February 2022: The New Comprehensive Insurance Disclosure Act

There is an old English proverb that says: “You don’t know where you’re going until you know where you’ve been.” On the afternoon of December 31, 2021, New York Governor Hochul signed into law New York Senate Bill “7052.” Called the “Comprehensive Insurance Disclosure Act,” (“CIDA”), it amends the rules that apply to civil litigation in New York as to the production of insurance information by a party in lawsuit. At the time when she signed the Bill, the Governor made clear that she was only signing it on the condition that the legislature would quickly make various changes to it.[1] Some of these changes came about as a result of the lobbying efforts of Big I NY, and various other interested parties.  In this issue of The E&O Report we will review the elements of this new law (based upon both the amendment and the changes that are being made to it) and the potential impact it may have for New York insurance agencies and brokerages.[2]

This amendment to the law, which is retroactive to all pending litigation, represents a change in insurance disclosure in civil cases and may affect your business. Given the complexities involved with this amendment, this E&O Report is a mere summary of the original law, the amendment to the law, and the impact that it may have on New York insurance agencies and brokerages.

Prior Insurance Disclosure Rule

New York Civil litigation practice, (no matter the nature of the case, claims, or relief sought), is governed by the Civil Practice Law and Rules, (“CPLR”). Despite the word “Rules” in the title, the CPLR is a compilation of state statutes, (similar to the New York Insurance Law), created by the legislative process. The rules contained in the CPLR govern everything from how to start a lawsuit, to how to appeal, and even how to conduct discovery.

 Article 31 of the CPLR sets forth the rules for discovery, including depositions, demands for documents, etc. CPLR §3101, titled “Scope of Disclosure” is the threshold section that governs everything that comes after it. This section provides the guidelines for discovery in New York civil litigation. Subsection “(f)” states as follows:

(f) Contents of insurance agreement. A party may obtain discovery of the existence and contents of any insurance agreement under which any person carrying on an insurance business may be liable to satisfy part or all of a judgment which may be entered in the action or to indemnify or reimburse for payments made to satisfy the judgment. Information concerning the insurance agreement is not by reason of disclosure admissible in evidence at trial. For purpose of this subdivision, an application for insurance shall not be treated as part of an insurance agreement.

First, by its terms, this rule is not self-executing. It creates no affirmative duty to disclose on any party. It requires the party seeking such disclosure to serve a demand for insurance information.

It dovetails with New York Insurance Law, §1101, “Definitions,” which defines an “Insurance contract” as an “agreement or other transaction whereby one party, the “insurer,” is obligated to confer benefit of pecuniary value upon another party, the “insured” or “beneficiary.”

Second, the definitions in this statute apply to the relationship between the parties to the insurance contract outside of the statutory scheme. See, Chase Manhattan Bank v. N.H. Ins. Co., 193 Misc. 2d 580, 749 N.Y.S.2d 632, 2002 N.Y. Misc. LEXIS 1297 (NY County 2002).

Third, always remember that an “insurance contract” is a bi-partite agreement between the policyholder and the insurer. See, Gilbane Bldg. Co./TDX Const. Corp. v. St. Paul Fire et al, 143 A.D.3d 146 (1st Dept., 2016)(“[a]n insurance policy is a contract between the insurer and the insured” (Bovis Lend Lease LMB, Inc. v. Great Am. Ins. Co., 53 A.D.3d 140, 145, 855 N.Y.S.2d 459 [1st Dept. 2008]).” See also, NY Ins. Law §101(a)(1). The insurance broker is never a party to any insurance contract.

 Fourth, CPLR §3120 “Discovery and production of documents and things for inspection, testing, copying or photographing” provides that a party must provide those documents which are in the “possession, custody or control of the party or person served.” Basically, a party has no obligation to provide documents that it does not have.

 

The New Comprehensive Insurance Disclosure Act as Amended

 The new CIDA now requires as follows:

1. It is not retroactive to all pending litigation and only applies to those cases filed after the original effective date of December 31, 2021.

2. It now mandates that even without a demand a party has an affirmative obligation, within 90 days after serving an answer, to provide the “insurance agreement.” This can be satisfied by providing the policies or the Declarations pages. Counsel may always ask for the actual policies if only the Declarations Pages are provided. This does not include producing the applications which was originally sought to be part of the amendment.

3. A party must also disclose the total limits available under the policy after taking into account policy erosion, if applicable.

4.The name and email of the insurer’s claims adjuster on the claim must be provided. (This would mean the “TPA” and not the person at the carrier to whom the TPA is reporting.)

5. The Amendment does not apply to PIP lawsuits.

6.Finally, the response needs to be certified by counsel and the party.

Our Analysis and Comments

Even with these hard-fought changes to the December 31, 2021 bill, the amendment fails to take into consideration that a party required to provide discovery, any discovery, under CPLR §3120, is limited to producing only those documents that are in its possession, custody or control. However, based upon the amendment to the CPLR, the documents that a party now has to produce, other than the insurance policies, are not in their possession or custody.

One might think that the documents for an insured in the files of an insurance company or its broker are the property, or in the “control” of the insured who merely has to demand them. However, that is incorrect. They are not. Those documents are the property of the insurance broker or the insurer. (As to insurance “agents,” their files are often defined in the Agency Agreement as the property of their principal, their insurer.)

In the end, one can expect that all that will change with this new disclosure requirement is that the same documents that were previously provided in compliance with the old CPLR §3101(f) demand will be used to comply with the new CPLR §3101(f) affirmative disclosure requirement.

Potential E&O Implications

We see no increase in the potential for substantive E&O claims against New York insurance brokers or agents based on this new insurance disclosure rule. If an E&O claim is going to made against a New York insurance broker or agent, that decision will be made having nothing to do with documents provided in response to this statute.

What this amendment to the CPLR will most likely do is cause insurance brokers and agents to have to contend with an increase in requests from their insureds for the documents responsive to the new affirmative disclosure duty. Any party that earnestly wants to fully comply, (and we doubt they will other than what is in their possession), will have to seek those documents from their insurance broker or agent, or the insurance carrier.

As mentioned above, the insurance agent and insurer are legally the same when it comes to the files created for an insured. That legal status and the typical agency agreement, (which often states that all files are that of the insurer), would mean that the agent would have no right to disclose its insurer’s files to even the insured without the consent of the insurer.

An insurance broker’s files are their own as well, negating that an insured could simply demand production of the information as part of the “control” requirement under the CPLR. That will likely result in threatening letters and subpoenas from insured’s lawyers to brokers.  This in turn will likely prompt more insurance producers to report a situation to their E&O insurer regarding a demand that they have received for their insurance files.  This should trigger the “Legal Assist” coverage under a typical insurance agent/broker E&O policy form.  The subject change to the CPLR may have the effect of causing an increase in the number of Legal Assist claims that are reported to E&O insurers in New York.

Endnotes

[1] The Chapter Amendments that contain the changes the Governor wanted made to the Bill she signed are presently working their way through the legislature and should be passed before March 1, 2022, which is the initial deadline for disclosure.  One of the changes is the elimination of the requirement for the disclosure of the insurance application.

[2] For the sake of clarity, we will simply refer to the final statute that will be in effect after the changes are made by the legislature as the amendment.