New York’s Timely Disclaimer Statute Does Not Apply to Foreign Risk Retention Groups, Holds Court of Appeals

Nadkos, Inc. v Preferred Contrs. Ins. Co. Risk Retention Group LLC

The Court of Appeals holds that a foreign Risk Retention Group’s failure to timely disclaim coverage is not an “unfair business practice,” while its failure to timely disclose the details of its coverage, is.  The Federal Risk Retention Group Act of 1986 pre-empts State law regarding disclaimers and thus the timely disclaimer requirement of Insurance Law 3420(d)(2) does not apply to out of state RRGs.­—LNR

On this appeal, we conclude that a general business practice of failing to promptly disclose coverage within the meaning of Insurance Law § 2601 (a) (6) does not include violations of the timely liability disclaimer requirement of Insurance Law § 3420 (d) (2).

The genesis of this appeal is in an insurance coverage dispute between plaintiff Nadkos, Inc., the general contractor in an underlying personal injury action by an employee of Nadkos’s subcontractor, and defendant Preferred Contractors Insurance Company Risk Retention Group LLC (PCIC), the subcontractor’s general liability insurer. PCIC is a risk retention group (RRG) charted in Montana and doing business in New York. An RRG is an issuer of insurance owned and operated by insureds who work in the same industry and are exposed to similar liability risks.

The PCIC policy named Nadkos as an additional insured, extending coverage to Nadkos for liability related to the “ongoing operations” of the subcontractor and other members of the risk retention group. After PCIC disclaimed coverage based on certain exclusions in the policy, Nadkos sought a declaratory judgment that the policy obligated PCIC to defend and indemnify Nadkos in the employee’s personal injury action. Nadkos also maintained—without objection from PCIC—that the disclaimer was untimely. Thus, according to Nadkos’s interpretation of Insurance Law § 3420 (d) (2), the disclaimer was void.

PCIC moved for summary judgment, arguing that section 3420 (d) (2) is inapplicable to a nondomiciliary RRG. Nadkos then cross-moved for summary judgment, asserting that Insurance Law § 2601 (a) (6), which undisputedly applies to foreign RRGs, cross-references section 3420 (d) and therefore subjects PCIC to the timely disclaimer requirements of section 3420 (d) (2). As such, PCIC is barred from asserting all coverage defenses as applied to Nadkos. Supreme Court granted PCIC summary judgment dismissing the complaint, denied Nadkos’s cross-motion and made a declaration in favor of PCIC.

The Appellate Division affirmed, holding that an insurance coverage disclaimer is not a disclosure of coverage within the meaning of Insurance Law § 2601 (a) (6), and therefore section 3420 (d) (2) does not apply to nondomiciliary PCIC. We granted Nadkos leave to appeal.

We begin our analysis with the applicable insurance provisions of the state’s statutory and regulatory framework. The Legislature promulgated the Risk Retention Groups and Purchasing Groups Act, codified in Article 59 of the Insurance Law, “to regulate the formation and/or operation in this state of risk retention groups” (Insurance Law § 5901). As relevant to this appeal, Insurance Law § 5904 provides that nondomiciliary RRGs doing business in New York “shall comply with the unfair claims settlement practices provisions as set forth in [section 2601] of this chapter, and any regulations promulgated thereunder” (Insurance Law § 5904 [d]).

In turn, Insurance Law § 2601 (a) lists acts by insurers that, “if committed without just cause and performed with such frequency as to indicate a general business practice, shall constitute unfair settlement practices.” Insurance Law § 2601 (a) (6) includes, “failing to promptly disclose coverage pursuant to” Insurance Law §§ 3420 (d) or (f) (2) (A) (Insurance Law § 2601 [a] [6]).

