insurance” provisions of the policies.

In Serio, First Central attempted to distinguish the American Empire holding of the First Department on the grounds that that case focused on issues of what events “triggered coverage, rather than on the issue of time on the risk.”

In Serio, the Second Department ruled in favor of  First Central, based on the decision of the New York Court of Appeals in Consolidated Edison Co. of New York v. Allstate Ins. Co., 98 NY2d 208, 746 NYS2d 622 (2002).  As explained in the Serio decision, the court in Consolidated Edison “adopted a ‘time on the risk’ analysis in a case involving the cleanup of toxic substances that had leaked into the soil and ground water…[and a] succession of twenty four insurers had provided coverage over the years, and it was impossible to pinpoint the exact times of the contamination vis-à-vis the terms of the various insurers’ policies.”

In Con Edison the utility sought “joint and several allocation” which would “allow it to collect all of its damages from any one of the liable insurers leaving the insurers to fight out issues of contribution and indemnification.”  The Court of Appeals, upheld the trial court’s decision, as affirmed by the Appellate Division which adopted a pro rata allocation based on the language of the policies providing that each was to pay for losses arising “during the policy period.”  Thus, based on Consolidated Edison, the Second Department in Serio ruled that Public Service had to pay two-thirds of the settlement based on its two years of coverage and that the Superintendent of Insurance, on behalf of First Central, was only liable for one-third based on its one year of coverage.

In Serio, the Second Department pointed out that: “the instant case is the first lead-paint case in New York to employ a time on the risk analysis.”  While the court did not address what significance its decision might have on other types of cases, it did make numerous references to other types of toxic tort cases such as asbestos, breast implant and other cases involving environmental contamination. 

What is significant about this decision by the Second Department in Serio is that it did not focus on the other insurance clauses in the policies which were used by the trial court to reason that the policies should share equally without regard to the time on the risk.

The Court in Serio also made a significant distinction between its analysis and the analysis in the earlier First Department decision in American Empire.  The Court stated:

 “We note, however, that the apportionment issue in American Empire was decided upon an analysis of when each policy was triggered, and in recognition of the equal apportionment required by the “other insurance clauses” of the policies.  Unlike American Empire the instant case presents no “triggering” issue.  The instant case presents a single, narrow issue; how shall two insurers apportion liability as between themselves for a continuing loss that occurred during the both of their consecutive policy periods. 

The Court in Serio also distinguished Consolidated Edison’s for this reason:

 “Consolidated Edison also is factually distinguishable from the instant matter insofar as it posed the issue of whether pro-rated apportionment or joint and several apportionment was appropriate, whereas the instant case pits pro-rated  apportionment against equal apportionment.” 

Despite this distinction in Consolidated Edison, the Court in Serio held that it was applicable and supported its allocation based on time on the risk. 

The Serio case does not address one issue that remains unclear in lead paint cases.  In Serio, the carriers appear to have assumed that each policy was triggered based on the exposure of the child to lead paint during the policy period.   There appeared to be no issue as to whether the child was injured during each policy period.  Since New York is an “injury- in-fact” jurisdiction, in order for a policy to be triggered there remains the issue of whether an  injury occurred during the policy period.   Indeed, in the earlier American Empire case, the First Department specifically discussed the evidence of injury to the child in earlier policy periods. In other words, in the case of a settlement even where the infant has been exposed over several policy periods, one or more of the insurers may argue that, despite the exposure, there was no injury in fact during  the applicable policy period.  However, this requires medical evidence as historically was required in asbestos cases. 

When asbestos litigation first arose, it was assumed by plaintiffs that the mere exposure to asbestos triggered coverage and some courts initially so held.  However, many courts then began to require medical proof, which ultimately lead to expert opinions that exposure caused injury and that the injury continued in successive policies, sometimes by continued exposure, and sometimes simply through the presence of asbestos fiber in the lungs of the injured person.

It is also not clear whether the Serio analysis will be accepted whole-heartedly by the New York Court of Appeals.  In the Consolidated Edison case, the Court of Appeals commented that the trial court’s analysis “was not error.” 746 NYS2d at 630.  The Court also observed, without discussion, that there are other relevant proration issues such as how to treat self-insured retention periods of no insurance, periods where no insurance is available and settled policies. Id. In Consolidated Edison, the utility asserted that there was damage during all of its policy periods.  The judge at concluded that it was therefore appropriate that all insurers should respond based on the damage “during the policy period.”  The Court of Appeals accepted this analysis but remarked that “this is not the last word on proration.” Id.  The same can be said of the holding by the Second Department in Serio.

Policyholders continue their imaginative efforts to shoehorn all kinds of claims into the “advertising injury” coverage afforded by commercial general liability policies since the New York Court of Appeals first addressed the meaning of that coverage in what remains one of the leading cases in the country in A. Meyers & Sons Corp. v. Zurich American Ins. Group in 1989.  Unlike Meyers which involved claims of patent infringement, most attempts for coverage today involve underlying claims of trademark infringement and that part of the definition of “advertising injury” which includes “misappropriation of advertising ideas or style of doing business.”  As always, the coverage determination depends on a careful review of the particular allegations against the insured and the exact policy language at issue.