In a 4-3 majority decision, a deeply divided New York State Court of Appeals greatly expanded the application of New York State Insurance Law §3420. The statute specifies that its provisions apply to policies that are “issued or delivered in this State.” This ruling construes the statute to apply to policies that cover “both insureds and risks located in this State.”

Prior to the Court of Appeals’ decision in Carlson v. American International Group, Inc. issued on November 20, 2017, New York courts had construed the statutory language “issued or delivered” to mean policies issued by a New York insurer or delivered to an insured or its agent in New York State. In Carlson, the Court of Appeals adopted a liberal construction of this statutory language, holding that the statute will apply to policies issued by foreign insurers and delivered to insureds with principal places of business outside of New York State as long as the policy covers insureds and risks located in New York State.

Insurance Law §3420 is arguably the most important insurance statute in New York State, as it includes New York State’s direct action statute (§3420(b)(2)), and New York’s draconian disclaimer statute (§3420(d)(2)). Under Insurance Law §3420(d)(2), which applies to claims of bodily injury or death arising from accidents within New York State, insurers must issue written denials of coverage promptly, commonly interpreted as within 30 days of receipt of a claim. A reservation of rights letter will not extend an insurer’s time to issue a prompt disclaimer and will be deemed irrelevant in determining whether the statutory requirements for a disclaimer have been met. Moreover, §3420(d)(2) requires that the disclaimer be delivered to the “insured and the injured person or any other claimant.” The failure of an insurer to comply with the strict requirements of §3420(d)(2) will render an otherwise valid disclaimer of coverage based upon a policy exclusion or breach of a policy condition unenforceable.

In railing against the majority’s ruling, the three-judge dissent warned that the majority’s holding “will surely wreak havoc well beyond this case.”

While the full ramifications of the court’s ruling in Carlson are not yet known, it is clear that all insurers who have issued liability policies to insureds with operations and risks in New York should expect that Insurance Law §3420 and all of its requirements may apply to New York accidents, no matter where the policy was actually “issued or delivered.”

Relevant Facts of Carlson v. American International Group, Inc.

Carlson involved a fatal motor vehicle accident and a subsequent direct action lawsuit by the husband of the decedent against the alleged insurers of the defendants to collect on the unpaid portion of a judgment that resulted from the underlying motor vehicle/wrongful death case.

Claudia Carlson was killed when a truck painted with a DHL logo, owned by MVP Delivery and Logistics, Inc. (MVP), and driven by an employee of MVP (William Porter), crossed the double-yellow divider and hit her car head-on. A jury awarded the decedent’s husband, Michael Carlson, individually, and as administrator of her estate, $20 million against MVP, Mr. Porter, and DHL. The Appellate Division set aside the verdict against DHL and dismissed the complaint against it, concluding that DHL was not vicariously liable as the employer of Mr. Porter. The court also found the damages to be excessive, and Mr. Carlson stipulated to a reduced judgment of $7.3 million. MVP’s insurer paid Carlson approximately $1.1 million, and Mr. Porter assigned to Mr. Carlson whatever rights Mr. Porter had to any other insurance coverage.

At the time of the accident, DHL and MVP were parties to a cartage agreement, pursuant to which MVP used its fleet of trucks and employees to perform DHL package delivery services in Western New York. DHL had three insurance policies: (1) a $3 million primary policy issued by National Union, which included “hired auto” coverage; (2) a $2 million excess insurance policy with AAIC; and (3) a $23 million umbrella policy issued by National Union, which covered vehicles “hired by [DHL] or on [DHL’s] behalf and used with [DHL’s] permission.”

