The application of New York Insurance Law § 3420(d)(2), which requires notice of disclaimer as soon as reasonably possible under a liability policy, has resulted in quite a few cases testing its outer limits and proper implementation. In a recent case, a New York intermediate appellate court was asked to address § 3420(d)(2)’s application in the context of a liability policy issued by a foreign risk retention group (“RRG”). The court affirmed summary judgment in favor of the RRG based, in part, on preemption by the Liability Risk Retention Act of 1986 (“LRRA”).
In Nadkos, Inc. v. Preferred Contractors Ins. Co. Risk Retention Grp LLC, No. 651556/16, 2018 N.Y. Slip. Op. 03242 (App. Div. 1st Dep’t May 3, 2018), an individual subcontractor was injured on a job site and sued the owner, the general contractor and a structural steel subcontractor. The subcontractor had obtained general liability insurance from the RRG, which named the owner and the general contractor as additional insureds. The general contractor’s carrier tendered the underlying personal injury lawsuit to the RRG for defense and indemnification. The RRG denied coverage to the subcontractor within days of the tender, but did not disclaim coverage to the general contractor until over two year’s later.
In the ensuing coverage litigation, the general contractor sought a declaration that the RRG had to defend and indemnify it and argued on a cross-motion for summary judgment that the RRG’s disclaimer was too little, too late under New York law, thereby waiving the RRG’s coverage defenses. The RRG, in its summary judgment motion, contended that § 3420(d)(2) did not apply because it was preempted by the LRRA. The motion court agreed and granted summary judgment to the RRG.
On appeal, the appellate court affirmed the grant of summary judgment to the RRG. While there was no dispute that the LRRA allows non-domiciliary states to require RRGs to comply with state unfair claim practices laws, the parties argued over whether § 3420(d)(2) was within the ambit of unfair claim practices under New York Insurance Law § 2601. This section listed the failure to promptly disclose coverage under § 3420(d) as an unfair claim practice. As the appellate court explained, the dispute came down to whether the reference to § 3420(d) included both subsection (1) and subsection (2).
In affirming summary judgment for the RRG, the court held that the general contractor’s claim that § 3420(d)(2) came within § 2601 was without merit. The court found this section unambiguous and pointed out how the terms “disclose” and “disclaim” have very distinct meanings. Section 3420(d)(1) addresses coverage disclosure issues–fitting within § 2601–where § 3420(d)(2) addresses disclaimers, not disclosure of coverage. Thus, held the court, § 3420(d)(2) was not within the scope of § 2601 and was preempted by the LRRA. The court found that the heightened disclaimer requirements under § 3420(d)(2) would impair an RRG’s ability to operation on a nationwide basis without being compelled to tailor its policies to the specific requirements of every state. The court noted that Congress chose to limit the power of nondomiciliary states to regulate RRGs and, therefore, the LRRA clearly preempted § 3420(b)(2).
As an aside, this case also points out the cost of collateral litigation over coverage where a timely disclaimer might have resolved the issue.