Disclaimer of Coverage Delay
December 21, 2015
The insurer filed a motion for summary judgment against its insured, seeking a declaration that it had no duty to defend or indemnify the insured in an underlying case where default judgment was previously granted against the insured. This case is Montpelier U.S. Insurance Company v. 240 Mt. Hope Realty Company, 2015 U.S. Dist. LEXIS 143820 (S.D.N.Y. 2015).
The insured owns and operates an apartment building and the insurer (MUSIC) issued a general liability policy on the building. On January 7, 2013, the insured was sued based on allegations that a pit bull belonging to a tenant in the building had bitten a child. Default judgment was granted against the insured on July 8, 2013. MUSIC received notice of the underlying claim and the default judgment on August 19, 2013. Thereafter, MUSIC retained counsel who then successfully moved to vacate the default judgment on November 18, 2013. However, an appeals court later reinstated the default judgment.
On June 12, 2014, MUSIC sent a letter to the insured reserving, for the first time, its right to disclaim coverage of the default judgment. The insurer based this disclaimer on untimely notice of the lawsuit. The insurer then filed this declaratory judgment action.
The United States District Court for the Southern District of New York declared that as a matter of law, New York Insurance Law required a timely disclaimer of coverage. The court said that an insurer intending to disclaim liability or deny coverage shall give written notice as soon as is reasonably possible of such disclaimer of coverage to the insured. Time begins to run for purposes of such disclaimer when the insurer knows the grounds for its entitlement to disclaim.
In this instance, MUSIC had knowledge of sufficient facts to disclaim coverage when it received notice of the default judgment on August 19, 2013. At that point, MUSIC would indisputably have been entitled to disclaim coverage on the ground that the notice was untimely, and that MUSIC was prejudiced by the delay. However, MUSIC elected not to disclaim coverage and did not make any reservation of its right to disclaim coverage until nearly ten months later. That ten month delay with no explanation, said the court, was an unexcused delay and unreasonable as a matter of New York law.
MUSIC argued that it has no duty to defend or indemnify because the insured failed to provide timely notice of the claim. The court answered that that would have been a valid basis to disclaim coverage had MUSIC elected to do so within a reasonable time of first receiving notice of the default judgment. But, it was no longer a valid basis to disclaim ten months later.
The insurer also argued that the time for its disclaimer began to run only when the appeals court reinstated the default judgment. The U.S. Court responded that the contention was without merit. The timeliness of an insurer's disclaimer is measured from the point in time when the insurer first learns of the grounds for disclaimer of coverage. Here, MUSIC first learned of the grounds for denial of coverage on August 19, 2013 when it received notice of the underlying lawsuit and the default judgment.
The motion by the insurer for summary judgment was denied.
Editor's Note: The U.S. District Court rules that the insurer unreasonably delayed its notice of the denial of coverage and so, the insurer was required to defend and indemnify the insured. In this case, the insured delayed its notice of a claim and default judgment to the insurer but the insurer failed to disclaim coverage at that time. Waiting ten months later cost the insurer its basis for denial of coverage.