To Disclaim or Not to Disclaim – That is the Question Where the Insured Has Failed to Cooperate

On February 18, 2014, the New York Court of Appeals, in Country-Wide Insurance Company v. Preferred Trucking Services Corporation, further clarified the application of New York Insurance Law § 3420 and the requirements imposed upon an insurer that seeks to disclaim coverage based upon the insured’s failure to cooperate. Over the past 47 years, since Thrasher v. U.S. Liability Insurance Company, 19 N.Y.2d 159 (1967), the state of the New York law regarding non-cooperation coverage denials has continued to evolve. Taking this evolution one step further, the High Court most recently focused on the specific circumstances presented when it unanimously reversed the lower courts, and rendered judgment in favor of Country-Wide Insurance Company (“Country-Wide”), finding its delay in disclaiming coverage based upon the insured’s non-cooperation to be reasonable, since the insured’s failure to cooperate had not previously been apparent.

Nearly 47 years ago, the Court of Appeals in Thrasher articulated a three-prong test for determining whether an insurer can properly disclaim coverage to its insured for failure to cooperate. Pursuant to this test, the insurer must demonstrate that: (i) it acted diligently in seeking to bring about the insured’s cooperation; (ii) the efforts it employed were reasonably calculated to obtain the insured’s cooperation; and (iii) the attitude of the insured, after his or her cooperation was sought, was one of “willful and avowed obstruction.” Since Thrasher, the three-prong test has been applied by the New York courts in evaluating the efforts of an insurer to determine whether the surrounding circumstances of each case can satisfy the heavy burden required to establish a lack of cooperation. The New York courts focus on whether an insurer has acted diligently, used reasonably calculated efforts to encourage the insured’s cooperation and, further, issued a timely disclaimer for lack of cooperation in compliance with New York Insurance Law § 3420(d). At the same time, such an evaluation must be undertaken on a case-by-case basis, leaving no definitive rule as to what is diligent and reasonably calculated, and what constitutes an inexcusable delay.

This declaratory judgment action was commenced by Country-Wide against its named insured, Preferred Trucking Services Corporation (“Preferred”), and its driver, Carlos Arias (“Arias”), seeking a declaration that it timely disclaimed coverage in connection with the underlying bodily injury action due to the non-cooperation of Preferred and Arias. By way of background, the underlying action was commenced in March 2007 by plaintiffs Filippo Gallina and his spouse against, amongst others, Preferred and Arias seeking to recover for the bodily injuries purportedly sustained as a result of an accident that had occurred during the unloading of a Preferred truck that was operated by Arias.

Country-Wide received first notice of the underlying lawsuit on October 4, 2007, by facsimile from plaintiffs’ counsel, which annexed a copy of plaintiffs’ September 21, 2007, motion for default judgment against Preferred and Arias. On October 10, 2007, Country-Wide issued correspondence to Preferred and Arias, wherein a defense was afforded to Preferred and Arias, subject to a reservation of its rights to deny coverage for failure to cooperate. Upon receipt of the reservation of rights correspondence, Preferred’s President expressed a willingness to cooperate; however, at all times thereafter, all further efforts to contact Preferred proved unsuccessful.

On July 28, 2008, the Country-Wide investigator reached Arias’ daughter, and obtained contact information for him. Contact was made with Arias on August 18, 2008, at which time he advised the investigator that he would cooperate and appear for a deposition in the underlying action. Thereafter, on October 13, 2008, Arias, for the first time, refused to cooperate when he advised the investigator that he did not “care about the EBT date” as he was dealing with a “family situation.” As a result of Arias’s failure to appear for his deposition on behalf of Preferred, the Preferred Answer was stricken by the trial court on October 16, 2008.  By correspondence dated November 6, 2008, Country-Wide disclaimed its obligation to defend and indemnify Preferred and Arias in the underlying action due to its failure to cooperate in breach of the cooperation provision of the Country-Wide business auto policy. The underlying action proceeded to inquest and damages were rendered against Preferred.

The Appellate Division affirmed the trial court’s grant of summary judgment in favor of the underlying plaintiffs, finding the Country-Wide disclaimer untimely, rendering it obligated to provide indemnification to Preferred and Arias in the underlying action. While the Preferred President had provided sufficient evidence of his failure to cooperate, there was no indication of non-cooperation on the part of Arias until October 13, 2008. Therefore, because Country-Wide had continued to seek the cooperation of Arias in good faith through October 13, 2008, it could not disclaim coverage to Preferred prior to that time. Therefore, the November 6, 2008 disclaimer, which came less than 30 days after Arias’ failure to cooperate, was timely as a matter of law. The Order of the lower court was therefore reversed and judgment was rendered in favor of Country-Wide, finding it to have no coverage obligation in connection with the underlying $2.6 million judgment.

At this juncture, there is no precise standard under New York law with respect to the timeliness of disclaimers; rather, as evidenced by this most recent decision, New York courts must look to the circumstances of each individual case when determining the timeliness of a non-cooperation disclaimer. Nonetheless, insurers must continue to act diligently, and use reasonable efforts to obtain the cooperation of their insured(s), and only upon notice of the insured’s failure to cooperate, issue a disclaimer of coverage. Even where the insurer has successfully established a lack of cooperation on the part of the insured, such a coverage defense will be waived absent a timely disclaimer by the insurer. It is therefore of paramount importance for an insurer to remain mindful of its need to timely disclaim coverage, while it attempts to establish the insured’s non-cooperation.