On Nov. 20, 2017, New York's highest court dramatically expandedthe breadth of New York Insurance Law §3420. Carlsonv. American International Group, 2017 NY Slip Op 08163(2017).

That section establishes the minimum requirements for liabilityinsurance policies in the state.

For liability policies that do not include required provisions,at least as favorable to insureds and injured parties, the statutedeems provisions into the policies. The Court of Appeals held thatit not only applied to policies that were issued to New Yorkinsureds or by New York insurers but also to insureds that have apresence in New York and create risks in New York.

N.Y. disclaimer requirements

Out-of-state insurers must take heed. If they issue policies tocompanies (and perhaps individuals) who have a presence in New York(operate a business, for example), New York disclaimerrequirements will apply to that policy and that insurer, even ifthe policy were issued by an out-of-state insurer to an insuredwhose home office was located outside of New York.

The Carlson decision sends a soberingmessage to insurers that issue policies to insureds that have apresence in New York even if the policies are sent from anon-New York office to a non-New York insured location.Section 3420 applies to policies thatcover both insureds and riskslocated in New York.

Many insurers regularly issue reservation of rights letters whenresponding to notices of New York accidents or claims. Oftencarriers that have issued policies in other states protectingagainst multi-state risks have not followed the New York InsuranceLaw §3420 mandates, i.e., to disclaim (rather than reserve theirrights) within 30 days and send copies of disclaimer letters to theinjured party and other claimants.

These insurers will learn that it is critical to quicklydetermine whether their insureds have a presence in New York stateand have created a risk in New York state. If the carriers fail todo so, they may find that their reservation of rights letters maybe ineffective. The same is the case for their exclusion-based orbreach-based disclaimers if not copied to injured persons and otherclaimants or not sent within 30 days after they received notice.The penalty is a significant one: the loss of a right to rely uponpolicy exclusions and breaches of policy conditions.

The case

Carlson, individually and as Administrator of his deceasedwife's estate (as an assignee of Porter) commenced a New York"Direct Action" against National Union Insurance Company (National)and American Alternative Insurance Company (AAIC) seeking to secureinsurance proceeds from policies issued to MVP Delivery (MVP) andPorter, under NY Insurance Law 3420(a)(2). That section permits anaction against an insurer to recover liability insurance coverageif a plaintiff (turned judgment creditor) obtains a judgmentagainst an insured defendant (turned judgment debtor) and thejudgment creditor believes the insurer's policy covers the judgmentbut the insurer refuses to pay it.

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That statute — which contains a variety of significantprovisions that govern New York liability insurance, and Draconianrules on disclaimers, only applies to policies "issued or deliveredin New York."

The New York Court of Appeals held that the term "issued ordelivered" in New York applied not only to policies issued toinsureds that had offices in New York and not only to insureds whoreceived the policies in New York, but encompassed situations whereboth insureds and risks were located in New York state.

Claudia Carlson was killed when a truck with a DHL logo, ownedby MVP and driven by Porter, crossed the double-yellow line and hither head on. The jury awarded her estate $20 million, which waseventually reduced to $7.3 million. MVP's insurer paid the estate$1.1 million and assigned to Carlson, Porter's right to othercoverages.

There was an issue of DHL's responsibility for the accident, butif it were responsible, National Union provided a $3 millionprimary policy, followed by a $2 million excess policy with AAICand then a $23 million umbrella policy with National Union.

AAIC moved to dismiss the lawsuit arguing that its policy wasnot "issued or delivered" in New York. It had been issued to DHL'spredecessor, Airborne, headquartered in Washington and laterassumed by DHL, headquartered in Florida. AAIC was inNew Jersey when the policy was issued.

Ineffective reservation of rights letters

Insurance Law §3420 is a "deeming statute," requiring carrierswhose policies are bound by its terms to permit direct actions,disclaim coverage promptly, accept notice of claim from injuredpersons in addition to insureds and disclaim promptly in bodilyinjury and wrongful death cases, generally within 30 days.

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Because of the statute's disclaimer requirements, reservation ofrights letters issued in such cases are usually ineffective topreserve an insurer's right to rely upon policy exclusions andbreaches of policy condition. Accordingly, broadening the scope ofpolicies impacted by this statute exposes insurers to significantand additional risks in New York.

In 2008, the Court of Appeals considered the same question in acase where a New Jersey insurer issued a policy to a NewJersey insured, East Coast Stucco, that covered New York risks. Thelanguage of the statute was slightly different at that time,applying to policies "delivered or issued fordelivery in this state":

It's undisputed that the policy was actually delivered in NewJersey by a New Jersey insurer to a New Jersey insured. Was thepolicy nonetheless "issued for delivery" in New York? We answer inthe negative.

