New York has been one of the last jurisdictions to hold onto the view that a policyholder’s promise to provide notice to its insurer of occurrence, claim or suit must be performed punctiliously at the risk of complete forfeiture of coverage. Following a relaxing of this rule when insurers themselves are the policyholder – that is, when they are in their capacity as cedents seeking reinsurance recovery – and given the lack of analytic foundation for New York’s formalism (addressed further below), many thought that New York would eventually adopt some form of what is usually called the “notice/prejudice” rule (probably akin to that in neighboring Connecticut, cited infra).
The New York Court of Appeal dispelled any such notion in Argo Corp. v. Greater New York Mut. Ins. Co., (April 5, 2005), available at http://www.nycourts.gov/courts/appeals/decisions/apr05/42opn05.pdf . Argo holds that an insurer in New York is not required to show “prejudice” from the policyholder’s providing notice “late” in order to be excused from coverage; on pain of a complete forfeiture of coverage, it is the policyholder’s burden to show that it reasonably complied with the obligation to provide notice.
While Argo confirms that whatever exceptions to the no-prejudice rule exist do not swallow the rule, the case that really reveals (in an ‘inside baseball’ way) the New York Court of Appeals’ perspective is the subsequent memorandum decision in Great Canal Realty Corp. v. Seneca Ins. Co., (June 16, 2005), available at http://www.courts.state.ny.us/ctapps/decisions/jun05/ssm13mem05.pdf. The reversal in Great Canal is more significant because there the Appellate Division had held that the “notice/prejudice” rule did reflect the law of New York. And that the high court decision is a mere memorandum indicates the high court’s ire.
The First Department Appellate Division opinion in Great Canal, available at http://www.courts.state.ny.us/reporter/3dseries/2004/2004_09419.htm, was notable not just because of its holding but also because of its analytical power. In a clever bit of legal craftsmanship, the Appellate Division had postured the no-prejudice rule (correctly) as an exception to the contract-law rule that an immaterial breach of contract does not excuse the other side’s performance (though it may entitle the non-breaching party to damages or set off). The Appellate Division ruled that: “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.”
While the Appellate Division addressed the idea of disproportionate forfeiture, compare Aetna Cas. & Sur. Co. v. Murphy, 538 A.2d 219 (Conn. 1988) (relying significantly, as did the First Department, on the “celebrated case of Jacob & Youngs, Inc. v. Kent, 230 N.Y. 239 (1921)”), the Appellate Division court could have buttressed its analysis by considering whether the notice provision is a true condition precedent or is a covenant, that is, an independent promise of performance. There is a maxim of contract construction that provisions should be construed as covenants and not as conditions, precisely to avoid forfeiture from technical breaches. Maryland’s high court correctly recognized this point in Sherwood Brands, Inc. v. Hartford Accident and Indemnity Co., 698 A.2d 1078 (1997) available at http://www.courts.state.md.us/opinions/coa/1997/104a96.pdf; see also Stephen Klein, Insurance Recovery of Pre-Notice Defense Costs, 34 Tort & Ins. L.J. 1103 (1999). This is a key insight, because it makes clear that a breach of the notice covenant does not (usually) equate to a material breach of contract by the policyholder (in the light of its other covenants and performance already rendered).
The idea that notice is a covenant, not a condition, (that is, that notice is a promise of contractural performance by the policyholder) also provides a more satisfactory framework for understanding the notice/prejudice rule. Those courts adopting a requirement of showing prejudice before nonperformance by the carrier is justified have been telling us that notice is not a condition. Were notice a “condition,” then, as the New York court held in Argo, prejudice wouldn’t matter – a condition is a condition. Because of this prospect of forfeiture, however, contract law adopts the maxim that provisions should be construed as covenants and not as conditions. But since the courts say (other than in NY) that prejudice does matter, then it follows that notice is not a condition. (Just because it is found in the “conditions’ section of the policy is not dispositive; there are other provisions there identifying aspects of the policy relationship that cannot plausibly be construed a conditions precedent to coverage.)
The covenant idea furthermore helps ground arguments about what types of things get ‘counted’ as prejudice to insurers under a notice/prejudice rule. When we then argue about whether a carrier has been prejudiced, we have a normative guidepost, for we are evaluating what happened in the light of the parties’ contractual relationship and whether whatever noncompliance is alleged so goes to the heart of the parties’ mutual contract as to constitute a material breach of the entire relationship – which then would excuse the non-breaching party’s obligations to perform at all. (The covenant framework also provides the way to analyze the question of the recoverability of pre-notice defense costs, see Klein, Insurance Recovery of Pre-Notice Defense Costs, 34 Tort & Ins. L.J. 1103.)
But the New York Court of Appeals does not address the covenant versus condition point, the idea of material versus immaterial breach, or of disproportionate forfeiture (see Restatement (2d) Contracts § 229). The Appellate Division’s now-reversed opinion in Great Canal addressed the concept of disproportionate forfeiture, a doctrine that New York led the way in adopting in Judge Cardozo’s opinion in Jacobs & Young. Yet the Court of Appeals does not even address its own prior (landmark and famous) precedent in smacking down the Appellate Division in its terse memorandum decision.
The most charitable construction of Argo and Great Canal is that the Court of Appeals did not want to disturb its own prior (if ill considered) precedent. (Protocol counsels that I refrain from invoking Emerson here.) This means that it is now up to the New York legislature to adopt remedial legislation. Or the Insurance Commissioner could act to prohibit an unfair policy term (as construed by the Court of Appeals). One would think it would be politically popular to allow policyholders (voters) to obtain the benefit of the coverage they paid for when they fail to give notice immediately to their carriers and the carrier has suffered no prejudice from the late notice. “No harm, no foul” seems like a good position politically, even if it is not a winning one in the New York court system (unless you’re a carrier).
Of course, the best position to be in for policyholders is not to need to argue about conditions versus covenants, material versus immaterial breach, prejudice, or disproportionate forfeiture: as with voting in Chicago policyholders should give notice early and often. See Marc Mayerson, Perfecting and Pursuing Liability Insurance Coverage: A Primer for Policyholders on Complying with Notice Obligations, 32 Tort & Ins. L. J. 1003 (1997), available at http://www.spriggs.com/news/pdfs/MSM-6.pdf.