Carlson then filed suit against National Union, AAIC, AIG, and DHL, alleging five causes of action. The relevant cause of action for our purposes is the first cause of action brought under Insurance Law §§3420(a) and 3420(a)(2). These provisions set forth New York’s Direct Action statute. Section 3420(a), a “deemer” provision, provides that no liability policy insuring against liability for injury to persons, or against liability for injury to or destruction of property, shall be “issued or delivered in this state,” unless it contains, in substance, provisions that are equally or more favorable to the insured and to judgment creditors as the provisions delineated in the statute. Insurance Law §3420(a)(2) sets forth direct action provisions which provide that covered policies must include a provision stating that if a judgment obtained against an insured or an insured’s personal representative in an action brought to recover damages for injuries occasioned during the policy period shall remain unsatisfied for 30 days or more, then a “direct action” may be maintained by the judgment creditor against the insurer under the terms of the policy or contract for the amount of the judgment not exceeding the amount of the applicable limit of coverage under the policy.

Like the direct action provisions, the disclaimer of coverage requirements of the statute set forth in §3420(d)(2) also expressly apply to liability policies “issued or delivered in this state.” The disclaimer portion of the statute is also limited to denials of coverage for death or bodily injury arising out of an accident within New York State. When a policy and claim are subject to §3420(d)(2), any denial of coverage must be issued “as soon as is reasonably possible,” and must be issued to the “insured and the injured person or any other claimant.” The Appellate Division, First Department, has held that an unexplained delay in disclaiming coverage of 30 days is untimely under Insurance Law §3420(d)(2), rendering the denial of coverage completely ineffective.

Prior to 2008, Insurance Law §§3420(a)(2) and 3420(d)(2) applied to policies “delivered or issued for delivery” in New York State. The state legislature significantly revised the statute and in 2008, changing the language to apply to policies “issued or delivered in this State.”

In 2008, the Court of Appeals interpreted the earlier version of the statute (policies “issued for delivery”) and ruled that a New Jersey insurer which issued a policy to a New Jersey company was not obligated to comply with §3420(d)(2) when denying coverage for a New York accident.  The Court of Appeals held that because the policy was neither delivered nor “issued for delivery” in New York, the insurer was not subject to the disclaimer requirements of §3420(d)(2). The court in Preserver Ins. Co. held that a policy is “issued for delivery” in New York State if it covers “both insureds and risks located in this State.”

The somewhat vague “delivered or issued for delivery in this State” language was supposedly simplified and clarified with the revision in 2008 to policies simply “issued or delivered in this State.” The verbs “issued” and “delivered” can hardly be viewed as ambiguous. Under well-settled principles of statutory interpretation, New York courts have long held that “words of ordinary import in a statute are to be given their usual and commonly understood meaning, unless it is clear from the statutory language that a different meaning was intended.” In an earlier decision by the Second Circuit, the court examined whether a policy was “issued” in New York, and used two accepted definitions of the term “issued”: “prepared and signed” or “sent out or distributed officially.”

The Carlson Decision

In Carlson, AAIC filed a motion to dismiss the §3420(a)(2) direct action claim because its policy, initially issued by it to DHL’s predecessor, Airborne, Inc. (headquartered in Washington) and later assumed by DHL (headquartered in Florida), was not “issued or delivered” in New York State. AAIC was located in New Jersey when the policy was issued.

The trial court denied the motion to dismiss the §3420(a)(2) claim, and the Appellate Division, Fourth Department, reversed, holding that the AAIC policy was clearly not issued or delivered in New York State. The Fourth Department concluded that the parties and the lower court had conflated the broader language of the prior version of the statue (“issued for delivery”) with the current and clearer “issued or delivered” language applicable to the case. The court noted that the excess policy was issued by AAIC from New Jersey and delivered to the insured in Washington, and then later in Florida. Thus, the policy was not “issued or delivered” in New York State as that phrase is ordinarily understood.

The Court of Appeals modified the decision of the Appellate Division, Fourth Department, and ruled that the AAIC excess policy was issued or delivered in New York State because the revised language of the statute applies to policies “that cover insureds and risks located in the State,” which is the very same interpretation that the court had applied to the earlier “issued for delivery” version of the statute. The Court of Appeals majority rejected the idea that the revised language “issued or delivered” has a more narrow application than the former “issued for delivery” language, and instead ruled that the change in language appears to have been a mere “stylistic change” with “no intended import,” and that, if anything, “issued or delivered” is “facially broader than issued for delivery.”

