In Estee Lauder Inc. v OneBeacon Ins. Group, LLC, 2016 N.Y. LEXIS 2788 (N.Y. Sept. 15, 2016), the New York Court of Appeals reversed the Appellate Division, First Department, and held that an insurer does not waive a late notice defense under the common law for failing to include the defense in a disclaimer letter. Instead, an insurer must “clearly manifest[] an intent to abandon their late-notice defense.”

In an unusual fact pattern, Estee Lauder sought coverage for environmental claims under a 1968-1971 liability policy that neither OneBeacon nor Estee Lauder could locate. Estee Lauder was first identified as a potentially responsible party for the remediation costs by the State of New York, and was subsequently sued as a third party defendant in litigation over the remediation costs. Estee Lauder reported the claims to its insurer OneBeacon.

After issuing several reservation of rights letters, some of which raised potential late notice issues, OneBeacon advised Estee Lauder that it was “terminating its investigation of this matter and closing its file” because of a lack of evidence that the policy existed. The First Department found this language to be a disclaimer. OneBeacon did not raise any other policy defenses, although it did reserve all rights under the “alleged” policies predating 1971.

Estee Lauder sued OneBeacon in New York Supreme Court for coverage under the policy. Both parties cross-moved for summary judgment. Relevant here, OneBeacon argued that coverage must be denied because Estee Lauder had not timely reported the occurrence. Estee Lauder responded that OneBeacon had waived the late notice defense because it was not contained within its disclaimer letter.

The trial court held that notice was not timely provided as a matter of law and that OneBeacon had not waived its late notice defense, even though it was not contained within its disclaimer letter, because the reservation of rights in the disclaimer preserved the defense. In cases Estee Lauder cited to the contrary, the trial court noted, the insurer did not reserve its rights in the disclaimer letter.

On appeal, the First Department reversed, holding “an insurer is deemed, as a matter of law, to have intended to waive a defense to coverage where other defenses are asserted, and where the insurer possesses sufficient knowledge (actual or constructive) of the circumstances regarding the unasserted defense.” Given subsequent Court of Appeals precedent concerning the applicability of Insurance Law § 3420, the First Department issued a second opinion confirming that OneBeacon had waived its late notice defense and that its decision was not predicated on Insurance Law § 3420. In KeySpan Gas E. Corp. v Munich Reins. Am., Inc., 23 N.Y.3d 583 (2014), “the Court of Appeals stated that "[t]o the extent [Estee Lauder] . . . and other Appellate Division cases hold that Insurance Law § 3420 (d) (2) applies to claims not based on death and bodily injury, those cases were wrongly decided and should not be followed." The First Department held that its decision in Estee Lauder was not based on Insurance Law § 3420.

The Court of Appeals, however, reversed the First Department and reinstated the trial court’s decision. “Analyzing the circumstances under the common-law waiver standard, which requires an examination of all factors, defendants cannot be said to have waived their right to assert the late-notice defense as a matter of law by failing to specifically identify late notice in their disclaimer letters.” The applicable standard to common law waiver is whether "defendants clearly manifested an intent to abandon their late-notice defense."

All disclaimer letters should contain a catch-all reservation of rights provision. Although it is good practice to disclaim on all available coverage defenses, a strongly worded reservation of rights at the time of disclaimer will prevent a waiver. The Court of Appeals has drawn a bright line distinction between policies governed by Insurance Law § 3420 and the common law, and early analysis of which law applies is critical.

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