Plaintiff Long Island Insurance Company (“LIICO”) instituted a declaratory judgment action and moved for summary judgment against certain defendants, including its insured, Oneil Johnson (“Johnson”), seeking an order that it had no duty to defend or indemnify Johnson in an underlying personal injury action.  See Long Island Ins. Co. v. Johnson, et al., No. 07-cv-40065 (Sup. Ct., Kings Cty., July 22, 2008).  Defendant Ann Gulston (“Gulston”), the claimant in the underlying action, cross-moved for summary judgment dismissing LIICO’s complaint against her on the ground that LIICO’s delay in issuing its coverage denial was unreasonable and directing LIICO to defend and indemnify Johnson in the underlying action.

In the underlying action, Gulston sought monetary damages for bodily injuries she allegedly sustained on July 3, 2007, when a motor vehicle owned and operated by Arlene McKenzie-Harris in which Gulston was a passenger collided head on with a van owned and operated by Johnson in which Deon Denny was a paying passenger.  At the time of the incident, Johnson was insured by LIICO under an automobile insurance policy.  The policy excluded coverage “arising out of the ownership or operation of a vehicle while it is being used as a public or livery consequence.”  Notably, the underlying complaint alleged, in relevant part, that “Johnson was in the course of employment by defendant Rescue Car Services, Inc.” at the time of the incident and that “defendant Johnson operated the [motor vehicle] with the permission and in the business of Rescue Car Services, Inc.”

LIICO initially learned of the underlying action on July 26, 2007 (23 days after the incident) when it received a copy of Gulston’s verified complaint.  LIICO ultimately denied coverage in writing on September 19, 2007, nearly two months after LIICO’s receipt of Gulston’s complaint, relying upon the livery exclusion clause.  The court held that LIICO’s delay in denying coverage was unreasonable as a matter of law under New York Insurance Law 3420(d), which requires a liability insurer for policies issued or delivered in New York to provide written notice to the insured, the injured person and any other claimant “as soon as is reasonably possible” if the insurer is disclaiming liability or denying coverage for “death or bodily injury arising out of a motor vehicle accident or any other type of accident” occurring within New York.

Notably, the court found two bases for the insurer’s delay.  First, the court noted that LIICO knew from the allegations of the complaint it received on July 26, 2007 of the basis upon which it ultimately denied coverage (the livery exclusion clause), but did not issue a written denial until nearly two months after receipt of the complaint.  Next, the court noted that LIICO had written to the insureds on two prior occasions, August 8 and 22, 2007, but did not deny coverage based on the livery exclusion, even though he grounds for their denial were “readily apparent” from the face of the complaint.  Accordingly, the court ruled that LIICO was obligated to defend and indemnify Johnson with respect to the underlying action.