Late Notice Problems Are a Thing of the Past, Right? Wrong!

In 2008, New York amended its insurance law to require an insurer to show prejudice before denying coverage for a liability claim when the declination is based on the insured’s late reporting of the occurrence. It’s common to say that New York’s late notice problems were solved, but Nikolai Minasian and Harutyun Minasian found out the hard way that the law only applies to liability insurance.

The Minasians, son and father, said they suffered a theft loss from their apartment on January 1, 2014 of approximately $190,000 in jewelry and $1,150 in cash. The loss was reported to the police within 15 minutes of its discovery, but was not reported to the insurance companies until 86 days later. Two insurance companies provided coverage: IDS and State Farm. Both investigated the claim and both denied coverage based on misrepresentations and late notice. The Minasians sued.

To explain the late notice, they said they wanted to see whether the police would recover the items.  In addition, they were unsophisticated and had no prior experience with reading or understanding insurance policy conditions. Harutyun, the father, didn’t read or write English.  Furthermore, their attorney asserted that the insurers weren’t prejudiced by the delayed loss notice.

The court rejected all their excuses. Its reasoning is pertinent to questions that regularly perplex producers. In brief, the court ruled:

• With regard to waiting until the police had fully investigated:

Under New York law, a plaintiff is not excused from timely notice by his belief that the loss will be recovered or otherwise reimbursed elsewhere.

• The insurers weren’t prejudiced by the delayed loss notice:

New York law does not require an insurer to demonstrate prejudice to successfully invoke a late notice defense (for other than liability claims).The insureds were unsophisticated and had no prior experience with reading or understanding insurance policy conditions.

Even if any of the asserted excuses could be viable as to certain types of insurance policies in certain circumstances, the insureds failed to present a genuine issue of material fact that the circumstances were a reasonable excuse for their lengthy delay.1

In short, New York’s draconian late notice rules give insurers a strong basis to deny coverage for late reporting. Roy Mura, Esq. discussed this case in his excellent Coverage Counsel blog.2 In response to an email, he sent me a list of cases that have held that even less than a month’s delay can provide grounds for denial of coverage:

Z Discount Clothing Corp. v. Meyninger, 23 F. Supp. 2d 270, 272 (E.D.N.Y. 1998) (10-day delay); Rushing v. Commercial Cas. Ins. Co., 251 N.Y. 302, 304 (1929) (22-day delay) (Cardozo, C.J.); Haas Tobacco Co. v. Am. Fid. Co., 226 N.Y. 343, 345 (1919) (10-day delay).

There are numerous other cases that have upheld an insurer’s denial of coverage based on late notice of 90 days or less.

My impression, based on an entirely unscientific sampling, is that there’s frequently another issue with the claim in addition to late notice, as there was in the Minasian case (the insurers also denied liability for misrepresentation). Nevertheless, I think some amelioration of the current interpretation is called for, perhaps the insurer should be required to show prejudice if the report is more that 90 or 180 days late. But remember the three first steps in claims handling remain: Report, Report, Report.

A Reader Writes: Another Day, Another Scam

In my last column, I quoted an email sent by Gordon Coyle, CPCU recounting that a prospect told him how he had almost lost more than $300,000 to an email scammer. Gordon just sent me another email telling of a prospect who did fall for an even simpler and more common version of the fake client scam. In this version, an attorney receives an unsolicited email from someone in a foreign county seeking the attorney’s help in collecting a debt owed by a US firm. After the attorney has agreed to represent the fake client and made demands via phone, USPS mail, and email for immediate payment, the ‘client’ emails the attorney that the ‘”debtor” has paid, but that the certified check the debtor sent is payable to the attorney. He writes that he will overnight it to the attorney who should deposit it in his trust account and immediately wire the balance after deducting his fee and expenses. Shortly after the attorney has complied, his bank notifies him that the check is a forgery. As Gordon’s prospect found out, it’s often too late to reverse the transaction wiring the finds to the “client.” Gordon’s prospect lost over $200,000.

Gordon raised an interesting question: would this type of loss be covered by ISO’s fraudulent impersonation coverage of any of the independent social engineering forms? The answer, of course, is RTFP, which is euphemistically translatable at “read the fine print,” a variant of the hoary computer put-down of RTFM.

If coverage were provided by the ISO form CR 04 17 11 15 (Fraudulent Impersonation), I see problems getting coverage. Here are a few items from the form:

We will pay for loss resulting directly from your having, in good faith, transferred “money”, “securities” or “other property” in reliance upon a “transfer instruction” purportedly issued by your “customer” or “vendor”, but which “transfer instruction” proves to have been fraudulently issued by an imposter without the knowledge or consent of the “customer” or “vendor”.

