New York was a relative latecomer to the club of states requiring liability insurers to be "prejudiced" in order to disclaim coverage in bodily injury matters. For that reason, New York case law provides less guidance on what constitutes prejudice in the context of late notice than many other states. One recent decision, however, provides an example of an insurer that was prejudiced as a matter of law.
In Villavicencio v. Erie Ins. Co.., a tenant had sued the owner of his apartment building for property damage after the building had caught fire. After the owner failed to answer the complaint, the court entered default judgment in favor of the plaintiff. Six days after the entry of default judgment, approximately nine months after suit was filed, and over three years after the fire, the property owner notified its insurer of the incident. Six days later, the insurer disclaimed coverage because of late notice.
With an unsatisfied judgment in hand, the tenant filed a direct action against the insurer to collect on the judgment. The tenant argued that the disclaimer was invalid because the insurer was not prejudiced by late notice. But the court disagreed, and granted the insurer's motion for summary judgment. In doing so, the court relied on the plain language of New York Insurance Law, §3420(c)(2)(b), which provides that "an irrebuttable presumption of prejudice shall apply if, prior to notice, the insured's liability has been determined by a court of competent jurisdiction or by binding arbitration; or if the insured has resolved the claim or suit by settlement or other compromise."
In reaching its decision, however, the court noted that the default judgment in the underlying action had not been vacated. Villavicencio will provide some comfort to insurers relying on a late notice defense, even if it left open the issue of whether a vacated default judgment would also vacate the prejudice. Thanks to Mike Gauvin for his contribution to this post.
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