Once again, the labyrinth wrapped in a conundrum that is New York Insurance Law 3420 (d)(2) rears its ugly head, but at least the outcome was not so ugly. In Black Bull Contracting, LLC v. Indian Harbor Ins. Co., 135 A.D. 401 (2016), the First Department of the Appellate Division considered an insurer’s delay of 79 and 85 days to disclaim coverage after receiving notice of the underlying lawsuit.
A Black Bull Contracting (Black Bull) employee, Luis Mora, was injured while using a jackhammer to demolish the chimney in a building the insured was hired as a subcontractor to assist with renovations. Black Bull’s CGL policy included a “classification limitation” endorsement stating the insurance only applied to operations or classifications shown on the Declarations page or specifically added by endorsement. The codes on the Declarations page listed four classifications/operations intended to be covered under the policy: (1) interior carpentry; (2) wallboard installation; (3) “Contractors — subcontracted work — in connection with construction, reconstruction, repair or erection of buildings — Not Otherwise Classified; and (4) Contractors — subcontracted work — in connection with construction, reconstruction, repair or erection of buildings — Not Otherwise Classified — uninsured/underinsured.” The listed classifications did not include demolition.
Mora sued the general contractor, who filed a third-party complaint against Black Bull, tendering its defense as a putative additional insured under the Black Bull’s policy, as per the subcontract. Indian Harbor issued two tardy disclaimers, grounded on the fact that demolition work was not within the four classifications of operations. Black Bull filed a declaratory judgment against Indian Harbor for coverage for both itself and the general contractor. In lieu of answer, Indian Harbor successfully moved to dismiss.
In upholding the dismissal, the Appellate Division first noted that if Indian Harbor had been “subject to the time this requirement of Insurance Law 3420(d)(2)” its disclaimers “would have been untimely as a matter of law.” The court noted that “the basis of the disclaimers was apparent from the face of the notice of claim and accompanying correspondence” hence, the 79 and 85 days were unreasonable.
However, citing a decision by the Court of Appeals (Worcester Ins. Co.v. Bettenhauser, 95 N.Y. 2d 185, 188-189 (2000)) and by a federal District Court in New York (Max Specialty Ins. Co. v. WSG Invs., LLC, (No. 09-CV-05237) 2012 WL 3150577 (E.D.N.Y. August 2, 2012)), the court held the classification limitation endorsement was not an exclusion. When a disclaimer is based on the failure of a claim to come within the scope of the policy’s coverage set forth in the insuring agreement, Insurance Law 3420(d)(2) does not apply to bar coverage.
Black Bull argued that one of the classification codes pertaining to subcontracted work in connection with construction, reconstruction, repair or erection of buildings could be reasonably interpreted to extend to “liability arising from any work subcontracted to the named insured,” as opposed to liability arising from work that the named insured subcontracts to other contractors. However, the court found this suggested interpretation strained and in conflict with the carpentry and wallboard installation operations in the classifications.
Tressler Comments
This case highlights several important principles regarding timeliness requirements. The statutory timeliness requirements for disclaimers only applies if the disclaimer is based on a policy exclusion. While the statute does not give a specific timeframe for issuing disclaimers, if the disclaimer is based on an exclusion, the application of which is evident from reading a loss notice or complaint, the disclaimer letter should be issued in 30 days or less from an insurer’s receipt of notice. That timeframe could be extended if the basis for the applicability of an exclusion is not self-evident from the complaint or notice, but requires investigation. If the basis for the disclaimer is not an exclusion, but an issue that addresses the applicability of coverage in the first instance, the nebulous statutory time limit does not apply. Unfortunately, the statute leaves out exactly how many days an insurer has to issue a disclaimer based on either an exclusion or other policy language.