Insurance Law § 3420 (d) contains two paragraphs. The first, paragraph (d) (1), requires insurers to respond to requests for information by insureds or injured individuals. Specifically, it mandates that insurers inform the requesting party, within firm statutory deadlines, whether the insured has a particular policy, the coverage limits of that policy, and whether additional information is needed to identify the policy (see Insurance Law § 3420 [d] [1]). The second, paragraph (d) (2), provides that if “an insurer shall disclaim liability or deny coverage . . . it shall give written notice as soon as is reasonably possible” (Insurance Law § 3420 [d] [2]). Like section 3420 (d) (1), section 3420 (f) (2) (A) requires insurers to inform insureds of the limits of coverage for uninsured/underinsured motorist claims (see Insurance Law § 3420 [f] [2] [A]).

The penalties for violations of the disclosure mandates in sections 3420 (d) (1) and 3420 (f) (2) (A) differ from those imposed for violations of the disclaimer requirements in section 3420 (d) (2). While an insurer is subject to a monetary penalty for failure to timely disclose in accordance with section 3420 (d) (1) (Insurance Law § 2601 [c]), its failure to timely disclaim liability or deny coverage is considered an unduly delayed notice that results in per se prejudice to the insured and limits the defenses an insurer could raise against an insured’s claim.

Whether PCIC’s disclaimer is regulated by the Insurance Law turns on whether the reference to an insurer’s failure “to promptly disclose coverage” in section 2601 (a) (6) includes the timely disclaimer requirement of section 3420 (d) (2). Nadkos argues that section 2601 (a) (6) cites to section 3420 (d) without limitation, and thus encompasses both paragraphs (d) (1) and (d) (2). According to Nadkos, if the Legislature intended to limit section 2601 (a) (6) to a specific subparagraph of section 3420 (d), it knew how to do so, as demonstrated by the cross-reference in section 2601 (a) (6) to a specific subparagraph of another provision—3420 (f) (2) (A). PCIC responds that section 2601 (a) (6) is intended to impose the disclosure requirements of sections 3420 (d) (1) and 3420 (f) (2) (A). Section 3420 (d) (2) is distinguishable as it requires insurers to timely disclaim liability or deny coverage.

We reject the interpretation advocated by Nadkos, and adopted by the dissent, because the prohibition on an unfair claim settlement practice based on a failure to promptly disclose coverage encompasses the mandates of section 3420 (d) (1), not (d) (2).

The text of Insurance Law § 2601 (a) (6) plainly qualifies its reference to Insurance Law § 3420, limiting it to an insurer’s failure “to promptly disclose coverage pursuant to” sections 3420 (d) and (f) (2) (A). In other words, section 2601 (a) (6) applies solely to those portions of subsections 3420 (d) and (f) that require a prompt disclosure of coverage-specific information. The term “disclose” is not defined in the Insurance Law, nor is it mentioned in sections 2601 and 3420 (d), but that does not render, as the dissent maintains (dissenting op at 17-20), these two sections ambiguous or their interplay unclear.

Section 3420 (d) (1) (A) provides that the subsequent subparagraphs apply only to certain policies (Insurance Law § 3420 [d] [1] [A]). In turn, subparagraph (B) requires an insurer to confirm the existence and limits of coverage for an applicable policy, when such information is requested by an injured person or claimant (Insurance Law § 3420 [d] [1] [B]). In furtherance of this goal to reveal an existing policy’s coverage, subparagraph (C) requires the insurer to request additional information from the injured person, or claimant, if necessary to identify an applicable policy (Insurance Law § 3420 [d] [1] [C]). By requiring insurers to confirm the existence of an applicable liability policy and to specify the limits of its coverage, the requirement in section 3420 (d) (1) falls within the general meaning of a disclosure. Conversely, an insurer does not disclose coverage by merely notifying the insured that it is not liable or will not provide coverage—a notification required by section 3420 (d) (2).

The dissent’s embellished version of Nadkos’s claim is as unpersuasive as the original. To disclose coverage is to make known the existence of a policy, which once disclosed may lead to litigation regarding whether the insured or other claimant is entitled to a payout under the terms of the policy. Indeed, Insurance Law §§ 3420 (d) (1) (B) and (C) respectively impose 60 and 45-day deadlines for notification, which promotes expeditious resolution of potential claims. While it is also useful for the insured and other claimant to know “as soon as reasonably possible” whether the insurer will disclaim liability or deny coverage in accordance with (d) (2), the dissent is incorrect that there is no benefit to the claimant from timely notice under (d) (1) that the insurer has “identified a liability insurance policy that may be relevant to the claim” (Insurance Law § 3420 [d] [1] [C]).

