In a decision issued on February 1, 2010, the United Stated Court of Appeals for the Second Circuit confirmed that under New York law some policy provisions, although placed outside of the policy’s “Exclusions” section, may nonetheless be considered an exclusion and, therefore, subject to the timely disclaimer and denial requirement of NY Insurance Law § 3420(d)(2). NGM. Ins. Co. v. Blakely Pumping, Inc., 593 F.3d 150 (2d Cir. 2010). However, the court did uphold the insurer’s denial of coverage.
NY Insurance Law § 3420(d)(2) requires that, with respect to liability policies issued or delivered in New York, “an insurer…disclaim liability or deny coverage for death or bodily injury…occurring within this state, …[by] giv[ing] written notice as soon as is reasonably possible of such disclaimer of liability or denial of coverage to the insured and the injured person or any other claimant.”
The dispute in this case arose when an executive of the insured company was involved in an auto accident, causing injuries to a third party. The injured party sued the driver and the company, as the driver was using the car in the course of his work for the company. The driver and the insured company both sought defense and indemnity coverage under a “Business-owners Liability Coverage.” Although the policy covered liability for personal injuries, its “Exclusions” section which barred coverage for damages “arising out of the ownership, maintenance, use or entrustment to others of any … ‘auto’ … owned or operated by or rented or loaned to any insured.”
However, the policy also included an endorsement extending coverage to bodily injury arising from the use of a “Hired Auto” or a “Non-Owned Auto” by the company or one of its employees. “Hired Auto” was defined as “any ‘auto’ you lease, hire or borrow. This does not include any ‘auto’ you lease, hire or borrow from any of your ‘employees’ or members of their households, or from any partner or “executive officer’ of yours.” “Non-Owned Auto” was defined as “any ‘auto’ you do not own, lease, hire or borrow which is used in connection with your business.”
The insurer timely disclaimed coverage under the exclusion. In response, the insured raised the endorsement as potentially applicable. It was only then that the insurer also disclaimed coverage under the endorsement, on grounds that the driver was an executive officer of the insured and, therefore, his car was neither a “Hired Auto” nor “Non-Owned Auto” as defined in the endorsement.
The insurer subsequently commenced suit, seeking a declaratory judgment that it was not obligated to defend the insured or its employee in connection with the underlying personal injury lawsuit. The district court ruled in favor of the insured, holding that the insurer did owe defense and indemnity, on the grounds that the endorsement’s definition of the terms “Hired Auto” and “Non-Owned Auto” constituted exclusions from general coverage, thereby triggering the timely disclaimer and denial requirement of § 3420(d)(2). As the insurer initially disclaimed coverage based solely on the policy’s auto exclusion, the court ruled that it had “waived” its right to disclaim coverage on other grounds. The court thus concluded that the insurer’s subsequent notice of disclaimer under the endorsement was invalid.
The Second Circuit reversed, however, holding that the endorsement’s definition of “Hired Auto” and “Non-Owned Auto” were not exclusions, and therefore did not trigger the timely disclaimer or denial requirement of § 3420(d)(2). In that regard, the court stated that “[d]etermining whether there is no coverage by reason of exclusion as opposed to lack of inclusion can be ‘problematic.'”
The court further noted:
The Endorsement did not generally cover auto accidents; it covered only accidents arising from the use of a “Hired Auto” or “Non-Owned Auto.” Those terms were defined in such a way that an employee’s or officer’s vehicle, like Blakely’s pickup truck, could never be covered. This is not a case then where “the happening of a subsequent event” implicated a definitional term that “uncovered” a formerly covered car. Id. Rather, it is a case in which “the policy as written could not have covered the liability in question under any circumstances.” Zappone, 55 N.Y.2d at 134. In short, there was no coverage “by reason of lack of inclusion,” and thus no notice of disclaimer was required. Id. at 137 (internal quotation marks omitted).
The court’s decision highlights the importance of distinguishing between policy provisions negating coverage, such as exclusions and policy conditions, which are subject to § 3420(d)’s timely disclaimer requirements, and provisions defining or otherwise clarifying the scope of coverage, which are not subject to § 3420(d).