(Article from Insurance Law Alert, June 2017)
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A New York appellate court ruled that a policyholder’s late notice is excused if it has a reasonable, good faith belief that the underlying claims are outside of the scope of policy coverage. Cohen Bros. Realty Corp. v. RLI Ins. Co., 2017 WL 2540546 (N.Y. App. Div. 1st Dep’t June 13, 2017).
The coverage dispute arose out of a fatal accident that occurred during construction of a building managed by Cohen Bros. Realty. On the day of the accident, Cohen Bros. contacted its insurance broker and was advised that because the accident was a workers’ compensation matter, a general liability policy issued by RLI would not apply. The workers’ compensation carrier, State Insurance Fund (“SIF”), agreed to defend and indemnify Cohen Bros. Approximately 5 months later, the decedent’s administratrix obtained an order to show cause to conduct discovery for the purpose of suing Cohen Bros. Cohen Bros. notified RLI, which denied coverage based on late notice. Cohen Bros. retained its own counsel, partially funded by SIF. The underlying litigation eventually settled for $2.5 million. Cohen Bros. sought a declaration that RLI was obligated to defend and indemnify the underlying claims. A New York trial court agreed and the appellate court affirmed.
The appellate court ruled that the delay in notice was excused due to a reasonable, good faith belief that the accident was outside the scope of policy coverage. The court expressly reaffirmed that Tesler v. Paramount Ins. Co., 220 A.D.2d 334 (N.Y. App. Div. 1st Dep’t 1995), which held that late notice is excused by reasonable belief of non-liability based on incorrect advice of an insurance agent, remains good law. Additionally, the court ruled that the voluntary payments doctrine did not bar recovery, explaining that by denying coverage and refusing to defend, RLI “excluded itself from any aspect of the [p]laintiff’s defense . . . including the negotiation of attorneys’ fees . . . and cannot now be heard to complain.”
Further, the court addressed the amount of defense costs for which RLI was responsible. RLI argued that the $150 per hour contribution by SIF to the underlying defense acted as a ceiling on defense fees for RLI as well. The court rejected this argument, reasoning that “[a]ny agreement between SIF and plaintiff as to fees has no bearing on RLI’s responsibility to provide a defense.” However, the court declined to address how defense fees should be allocated between SIF and RLI, noting that such a determination would be based, at least in part, on SIF’s policy language.