Chartwell Law partners Matthew Kraus and Andrew Furman recently obtained a major victory for Certain Underwriters at Lloyd’s, London and Great Lakes Reinsurance (collectively “Underwriters”) in the Supreme Court of New York, Appellate Division, First Department. Plaintiff Menlo Energy Florida, LLC (“Menlo”), the owner of a glycerin refinery, sought property damage and business interruption coverage following a two-month disruption of its operations due to mechanical failure of a vacuum blower. Before Underwriters could complete its adjustment of Menlo’s claim, Menlo filed an action seeking in excess of $1 million in damages for a breach of contract and bad faith/consequential damages. During the lawsuit, Underwriters asserted that Menlo’s notice of claim – which was provided only after Menlo had resumed operations at the refinery – was not made “as soon thereafter as practicable” and vitiated Underwriters’ coverage obligations.
In October of 2021, the Supreme Court granted Underwriters’ motion for summary judgment and held that Menlo’s delay in providing notice was unreasonable and unexcused. Significantly, the Supreme Court rejected Menlo’s argument that Underwriters was required to establish prejudice as an element of a late notice defense. In its appeal of the decision to the First Department, Menlo argued that Underwriters’ failure to establish that Underwriters were appreciably prejudiced by the late notice voided the defense. The First Department, in rejecting Menlo’s appeal, stated that insurers are not required to establish prejudice to sustain a late notice defense in any matter that is unrelated to death or bodily injury. Since Menlo sought coverage solely for property damage and business interruption, Underwriters were not required to demonstrate that the late notice prejudiced their investigation. Furthermore, the First Department ruled that Menlo’s notice was untimely as a matter of law as it proffered no excuse to justify its failure to provide notice while the refinery was inoperable.
The implications of the decision are vast. In 2009, New York amended Insurance Law § 3420 to require insurers to establish prejudice to deny coverage for late notice in claims involving death and bodily injury. Insureds in first-party property matters have argued that amendment reflects that the public policy of New York is that prejudice is now a requirement for all late notice defenses, not just in death and bodily injury cases. For the first time, however, an appellate court has considered, and rejected, that argument. In so doing, the Court has reaffirmed that New York’s common law “no prejudice rule” still applies to late notice in the first-party context.
Congratulations, Matt and Andrew!