The Court of Appeals noted that §3420 was intended to protect injured persons and tort victims in New York, and that statutes “designed to promote the public good” should be construed liberally. The majority reasoned that the amendments to the statute in 2008 were intended to expand the scope of the statute, not to contract it.

The Court of Appeals majority concluded that the named insured under the AAIC policy, DHL, is clearly “located in” New York “because it has a substantial business presence and creates risks in New York.” The court deemed insignificant the fact that the policy was issued to DHL at its headquarters in Florida. Because the policy was issued to an insured with substantial business in New York, and insured risks in New York, the direct action provisions of §3420(a)(2) (and by necessary extension, the disclaimer requirements of §3420(d)(2)) must apply.

The majority reasoned that the legislature could not have intended that the phrase “issued or delivered” would be limited to its literal sense, arguing that the statute could not be meant to exclude an insurance policy issued by a national insurer located in Connecticut to a retailer operating in all 50 states if the policy was delivered to the retailer’s headquarters in Arkansas — even if the policy was specifically written to cover risks in New York created by the insured’s extensive operations in this state.

The three-judge dissent predicted that the majority’s interpretation of §3420(a) would enact “sweeping change across the Insurance Law, generating substantial implications, both known and unknown.” The dissent flatly rejected the majority’s conclusion that the term “issued or delivered” (in this state) is facially broader than, or identical to, the prior phrase “issued for delivery” (in this state). The dissent reasoned that the new language is clearly narrower in its scope.

The dissent accused the majority of “attempting to rectify a perceived injustice,” and in so doing, applying a strained meaning to the legislature’s simple language.

Rejecting the majority’s concern that insurers would avoid the effect of §3420 by mailing policies to insureds’ satellite offices outside of New York State, the dissent stated that it was implausible that the legislature intended to require every automobile insurer throughout the country — regardless of where the policy was issued or delivered — to comply with New York Insurance statutes on the chance that the insured vehicle may be driven into New York State.

Implications for Insurers

As a result of the Court of Appeals’ decision in Carlson, it is now clear that Insurance Law §3420’s direct action provisions and disclaimer requirements will be applied to policies issued by non-New York insurers to insureds headquartered outside of New York State, as long as the policy covers both insureds and risks located in New York State. An insured will be found to be located in New York if it has “a substantial business presence and creates risks in New York.” Accordingly, an insurer that issues a liability policy to a business entity headquartered outside of New York State may still be subject to the disclaimer requirements of Insurance Law §3420(d)(2) when faced with a New York accident.

Now, when faced with a claim against an insured for bodily injury or death arising from an accident in New York State, an insurer must determine whether the insured has a “substantial business presence” in New York State (a criterion that remains unclear) and whether the policy covers risks located in New York State.

If the answer to these questions might, as construed by a New York court, be yes, then it would be prudent for the insurer to assume that a denial of coverage will be governed by Insurance Law §3420(d)(2). This statute requires that insurers promptly issue denials of coverage and apprise the recipients of the grounds for disclaimer with a high degree of specificity. Insurers must deliver denials of coverage to the insureds, the injured party, and any other claimant. The term “any other claimant” includes parties with cross-claims or third-party claims against the insured for contribution or indemnity.

Insurance Law §3420(d)(2) applies to denials of coverage based upon a policy exclusion or a breach of a policy condition. While claims that are outside the scope of the insuring agreements of a policy are not intended to be subject to the strict requirements of Insurance Law §3420(d)(2), the distinction between a denial based upon “non-coverage” and a policy limitation is not always clear, and it is a best practice to assume that §3420(d)(2) will apply.

For further information on the Carlson decision and its implications, contact:

• Michael P. Kandler
• Or any other member of the Global Insurance Services practice group.