Insurer Need Not Demonstrate Prejudice in Order to Deny an Insured's Untimely Notice of a Lawsuit
May 16, 2005

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On April 5, 2005, the New York Court of Appeals decided the case of Argo Corp. v. Greater New York Mut. Ins. Co. , 2005 NY LEXIS 770 (2005) ("Argo"), and reinforced New York's application of the "No Prejudice Rule" — that an insurer need not demonstrate prejudice in order to deny an insured's untimely notice of a lawsuit. Nevertheless, while affirming the No-Prejudice Rule, the Court reaffirmed the distinction drawn where arguably late notice of a lawsuit is provided after an insurer had prior notice of the claim.

The No-Prejudice Rule

New York courts have long held that an insurer need not demonstrate prejudice to disclaim coverage when a policy requires notice "as soon as practicable" after an occurrence. See Security Mut. Ins. Co. of NY v Acker-Fitzsimons Corp. , 31 N.Y.2d 436 (1972). Providing timely notice of a claim is a condition precedent to coverage, the failure to comply with which vitiates the policy, as a matter of law. New York courts reason that the insured must strictly comply with the notice provision of an insurance contract so that the insurer may:

1. protect itself against fraud or collusion;

2. have an opportunity to investigate claims while evidence is fresh;

3. estimate potential exposure;

4. establish adequate reserves; and

5. exercise early control of claims, thereby aiding in settling the case.

Insurers became increasingly uneasy, however, when this long-standing rule was seemingly challenged in the case of In re Brandon , 97 N.Y.2d 491 (2002) and its progeny. In Brandon , the Court departed from the No-Prejudice Rule holding that an insurer must demonstrate prejudice before disclaiming based on untimely notice of a lawsuit in the context of SUM lawsuits. Briefly, the insurer in Brandon received timely notice of a claim, but untimely notice of the subsequent lawsuit. The Court refused to extend the No-Prejudice Rule to late notice of a lawsuit because "unlike most notices of claim — which must be submitted promptly after the accident, while an insurer's investigation has the greatest potential to curb fraud — notices of legal action become due at a moment that cannot be fixed relative to any other key event, such as the injury, the discovery of the tortfeasor's insurance limits or the resolution of the underlying tort claim." 1

Argo and the No-Prejudice Rule

In Argo , the underlying plaintiff slipped and fell on an icy sidewalk adjacent to property owned by the insured; and thereafter brought suit against the insured. Although the insured received the summons and complaint, it failed to notify its insurer until 14 months after service. The insurer disclaimed coverage based on the insured's failure to provide it with timely notice of the occurrence and lawsuit, thereby violating a condition precedent to coverage.

The Court of Appeals held that the insurer was not obligated to demonstrate that it suffered prejudice as a result of the insured's untimely notice of the claim reasoning that the insured's notice was unreasonable as a matter of law, thereby vitiating the policy. The Court also distinguished its decision in Brandon , upon which the insured had placed considerable reliance, noting that Brandon, where in the insurer received timely notice of the claim but late notice of the lawsuit, did not repeal the No Prejudice Rule and should not be extended to cases where an insurer received unreasonably late notice of a claim.

The Argo Court did, however, make clear that where an insured provides timely notice of an occurrence or claim, but fails to provide timely notice of the subsequent lawsuit, the insurer will be required to demonstrate prejudice before disclaiming coverage. No doubt, policy considerations unique to SUM cases and the Court's inability to pinpoint a reasonable time to give notice of a suit in relation to other occurrences, such as the injury, are the basis for the requirement of prejudice. In such cases, the inquiry should be focused on gathering proof of prejudice.

When analyzing potential late notice claims, insurers should be mindful of the distinction delineated in Argo between late notice of a claim and late notice of a lawsuit. Brandon will only excuse late notice of a lawsuit when the insurer has previously received timely notice of the claim. The No-Prejudice Rule will unequivocally protect insurers when they receive late notice of a claim (and arguably, late notice of a lawsuit not preceded by a claim). Claims personnel, should not be intimidated by references to Brandon and its progeny in support of untimely claims.

1 See e.g. , Great Canal Realty Corp v. Seneca Ins. Co., 13 A.D.3d 227 (1 st Dep't 2004),where the Appellate Division, First Department, citing Brandon stated: "While the Brandon Court was not dealing with the precise issue before us, its rationale in concluding the no-prejudice exception should not apply to disclaimers of late service of legal papers, militates equally toward moving to a "prejudice" standard as to the initial notice requirement …It would appear that the time has come for New York, too, to adopt that principle . . . . Ultimately, we see no reason to extend the "no-prejudice" exception to allow insurers to disclaim coverage on the basis of late notice of claim where lateness is an arbitrary temporal standard applied to a lapse between occurrence and notice, and where contractual rights favor just one party, the insurer."