A policy is "issued for delivery" in New York if it covers bothinsureds and risks located in this state (citations omitted). Byincluding New York as an "Item 3.C." state, the policy covers riskslocated in New York. East Coast Stucco is a New Jerseycompany, with its only offices located in that state, so it cannotbe said that the insured is located in New York. Because the policywas neither actually "delivered" nor "issued for delivery" in NewYork, Preserver is not required [to comply with thestatute]. Preserver Ins. Co. v. Ryba, 10 N.Y.3d635, 642 (2008).

'Sweeping changes'

However, in Carlson, the same court heldthat:

DHL is located in New York because it has a substantial businesspresence and creates risks in New York. It is even clearer that DHLpurchased liability insurance covering vehicle-related risksarising from vehicles when delivering its packages in New York,because its insurance agreements say so.

Again, note that East Coast Stucco, the insured inthe Preserver case, also purchasedliability insurance coverage to protect New Yorkrisk, because its insurance agreements sayso.

The Court of Appeals held that the change in statutory language,from "issued for delivery" to "issued or delivered" broadened itsapplication. Applying the language to policies issued "by aninsurer located in New York or by an out-of-state insurer who mailsa policy to a New York address would undermine the legislativeintent" of the statute.

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The court specifically rejected a strong three-judge dissentholding that the dissent's approach would wrongly exclude "aninsurance policy issued by a national insurer located inConnecticut to a retailer operating in all fifty states, if thepolicy was delivered to the retailer's headquarters inArkansas — even if the policy was specifically written to coverrisks in New York created by the insured's extensive operations inthis state."

The dissenting judges noted, properly, that the majority's"misinterpretation" of Insurance Law 3420 "enacts sweeping changesacross the Insurance Law, generating substantial implications, bothknown and unknown." It pointed out that the term "issued fordelivery" — the phrase usedin Preserver is not the phrase now usedin 3420 now, which is "issued or delivered."

Frightening consequences

The dissent's language is instructive and suggests frighteningconsequences:

[I]t is hardly plausible that the legislature intended torequire every automobile insurer throughout the country—regardlessof where the policy was issued or delivered — to comply with NewYork insurance statutes on the chance that the insured vehicle maybe driven into New York.

The majority opinion claims that its holding is limited topolicies that cover "both insureds and risks" located in New York.The dissent wonders whether it will be applicable when anout-of-state resident drives into New York and it owns property orvacations in New York.

What are the counseling points? When an insurer is placed onnotice about a New York bodily injury or wrongful death accident,it must act quickly and respond properly:

• It must determine whether its insured is "located inNew York." The Court of Appeals found that DHL was "located in" NewYork "because it has a substantial business presence." How muchbusiness must an insured be doing to create a "substantial businesspresence" is unclear.

• It needs to examine its policy to see if New Yorkrisks are covered, by policy terms.

• If the answer to both questions is "yes" or, mostimportantly, if the answer to both questions "might be yes," theinsurer should err on the side of compliance with Insurance Law§3420(d)(2).

• It must send out a coverage position letter within30 days, which avoids reservation of rights language, uses, ifnecessary, complete or "partial" disclaimer language and is copiedto the injured party (or his/her counsel) and any other person,entity or party who might interpose a cross-claim against theinsured.

Loss of breach of policy conditions

Failure to do so, when required, may well result in the loss ofthe insurer's ability to rely upon otherwise valid and applicablepolicy exclusions or the insured's breach of policy conditions.

The dissent suggests, understandably so, that with respect toauto policies i.e., the New York legislature did not intend forInsurance Law §3420 to require to "every automobile insurerthroughout the country … to comply with New York insurance statuteson the chance that the insured vehicle may be driven into NewYork." Consider:

• Jane Roe from New Jersey commutes to New York Cityfor work. While driving down Fifth Avenue, she runs over MaxFactor, who is injured. Jane seeks coverage under her homeownerspolicy issued in Connecticut and mailed to her home in New Jersey.The policy contains an auto exclusion. Jane derives all of herincome from her job in New York. Does Jane have a "substantialbusiness presence" in New York? If the Connecticut homeownerscarrier does not comply with the disclaimer requirements ofInsurance Law §3420, will it lose its right to rely upon the autoexclusion? Is there a carve-out for nature persons? Does the"substantial business presence" requirement only apply to businesscorporations?

• What about employer liability lawsuits where bodilyinjury is alleged? ABC, a national corporation, runs a nationalchain of department stores. ABC has a policy issued in CA deliveredto headquarters in TX. Employee, who works at NY branch, commencesaction for workplace harassment and emotional distress is claimed,which in New York, constitutes "bodily injury." If the carriermerely reserves it rights on policy exclusions, will it beprecluded from relying upon them as a basis for disclaimer?

We shall see. In the meantime, we recommend a careful review ofall New York claims.

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Dan D. Kohane ([email protected]) is asenior attorney with Hurwitz & Fine, P.C.