Indeed, if the Legislature intended Nadkos’s interpretation as adopted by the dissent, it would have used simpler, more direct language of this alleged more expansive construction. For example, the drafters could have described this type of unfair claim settlement practice in either of the following ways: “failing to promptly notify the insured pursuant to section 3420 (d) and section 3420 (f) (2) (A),” or “violating section 3420 (d) and section 3420 (f) (2) (A).”

The statutory structure also supports interpreting the confirmation requirements of section 3420 (d) (1) as distinct from the timely disclaimer of liability and denial of coverage mandated in section 3420 (d) (2). First, as the Appellate Division observed, if section 2601 (a) (6) both encompasses the disclosure requirement of paragraph (d) (1) and disclaimer requirement of (d) (2), then the use of the term “disclosure” in section 2601 (a) (6) would be superfluous. Such an interpretation violates the rule of construction that “words must be “harmonize[d]” and read together to avoid surplusage. A statute should be construed to avoid rendering any of its provisions superfluous. Second, the cross-reference to section 3420 (f) (2) (A), which in turn addresses disclosures of supplemental uninsured/underinsured motorists insurance coverage limits, supports our reading that section 2601 (a) (6) refers only to an insurer’s divulgence of the existence and limits of a specified policy—required in paragraph (d) (1)—and not to a blanket statement disclaiming liability or denying coverage—mandated by paragraph (d) (2). Therefore, we reject the invitation of Nadkos and the dissent to ignore the simple fact that the cross-reference in section 2601 (a) (6) is limited to those parts of sections 3420 (d) and 3420 (f) (2) (A) violated by an insurer’s repeated “failure to promptly disclose coverage.”

The disclosure requirements in section 3420 (d) (1) were enacted as part of amendments made to the Insurance Law in 2008. Prior to the 2008 amendments, section 3420 (d) included only the timely disclaimer requirement now set forth in section 3420 (d) (2). At the time, Insurance Law § 2601 (a) (6) referred solely to section 3420 (f) (2) (A) (see Insurance Law § 2601 [a] [6] [1998]). Only after section 3420 (d) (1) was added in 2008 was section 2601 (a) (6) amended to cross-reference section 3420 (d). The inescapable inference is that the Legislature did not consider violations of section 3420 (d) (2) to be an unfair claim settlement practice when it amended section 2601.

The purposes of the 2008 amendments support this reading. The changes in the law were intended to permit individuals suing an insured tortfeasor to initiate a simultaneous declaratory judgment action against the tortfeasor’s insurer to challenge the denial of coverage based on late notice, and prohibit insurers from denying coverage based on the failure to provide timely notice without demonstrating they were prejudiced by the delay (see Introducer’s Memorandum, L. 2008 ch 388). As the introducer’s memorandum states, section 3420 (d) (1) was intended to:

“
establish a process for a claimant to receive confirmation from an insurer that the insured had an insurance policy in effect on the alleged occurrence date, and the limits of such policy. This section of the bill also establishes a process in case insufficient information is provided to the insurer and such confirmation is not possible.”

While section 3420 (d) (1) furthered the purposes of the 2008 amendments by creating a process that would allow injured claimants to obtain sufficient information to seek declaratory relief, it is not evident how, as Nadkos and the dissent argue, paragraph (d) (2) was essential to furthering those objectives.

The statutory text, framework and legislative history establish that section 2601 (a) (6) does not encompass the liability disclaimer requirement of section 3420 (d) (2). Accordingly, the order of the Appellate Division should be affirmed, with costs.

2019 NY Slip Op 04641

Decided on June 11, 2019

Court of Appeals

Rivera, J.