For insurance recovery attorneys, one of the more frustrating ways for a policyholder to lose coverage for a property loss is on the basis of late notice. Property insurance policies generally require the policyholder to give the insurance company “prompt notice” of claims and potential claims. Property policies may specify a timeframe in which the policyholder must give notice, but in many cases do not. New York courts routinely hold that short delays, even as little as one to two months, suffice as a basis to deny coverage where the policy has “prompt notice” requirements. Under New York law, however, an insurance company can waive its late notice defense by not raising it explicitly when it finally disclaims coverage. Indeed, recently, a federal court in New York court rejected the insurance company’s late notice defense, even where the policyholder conceded that it did not provide prompt notice as a matter of law, because the insurance company failed to explicitly deny coverage on that ground.
Summary of recent New York federal court decision
In Mave Hotel Investors LLC v. Certain Underwriters at Lloyd’s London, the plaintiffs (“Mave”) sought coverage for property damage at its hotel following the termination of its contract with a human services organization housing formerly homeless families with children at the hotel. No. 21-cv-08743 (JSR), 2023 U.S. Dist. LEXIS 62718 (S.D.N.Y. Apr. 10, 2023). Mave alleged that its rooms were damaged while the families were living there. The insurer, Certain Underwriters at Lloyd’s London (“Lloyds”), ultimately denied coverage the ground that any damage was caused by ordinary wear and tear, an excluded cause of loss. At trial, however, Lloyd’s moved for summary judgment, arguing among other things, late notice.
Notably, Mave conceded that it failed to provide “prompt notice” because it waited a little over three months to give notice. Mave argued, however, that Lloyd’s waived its late notice defense by not raising it explicitly in its final denial letter. The letter denied Mave’s claim on the basis the policy’s “wear and tear” exclusion, but only included additional general reservation of rights language. The court agreed that Lloyd’s had waived its late notice defense by denying coverage on the basis of wear-and-tear but not late-notice, even at a point in time when Lloyd’s likely could have known all the facts that might have led it to disclaim coverage on late notice grounds.
Lloyd’s argued that its denial letter “reserv[ed] each and every right [it] ha[d] under the policy and at law.” The court acknowledged that some cases do permit an insurance company to rely on such generic reservations of rights. The court distinguished those cases because they involved reservations of rights in the insurance company’s communications with the policyholder during the course of its investigation, rather than in the ultimate denial of coverage letter. The court reasoned that “by the time the [insurance company] denies coverage, there should already be a full record and a complete investigation, and there is much less reason why [insurance companies] should be allowed to reserve generic unnamed defenses in the event of later court challenge.”
What should policyholders take away?
Give timely notice. Forfeiture of coverage for failure to give prompt notice under a property policy is a draconian penalty, but one that New York courts will impose. That said, policyholders are entitled to know all grounds on which their insurance company is denying coverage. Policyholders should challenge the insurance company when it attempts to raise additional defenses, such as late notice, that the insurance company failed to raise when denying coverage.