On Nov. 20, 2017, New York's highest court dramatically expanded the breadth of New York Insurance Law §3420. Carlson v. American International Group, 2017 NY Slip Op 08163 (2017).

That section establishes the minimum requirements for liability insurance policies in the state.

For liability policies that do not include required provisions, at least as favorable to insureds and injured parties, the statute deems provisions into the policies. The Court of Appeals held that it not only applied to policies that were issued to New York insureds or by New York insurers but also to insureds that have a presence in New York and create risks in New York.

N.Y. disclaimer requirements

Out-of-state insurers must take heed. If they issue policies to companies (and perhaps individuals) who have a presence in New York (operate a business, for example), New York disclaimer requirements will apply to that policy and that insurer, even if the policy were issued by an out-of-state insurer to an insured whose home office was located outside of New York.

The Carlson decision sends a sobering message to insurers that issue policies to insureds that have a presence in New York even if the policies are sent from a non-New York office to a non-New York insured location. Section 3420 applies to policies that cover both insureds and risks located in New York.

Many insurers regularly issue reservation of rights letters when responding to notices of New York accidents or claims. Often carriers that have issued policies in other states protecting against multi-state risks have not followed the New York Insurance Law §3420 mandates, i.e., to disclaim (rather than reserve their rights) within 30 days and send copies of disclaimer letters to the injured party and other claimants.

These insurers will learn that it is critical to quickly determine whether their insureds have a presence in New York state and have created a risk in New York state. If the carriers fail to do so, they may find that their reservation of rights letters may be ineffective. The same is the case for their exclusion-based or breach-based disclaimers if not copied to injured persons and other claimants or not sent within 30 days after they received notice. The penalty is a significant one: the loss of a right to rely upon policy exclusions and breaches of policy conditions.

The case

Carlson, individually and as Administrator of his deceased wife's estate (as an assignee of Porter) commenced a New York "Direct Action" against National Union Insurance Company (National) and American Alternative Insurance Company (AAIC) seeking to secure insurance proceeds from policies issued to MVP Delivery (MVP) and Porter, under NY Insurance Law 3420(a)(2). That section permits an action against an insurer to recover liability insurance coverage if a plaintiff (turned judgment creditor) obtains a judgment against an insured defendant (turned judgment debtor) and the judgment creditor believes the insurer's policy covers the judgment but the insurer refuses to pay it.

That statute — which contains a variety of significant provisions that govern New York liability insurance, and Draconian rules on disclaimers, only applies to policies "issued or delivered in New York."

The New York Court of Appeals held that the term "issued or delivered" in New York applied not only to policies issued to insureds that had offices in New York and not only to insureds who received the policies in New York, but encompassed situations where both insureds and risks were located in New York state.

Claudia Carlson was killed when a truck with a DHL logo, owned by MVP and driven by Porter, crossed the double-yellow line and hit her head on. The jury awarded her estate $20 million, which was eventually reduced to $7.3 million. MVP's insurer paid the estate $1.1 million and assigned to Carlson, Porter's right to other coverages.

There was an issue of DHL's responsibility for the accident, but if it were responsible, National Union provided a $3 million primary policy, followed by a $2 million excess policy with AAIC and then a $23 million umbrella policy with National Union.

AAIC moved to dismiss the lawsuit arguing that its policy was not "issued or delivered" in New York. It had been issued to DHL's predecessor, Airborne, headquartered in Washington and later assumed by DHL, headquartered in Florida. AAIC was in New Jersey when the policy was issued.

Ineffective reservation of rights letters

Insurance Law §3420 is a "deeming statute," requiring carriers whose policies are bound by its terms to permit direct actions, disclaim coverage promptly, accept notice of claim from injured persons in addition to insureds and disclaim promptly in bodily injury and wrongful death cases, generally within 30 days.

Because of the statute's disclaimer requirements, reservation of rights letters issued in such cases are usually ineffective to preserve an insurer's right to rely upon policy exclusions and breaches of policy condition. Accordingly, broadening the scope of policies impacted by this statute exposes insurers to significant and additional risks in New York.

In 2008, the Court of Appeals considered the same question in a case where a New Jersey insurer issued a policy to a New Jersey insured, East Coast Stucco, that covered New York risks. The language of the statute was slightly different at that time, applying to policies "delivered or issued for delivery in this state":

It's undisputed that the policy was actually delivered in New Jersey by a New Jersey insurer to a New Jersey insured. Was the policy nonetheless "issued for delivery" in New York? We answer in the negative.