“Customer” means an entity or individual to whom you sell goods or provide services under a written contract.

I think there would be a dispute about coverage under the ISO form. Yes, there may have been a fraudulent impersonation, but the coverage applies to acts by someone who impersonates a customer. The coverage definition implies two entities. In this case there’s only one entity. Either the scammer is the customer, in which case there’s no impersonation or there’s just an impersonator pretending to be a customer, and no customer at all. Furthermore, the cause of loss here is really the acceptance of a forged check. (ISO does not offer forged incoming check coverage. The Surety Association of America, which promulgated crime forms prior to ISO, did have such coverage but it was eliminated in the mid-1980s. At that time it was running a loss ratio of over 1,000%–that’s $1,000 in losses for every $100 in premiums written.)

If insurance had been provided by Chubb’s independently developed Social Engineering form, the loss might be covered. Here are excerpts from Chubb’s Social Engineering Fraud Coverage Insuring Clause:

Social Engineering Fraud means the intentional misleading of an Employee, through misrepresentation of a material fact which is relied upon by an Employee, believing it be genuine.

We will pay for loss resulting directly from your having, in good faith, transferred “money”, “securities” or “other property” in reliance upon a “transfer instruction” purportedly issued by your “customer” or “vendor”, but which “transfer instruction” proves to have been fraudulently issued by an imposter without the knowledge or consent of the “customer” or “vendor”. “Customer” means an entity or individual to whom you sell goods or provide services under a written contract.

Furthermore, Chubb’s promotional material describes this coverage by citing an example of a $250,000 loss arising from almost exactly the same fraud that trapped Gordon’s client!3

Some policies, whether called fraudulent impersonation or social engineering, contain a requirement that the insured verify the authenticity of a communication via a verbal conversation with a purported Vendor or Client, using a pre-determined telephone number. Failure to do so vitiates coverage. One insurer defines pre-determined telephone number as:

Pre-Determined Telephone Number means a telephone number that was provided by the Vendor or Client when the written agreement or other arrangement was first established with the Insured; or replaced a telephone number previously provided by the Vendor or Client, provided that confirmation of the legitimacy of the change was achieved through verbal contact with the Vendor or Client at the previously provided telephone number, or replaced a telephone number previously provided by the Vendor or Client and was received by the Insured at least 30 days prior to the receipt of a Communication.4

Verification is an excellent loss-control technique and insureds should require that their employees use it, but it shouldn’t be a policy requirement. It’s stupid not to do it, but if there were a stupidity exclusion in insurance policies, claim frequency would decline by at least 50%.

ISO has a similar provision available for its fraudulent impersonation form, but it’s optional. An insurer using the ISO form has three choices: requiring verification, requiring verification only when the amount involved exceeds a specified level, or not requiring verification.

Another change is in the wind. Insurers who provide cyber liability coverage are planning to add cyber fraud coverage. That would cover some of the same types of loss as social engineering/fraudulent impersonation. However, by linking it solely to cyber losses, it may not cover losses that occur the old-fashioned way: impersonation via telephone or in person. Nevertheless, it’s a development to watch for.

These have become very common scams. Alert your clients to the dangers of forged cashier’s checks. It can sometimes take a long time to detect a forgery. Tell them about these scams and how they might protect themselves by exercising caution. And tell them about the coverages that are available in case loss control fails.

ISO Tackles Airbnb, VRBO And Other Home-Sharing Services

I’ve written about the insurance problems inherent in home-sharing services such as Airbnb, VRBO, etc. before.5 ISO has now provided an Advisory Notice (ADVISORY NOTICE TO POLICYHOLDERS REGARDING HOME-SHARING SERVICES HO P 063 10 15) that can be sent to insureds to alert them to coverage gaps. It’s a good idea, but I wish the notice were more user friendly.

The notice starts with 11 lines of legal-sounding gobbledegook stating in convoluted language that the policy governs the interpretation of coverage and what home-sharing services are. This could be condensed into two or three lines by a statement that the provisions of your homeowners policy shall prevail in the event of loss and saying that the notice refers to Airbnb, VRBO and other home-sharing services. (More insureds will know what Airbnb and VRBO are than will understand that home-sharing refers to something other than staying with cousin Bert in Dubuque.)

The form then sets out the most important part: the possible gaps in coverage:

Your Homeowners Policy contains several provisions which may limit or exclude certain coverages when you participate in a home-sharing service, either when acting as a host or acting as a guest. For example:

When acting as a host, and renting out space to others, coverage under your Homeowners Policy may, with certain exceptions, be limited or excluded with respect to:

• Loss to a structure, other than your residence, that is rented or held for rental to others;

• Loss to personal property of your roomers, boarders and other tenants;

• Theft of your personal property from that part of your residence rented by you to others;

• Loss of your appliances, carpeting and other household furnishings in each apartment regularly rented or held for rental to others; and

• Your liability for bodily injury or property damage to others when the rentals occur more than occasionally.

