On July 25, 2019, Justice Crane of the New York County Supreme Court issued a decision in American Empire Surplus Lines Ins. Co. v. Burlington Ins. Co., 2019 NY Slip Op 32221(U), holding that a CGL carrier was required to provide a defense to an additional insured for a personal injury claim, but concluding that, absent a showing of prejudice to the insured, the insurer’s delay in issuing a reservation of rights letter was not a basis to impose a duty to defend.
Justice Crane’s decision provides a helpful overview of the role of an insurer’s reservation of rights letter under New York law:
New York permits an insurer to assume the defense of its insured subject to a reservation of rights, thus allowing the insurer the flexibility of fulfilling its obligation to provide its insured with a defense, while continuing to investigate the claim further.
Reservation of rights letters operate to prevent equitable estoppel and waiver from attaching before determination of the insured’s liability is determined.
By reserving its rights, the insurer is not imposing conditions on its defense. The defense remains unqualified; the insurer, by reserving its rights, is merely putting the insured on notice of what the insurer believes are its existing rights under the policy. Notwithstanding the foregoing, the insured has the right to reject the conditions the insurer is seeking to impose, by objecting or requesting separate counsel. To be sure, the insurer’s reservation affects only the insurer’s duty to indemnify, not its duty to defend, and, unlike some nonwaiver agreements, reservation of rights letters do not require that the insured make any concessions with regard to the insurer’s duty to indemnify.
Although the Court found that the insurer (Burlington) had a duty to defend the additional insured under the applicable policy, Justice Crane explained that Burlington’s delay in issuing a reservation of rights letter was not a basis to impose any duty on the insurer, explaining:
In 206-208 Main St. Assoc., Inc. v Arch Ins. Co., 106 AD3d 403, 407-408 [1st Dept 2013]), the court held that the insured has the burden on a motion for summary judgment to present evidence showing that it was prejudiced by the insurer’s late reservation of rights as a matter of law. The court ruled that the posture of litigation is a relevant factor but determined that the insured had not been prejudiced here as the subject reservation of rights was issued when the underlying litigation was, by the insured’s own admission, still in its “early phase” (id. at 407). The court further held that the insured had also failed to establish prejudice on the basis that “plaintiff insurer had taken advantage of information defense counsel had communicated to it to form the basis for the eventual disclaimer” (id. at 408).
The court notes filed the underlying action on November 5, 2015 and that the parties were still engaged in discovery, on May 26, 2016, the time Burlington issued its reservation of rights letter. Thus, plaintiff has not established that the underlying litigation was in an advanced stage, nor did plaintiff present any evidence sufficient to demonstrate that it was prejudiced by Burlington’s alleged late reservation of rights. Thus, this Court will not impose a duty to defend on Burlington merely because of the timing of its reservation of rights letter.
Notably, the coverage issues in this case did not involve an exclusion to coverage. However, where an insurer seeks to invoke a policy exclusion to deny liability coverage for a death or bodily injury claim, the New York Insurance Law requires the insurer to “give written notice as soon as is reasonably possible of such . . . denial of coverage.” N.Y. Ins. Law § 3420(d)(2). Failure to do so can result in a waiver of the exclusion. While the determination whether the insurer has provided notice “as soon as is reasonably possible” is fact specific and not subject to a strict bright-line rule, Courts have found delays of more than 30 days to be unreasonable.