A policy is "issued for delivery" in New York if it covers both insureds and risks located in this state (citations omitted). By including New York as an "Item 3.C." state, the policy covers risks located in New York. East Coast Stucco is a New Jersey company, with its only offices located in that state, so it cannot be said that the insured is located in New York. Because the policy was neither actually "delivered" nor "issued for delivery" in New York, Preserver is not required [to comply with the statute]. Preserver Ins. Co. v. Ryba, 10 N.Y.3d 635, 642 (2008).

'Sweeping changes'

However, in Carlson, the same court held that:

DHL is located in New York because it has a substantial business presence and creates risks in New York. It is even clearer that DHL purchased liability insurance covering vehicle-related risks arising from vehicles when delivering its packages in New York, because its insurance agreements say so.

Again, note that East Coast Stucco, the insured in the Preserver case, also purchased liability insurance coverage to protect New York risk, because its insurance agreements say so.

The Court of Appeals held that the change in statutory language, from "issued for delivery" to "issued or delivered" broadened its application. Applying the language to policies issued "by an insurer located in New York or by an out-of-state insurer who mails a policy to a New York address would undermine the legislative intent" of the statute.

The court specifically rejected a strong three-judge dissent holding that the dissent's approach would wrongly exclude "an insurance policy issued by a national insurer located in Connecticut to a retailer operating in all fifty states, if the policy was delivered to the retailer's headquarters in Arkansas — even if the policy was specifically written to cover risks in New York created by the insured's extensive operations in this state."

The dissenting judges noted, properly, that the majority's "misinterpretation" of Insurance Law 3420 "enacts sweeping changes across the Insurance Law, generating substantial implications, both known and unknown." It pointed out that the term "issued for delivery" — the phrase used in Preserver is not the phrase now used in 3420 now, which is "issued or delivered."

Frightening consequences

The dissent's language is instructive and suggests frightening consequences:

[I]t is hardly plausible that the legislature intended to require every automobile insurer throughout the country—regardless of where the policy was issued or delivered — to comply with New York insurance statutes on the chance that the insured vehicle may be driven into New York.

The majority opinion claims that its holding is limited to policies that cover "both insureds and risks" located in New York. The dissent wonders whether it will be applicable when an out-of-state resident drives into New York and it owns property or vacations in New York.

What are the counseling points? When an insurer is placed on notice about a New York bodily injury or wrongful death accident, it must act quickly and respond properly:

• It must determine whether its insured is "located in New York." The Court of Appeals found that DHL was "located in" New York "because it has a substantial business presence." How much business must an insured be doing to create a "substantial business presence" is unclear.

• It needs to examine its policy to see if New York risks are covered, by policy terms.

• If the answer to both questions is "yes" or, most importantly, if the answer to both questions "might be yes," the insurer should err on the side of compliance with Insurance Law §3420(d)(2).

• It must send out a coverage position letter within 30 days, which avoids reservation of rights language, uses, if necessary, complete or "partial" disclaimer language and is copied to the injured party (or his/her counsel) and any other person, entity or party who might interpose a cross-claim against the insured.

Loss of breach of policy conditions

Failure to do so, when required, may well result in the loss of the insurer's ability to rely upon otherwise valid and applicable policy exclusions or the insured's breach of policy conditions.

The dissent suggests, understandably so, that with respect to auto policies i.e., the New York legislature did not intend for Insurance Law §3420 to require to "every automobile insurer throughout the country … to comply with New York insurance statutes on the chance that the insured vehicle may be driven into New York." Consider:

• Jane Roe from New Jersey commutes to New York City for work. While driving down Fifth Avenue, she runs over Max Factor, who is injured. Jane seeks coverage under her homeowners policy issued in Connecticut and mailed to her home in New Jersey. The policy contains an auto exclusion. Jane derives all of her income from her job in New York. Does Jane have a "substantial business presence" in New York? If the Connecticut homeowners carrier does not comply with the disclaimer requirements of Insurance Law §3420, will it lose its right to rely upon the auto exclusion? Is there a carve-out for nature persons? Does the "substantial business presence" requirement only apply to business corporations?

• What about employer liability lawsuits where bodily injury is alleged? ABC, a national corporation, runs a national chain of department stores. ABC has a policy issued in CA delivered to headquarters in TX. Employee, who works at NY branch, commences action for workplace harassment and emotional distress is claimed, which in New York, constitutes "bodily injury." If the carrier merely reserves it rights on policy exclusions, will it be precluded from relying upon them as a basis for disclaimer?

We shall see. In the meantime, we recommend a careful review of all New York claims.

Dan D. Kohane (ddk@hurwitzfine.com) is a senior attorney with Hurwitz & Fine, P.C.

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