When acting as a guest, and utilizing someone else’s space, coverage under your Homeowners Policy may be limited or excluded with respect to damage to property you rent, occupy, use or, property that is in your care.

Unfortunately, most insureds will have stopped reading long before they reach this list. I’d recommend that producers either accompany the notice with their own, or just create their own notice.

Airbnb and some of the other home-sharing services offer coverage to hosts and renters that plug some or most of the gaps in coverage in a standard homeowners policy. ISO is currently developing endorsements for the homeowners policy to deal with home-sharing. One will exclude and another will afford coverage for home-sharing activities. These are both points to mention when you write to your clients.

Short Takes on Significant Topics:

Loss Payee on a Property Policy Doesn’t Have the Same Rights as a Mortgagee

In 2010, Stairway Capital Management II LP lent Eidos Partners LLC, $20 million to fund a patent enforcement program. That sum, and the amount of insurance, was later increased to $25 million. As a condition for the loan, Stairway required Eidos to obtain a contingent loss reimbursement policy, which was issued by Ironshore Specialty Insurance Company.

Ironshore’s policy provided coverage to Eidos in case it couldn’t recoup enough recovery from the patent litigation to repay the loan’s principal by November 2013. Stairway was named as a loss payee and there was a contract between Steinway, Eidos, and Ironshore assigning the right to make claim under the policy to Steinway.

Eidos failed to make the principal payments and Stairway filed claim against Ironshore.6 Ironshore denied coverage for the loss and Stairway sued.

This is obviously not the type of transaction that crosses our desks every day. It is more financial guarantee than insurance. It sounds like a plot idea for a sequel to the movie “The Big Short.” Nevertheless the principles set out in the decision apply to our everyday work.

Stairway claimed that under the loss payee clause in the policy and the agreement between the Stairway, the insured and insurer, it was entitled to receive payment from Ironshore despite any defense that Ironshore might have against Eidos. The lower court agreed, but the Appellate Division, NY Supreme Court, First Department reversed and ruled in favor of the insurer.

The court emphasized the difference between a loss payee clause and a standard mortgagee clause.

Here’s an excerpt of the wording from a typical loss payee clause:

Loss Payable Clause For Covered Property in which both you (the insured) and a Loss Payee shown in the Schedule or in the Declarations have an insurable interest, we will:

1. Adjust losses with you (the insured); and

2. Pay any claim for loss or damage jointly to you and the Loss Payee, as interests may appear.7

That differs greatly from a standard mortgagee clause. In addition to agreeing to pay the loss jointly to the mortgagee and the insured, the NY Standard Mortgagee Clause provides that the insured’s acts or neglect will not invalidate the insurance, that the mortgagee may file a claim and a proof of loss and even demand appraisal if the insured has not, and that if the insured fails to pay premiums due, the mortgagee can pay the premiums to continue coverage. The NY standard mortgagee clause is often described as creating a virtual separate policy for the mortgagee.

The court ruled that Stairway, as lender and loss payee, is not itself an insured under the policy issued by Ironshore to the Eidos Partners, LLC since the loss payee endorsement in the policy does not contain any such provision. Stairway is only entitled to payment of any loss it may be due from Ironshore. Furthermore, all the policy terms apply.8

If one of your clients is a lender relying on a loss payee clause for security, explain the difference between the two clauses.

A Big Embezzlement Loss and a Bigger Auto One

Hearing about big losses can get us thinking about how the coverage clients carry will respond and can get insureds thinking about the adequacy of their coverage. Two unrelated losses serve those purposes very well.

The first one is a fidelity loss. A QBE executive and his accomplice were arrested and charged with embezzling $2.6 million by forging the signature of the QBE CFO to fictitious invoices for consulting services.9 Not a very sophisticated crime, but the size of the loss and the fact that it involves an insurance company proves that it can happen to anyone and that the money involved can be substantial. It should be a wake-up call to insureds to strengthen loss-control and look at the limits of coverage they carry. We regularly see firms with many millions of dollars exposed to loss carrying fidelity limits of less than $100,000.

The second involved an auto accident. David Zucker suffered spinal injuries when motorist Miguel Gonzalez collided with an 18-wheel oil tank truck and careened into the path of Zuckers’ car on Interstate 95 in Miami.10 The jury awarded the Zuckers $14.5 million.

And your clients think $1,000,000 liability limits are sufficient? Ask them to think again.